Exhibit 10.1

 

Diametrics Medical, Inc.

Shares of Series G Convertible Preferred Stock and Common Stock Warrant

 

SUBSCRIPTION AGREEMENT

 

May 28, 2004

 

BCC Acquisition II, LLC

c/o Bay City Capital

750 Battery Street, Suite 600

San Francisco, California 94111

 

Monarch Pointe, Ltd.

Mercator Momentum Fund, LP

Mercator Momentum Fund III, LP

c/o Mercator Advisory Group, LLC

555 South Flower Street, Suite 4500

Los Angeles, California 90071

 

Ladies and Gentlemen:

 

Diametrics Medical, Inc., a Minnesota corporation (the “Company”), hereby
confirms its agreement with BCC Acquisition II, LLC (“BCC”), Monarch Pointe,
Ltd. (“Monarch”), Mercator Momentum Fund, LP (“MMF”), and Mercator Momentum Fund
III, LP, (“MMF III”) (collectively, the “Purchasers”), as set forth below.

 

1. The Securities. Subject to the terms and conditions herein contained, the
Company proposes to issue and sell to the Purchasers an aggregate of 15,000
shares (the “Shares”) of its Series G Convertible Preferred Stock, par value
$0.01 per share (the “Series G Stock”), which shall be convertible into shares
(the “Conversion Shares”) of the Company’s Common Stock (the “Common Stock”) in
accordance with the formula set forth in the Certificate of Designation further
described below. In addition, the Company shall issue and sell to the
Purchasers, for no additional consideration, warrants, substantially in the form
attached hereto at Exhibit A (the “Warrants”), to acquire up to an aggregate of
1,250,000 shares of Common Stock (the “Warrant Shares”), which shall be
allocated 1,000,000 shares to BCC, 83,334 shares to Monarch, 83,333 shares to
MMF, and 83,333 to MMF III. The rights, preferences and privileges of the Series
G Stock are as set forth in the Certificate of Designation of Series G Preferred
Stock as filed with the Secretary of State of the State of Minnesota (the
“Certificate of Designation”) in the form attached hereto as Exhibit B. The
numbers of Conversion Shares and Warrant Shares that each of Monarch, MMF and
MMF III may acquire at any time are subject to limitation in the Certificate of
Designation and in the Warrants, respectively, so that the aggregate number of
shares of Common Stock of which Monarch, MMF and MMF III and all persons
affiliated with Monarch, MMF and MMF III have beneficial ownership (calculated
pursuant to Rule 13d-3 of the Securities Exchange Act of 1934, as amended) does
not at any time exceed 9.99% of the Company’s then outstanding Common Stock.

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The Shares and the Warrants are sometimes herein collectively referred to as the
“Securities.” This Agreement, the Warrants and the Certificate of Designation
are sometimes herein collectively referred to as the “Transaction Documents.”

 

The Securities will be offered and sold to the Purchasers without such offers
and sales being registered under the Securities Act of 1933, as amended
(together with the rules and regulations of the Securities and Exchange
Commission (the “SEC”) promulgated thereunder, (the “Securities Act”), in
reliance on exemptions therefrom.

 

In connection with the sale of the Securities, the Company has made available
(including electronically via the Commission’s EDGAR system) to Purchasers its
periodic and current reports, forms, schedules, proxy statements and other
documents (including exhibits and all other information incorporated by
reference) filed with the SEC under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”) since January 1, 2000. These reports, forms,
schedules, statements, documents, filings and amendments, are collectively
referred to as the “Disclosure Documents.” All references in this Agreement to
financial statements and schedules and other information which is “contained,”
“included” or “stated” in the Disclosure Documents (or other references of like
import) shall be deemed to mean and include all such financial statements and
schedules, documents, exhibits and other information which is incorporated by
reference in the Disclosure Documents.

 

2. Representations and Warranties of the Company. The Company represents and
warrants to and agrees with Purchasers and Mercator Advisory Group, LLC as
follows:

 

(a) The Disclosure Documents as of their respective dates did not (after giving
effect to any updated disclosures therein), and as of the Closing Date as
defined in Section 3 below will not, contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
The Disclosure Documents and the documents incorporated or deemed to be
incorporated by reference therein, at the time they were filed (after giving
effect to any updated disclosures therein) or hereafter are filed with the
Commission, complied and will comply in all material respects with the
requirements of the Securities Act and/or the Exchange Act, as the case may be,
as applicable.

 

(b) Each of the Company and its subsidiaries set forth on Schedule A attached
hereto (the “Subsidiaries”) has been duly incorporated and each of the Company
and the Subsidiaries is validly existing in good standing as a corporation under
the laws of its jurisdiction of incorporation, with the requisite corporate
power and authority to own its properties and conduct its business as now
conducted as described in the Disclosure Documents and is duly qualified to do
business as a foreign corporation in good standing in all other jurisdictions
where the ownership or leasing of its properties or the conduct of its business
requires such qualification, except where the failure to be so qualified would
not, individually or in the aggregate, have a material adverse effect on the
business, condition (financial or other),

 

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properties, prospects or results of operations of the Company and the
Subsidiaries, taken as a whole (any such event, a “Material Adverse Effect”); as
of the Closing Date, the Company will have the authorized, issued and
outstanding capitalization set forth in the Disclosure Documents (including as
described in Proposal Two in the Company’s proxy statement for its Annual
Meeting held on April 29, 2004 and approved by the Company’s shareholders at
such meeting, and subject to the issuance of shares pursuant to options
outstanding under the Company’s stock option plans, employee stock purchase
plans or outstanding warrants, 2,013,432 shares issuable upon conversion of
convertible notes, or other rights to acquire shares described in the Disclosure
Documents, and subject to the filing of the Certificate of Designation); except
as set forth in the Disclosure Documents, the Company does not have any
subsidiaries or own directly or indirectly any of the capital stock or other
equity or long-term debt securities of or have any equity interest in any other
person; all of the outstanding shares of capital stock of the Company and the
Subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable and were not issued in violation of any preemptive or similar
rights and are owned free and clear of all liens, encumbrances, equities, and
restrictions on transferability (other than those imposed by the Securities Act
and the state securities or “Blue Sky” laws) or voting; except as set forth in
the Disclosure Documents, all of the outstanding shares of capital stock of the
Subsidiaries are owned, directly or indirectly, by the Company; except as set
forth in the Disclosure Documents, no options, warrants or other rights to
purchase from the Company or any Subsidiary, agreements or other obligations of
the Company or any Subsidiary to issue or other rights to convert any obligation
into, or exchange any securities for, shares of capital stock of or ownership
interests in the Company or any Subsidiary are outstanding; and except as set
forth in the Disclosure Documents, there is no agreement, understanding or
arrangement among the Company or any Subsidiary and each of their respective
stockholders or any other person relating to the ownership or disposition of any
capital stock of the Company or any Subsidiary or the election of directors of
the Company or any Subsidiary or the governance of the Company’s or any
Subsidiary’s affairs, and, if any, such agreements, understandings and
arrangements will not be breached or violated as a result of the execution and
delivery of, or the consummation of the transactions contemplated by, the
Transaction Documents.

 

(c) The Company has the requisite corporate power and authority to execute and
deliver this Agreement and the Transaction Documents to which it is a party, to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby. Each of the Transaction Documents
has been duly and validly authorized by all necessary corporate and shareholder
action on the part of the Company and, when executed and delivered by the
Company, will constitute a valid and legally binding agreement of the Company,
enforceable against the Company in accordance with its terms except as the
enforcement thereof may be limited by (i) bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other similar laws now or
hereafter in effect relating to or affecting creditors’ rights generally or (ii)
general principles of equity and the discretion of the court before which any
proceeding therefore may be brought (regardless of whether such enforcement is
considered in a proceeding at law or in equity) (collectively, the
“Enforceability Exceptions”).

 

(d) The Shares and the Warrants have been duly authorized and, when issued upon
payment thereof in accordance with this Agreement, will have been validly
issued,

 

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fully paid and nonassessable. Based on a Floor Price (as that term is defined in
the Certificate of Designation) of $0.06 per share, the Conversion Shares
issuable with respect to the Shares have been duly authorized and validly
reserved for issuance, and when issued upon conversion of the Shares in
accordance with the terms of the Certificate of Designation, will have been
validly issued, fully paid and nonassessable. The Conversion Shares issuable
with respect to the Shares based on a Floor Price below $0.06 per share will be
subject to shareholder approval to increase the number of authorized shares of
Company Common Stock to an amount sufficient to issue such Conversion Shares.
The Warrant Shares have been duly authorized and validly reserved for issuance,
and when issued upon exercise of the Warrants in accordance with the terms
thereof, will have been validly issued, fully paid and nonassessable. The Common
Stock of the Company conforms to the description thereof contained in the
Disclosure Documents. The stockholders of the Company have no preemptive or
similar rights with respect to the Common Stock.

 

(e) No consent, approval, authorization, license, qualification, exemption or
order of any court or governmental agency or body or third party is required for
the execution, delivery, or performance of any obligations under the Transaction
Documents by the Company or for the consummation by the Company of any of the
transactions contemplated thereby, or the application of the proceeds of the
issuance of the Securities as described in this Agreement, except for such
consents, approvals, authorizations, licenses, qualifications, exemptions or
orders (i) as have been obtained on or prior to the Closing Date, (ii) as are
not required to be obtained on or prior to the Closing Date that will be
obtained when required, or (iii) the failure to obtain which would not,
individually or in the aggregate, have a Material Adverse Effect.

 

(f) None of the Company or the Subsidiaries is (i) in material violation of its
articles of incorporation or bylaws (or similar organizational document), (ii)
in breach or violation of any statute, judgment, decree, order, rule or
regulation applicable to it or any of its properties or assets, which breach or
violation would, individually or in the aggregate, have a Material Adverse
Effect, or (iii) except as described in the Disclosure Documents, in default
(nor has any event occurred which with notice or passage of time, or both, would
constitute a default) in the performance or observance of any obligation,
agreement, covenant or condition contained in any contract, indenture, mortgage,
deed of trust, loan agreement, note, lease, license, franchise agreement,
permit, certificate or agreement or instrument to which it is a party or to
which it is subject, which default would, individually or in the aggregate, have
a Material Adverse Effect.

 

(g) The execution, delivery and performance by the Company of the Transaction
Documents and the consummation by the Company of the transactions contemplated
thereby and the fulfillment of the terms thereof will not (a) violate, conflict
with or constitute or result in a breach of or a default under (or an event
that, with notice or lapse of time, or both, would constitute a breach of or a
default under) any of (i) the terms or provisions of any contract, indenture,
mortgage, deed of trust, loan agreement, note, lease, license, franchise
agreement, permit, certificate or agreement or instrument to which any of the
Company or the Subsidiaries is a party or to which any of their respective
properties or assets are subject, (ii) the articles of incorporation or bylaws
of any of the Company or the Subsidiaries (or similar organizational document)
(subject to shareholder approval of additional authorized shares in order to
issue Conversion Shares based on a Floor Price below $0.06 per share) or (iii)
any statute, judgment,

 

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decree, order, rule or regulation of any court or governmental agency or other
body applicable to the Company or the Subsidiaries or any of their respective
properties or assets or (b) result in the imposition of any lien upon or with
respect to any of the properties or assets now owned or hereafter acquired by
the Company or any of the Subsidiaries, which violation, conflict, breach,
default or lien would, individually or in the aggregate, have a Material Adverse
Effect.

 

(h) The audited consolidated financial statements included in the Disclosure
Documents present fairly the consolidated financial position, results of
operations, cash flows and changes in shareholders’ equity of the entities, at
the dates and for the periods to which they relate and have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis; the interim unaudited consolidated financial statements included in the
Disclosure Documents present fairly the consolidated financial position, results
of operations and cash flows of the entities, at the dates and for the periods
to which they relate subject to year-end audit adjustments and have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis with the audited consolidated financial statements included
therein; the selected financial and statistical data included in the Disclosure
Documents present fairly the information shown therein and have been prepared
and compiled on a basis consistent with the audited financial statements
included therein, except as otherwise stated therein; and KPMG LLP, which has
examined certain of such financial statements as set forth in its report
included in the Disclosure Documents, is an independent certified public
accountant as required by the Securities Act for an offering registered
thereunder.

 

(i) Except as described in the Disclosure Documents, there is not pending or, to
the knowledge of the Company, threatened any action, suit, proceeding, inquiry
or investigation, governmental or otherwise, to which any of the Company or the
Subsidiaries is a party, or to which their respective properties or assets are
subject, before or brought by any court, arbitrator or governmental agency or
body, that, if determined adversely to the Company or any such Subsidiary,
would, individually or in the aggregate, have a Material Adverse Effect or that
seeks to restrain, enjoin, prevent the consummation of or otherwise challenge
the issuance or sale of the Securities to be sold hereunder or the application
of the proceeds therefrom or the other transactions described in the Disclosure
Documents.

 

(j) The Company and the Subsidiaries own or possess adequate licenses or other
rights to use all patents, trademarks, service marks, trade names, copyrights
and know-how that are necessary to conduct their businesses as described in the
Disclosure Documents. None of the Company or the Subsidiaries has received any
written notice of infringement of (or knows of any such infringement of)
asserted rights of others with respect to any patents, trademarks, service
marks, trade names, copyrights or know-how that, if such assertion of
infringement or conflict were sustained, would, individually or in the
aggregate, have a Material Adverse Effect.

 

(k) Each of the Company and the Subsidiaries possesses all licenses, permits,
certificates, consents, orders, approvals and other authorizations from, and has
made all declarations and filings with, all federal, state, local and other
governmental authorities, all self-regulatory organizations and all courts and
other tribunals presently required or necessary to own or lease, as the case may
be, and to operate its respective properties and to carry on its respective

 

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businesses as now or proposed to be conducted as set forth in the Disclosure
Documents (“Permits”), except where the failure to obtain such Permits would
not, individually or in the aggregate, have a Material Adverse Effect and none
of the Company or the Subsidiaries has received any notice of any proceeding
relating to revocation or modification of any such Permit, except as described
in the Disclosure Documents and except where such revocation or modification
would not, individually or in the aggregate, have a Material Adverse Effect.

 

(l) Subsequent to the respective dates as of which information is given in the
Disclosure Documents and except as described therein, (i) the Company and the
Subsidiaries have not incurred any material liabilities or obligations, direct
or contingent, or entered into any material transactions not in the ordinary
course of business or (ii) the Company and the Subsidiaries have not purchased
any of their respective outstanding capital stock, or declared, paid or
otherwise made any dividend or distribution of any kind on any of their
respective capital stock or otherwise (other than, with respect to any of such
Subsidiaries, the purchase of capital stock by the Company), (iii) there has not
been any material increase in the long-term indebtedness of the Company or any
of the Subsidiaries, (iv) there has not occurred any event or condition,
individually or in the aggregate, that has a Material Adverse Effect, and (v)
the Company and the Subsidiaries have not sustained any material loss or
interference with respect to their respective businesses or properties from
fire, flood, hurricane, earthquake, accident or other calamity, whether or not
covered by insurance, or from any labor dispute or any legal or governmental
proceeding.

 

(m) There are no material legal or governmental proceedings nor are there any
material contracts or other documents required by the Securities Act to be
described in a prospectus that are not described in the Disclosure Documents.
Except as described in the Disclosure Documents, none of the Company or the
Subsidiaries is in default under any of the contracts described in the
Disclosure Documents, has received a notice or claim of any such default or has
knowledge of any breach of such contracts by the other party or parties thereto,
except for such defaults or breaches as would not, individually or in the
aggregate, have a Material Adverse Effect.

 

(n) Each of the Company and the Subsidiaries has good and marketable title to
all real property described in the Disclosure Documents as being owned by it and
good and marketable title to the leasehold estate in the real property described
therein as being leased by it, free and clear of all liens, charges,
encumbrances or restrictions, except, in each case, as described in the
Disclosure Documents or such as would not, individually or in the aggregate,
have a Material Adverse Effect. All material leases, contracts and agreements to
which the Company or any of the Subsidiaries is a party or by which any of them
is bound are valid and enforceable against the Company or any such Subsidiary,
are, to the knowledge of the Company, valid and enforceable against the other
party or parties thereto and are in full force and effect.

 

(o) Each of the Company and the Subsidiaries has filed all necessary federal,
state and foreign income and franchise tax returns, except where the failure to
so file such returns would not, individually or in the aggregate, have a
Material Adverse Effect, and has paid all taxes shown as due thereon; and other
than tax deficiencies which the Company or any Subsidiary is contesting in good
faith and for which adequate reserves have been provided in

 

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accordance with generally accepted accounting principles, there is no tax
deficiency that has been asserted against the Company or any Subsidiary that
would, individually or in the aggregate, have a Material Adverse Effect.

 

(p) None of the Company or the Subsidiaries is, or immediately after the Closing
Date will be, required to register as an “investment company” or a company
“controlled by” an “investment company” within the meaning of the Investment
Company Act of 1940, as amended (the “Investment Company Act”).

 

(q) None of the Company or the Subsidiaries or, to the knowledge of any of such
entities’ directors, officers, employees, agents or controlling persons, has
taken, directly or indirectly, any action designed, or that might reasonably be
expected, to cause or result in the stabilization or manipulation of the price
of the Common Stock.

 

(r) None of the Company, the Subsidiaries or any of their respective Affiliates
(as defined in Rule 501(b) of Regulation D under the Securities Act) directly,
or through any agent, engaged in any form of general solicitation or general
advertising (as those terms are used in Regulation D under the Securities Act)
in connection with the offering of the Securities or in any manner involving a
public offering within the meaning of Section 4(2) of the Securities Act.
Assuming the accuracy of the representations and warranties of the Purchasers in
Section 6 hereof, it is not necessary in connection with the offer, sale and
delivery of the Securities to the Purchasers in the manner contemplated by this
Agreement to register any of the Securities under the Securities Act.

 

(s) Except as set forth in the Disclosure Documents, there is no strike, labor
dispute, slowdown or work stoppage with the employees of the Company or any of
the Subsidiaries which is pending or, to the knowledge of the Company or any of
the Subsidiaries, threatened.

 

(t) Each of the Company and the Subsidiaries carries general liability insurance
coverage comparable to other companies of its size and similar business.

 

(u) Each of the Company and the Subsidiaries maintains internal accounting
controls which provide reasonable assurance that (A) transactions are executed
in accordance with management’s authorization, (B) transactions are recorded as
necessary to permit preparation of its financial statements and to maintain
accountability for its assets, (C) access to its material assets is permitted
only in accordance with management’s authorization and (D) the reported
accountability for its material assets is compared with existing assets at
reasonable intervals.

 

(v) Except for a due diligence fee payable to Mercator Advisory Group, LLC, the
Company does not know of any claims for services, either in the nature of a
finder’s fee or financial advisory fee, with respect to the offering of the
Shares and the transactions contemplated by the Transaction Documents.

 

(w) The Common Stock is traded on the Over-the-Counter Bulletin Board (the “OTC
Bulletin Board”). Except as described in the Disclosure Documents, the Company

 

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currently is not in violation of, and the consummation of the transactions
contemplated by the Transaction Documents will not violate, any rule of the
National Association of Securities Dealers.

 

(x) The Company has no reason to believe that it is not capable of satisfying
the registration or qualification requirements (or an exemption therefrom)
necessary to permit the resale of the Conversion Shares and the Warrant Shares
under the securities or “blue sky” laws of any jurisdiction within the United
States that is the residence or domicile of any Purchaser.

 

3. Purchase, Sale and Delivery of the Shares. On the basis of the
representations, warranties, agreements and covenants herein contained and
subject to the terms and conditions herein set forth, the Company agrees to
issue and sell to the Purchasers, and Purchasers agree to purchase from the
Company, 15,000 Shares of Series G Stock at $100 per Share in the amounts shown
on the signature page hereto. In connection with the purchase and sale of
Shares, the Purchasers will receive, for no additional consideration, Warrants
to purchase up to an aggregate of 1,250,000 shares of Common Stock, subject to
adjustment as set forth in the Warrants.

 

One or more certificates in definitive form for the Shares that the Purchasers
have agreed to purchase, as well as the Warrants, shall be delivered by or on
behalf of the Company, against payment by or on behalf of each of the
Purchasers, of the purchase price therefor by wire transfer of immediately
available funds to the account of the Company previously designated by it in
writing. Such delivery of and payment for the Shares and the Warrants shall be
made, with respect to Monarch, at the offices of Mercator Advisory Group, LLC,
555 South Figueroa Street, Suite 4500, Los Angeles, California 90071 and, with
respect to BCC, at the offices of Latham & Watkins LLP, Sears Tower, Suite 5800,
233 South Wacker Drive, Chicago, Illinois 60606 on May 28, 2004 (the “Closing”),
or at such other date and/or location as the Purchasers and the Company may
agree upon, such time and date of delivery against payment being herein referred
to as the “Closing Date.” Upon completion of the Closing, the Company agrees to
pay to Mercator Advisory Group, LLC a due diligence fee of $55,000 and to
reimburse Mercator Advisory Group, LLC for all out-of-pocket legal expenses
related to the transactions contemplated herein up to $15,000, payable by wire
transfer of immediately available funds to an account of Mercator Advisory
Group, LLC previously designated by them in writing. Upon the completion of the
Closing, the Company agrees to reimburse BCC for all out-of-pocket legal
expenses related to the transactions contemplated herein up to $7,500 and to pay
BCC $55,000 as partial reimbursement of accrued unpaid expenses under the terms
of the Company’s Convertible Senior Secured Fixed Rate Notes, as amended,
payable by wire transfer of immediately available funds to an account of BCC
previously designed in writing.

 

4. Certain Covenants of the Company. The Company covenants and agrees with each
Purchaser as follows:

 

(a) None of the Company or any of its Affiliates will sell, offer for sale or
solicit offers to buy or otherwise negotiate in respect of any “security” (as
defined in the Securities Act) which could be integrated with the sale of the
Securities in a manner which would require the registration under the Securities
Act of the Securities.

 

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(b) The Company will not become, at any time prior to the expiration of three
years after the Closing Date, an open-end investment company, unit investment
trust, closed-end investment company or face-amount certificate company that is
or is required to be registered under the Investment Company Act.

 

(c) None of the proceeds of the Series G Stock will be used to reduce or retire,
any insider note or convertible debt held by an officer or director of the
Company.

 

(d) Subject to Section 10 of this Agreement, the Conversion Shares and the
Warrant Shares will be tradable on the OTC Bulletin Board, or such market on
which the Company’s shares are subsequently listed or traded, immediately
following their issuance.

 

(e) The Company will use its best efforts to ensure that no officer or director
of the Company sells any shares of Company Common Stock from the Closing Date
until the date that is 90 days following the effective date of the Registration
Statement, as defined in Section 9 below. The Company represents that each of
its officers and directors is aware of this commitment and has agreed to use his
or her best efforts not to sell any shares of Company Common Stock during this
period.

 

(f) The Board of Directors of the Company will propose to the Company’s
shareholders within 10 business days following the filing of the Registration
Statement with the SEC an amendment to the Company’s Articles of Incorporation
to increase the number of authorized shares of Company Common Stock to an amount
at least sufficient to issue the Conversion Shares upon conversion of the Shares
assuming a Floor Price of $.03 per share, and to amend the certificates of
designation for each of the Company’s Series E Convertible Preferred Stock
(“Series E Stock”) and Series F Convertible Preferred Stock (“Series F Stock”)
to clarify (i) the seniority of the Series G Stock over the Series F Stock and
Series E Stock, and (ii) the seniority of the Series F Stock over the Series E
Stock, with respect to liquidation preferences.

 

(g) The Company will use its best efforts to do and perform all things required
to be done and performed by it under this Agreement and the other Transaction
Documents and to satisfy all conditions precedent on its part to the obligations
of the Purchasers to purchase and accept delivery of the Securities.

 

5. Conditions of the Purchasers’ Obligations. The obligation of each Purchaser
to purchase and pay for the Securities is subject to the following conditions
unless waived in writing by each Purchaser:

 

(a) The representations and warranties of the Company contained in this
Agreement shall be true and correct in all material respects (other than
representations and warranties with a Material Adverse Effect qualifier, which
shall be true and correct as written) on and as of the Closing Date; the Company
shall have complied in all material respects with all agreements and satisfied
all conditions on its part to be performed or satisfied hereunder at or prior to
the Closing Date.

 

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(b) None of the issuance and sale of the Securities pursuant to this Agreement
or any of the transactions contemplated by any of the other Transaction
Documents shall be enjoined (temporarily or permanently) and no restraining
order or other injunctive order shall have been issued in respect thereof; and
there shall not have been any legal action, order, decree or other
administrative proceeding instituted or, to the Company’s knowledge, threatened
against the Company or against any Purchaser relating to the issuance of the
Securities or any Purchaser’s activities in connection therewith or any other
transactions contemplated by this Agreement, the other Transaction Documents or
the Disclosure Documents.

 

(c) The Purchasers shall have received certificates, dated the Closing Date and
signed by the Chief Executive Officer and the Chief Financial Officer of the
Company, to the effect of paragraphs 5(a) and (b).

 

(d) The Purchasers shall have received an opinion of Dorsey & Whitney LLP,
counsel to the Company, with respect to the authorization of the Shares, the
Warrants and the Warrant Shares and other customary matters in the form attached
hereto as Exhibit C.

 

(e) The Purchasers shall have a right of first refusal on any financing in which
the Company is the issuer of debt or equity securities between the Closing Date
and the date of effectiveness of the Registration Statement.

 

(f) The Company shall have received the consent of the holders of the Company’s
Convertible Senior Secured Fixed Rate Notes, as amended, to defer payments due
on the Notes and other matters in substantially the form attached hereto as
Exhibit D.

 

(g) The Company shall have delivered to Mercator Advisory Group, LLC the share
certificates for the shares of the Company’s Series E Convertible Preferred
Stock issued to MMF, MMF III and Focus Fund LP.

 

(h) The Company and the respective holders of the Series F Stock shall have
entered into an agreement that the Company will not issue and sell additional
shares of Series F Stock.

 

6. Representations and Warranties of the Purchasers.

 

(a) Each Purchaser represents and warrants to the Company that the Securities to
be acquired by it hereunder (including the Conversion Shares and the Warrant
Shares that it may acquire upon conversion or exercise thereof, as the case may
be) are being acquired for its own account for investment and with no intention
of distributing or reselling such Securities (including the Conversion Shares
and the Warrant Shares that it may acquire upon conversion or exercise thereof,
as the case may be) or any part thereof or interest therein in any transaction
which would be in violation of the securities laws of the United States of
America or any State. Nothing in this Agreement, however, shall prejudice or
otherwise limit a Purchaser’s right to sell or otherwise dispose of all or any
part of such Conversion Shares or

 

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Warrant Shares under an effective registration statement under the Securities
Act and in compliance with applicable state securities laws or under an
exemption from such registration. By executing this Agreement, each Purchaser
further represents that such Purchaser does not have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participation to any Person with respect to any of the Securities.

 

(b) Each Purchaser understands that the Securities (including the Conversion
Shares and the Warrant Shares that it may acquire upon conversion or exercise
thereof, as the case may be) have not been registered under the Securities Act
and may not be offered, resold, pledged or otherwise transferred except (a)
pursuant to an exemption from registration under the Securities Act (and, if
requested by the Company, based upon an opinion of counsel acceptable to the
Company) or pursuant to an effective registration statement under the Securities
Act and (b) in accordance with all applicable securities laws of the states of
the United States and other jurisdictions.

 

Each Purchaser agrees to the imprinting, so long as appropriate, of the
following legend on the Securities (including the Conversion Shares and the
Warrant Shares that it may acquire upon conversion or exercise thereof, as the
case may be):

 

The shares of stock evidenced by this certificate have not been registered under
the U.S. Securities Act of 1933, as amended, and may not be offered, sold,
pledged or otherwise transferred (“transferred”) in the absence of such
registration or an applicable exemption therefrom. In the absence of such
registration, such shares may not be transferred unless, if the Company
requests, the Company has received a written opinion from counsel in form and
substance satisfactory to the Company stating that such transfer is being made
in compliance with all applicable federal and state securities laws.

 

The legend set forth above may be removed if and when the Conversion Shares or
the Warrant Shares, as the case may be, are disposed of pursuant to an effective
registration statement under the Securities Act or in the opinion of counsel to
the Company experienced in the area of United States Federal securities laws
such legends are no longer required under applicable requirements of the
Securities Act. The Shares, the Conversion Shares and the Warrant Shares shall
also bear any other legends required by applicable Federal or state securities
laws, which legends may be removed when in the opinion of counsel to the Company
experienced in the applicable securities laws, the same are no longer required
under the applicable requirements of such securities laws. The Company agrees
that it will provide each Purchaser, upon request, with a substitute
certificate, not bearing such legend at such time as such legend is no longer
applicable. Each Purchaser agrees that, in connection with any transfer of the
Conversion Shares or the Warrant Shares by it pursuant to an effective
registration statement under the Securities Act, such Purchaser will comply with
all prospectus delivery requirements of the Securities Act. The Company makes no
representation, warranty or agreement as to the availability of any exemption
from registration under the Securities Act with respect to any resale of the
Shares, the Conversion Shares or the Warrant Shares.

 

11

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(c) Each Purchaser is an “accredited investor” within the meaning of Rule 501(a)
of Regulation D under the Securities Act.

 

(d) Each Purchaser represents and warrants to the Company that it has such
knowledge, sophistication and experience in business and financial matters so as
to be capable of evaluating the merits and risks of the prospective investment
in the Securities, having been represented by counsel, and has so evaluated the
merits and risks of such investment and is able to bear the economic risk of
such investment and, at the present time, is able to afford a complete loss of
such investment.

 

(e) Each Purchaser represents and warrants to the Company that (i) the purchase
of the Securities to be purchased by it has been duly and properly authorized
and this Agreement has been duly executed and delivered by it or on its behalf
and constitutes the valid and legally binding obligation of the Purchaser,
enforceable against the Purchaser in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors’ rights
generally and to general principals of equity; (ii) the purchase of the
Securities to be purchased by it does not conflict with or violate its charter,
by-laws or any law, regulation or court order applicable to it; and (iii) the
purchase of the Securities to be purchased by it does not impose any penalty or
other onerous condition on Purchaser under or pursuant to any applicable law or
governmental regulation.

 

(f) Each Purchaser represents and warrants to the Company that neither it nor
any of its directors, officers, employees, agents, partners, members, or
controlling persons has taken, directly or indirectly, any actions designed, or
might reasonably be expected to cause or result in the stabilization or
manipulation of the price of the Common Stock.

 

(g) Each Purchaser acknowledges it or its representatives have reviewed the
Disclosure Documents and further acknowledges that it or its representatives
have been afforded (i) the opportunity to ask such questions as it has deemed
necessary of, and to receive answers from, representatives of the Company
concerning the terms and conditions of the offering of the Securities and the
merits and risks of investing in the Securities; (ii) access to information
about the Company and the Company’s financial condition, results of operations,
business, properties, management and prospects sufficient to enable it to
evaluate its investment in the Securities; and (iii) the opportunity to obtain
such additional information which the Company possesses or can acquire without
unreasonable effort or expense that is necessary to verify the accuracy and
completeness of the information contained in the Disclosure Documents.

 

(h) Each Purchaser represents and warrants to the Company that it has based its
investment decision solely upon the information contained in the Disclosure
Documents and such other information as may have been provided to it or its
representatives by the Company in response to their inquiries, and has not based
its investment decision on any research or other report regarding the Company
prepared by any third party (“Third Party Reports”). Each Purchaser understands
and acknowledges that (i) the Company does not endorse any Third Party Reports
and (ii) its actual results may differ materially from those projected in any
Third Party Report.

 

12

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(i) Each Purchaser understands and acknowledges that (i) any forward-looking
information included in the Disclosure Documents supplied to Purchaser by the
Company or its management is subject to risks and uncertainties, including those
risks and uncertainties set forth in the Disclosure Documents; and (ii) the
Company’s actual results may differ materially from those projected by the
Company or its management in such forward-looking information.

 

(j) Each Purchaser understands and acknowledges that (i) the Securities are
offered and sold without registration under the Securities Act in a private
placement that is exempt from the registration provisions of the Securities Act
and (ii) the availability of such exemption depends in part on, and that the
Company and its counsel will rely upon, the accuracy and truthfulness of the
foregoing representations and Purchaser hereby consents to such reliance.

 

7. Certain Covenants of the Purchasers.

 

(a) Each Purchaser agrees not to short the Company Common Stock as long as
shares of the Series G Stock are outstanding.

 

(b) Each of Bay City Capital Management LLC and Mercator Advisory Group, LLC
consent to defer any and all payments due from the Company to Bay City Capital
Management LLC, Mercator Advisory Group, LLC and their respective affiliates
prior to December 31, 2004, except for payments due under this Agreement, until
December 31, 2004.

 

8. Termination.

 

(a) This Agreement may be terminated in the sole discretion of the Company by
notice to each Purchaser if at the Closing Date:

 

(i) the representations and warranties made by any Purchaser in Section 6 are
not true and correct in all material respects; or

 

(ii) as to the Company, the sale of the Securities hereunder (i) is prohibited
or enjoined by any applicable law or governmental regulation or (ii) subjects
the Company to any penalty, or in its reasonable judgment, other onerous
condition under or pursuant to any applicable law or government regulation that
would materially reduce the benefits to the Company of the sale of the
Securities to the Purchasers, so long as such regulation, law or onerous
condition was not in effect in such form at the date of this Agreement.

 

(b) This Agreement may be terminated in the discretion of the Purchasers by
notice to the Company given in the event that the Company shall have failed,
refused or been unable to satisfy all conditions on its part to be performed or
satisfied hereunder on or prior to the Closing Date, or if after the execution
and delivery of this Agreement and immediately prior to the Closing Date trading
in securities of the Company or in securities generally on the New York Stock
Exchange, the American Stock Exchange, the Nasdaq National or Small Cap Market
or the OTC Bulletin Board shall have been suspended or minimum or maximum prices
shall have been established on any such exchange.

 

13

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(c) This Agreement may be terminated by mutual written consent of all parties.

 

9. Registration.

 

(a) Within 15 business days from the Closing Date, the Company shall prepare and
file with the SEC a Registration Statement covering the resale of the maximum
number of Conversion Shares issuable upon conversion of the Shares and the
Warrant Shares (collectively, the “Registrable Securities”) for an offering to
be made on a continuous basis pursuant to Rule 415 (the “Registration
Statement”) based on a Floor Price of $0.06 per share. The Company shall use
diligent efforts to cause such Registration Statement to become effective as
soon as practicable, and in all events within 70 days after the initial filing
with the SEC, but shall not be liable for any damages should such effectiveness
be delayed by the SEC review process.

 

(b) Within 15 business days following receipt of shareholder approval to
increase the number of authorized shares of Company Common Stock as described in
Section 4(f), the Company shall prepare and file with the SEC either an
amendment to the Registration Statement or a new registration statement covering
the resale of the additional number of Conversion Shares issuable upon
conversion of the Shares for an offering to be made on a continuous basis
pursuant to Rule 415 (if applicable, the “Second Registration Statement”) based
on a Floor Price of $0.03 per share. The Company shall use diligent efforts to
cause such amendment or Second Registration Statement to become effective as
soon as practicable, and in all events within 70 days after the initial filing
with the SEC, but shall not be liable for any damages should such effectiveness
be delayed by the SEC review process.

 

(c) The Company shall use diligent efforts to keep such Registration Statement
(and Second Registration Statement, if applicable) continuously effective under
the Securities Act until the date which is two years after the date that such
Registration Statement (or Second Registration Statement, if applicable) is
declared effective by the SEC or such earlier date when all Registrable
Securities covered by such Registration Statement (or Second Registration
Statement, if applicable) have been sold or may be sold without volume
restrictions pursuant to Rule 144(k) as determined by the counsel to the Company
pursuant to a written opinion to such effect addressed and acceptable to the
Company’s transfer agent.

 

10. Event of Default.

 

(a) If an Event of Default (as defined below) occurs and remains uncured for a
period of 10 days, the Purchasers shall have the right to (i) exercise any or
all of the rights given to the Purchasers relating to the Securities, as further
described in the Certificate of Designation or (ii) immediately convert any or
all of the Series G Stock into shares of Common Stock. In addition, the price at
which the shares of Series G Stock may be converted into Common Stock shall be
reduced from 75% of the Market Price (as defined in the Certificate of
Designation) to 65% of the Market Price. An “Event of Default” shall include the
commencement by the Company of a voluntary case or proceeding under the
bankruptcy laws or the Company’s failure to: (v) discharge or stay a bankruptcy
proceeding within 60 days of such action being taken against the Company, (w)
file the Registration Statement with the SEC within

 

14

--------------------------------------------------------------------------------

15 business days after the Closing Date, other than due to a delay not caused by
the Company, (x) the de-listing of the Company’s Common Stock from the OTC
Bulletin Board, (y) file the preliminary proxy with the SEC within 10 business
days after the filing of the Registration Statement to obtain shareholder
authorization for issuance of up to 200,000,000 shares of Company common stock,
or (z) file an amendment to the Registration Statement or the Second
Registration Statement within 15 business days after shareholder approval of
authorization for issuance of up to 200,000,000 shares of Company common stock,
other than due to a delay not caused by the Company,.

 

(b) If the Company fails to file the Registration Statement, as referenced above
in clause (w) of Section 10(a), the Company shall pay the Purchasers an amount
equal to one percent (1%) of the total consideration paid for the Shares for
each day that the filing is late, to be allocated pro rata according to each
Purchaser’s individual investment in Series G Stock.

 

11. Notices. All communications hereunder shall be in writing and shall be hand
delivered, mailed by first-class mail, couriered by next-day air courier or by
facsimile and confirmed in writing (i) if to the Company, at the addresses set
forth below, or (ii) if to a Purchaser, to the address(es) set forth on the
signature page hereto.

 

If to the Company:

 

Diametrics Medical, Inc.

3050 Centre Pointe Drive

St. Paul, Minnesota 55113

Attention: Chief Financial Officer

Facsimile: 651/639-8549

 

with a copy to:

 

Dorsey & Whitney LLP

50 South Sixth Street, Suite 1500

Minneapolis, Minnesota 55402

Attention: Kenneth L. Cutler

Facsimile: 612/340-7800

 

All such notices and communications shall be deemed to have been duly given: (i)
when delivered by hand, if personally delivered; (ii) five business days after
being deposited in the mail, postage prepaid, if mailed certified mail, return
receipt requested; (iii) one business day after being timely delivered to a
next-day air courier guaranteeing overnight delivery; (iv) the date of
transmission if sent via facsimile to the facsimile number as set forth in this
Section or the signature page hereof prior to 6:00 p.m. on a business day, or
(v) the business day following the date of transmission if sent via facsimile at
a facsimile number set forth in this Section or on the signature page hereof
after 6:00 p.m. or on a date that is not a business day. Change of a party’s
address or facsimile number may be designated hereunder by giving notice to all
of the other parties hereto in accordance with this Section.

 

15

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12. Survival Clause. The respective representations, warranties, agreements and
covenants of the Company and the Purchasers set forth in this Agreement shall
survive until the first anniversary of the Closing.

 

13. Fees and Expenses. The Company agrees to pay the documented out-of-pocket
expenses of Mercator Advisory Group, LLC and BCC as contemplated in Section 3
hereto. If any action at law or in equity is necessary to enforce or interpret
the terms of this Agreement, the Warrant or the Certificate of Designation, the
prevailing party or parties shall be entitled to receive from the other party or
parties reasonable attorneys’ fees, costs and necessary disbursements in
addition to any other relief to which the prevailing party or parties may be
entitled.

 

14. Successors. This Agreement shall inure to the benefit of and be binding upon
Purchasers and the Company and their respective successors and legal
representatives, and nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any other person any legal or equitable
right, remedy or claim under or in respect of this Agreement, or any provisions
herein contained; this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person. Neither the Company nor any Purchaser may
assign this Agreement or any rights or obligation hereunder without the prior
written consent of the other party.

 

15. No Waiver; Modifications in Writing. No failure or delay on the part of the
Company or any Purchaser in exercising any right, power or remedy hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such right, power or remedy preclude any other or further exercise thereof
or the exercise of any other right, power or remedy. The remedies provided for
herein are cumulative and are not exclusive of any remedies that may be
available to the Company or the Purchasers at law or in equity or otherwise. No
waiver of or consent to any departure by the Company or the Purchasers from any
provision of this Agreement shall be effective unless signed in writing by the
party entitled to the benefit thereof, provided that notice of any such waiver
shall be given to each party hereto as set forth below. Except as otherwise
provided herein, no amendment, modification or termination of any provision of
this Agreement shall be effective unless signed in writing by or on behalf of
each of the Company and the Purchasers. Any amendment, supplement or
modification of or to any provision of this Agreement, any waiver of any
provision of this Agreement, and any consent to any departure by the Company or
the Purchasers from the terms of any provision of this Agreement shall be
effective only in the specific instance and for the specific purpose for which
made or given. Except where notice is specifically required by this Agreement,
no notice to or demand on the Company in any case shall entitle the Company to
any other or further notice or demand in similar or other circumstances.

 

16. Entire Agreement. This Agreement, together with Transaction Documents,
constitutes the entire agreement among the parties hereto and supersedes all
prior agreements, understandings and arrangements, oral or written, among the
parties hereto with respect to the subject matter hereof and thereof.

 

16

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17. Severability. If any provision of this Agreement is held to be invalid or
unenforceable in any respect, the validity and enforceability of the remaining
terms and provisions of this Agreement shall not in any way be affected or
impaired thereby.

 

18. APPLICABLE LAW. THE VALIDITY AND INTERPRETATION OF THIS AGREEMENT, AND THE
TERMS AND CONDITIONS SET FORTH HEREIN SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO
PROVISIONS RELATING TO CONFLICTS OF LAW TO THE EXTENT THE APPLICATION OF THE
LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.

 

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

 

Signature page follows.

 

17

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If the foregoing correctly sets forth our understanding, please indicate your
acceptance thereof in the space provided below for that purpose, whereupon this
Agreement shall constitute a binding agreement among the Company and the
Purchasers.

 

Very truly yours,

Diametrics Medical, Inc.

By:

 

/s/ David B. Kaysen

--------------------------------------------------------------------------------

Name:

 

David B. Kaysen

Title:

 

Chief Executive Officer

 

18

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ACCEPTED AND AGREED:

       

BCC Acquisition II LLC

 

Bay City Capital Management LLC

By:

 

The Bay City Capital Fund I, L.P.

 

By:

 

/s/ Fred Craves

--------------------------------------------------------------------------------

Its:

 

Manager

 

Name:

 

Fred Craves

       

Title:

 

Managing Director

By:

 

Bay City Capital Management LLC

       

Its:

 

General Partner

       

By:

 

/s/ Fred Craves

--------------------------------------------------------------------------------

       

Name:

 

Fred Craves

       

Title:

 

Managing Director

       

 

Number of Shares Purchased at Closing: 5,000

 

Purchase Price: $500,000

 

Monarch Pointe, Ltd.

 

Mercator Momentum Fund, LP

By:

 

/s/ David Firestone

--------------------------------------------------------------------------------

 

By:

 

/s/ David Firestone

--------------------------------------------------------------------------------

Name:

 

David Firestone

 

Name:

 

David Firestone

Its:

 

Managing Member

 

Its:

 

Managing Member

Number of Shares Purchased at Closing: 3,334

 

Number of Shares Purchased at Closing: 3,333

Purchase Price: $333,334

 

Purchase Price: $333,333

Mercator Momentum Fund III, LP

 

Mercator Advisory Group, LLC

         

By:

 

/s/ David Firestone

--------------------------------------------------------------------------------

 

By:

 

/s/ David Firestone

--------------------------------------------------------------------------------

Name:

 

David Firestone

 

Name:

 

David Firestone

Its:

 

Managing Member

 

Its:

 

Managing Member

 

Number of Shares Purchased at Closing: 3,333

 

Purchase Price: $333,333

 

19

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Addresses for Notice:

   

BCC Acquisition II, LLC

 

Monarch Pointe, Ltd.

c/o Bay City Capital

 

Mercator Momentum Fund, LP

750 Battery Street, Suite 600

 

Mercator Momentum Fund III, LP

San Francisco, California 94111

 

c/o Mercator Advisory Group, LLC

   

555 South Flower Street, Suite 4500

with copy to:

 

Los Angeles, California 90071

Michael A. Pucker

 

with copy to:

Latham & Watkins LLP

   

233 South Franklin, Suite 5800

 

David C. Ulich, Esq.

Chicago, Illinois 60606

 

Sheppard, Mullin, Richter & Hampton LLP

Facsimile: (312) 993-9767

 

333 South Hope Street, 48th Floor

   

Los Angeles, California 90071

   

Facsimile: (213) 620-1398

 

20

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Schedule A

 

Subsidiaries

 

Diametrics Medical, Ltd.

--------------------------------------------------------------------------------

Exhibit A

 

Form of Warrant

(filed separately)

--------------------------------------------------------------------------------

Exhibit B

 

Certificate of Designation of

Series G Convertible Preferred Stock

of

Diametrics Medical, Inc.

 

(filed separately)

--------------------------------------------------------------------------------

Exhibit C

 

Form of Legal Opinion

 

1. The Company is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Minnesota, with corporate power to
conduct any lawful business activity.

 

2. The Company has the corporate power to execute, deliver and perform the
Transaction Documents. The Transaction Documents have been duly authorized by
all requisite corporate action by the Company and constitute the valid and
binding obligations of the Company, enforceable in accordance with their terms.

 

3. The authorized capital stock of the Company consists of 5,000,000 shares of
Preferred Stock, $0.01 par value and 100,000,000 shares of Common Stock, $0.01
par value. The shares of the Company’s Series G Stock have been duly authorized
and, upon issuance, delivery, and payment therefor as described in the
Subscription Agreement, will be validly issued, fully paid and nonassessable.
The shares of the Company’s Common Stock initially issuable upon conversion of
the shares of Series G Stock (based on a Floor Price of $0.06 per share) have
been duly authorized and reserved for issuance and, upon issuance and delivery
as described in the Certificate of Designation, will be validly issued, fully
paid and nonassessable. The shares of the Company’s Common Stock issuable upon
exercise of the Warrants have been duly authorized and reserved for issuance,
and upon issuance, delivery, and payment therefor, will be validly issued, fully
paid and nonassessable.

 

4. The Company’s execution and delivery of the Transaction Documents and the
issue and sale of the Shares, on the terms and conditions set forth in the
Subscription Agreement, will not violate any law of the United States or the
State of Minnesota, any rule or regulation of any governmental authority or
regulatory body of the United States or the State of Minnesota or any provision
of the Company’s Amended and Restated Articles of Incorporation or Bylaws.

 

5. No consent, approval, order or authorization of, and no notice to or filing
with, any governmental agency or body or any court is required to be obtained or
made by the Company for the issuance and sale of the Shares and Warrants
pursuant to the Transaction Documents, except such as have been obtained or made
and such as may be required under applicable securities laws.

 

6. On the assumption that the representations of the Purchasers in the
Subscription Agreement are correct, the offer and sale of the Shares and the
Warrants pursuant to the terms of the Subscription Agreement are exempt from the
registration requirements of Section 5 of the Securities Act of 1933, as
amended, and from the qualification requirements of Minnesota securities
statutes and regulations, and, under such securities laws as they presently
exist, the issuance of the Company’s Common Stock upon conversion of the Shares
and exercise of the Warrants would also be exempt from such registration and
qualification requirements.

 

7. We know of no pending or overtly threatened action, proceeding or
governmental investigation with respect to the Company’s sale of Series G Stock
and Warrants pursuant to the Transaction Documents.