EQUITY CREDIT AGREEMENT

BY AND BETWEEN

SAUER ENERGY, INC

AND

ECLIPSE ADVISORS, LLC

Dated

As of December 14 , 2012

 

 

 

4294967295

 

THIS EQUITY CREDIT AGREEMENT is entered into as of the 14th day of December 2012
(this "Agreement"), by and between ECLIPSE ADVISORS, LLC (‘Investor"), and SAUER
ENERGY, INC , a corporation organized and existing under the laws of the State
of  Nevada (the "Company").

WHEREAS, the parties desire that, upon the terms and subject to the conditions
contained herein, the Company shall issue and sell to Investor, from time to
time as provided herein, and Investor shall purchase from the Company, shares of
the Company’s Common Stock (as defined below) for an aggregate investment amount
of up to Fifteen Million Dollars ($15,000,000).

NOW, THEREFORE, the parties hereto agree as follows:

ARTICLE I

CERTAIN DEFINITIONS

Section 1.1            Defined Terms  As used in this Agreement, the following
terms shall have the following meanings specified or indicated (such meanings to
be equally applicable to both the singular and plural forms of the terms
defined).

“Affiliate” means, with respect to any Person, any other Person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such first Person. For purposes of this
definition, “control” as applied to any Person means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of that Person, whether through the ownership of voting securities, by
contract, or otherwise.

"Agreement" shall have the meaning specified in the preamble hereof.

"Blackout Notice" shall mean a written notice from the Company to the Investor
with respect to the existence of a Potential Material Event.

“Blackout Period" shall have the meaning specified in Section 2.4

“Blackout Shares" shall have the meaning specified in Section 2.4

"By-Laws" shall have the meaning specified in Section 4.8.

"Certificate" shall have the meaning specified in Section 4.8.

"Claim Notice" shall have the meaning specified in Section 9.3(a).

"Closing" shall mean one of the closings of a purchase and sale of shares of
Common Stock pursuant to Section 2.3.

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"Closing Certificate" shall mean the closing certificate of the Company in the
form of Exhibit D hereto.

"Closing Date" shall mean, with respect to a Closing, the fourth (4th) Trading
Day following the Put Date related to such Closing, or such earlier date as the
Company and Investor shall agree, provided all conditions to such Closing have
been satisfied on or before such Trading Day.

"Commitment Period" shall mean the period commencing on the date hereof, and
ending on the earlier of (i) the date on which Investor shall have purchased Put
Shares pursuant to this Agreement for an aggregate Purchase Price of the Maximum
Commitment Amount, or (ii) the date occurring twenty four (24) months from the
date hereof.

“Commitment Shares” shall have the meaning specified in Section 10.7.

"Common Stock" shall mean the Company's common stock, $0.0001 par value per
share, and any shares of any other class of common stock whether now or
hereafter authorized, having the right to participate in the distribution of
dividends (as and when declared) and assets (upon liquidation of the Company).

"Common Stock Equivalents" shall mean any securities that are convertible into
or exchangeable for Common Stock or any options or other rights to subscribe for
or purchase Common Stock or any such convertible or exchangeable securities.

"Company" shall have the meaning specified in the preamble to this Agreement.

"Condition Satisfaction Date" shall have the meaning specified in Section 7.2.

"Damages" shall mean any loss, claim, damage, liability, cost and expense
(including, without limitation, reasonable attorneys' fees and disbursements and
costs and expenses of expert witnesses and investigation).

"Dispute Period" shall have the meaning specified in Section 9.3(a).

“Dollar Volume” shall mean for any Trading Day the dollar volume of the shares
of Common Stock traded on the Principal Market on a Trading Day.

"DTC" shall mean the Depository Trust Company.

"Effective Date" shall mean the date on which the SEC first declares effective a
Registration Statement, or any amendment thereof, registering the Registrable
Securities as set forth in Section 7.2(a). 

"Exchange Act" shall mean the Securities Exchange Act of 1934 and the rules and
regulations promulgated thereunder.

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"FINRA" shall mean the Financial Industry Regulatory Authority, Inc.

"Indemnified Party" shall have the meaning specified in Section 9.3(a).

"Indemnifying Party" shall have the meaning specified in Section 9.3(a).

"Indemnity Notice" shall have the meaning specified in Section 9.3(b).

"Investment Amount" shall mean the dollar amount (within the range specified in
Section 2.2) to be invested by Investor to purchase Put Shares with respect to
any Put as notified by the Company to Investor in accordance with Section 2.2.

"Investor" shall have the meaning specified in the preamble to this Agreement.

"Legend" shall have the meaning specified in Section 8.1.

"Material Adverse Effect" shall mean any effect on the business, operations,
properties, or financial condition of the Company that is material and adverse
to the Company and/or any condition, circumstance, or situation that would
prohibit or otherwise materially interfere with the ability of the Company to
enter into and perform its obligations under this Agreement or any of the other
Transaction Documents.

"Maximum Commitment Amount" shall mean Fifteen Million Dollars ($15,000,000).

“Maximum Put Amount” shall mean, with respect to any Put, the lesser of (a) Two
Hundred Fifty Thousand Dollars ($250,000), or (b) Three Hundred Seventy Five
(375%) percent of the average of the Dollar Volume for the 15 Trading Days
immediately preceding the Put Date.

"New VWAP" shall have the meaning specified in Section 2.4.

"Old VWAP" shall have the meaning specified in Section 2.4. 

"Outstanding" shall mean, with respect to the Common Stock, at any date as of
which the number of shares of Common Stock is to be determined, all issued and
outstanding shares of Common Stock, including all shares of Common Stock
issuable in respect of outstanding convertible securities, scrip or any
certificates representing fractional interests in shares of Common Stock;
provided, however, that Outstanding shall not include any shares of Common Stock
then directly or indirectly owned or held by or for the account of the Company.

"Person" shall mean an individual, a corporation, a partnership, an association,
a trust or other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.

2

"Potential Material Event" shall mean any of the following: (i) the possession
by the Company of material information not ripe for disclosure in a Registration
Statement, which shall be evidenced by determinations in good faith by the Board
of Directors of the Company that disclosure of such information in the
Registration Statement would be detrimental to the business and affairs of the
Company, or (ii) any material engagement or activity by the Company which would,
in the good faith determination of the Board of Directors of the Company, be
adversely affected by disclosure in a Registration Statement at such time, which
determination shall be accompanied by a good faith determination by the Board of
Directors of the Company that the Registration Statement would be materially
misleading absent the inclusion of such information.

“Principal Market” shall mean the Nasdaq Global Select Market, the Nasdaq Global
Market, the Nasdaq Capital Market, the NYSE Euronext, the New York Stock
Exchange, the OTC Bulletin Board or other trading exchange or market (or any
successor to any of the foregoing), whichever is at the time the principal
trading exchange or market for the Common Stock.

“Pricing Period” shall mean the period commencing nine Trading Days prior to the
Put Date and ending three Trading Days following the Put Date.

"Purchase Price" shall mean, with respect to any Put, 94% multiplied by the
average of the three lowest VWAPs during the Pricing Period.

"Put" shall mean the right of the Company to require the Investor to purchase
shares of Common Stock, subject to the terms and conditions of this Agreement.

"Put Date" shall mean any Trading Day during the Commitment Period that a Put
Notice is deemed delivered pursuant to Section 2.2(b).

"Put Notice" shall mean a written notice, substantially in the form of Exhibit B
hereto, to Investor setting forth the Investment Amount with respect to which
the Company intends to require Investor to purchase shares of Common Stock
pursuant to the terms of this Agreement.

"Put Shares" shall mean all shares of Common Stock issued or issuable pursuant
to a Put that has been exercised or may be exercised in accordance with the
terms and conditions of this Agreement.

"Registrable Securities" shall mean the (i) Put Shares, (ii) the Blackout
Shares, (iii) the Commitment Shares and (iv) any securities issued or issuable
with respect to any of the foregoing by way of exchange, stock dividend or stock
split or in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization or otherwise. As to any particular
Registrable Securities, once issued such securities shall cease to be
Registrable Securities when (A) a Registration Statement has been declared
effective by the SEC and such Registrable Securities have been disposed of
pursuant to a Registration Statement, (B) such Registrable Securities could be
sold under

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circumstances under which all of the applicable conditions of Rule 144 are met,
(C) such time as such Registrable Securities have been otherwise transferred to
holders who may trade such shares without restriction under the Securities Act
or (D) in the opinion of counsel to the Company, which counsel shall be
reasonably acceptable to Investor, such Registrable Securities may be sold
without registration under the Securities Act or the need for an exemption from
any such registration requirements and without any time, volume or manner
limitations pursuant to Rule 144 (or any similar provision then in effect) under
the Securities Act.

"Registration Rights Agreement" shall mean the registration rights agreement in
the form of Exhibit A annexed hereto.

"Registration Statement" shall mean a registration statement on such form
promulgated by the SEC for which the Company then qualifies and which counsel
for the Company shall deem appropriate and which form shall be available for the
resale of the Registrable Securities to be registered thereunder in accordance
with the provisions of this Agreement and the Registration Rights Agreement and
in accordance with the intended method of distribution of such securities, for
the registration of the resale by Investor of the Registrable Securities under
the Securities Act.

"Regulation D" shall mean Regulation D promulgated under the Securities Act.

"Remaining Put Shares" shall have the meaning specified in Section 2.4.

"Rule 144" shall mean Rule 144 under the Securities Act or any similar provision
then in force under the Securities Act.

"SEC" shall mean the Securities and Exchange Commission.

 

"Securities Act" shall have the meaning specified in the recitals of this
Agreement.

"SEC Documents" shall mean, as of a particular date, all reports and other
documents filed by the Company pursuant to Section 13(a) or 15(d) of the
Exchange Act since the beginning of the Company's then most recently completed
fiscal year as of the time in question (provided that if the date in question is
within ninety days of the beginning of the Company's fiscal year, the term shall
include all documents filed since the beginning of the second preceding fiscal
year).

“Short Sales” shall mean all “short sales” as defined in Rule 200 of Regulation
SHO under the Exchange Act.

"Third Party Claim" shall have the meaning specified in Section 9.3(a).

“Trading Day” shall mean a day on which the Principal Market shall be open for
business.

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“Transaction Documents” shall mean this Equity Credit Agreement, the
Registration Rights Agreement, Closing Certificate, the Transfer Agent
Instructions and the other documents and instruments executed in connection
herewith.

"Transfer Agent" shall mean the transfer agent for the Common Stock (and to any
substitute or replacement transfer agent for the Common Stock upon the Company's
appointment of any such substitute or replacement transfer agent).

"Valuation Event" shall mean an event in which the Company at any time during a
Valuation Period takes any of the following actions:

(i)           subdivides or combines the Common Stock;

(ii)           pays a dividend in shares of Common Stock or makes any other
distribution of shares of Common Stock, except for dividends paid with respect
to any series of preferred stock authorized by the Company, whether existing now
or in the future;

(iii)           issues any options or other rights to subscribe for or purchase
shares of Common Stock other than pursuant to this Agreement or pursuant to a
stock plan and the price per share for which shares of Common Stock may at any
time thereafter be issuable pursuant to such options or other rights shall be
less than the VWAP in effect immediately prior to such issuance;

 

(iv)           issues any securities convertible into or exchangeable for shares
of Common Stock and the consideration per share for which shares of Common Stock
may at any time thereafter be issuable pursuant to the terms of such convertible
or exchangeable securities shall be less than the VWAP in effect immediately
prior to such issuance;

(v)           issues shares of Common Stock otherwise than as  provided in the
foregoing subsections (a) through (d), at a price per share less, or for other
consideration lower, than the VWAP in effect immediately prior to such issuance,
or without consideration; or

(f)           makes a distribution of its assets or evidences of indebtedness to
the holders of Common Stock as a dividend in liquidation or by way of return of
capital or other than as a dividend payable out of earnings or surplus legally
available for dividends under applicable law or any distribution to such holders
made in  respect of the sale of all or substantially all of the Company's assets
(other than under the circumstances provided for in the foregoing  subsections
(a) through (e).

"Valuation Period" shall mean the period of three (3) Trading Days immediately
following the date on which the applicable Put Notice is deemed to be delivered
and during which the Purchase Price of the Common Stock is valued; provided,
however, that if a Valuation Event occurs during any Valuation Period, a new
Valuation Period shall

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begin on the Trading Day immediately after the occurrence of such Valuation
Event and end on the third Trading Day thereafter.

“VWAP” shall mean the daily volume weighted average price (based on a Trading
Day from 9:30 a.m. to 4:00 p.m. (New York time)) of the Company on the Principal
Market as reported by Bloomberg Financial L.P. using the AQR function.

 ARTICLE II

PURCHASE AND SALE OF COMMON STOCK

Section 2.1           

Investments.

Upon the terms and conditions set forth herein (including, without limitation,
the provisions of Article VII), on any Put Date the Company may exercise a Put
by the delivery of a Put Notice. The number of Put Shares that Investor shall
purchase pursuant to such Put shall be determined by dividing the Investment
Amount specified in the Put Notice by the Purchase Price with respect to such
Put Notice.

Section 2.2            

Mechanics.

(a)           At any time and from time to time during the Commitment Period,
the Company may deliver a Put Notice to Investor, subject to the conditions set
forth herein; provided, however, that the Investment Amount identified in the
applicable Put Notice shall not be greater than the Maximum Put Amount and, when
taken together with any prior Put Notices, shall not exceed the Maximum
Commitment Amount. The Company shall not have the right to submit a Put Notice
(i) at anytime that there is an outstanding Put Notice or (ii) in the event that
the VWAP at any time during the 15 Trading Days prior to the Put Date is less
than $.02 per share.

(b)          A Put Notice shall be deemed delivered on (i) the Trading Day it is
received by facsimile or otherwise by Investor if such notice is received on or
prior to 12:00 noon New York time, or (ii) the immediately succeeding Trading
Day if it is received by facsimile or otherwise after 12:00 noon New York time
on a Trading Day or at any time on a day which is not a Trading Day.

Section 2.3           

Closings.

On each Closing Date, the Company shall, or shall cause the Company’s Transfer
Agent to, electronically transfer the Put Shares purchased by the Investor by
crediting the Investor’s or its designees’ account at DTC through its
Deposit/Withdrawal at Custodian (DWAC) system, which Put Shares shall be freely
tradable and transferable and without restriction on resale, against payment
therefor to the Company’s designated account by wire transfer of immediately
available funds upon the receipt by the Investor of the Put Shares; provided
that if the Put Shares are received by the Investor later than 12:00 noon (New
York time), payment therefor shall be made with

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next day funds. In addition, on or prior to such Closing Date, each of the
Company and Investor shall deliver to each other all documents, instruments and
writings required to be delivered or reasonably requested by either of them
pursuant to this Agreement in order to implement and effect the transactions
contemplated herein.

Section 2.4            

Blackout Shares.

(a)           If at any time or from time to time after the date of
effectiveness of the Registration Statement, the Company delivers a Blackout
Notice to the Investor, the Investor shall not offer or sell any Put Shares, or
Blackout Shares (as defined below), or engage in any other transaction involving
or relating to such shares, from the time of the Blackout Notice until Investor
receives written notice from the Company that such Potential Material Event
either has been disclosed to the public or no longer constitutes a Potential
Material Event (such period, a "Blackout Period").

(b)           In the event that, (i) within five (5) Trading Days following any
Closing Date, the Company delivers a Blackout Notice to Investor, and (ii) the
VWAP on the Trading Day immediately preceding the applicable Blackout Period
("Old VWAP Price") is greater than the VWAP on the first Trading Day following
such Blackout Period that Investor may sell its Registrable Securities pursuant
to an effective Registration Statement ("New VWAP”), then the Company shall
issue to Investor the number of additional shares of Registrable Securities (the
"Blackout Shares") equal to the excess of (x) the product of the number of Put
Shares held by Investor immediately prior to the Blackout Period that were
issued on the most recent Closing Date (the "Remaining Put Shares") multiplied
by the Old VWAP Price, divided by the New VWAP Price, over (y) the Remaining Put
Shares.

Section 2.5    

      

Delay.   The Company understands that a delay in the issuance of shares of
Common Stock more than five (5) days beyond the Closing Date could result in
economic loss to the Investor.  After the Effective Date, as compensation to the
Investor for such loss, the Company agrees to pay late payments to the Investor
for late issuance of shares of Common Stock beyond such five (5) day period in
accordance with the following schedule (where “No. of Days Late” is defined as
the number of days beyond the date which is five (5) days after the Closing
Date):

Late Payment For Each  No. of Days Late

$10,000 of Common Stock

1

$100

2

$200

3

$300

4

$400

5

$500

6

$600

7

$700

8

$800

9

$900

10

1,000

Beyond 10

$1,000 plus $200 for each Business Day late

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Section 2.6            

Liquidated Damages. Each of the Company and Investor acknowledge and agree that
the requirements under Section 2.5 shall give rise to liquidated damages and not
penalties. Each of the Company and Investor further acknowledge that (i) the
amount of loss or damages likely to be incurred is incapable or is difficult to
precisely estimate, (ii) the amount specified in such Section bears a reasonable
proportion and is not plainly or grossly disproportionate to the probable loss
likely to be incurred by Investor and (iii) each of the Company and Investor are
sophisticated business parties and have been represented by sophisticated and
able legal and financial counsel and negotiated this Agreement at arm's length.

 

 

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF INVESTOR

Investor represents and warrants to the Company that:

Section 3.1                  Sophisticated Investor. Investor is a sophisticated
investor (as described in Rule 506(b)(2)(ii) of Regulation D) and an accredited
investor (as defined in Rule 501 of Regulation D), and Investor has such
experience in business and financial matters that it is capable of evaluating
the merits and risks of an investment in the Common Stock. Investor acknowledges
that an investment in the Common Stock is speculative and involves a high degree
of risk.

Section 3.2            

Authority.  Investor has the requisite power and authority to enter into and
perform its obligations under this Agreement and the transactions contemplated
hereby in accordance with its terms. The execution and delivery of this
Agreement and the Registration Rights Agreement, and the consummation by it of
the transactions contemplated hereby and thereby have been duly authorized by
all necessary action and no further consent or authorization of Investor or its
members is required. Each of this Agreement and the Registration Rights
Agreement has been duly authorized and validly executed and delivered by
Investor and constitutes a valid and binding obligation of Investor enforceable
against it in accordance with its terms, subject to applicable bankruptcy,
insolvency, or similar laws relating to, or affecting generally the enforcement
of, creditors' rights and remedies or by other equitable principles of general
application.

Section 3.3           

Organization and Standing. Investor is a limited liability company duly
organized, validly existing and in good standing under the laws of the state of
New York and has all requisite power and authority to own, lease and operate its
properties and to carry on its business as now being conducted. Investor is duly
qualified and in good standing in every jurisdiction in which the nature of the
business conducted or property owned by it makes such qualification necessary,
other than those in which the

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failure so to qualify would not have a material adverse effect on Investor.

Section 3.4            

Absence of Conflicts. The execution and delivery of this Agreement and any other
document or instrument contemplated hereby, and the consummation of the
transactions contemplated hereby and thereby, and compliance with the
requirements hereof and thereof, will not: (i) violate any law, rule,
regulation, order, writ, judgment, injunction, decree or award binding on
Investor, (ii) violate any provision of any indenture, instrument or agreement
to which Investor is a party or is subject, or by which Investor or any of its
assets is bound, or conflict with or constitute a material default thereunder,
(iii) result in the creation or imposition of any lien pursuant to the terms of
any such indenture, instrument or agreement, or constitute a breach of any
fiduciary duty owed by Investor to any third party, or (iv) require the approval
of any third-party (that has not been obtained) pursuant to any material
contract, instrument, agreement, relationship or legal obligation to which
Investor is subject or to which any of its assets, operations or management may
be subject.

 Section 3.5

  Information. All materials relating to the business, financial condition,
management and operations of the Company and materials relating to the offer and
sale of the shares of Common Stock which have been requested by the Investor
have been furnished or otherwise made available to the Investor or its advisors
(subject to Section 4.15 of this Agreement).  The Investor and its advisors have
been afforded the opportunity to ask questions of representatives of the
Company. The Investor 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 shares of Common Stock. The Investor understands that it (and
not the Company) shall be responsible for its own tax liabilities that may arise
as a result of this investment or the transactions contemplated by this
Agreement. The Investor is aware of all of its obligations under U.S. federal
and applicable state securities laws and all rules and regulations promulgated
thereunder in connection with this Agreement and the transactions contemplated
hereby and the purchase and sale of the shares of Common Stock hereunder.

 

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company represents and warrants to Investor that, except as disclosed in the
SEC Documents:

Section 4.1            Organization of the Company. The Company is a corporation
duly organized and validly existing and in good standing under the laws of the
State of Nevada and has all requisite power and authority to own, lease and
operate its properties and to carry on its business as now being conducted.  The
Company is duly qualified as a foreign corporation to do business and is in good
standing in every jurisdiction in which the nature of the business conducted or
property owned by it makes such qualification necessary, other than those in
which the failure so to qualify would not have a Material

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Adverse Effect.

 

Section 4.2           Authority.  The Company has the requisite corporate power
and authority to enter into and perform its obligations under this Agreement and
the Registration Rights Agreement and to issue the Put Shares, the Commitment
Shares and  the Blackout Shares, if any. The execution and delivery of this
Agreement and the Registration Rights Agreement by the Company and the
consummation by it of the transactions contemplated hereby and thereby have been
duly authorized by all necessary corporate action and no further consent or
authorization of the Company or its Board of Directors or stockholders is
required. Each of this Agreement and the Registration Rights Agreement has been
duly executed and delivered by the Company and constitutes a valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, or similar laws relating to, or affecting generally the enforcement
of, creditors' rights and remedies or by other equitable principles of general
application.

Section 4.3          Capitalization.   As of the date hereof, the authorized
capital stock of the Company consists of 650,000,000 shares of Common Stock,
$.0001 par value per share, of which 88,369,086 shares are outstanding as of the
date hereof (which amounts may be increased from time to time after the date
hereof). Except as otherwise disclosed in the SEC Documents, there are no
outstanding securities which are convertible into shares of Common Stock,
whether such conversion is currently exercisable or exercisable only upon some
future date or the occurrence of some event in the future.  All of the
outstanding shares of Common Stock of the Company have been duly and validly
authorized and issued and are fully paid and non-assessable.

Section 4.4           Common Stock. The Company has registered the Common Stock
pursuant to Section 12(b) or 12(g) of the Exchange Act and is in full compliance
with all reporting requirements of the Exchange Act, and the Company has
maintained all requirements for the continued listing or quotation of the Common
Stock, and such Common Stock is currently listed or quoted on the Principal
Market. The Company has taken no action designed to, or which to its knowledge
is likely to have the effect of, terminating the registration of the Common
Stock under the Exchange Act nor has the Company received any notification that
the SEC is contemplating terminating such registration.

Section 4.5      SEC Documents. The Company may make available to Investor true
and complete copies of the SEC Documents (including, without limitation, proxy
information and solicitation materials). The Company has not provided to
Investor any information that, according to applicable law, rule or regulation,
should have been disclosed publicly prior to the date hereof by the Company, but
which has not been so disclosed. As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the Securities Act or
the Exchange Act, as the case may be, and other federal, state and local laws,
rules and regulations applicable to such SEC Documents, and none of the SEC
Documents 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

10

the statements therein, in light of the circumstances under which they were
made, not misleading. The financial statements of the Company included in the
SEC Documents comply as to form and substance in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC or other applicable rules and regulations with respect thereto. Such
financial statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
(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 not include footnotes or may be condensed or summary statements) and
fairly present in all material respects the financial position of the Company as
of the dates thereof and the results of operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments).

 

 Section 4.6        Valid Issuances. When issued and paid for as herein
provided, the Put Shares, the Commitment Shares and the Blackout Shares, if any,
shall be duly and validly issued, fully paid, and non-assessable. Neither the
sale of the Put Shares, the Commitment Shares or the Blackout Shares, if any,
pursuant to, nor the Company's performance of its obligations under, this
Agreement or the Registration Rights Agreement shall (i) result in the creation
or imposition of any liens, charges, claims or other encumbrances upon the Put
Shares, the Commitment Shares or Blackout Shares, if any, or any of the assets
of the Company, or (ii) entitle the holders of outstanding shares of Common
Stock to preemptive or other rights to subscribe to or acquire the Common Stock
or other securities of the Company. The Put Shares, the Commitment Shares and
Blackout Shares, if any, shall not subject Investor to personal liability, in
excess of the subscription price by reason of the ownership thereof.

Section 4.7          No General Solicitation or Advertising in Regard to this
Transaction. Neither the Company nor any of its Affiliates nor any Person acting
on its or their behalf (i) has conducted or will conduct any general
solicitation (as that term is used in Rule 502(c) of Regulation D) or general
advertising with respect to any of the Put Shares, the Commitment Shares or the
Blackout Shares, if any, or (ii) made any offers or sales of any security or
solicited any offers to buy any security under any circumstances that would
require registration of the Common Stock under the Securities Act.

Section 4.8           Corporate Documents.  The Company has furnished or made
available to Investor true and correct copies of the Company's Certificate of
Incorporation, as amended and in effect on the date hereof (the "Certificate"),
and the Company's By-Laws, as amended and in effect on the date hereof (the
"By-laws").

Section 4.9            No Conflicts. The execution, delivery and performance of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby, including without limitation the issuance of
the Put Shares, the Commitment Shares and the Blackout Shares, if any, do not
and will not (i) result in a violation of the Certificate or By-Laws or (ii)
conflict with, or constitute a material default (or an event that with notice or
lapse of time or both would become a material default) under, or give to others
any rights of termination, amendment, acceleration or

11

cancellation of, any material agreement, indenture, instrument or any "lock-up"
or similar provision of any underwriting or similar agreement to which the
Company is a party, or (iii) result in a violation of any federal, state or
local law, rule, regulation, order, judgment or decree (including federal and
state securities laws and regulations) applicable to the Company or by which any
property or asset of the Company is bound or affected, and (iv) the Company is
not otherwise in violation of, conflict with or in default under any of the
foregoing. The business of the Company is not being conducted in violation of
any law, ordinance or regulation of any governmental entity. Except as provided
herein and the other Transaction Documents, the Company is not required under
federal, state or local law, rule or regulation to obtain any consent,
authorization or order of, or make any filing or registration with, any court or
governmental agency in order for it to execute, deliver or perform any of its
obligations under this Agreement or issue and sell the Common Stock in
accordance with the terms hereof; provided that, for purposes of the
representation made in this sentence, the Company is assuming and relying upon
the accuracy of the relevant representations and agreements of Investor herein.

 

Section 4.10          No Material Adverse Change. Since August 31, 2012 no event
has occurred that would have a Material Adverse Effect on the Company, except as
disclosed in the SEC Documents.

Section 4.11         No Undisclosed Liabilities. The Company has no liabilities
or obligations that are material, individually or in the aggregate, and that are
not disclosed in the SEC Documents or otherwise publicly announced, other than
those incurred in the ordinary course of the Company's businesses since August
31, 2012 and which, individually or in the aggregate, do not or would not have a
Material Adverse Effect on the Company.

Section 4.12

      No Undisclosed Events or Circumstances. Since August 31, 2012, no event or
circumstance has occurred or exists with respect to the Company or its
businesses, properties, operations or financial condition, that, under
applicable law, rule or regulation, requires public disclosure or announcement
prior to the date hereof by the Company but which has not been so publicly
announced or disclosed in the SEC Documents.

Section 4.13        No Integrated Offering. Neither the Company, nor any of its
Affiliates, nor any Person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, other than pursuant to this Agreement, under circumstances
that would require registration of the Common Stock under the Securities Act.

Section 4.14          Litigation and Other Proceedings.  Except as may be set
forth in the SEC Documents, there are no lawsuits or proceedings pending or to
the knowledge of the Company threatened, against the Company, nor has the
Company received any written or oral notice of any such action, suit, proceeding
or investigation, which would have a Material Adverse Effect. Except as set
forth in the SEC Documents, no judgment, order,

12

writ, injunction or decree or award has been issued by or, so far as is known by
the Company, requested of any court, arbitrator or governmental agency which
would have a Material Adverse Effect.

  

Section 4.15         Material Non-Public Information. The Company is not in
possession of, nor has the Company or its agents disclosed to Investor, any
material non-public information that (i) if disclosed, would reasonably be
expected to have a materially adverse effect on the price of the Common Stock or
(ii) according to applicable law, rule or regulation, should have been disclosed
publicly by the Company prior to the date hereof but which has not been so
disclosed.

Section 4.16         Sarbanes-Oxley; Internal Accounting Controls.

Except as otherwise disclosed in the SEC Documents, the Company is in material
compliance with all provisions of the Sarbanes-Oxley Act of 2002 which are
applicable to it. Except as otherwise disclosed in the SEC Documents, the
Company and 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 GAAP and to maintain asset accountability, (iii)
access to assets is permitted only in accordance with management’s general or
specific authorization, and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences. The Company has established disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the Company and designed such disclosure controls and procedures
to ensure that information required to be disclosed by the Company in the
reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules
and forms. The Company’s certifying officers have evaluated the effectiveness of
the Company’s disclosure controls and procedures as of the end of the period
covered by the Company’s most recently filed periodic report under the Exchange
Act (such date, the “Evaluation Date”). The Company presented in its most
recently filed periodic report under the Exchange Act the conclusions of the
certifying officers about the effectiveness of the disclosure controls and
procedures based on their evaluations as of the Evaluation Date. Since the
Evaluation Date, there have been no changes in the Company’s internal control
over financial reporting (as such term is defined in the Exchange Act) that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.

13

ARTICLE V

COVENANTS OF INVESTOR

Section 5.1         Compliance with Law; Trading in Securities. Investor's
trading activities with respect to shares of the Common Stock will be in
compliance with all applicable state and federal securities laws, rules and
regulations and the rules and regulations of FINRA and the Principal Market on
which the Common Stock is listed or quoted.

Section 5.2         Short Sales. Neither Investor nor any Affiliate (or
associate as defined under FINRA rules and regulations) of the Investor acting
on its behalf or pursuant to any understanding with it will execute any Short
Sales during the period from the date hereof to the end of the Commitment
Period.  For the purposes hereof, and in accordance with Regulation SHO, the
sale after delivery of a Put Notice of such number of shares of Common Stock
reasonably expected to be purchased under a Put Notice until the delivery of the
Put Shares specified in the Put Notice shall not be deemed a Short Sale (“Put
Exempt Sale”).

Section 5.3

Beneficial Ownership.  Upon the Company’s written request, the Investor shall
notify the Company as to whether the Registrable Securities then owned by
Investor beneficially or deemed beneficially owned by Investor, is more than
4.99% of all of such Common Stock as then outstanding as determined in
accordance with Section 16 of the Exchange Act and the regulations promulgated
thereunder.

ARTICLE VI

COVENANTS OF THE COMPANY

Section 6.1          Registration Rights. The Company shall use its best efforts
to cause the Registration Rights Agreement to remain in full force and effect
and the Company shall comply in all respects with the terms thereof.

Section 6.2           Reservation of Common Stock. The Company will, from time
to time as needed in advance of a Closing Date, reserve and keep available until
the consummation of such Closing, free of preemptive rights sufficient shares of
Common Stock for the purpose of enabling the Company to satisfy its obligation
to issue the Put Shares to be issued in connection therewith. The number of
shares so reserved from time to time, as theretofore increased or reduced as
hereinafter provided, may be reduced by the number of shares actually delivered
hereunder.

Section 6.3         Listing of Common Stock.  If the Company applies to have the
Common Stock traded on any other Principal Market, it shall include in such
application the Put Shares, the Commitment Shares and the Blackout Shares, if
any, and shall take such other action as is necessary or desirable in the
reasonable opinion of Investor to

14

cause the Common Stock to be listed on such other Principal Market as promptly
as possible. The Company shall use its commercially reasonable efforts to
continue the listing and trading of the Common Stock on the Principal Market
(including, without limitation, maintaining sufficient net tangible assets) and
will comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of FINRA and the Principal Market.

Section 6.4          Exchange Act Registration. The Company shall cause the
Common Stock to continue to be registered under Section 12(g) or 12(b) of the
Exchange Act, will comply in all material respects with its reporting and filing
obligations under the Exchange Act, and will not take any action or file any
document (whether or not permitted by the Exchange Act or the rules thereunder)
to terminate or suspend such registration or to terminate or suspend its
reporting and filing obligations under the Exchange Act.  

 

Section 6.5          Notice of Certain Events Affecting Registration; Suspension
of Right to Make a Put. The Company shall promptly notify Investor upon the
occurrence of any of the following events in respect of a registration statement
or related prospectus in respect of an offering of Registrable Securities: (i)
receipt of any request by the SEC or any other federal or state governmental
authority during the period of effectiveness of the Registration Statement for
amendments or supplements to the Registration Statement or related prospectus;
(ii) the issuance by the SEC or any other federal or state governmental
authority of any stop order suspending the effectiveness of any Registration
Statement or the initiation of any proceedings for that purpose; (iii) receipt
of any notification with respect to the suspension of the qualification or
exemption from qualification of any of the Registrable Securities for sale in
any jurisdiction or the initiation or threatening of any proceeding for such
purpose; (iv) the happening of any event that makes any statement made in such
Registration Statement or related prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
that requires the making of any changes in the Registration Statement, related
prospectus or documents so that, in the case of a Registration Statement, it
will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and that in the case of the related prospectus, it will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and (v) the Company's reasonable determination that a post-effective
amendment to the Registration Statement would be appropriate, and the Company
shall promptly make available to Investor any such supplement or amendment to
the related prospectus. The Company shall not deliver to Investor any Put Notice
during the continuation of any of the foregoing events. Investor shall
immediately cease all sales of Registrable Securities and distribution of a
Prospectus upon receipt of such notification.

Section 6.6          Consolidation; Merger.  The Company shall not, without the
prior written consent of Investor, at any time after the date hereof effect any
merger or

15

consolidation of the Company unless the resulting successor or acquiring entity
(if not the Company) assumes by written instrument the obligation to deliver to
Investor such shares of Common Stock and/or securities as Investor is entitled
to receive pursuant to this Agreement.

Section 6.7          Reimbursement.  If (i) Investor, other than by reason of
Investor’s gross negligence or willful misconduct, becomes involved in any
capacity in any action, proceeding or investigation brought by any shareholder
of the Company, in connection with or as a result of the consummation of the
transactions contemplated by the Transaction Documents, or if Investor is
impleaded in any such action, proceeding or investigation by any Person, or (ii)
Investor, other than by reason of Investor’s gross negligence or willful
misconduct or by reason of its trading of the Common Stock in a manner that is
illegal under the federal securities laws, becomes involved in any capacity in
any action, proceeding or investigation brought by the SEC against or involving
the Company or in connection with or as a result of the consummation of the
transactions contemplated by the Transaction Documents, or if Investor is
impleaded in any such action, proceeding or investigation by any Person, then in
any such case, the Company will reimburse Investor for its reasonable legal and
other expenses (including the cost of any investigation and preparation)
incurred in connection therewith, as such expenses are incurred. The
reimbursement obligations of the Company under this section shall be in addition
to any liability which the Company may otherwise have, shall extend upon the
same terms and conditions to any Affiliates of Investor that are actually named
in such action, proceeding or investigation, and partners, directors, agents,
employees and controlling Persons (if any), as the case may be, of Investor and
any such Affiliate, and shall be binding upon and inure to the benefit of any
successors, assigns, heirs and personal representatives of the Company, Investor
and any such Affiliate and any such Person.

 

Section 6.8          Dilution.  The number of shares of Common Stock issuable as
Put Shares may increase substantially in certain circumstances, including, but
not necessarily limited to, the circumstance wherein the trading price of the
Common Stock declines during the period between the date hereof and the end of
the Commitment Period.  The Company’s executive officers and directors
understand the nature of the transactions contemplated by this Agreement and
recognize that they have a potential dilutive effect.  The board of directors of
the Company has concluded, in its good faith business judgment, that such
issuance is in the best interests of the Company.  The Company specifically
acknowledges that its obligation to issue the Put Shares is binding upon the
Company and enforceable regardless of the dilution such issuance may have on the
ownership interests of other shareholders of the Company.

Section 6.9         Certain Agreements. The Company covenants and agrees that it
will not, without the prior written consent of the Investor, enter into any
other equity line of credit agreement with a third party during the Commitment
Period.  For the avoidance of doubt, nothing contained in the Transaction
Documents shall restrict, or require the Investor's consent for, any agreement
providing for the issuance or distribution of (or the

16

issuance or distribution of) any equity securities pursuant to any agreement or
arrangement that is not commonly understood to be an "equity line of credit."

ARTICLE VII

CONDITIONS TO DELIVERY OF

PUT NOTICES AND CONDITIONS TO CLOSING

Section 7.1           Conditions Precedent to the Obligation of the Company to
Issue and Sell Common Stock. The obligation hereunder of the Company to issue
and sell the Put Shares to Investor incident to each Closing is subject to the
satisfaction, at or before each such Closing, of each of the conditions set
forth below.

(a)           Accuracy of Investor's Representations and Warranties. The
representations and warranties of Investor shall be true and correct in all
material respects as of the date of this Agreement and as of the date of each
such Closing as though made at each such time.

 

(b)           Performance by Investor. Investor shall have performed, satisfied
and complied in all material respects with all covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied
with by Investor at or prior to such Closing.

(c)           Principal Market Regulation. The Company shall not issue any Put
Shares or Blackout Shares, if any, and the Investor shall not have the right to
receive any Put Shares or Blackout Shares, if the issuance of such shares would
exceed the aggregate number of shares of Common Stock which the Company may
issue without breaching the Company’s obligations under the rules or regulations
of the Principal Market (the “Exchange Cap”), except that such limitation shall
not apply in the event that the Company obtains the approval of its stockholders
as required by the applicable rules of the Principal Market for issuances of
Common Stock in excess of such amount, which such approval the Company will use
its best efforts to obtain. Until such approval is obtained, Investor shall not
be issued under the Transaction Documents, shares of Common Stock in an amount
greater than the Exchange Cap.

Section 7.2        Conditions Precedent to the Right of the Company to Deliver a
Put Notice and the Obligation of Investor to Purchase Put Shares. The right of
the Company to deliver a Put Notice and the obligation of Investor hereunder to
acquire and

17

pay for the Put Shares incident to a Closing is subject to the satisfaction, on
(i) the date of delivery of such Put Notice and (ii) the applicable Closing Date
(each a "Condition Satisfaction Date”), of each of the following conditions:

(a)          Effective Registration Statement. As set forth in the Registration
Rights Agreement, a Registration Statement, and any amendment or supplement
thereto, shall have previously become effective for the resale by Investor of
the Registrable Securities subject to such Put Notice, and such Registration
Statement shall remain effective on each Condition Satisfaction Date and (i)
neither the Company nor Investor shall have received notice that the SEC has
issued or intends to issue a stop order with respect to such Registration
Statement or that the SEC otherwise has suspended or withdrawn the effectiveness
of such Registration Statement, either temporarily or permanently, or intends or
has threatened to do so (unless the SEC's concerns have been addressed and
Investor is reasonably satisfied that the SEC no longer is considering or
intends to take such action), and (ii) no other suspension of the use or
withdrawal of the effectiveness of such Registration Statement or related
prospectus shall exist.

(b)          Accuracy of the Company's Representations and Warranties. The
representations and warranties of the Company shall be true and correct in all
material respects as of each Condition Satisfaction Date as though made at each
such time (except for representations and warranties specifically made as of a
particular date) with respect to all periods, and as to all events and
circumstances occurring or existing to and including each Condition Satisfaction
Date.

(c)          Performance by the Company. The Company shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement and the Registration Rights Agreement
to be performed, satisfied or complied with by the Company at or prior to each
Condition Satisfaction Date.

(d)          No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
adopted by any court or governmental authority of competent jurisdiction that
prohibits or directly and materially adversely affects any of the transactions
contemplated by this Agreement, and no proceeding shall have been commenced that
may have the effect of prohibiting or materially adversely affecting any of the
transactions contemplated by this Agreement.

(e)          Adverse Changes. Since the date of filing of the Company's most
recent SEC Document, no event that had or is reasonably likely to have a
Material Adverse Effect has occurred.

(f)           No Suspension of Trading in or Delisting of Common Stock. The
trading of the Common Stock shall not have been suspended by the SEC, the
Principal Market or FINRA and the Common Stock shall have been approved for
listing or quotation on and shall not have been delisted from the Principal
Market.

18

(g)          Legal Opinion. The Company shall have caused to be delivered to
Investor, prior to the first Closing, an opinion of the Company's legal counsel
in the form of Exhibit C hereto, addressed to Investor.

(h)          9.99% Percent Limitation. On each Closing Date, the number of Put
Shares then to be purchased by Investor shall not exceed the number of such
shares that, when aggregated with all other shares of Registrable Securities
then owned by Investor beneficially or deemed beneficially owned by Investor,
would result in Investor owning more than 9.99% of all of such Common Stock as
would be outstanding on such Closing Date, as determined in accordance with
Section 16 of the Exchange Act and the regulations promulgated thereunder. For
purposes of this Section, in the event that the amount of Common Stock
outstanding as determined in accordance with Section 16 of the Exchange Act and
the regulations promulgated thereunder is greater on a Closing Date than on the
date upon which the Put Notice associated with such Closing Date is given, the
amount of Common Stock outstanding on such Closing Date shall govern for
purposes of determining whether Investor, when aggregating all purchases of
Common Stock made pursuant to this Agreement and Blackout Shares, if any, would
own more than 9.99% of the Common Stock following such Closing Date.

(i)       

Principal Market Regulation. The Company shall not issue any Put Shares or
Blackout Shares, if any, and the Investor shall not have the right to receive
any Put Shares, or Blackout Shares, if the issuance of such shares would exceed
the Exchange Cap, except that such limitation shall not apply in the event that
the Company obtains the approval of its stockholders as required by the
applicable rules of the Principal Market for issuances of Common Stock in excess
of such amount, which such approval the Company will use its best efforts to
obtain. Until such approval is obtained, Investor shall not be issued under the
Transaction Documents, shares of Common Stock in an amount greater than the
Exchange Cap.

(j)          No Knowledge. The Company shall have no knowledge of any event more
likely than not to have the effect of causing such Registration Statement to be
suspended or otherwise ineffective (which event is more likely than not to occur
within the fifteen (15) Trading Days following the Trading Day on which such Put
Notice is deemed delivered).

(k)          Shareholder Vote. The issuance of shares of Common Stock with
respect to the applicable Closing, if any, shall not violate the shareholder
approval requirements of the Principal Market.

(l)           No Valuation Event. No Valuation Event shall have occurred since
the Put Date.

(m)

DTC Eligible.  The Put Shares delivered to the Investor are DTC eligible, can be
immediately converted into electronic form and there is no DTC “chill” or
equivalent on the Company’s Common Stock.

19

(n)

Continuing Clearing House Acceptability. The Common Stock to be issued pursuant
to each Put Notice shall continue to be eligible for deposit with and clearing
through the Depository Trust Company or another FINRA member clearing firm
without cost or expense to the investor.   No legend shall be placed on the
share certificates representing the Put Shares.

(o)         Other. On each Condition Satisfaction Date, Investor shall have
received a certificate in substantially the form and substance of Exhibit D
hereto, executed by an executive officer of the Company and to the effect that
all the conditions to such Closing shall have been satisfied as at the date of
each such certificate.

ARTICLE VIII

LEGENDS

Section 8.1       Legends.   Prior to the execution hereof, the Company shall
execute the Transfer Agent Instructions in the form annexed hereto as Exhibit
E.  Until such time as the Registrable Securities have been registered under the
Securities Act, as contemplated by the Registration Rights Agreement, and sold
in accordance with an effective Registration Statement or otherwise in
accordance with another effective Registration Statement, or until such
Registrable Securities can otherwise be sold without restriction, whichever is
earlier, each certificate representing Registrable Securities will bear the
following legend (the "Legend"):

THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS.

 

The Company warrants that it will give the Transfer Agent no instructions
inconsistent with the provisions hereof. It is the intent and purpose of such
instructions, as provided therein, to require the Transfer Agent to issue to
Investor certificates evidencing shares of Common Stock incident to a Closing,
free of the Legend; provided that (i) a Registration Statement shall then be
effective, (ii) Investor confirms to the Transfer Agent and the Company that it
has sold or intends to sell such Common Stock to a third party which is not an
Affiliate of Investor or the Company and Investor agrees to redeliver the
certificate representing such shares of Common Stock to the Transfer Agent to
add the Legend in the event the Common Stock is not sold, and (iii) Investor
confirms to the Transfer Agent and the Company that Investor has complied, or
will comply  with the prospectus

20

delivery requirement under the Securities Act.

 

Section 8.2      No Other Legend or Stock Transfer Restrictions. No legend other
than the one specified in Section 8.1 has been or shall be placed on the share
certificates representing the Common Stock.

 

Section 8.3      Cover.  If the Company fails for any reason to take or cause to
be taken all steps necessary on the part of the Company to deliver the Put
Shares on such Closing Date and  the Investor purchases, in an open market
transaction or otherwise, shares of Common Stock (the "Covering Shares") in
order to make delivery in satisfaction of a sale of Common Stock by the Investor
(the "Sold Shares"), which delivery the Investor anticipated to make using the
Put Shares (a "Buy-In"), then the Company shall pay to the Investor, in addition
to all other amounts contemplated hereby, and not in lieu thereof, the Buy-In
Adjustment Amount (as defined below). The "Buy-In Adjustment Amount" is the
amount equal to the excess, if any, of (x) such Investor’s total purchase price
(including brokerage commissions, if any) for the Covering Shares over (y) the
net proceeds (after brokerage commissions, if any) received by such Investor
from the sale of the Sold Shares. The Company shall pay the Buy-In Adjustment
Amount to the Investor in immediately available funds immediately upon demand by
the Investor. By way of illustration and not in limitation of the foregoing, if
the Investor purchases Covering Shares having a total purchase price (including
brokerage commissions) of $11,000 to cover a Buy-In with respect to shares of
Common Stock that it sold for net proceeds of $10,000, the Buy-In Adjustment
Amount that the Company will be required to pay to the Investor will be $1,000.

Section 8.4          Investor's Compliance. Nothing in this Article VIII shall
affect in any way Investor's obligations under any agreement to comply with all
applicable securities laws upon resale of the Common Stock.

  

ARTICLE IX

NOTICES; INDEMNIFICATION

Section 9.1         Notices. All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be in
writing and, unless otherwise specified herein, shall be (i) personally served,
(ii) deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, or facsimile, addressed as set
forth below or to such other address as such party shall have specified most
recently by written notice given in accordance herewith. Any notice or other
communication required or permitted to be given hereunder shall be deemed
effective (i) upon hand delivery or delivery by facsimile, with accurate
confirmation generated by the transmitting facsimile machine, at the address or
number designated below (if delivered on a business day during normal business
hours where such notice is to be received), or the first business day following
such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (ii) on the second

21

business day following the date of mailing by express courier service or on the
fifth business day after deposited in the mail, in each case, fully prepaid,
addressed to such address, or upon actual receipt of such mailing, whichever
shall first occur. The addresses for such communications shall be as follows:

If to the Company:                                                      

Dieter Sauer, Jr., President

Sauer Energy, Inc.4670 Calle Carga, Unit A

Camarillo, CA    93012

Facsimile: (888) 829-8748

 

With a copy to:

Frank Hariton, Esq.

1065 Dobbs Ferry

White Plains, NY 10607

Facsimile: (914) 693-2963

If to Investor:

Barry Patterson

Eclipse Advisors, LLC

551 Fifth Avenue, 6th floor, suite 612

New York, NY 10176

Facsimile: (212) 409-8447

With a copy to:

Marc G. Rosenberg, Esq.McLaughlin & Stern, LLP260 Madison AvenueNew York, New
York 10016Facsimile: (800) 933-0981

Either party hereto may from time to time change its address or facsimile number
for notices under this Section 9.1 by giving at least ten (10) days' prior
written notice of such changed address or facsimile number to the other party
hereto.

Section 9.2       Indemnification.  The Company agrees to indemnify and hold
harmless

22

Investor and its officers, directors, employees, and agents, and each Person or
entity, if any, who controls Investor within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, together with the Controlling
Persons (as defined in the Registration Rights Agreement) from and against any
Damages, joint or several, and any action in respect thereof to which Investor,
its partners, Affiliates, officers, directors, employees, and duly authorized
agents, and any such Controlling Person becomes subject to, resulting from,
arising out of or relating to any misrepresentation, breach of warranty or
nonfulfillment of or failure to perform any covenant or agreement on the part of
Company contained in this Agreement, as such Damages are incurred, except to the
extent such Damages result solely from Investor's failure to perform any
covenant or agreement contained in this Agreement or Investor's or its
officer’s, director’s, employee’s, agent’s or Controlling Person’s recklessness
or bad faith in performing its obligations under this Agreement.

Section 9.3       Method of Asserting Indemnification Claims. All claims for
indemnification by any Indemnified Party (as defined below) under Section 9.2
shall be asserted and resolved as follows:

(a)           In the event any claim or demand in respect of which any Person
claiming indemnification under any provision of Section 9.2 (an "Indemnified
Party") might seek indemnity under Section 9.2 is asserted against or sought to
be collected from such Indemnified Party by a Person other than a party hereto
or an Affiliate thereof (a "Third Party Claim"), the Indemnified Party shall
deliver a written notification (a "Claim Notice"), enclosing a copy of all
papers served, if any, and specifying the nature of and basis for such Third
Party Claim and for the Indemnified Party's claim for indemnification that is
being asserted under any provision of Section 9.2 against any Person (the
"Indemnifying Party"), with reasonable promptness to the Indemnifying Party,
  provided  however , that failure to notify the Indemnifying Party will not
relieve the Indemnifying Party from liability hereunder, except to the extent it
has been materially prejudiced by the failure to give notice. The Indemnifying
Party shall notify the Indemnified Party as soon as practicable within the
period ending thirty (30) calendar days following receipt by the Indemnifying
Party of either a Claim Notice or an Indemnity Notice (as defined below) (the
"Dispute Period") whether the Indemnifying Party disputes its liability or the
amount of its liability to the Indemnified Party under Section 9.2 and whether
the Indemnifying Party desires, at its sole cost and expense, to defend the
Indemnified Party against such Third Party Claim.

 

(i)           If the Indemnifying Party notifies the Indemnified Party within
the Dispute Period that the Indemnifying Party desires to defend the Indemnified
Party with respect to the Third Party Claim pursuant to this Section 9.3(a),
then the Indemnifying Party shall have the right to defend, with counsel
reasonably satisfactory to the Indemnified Party, at the sole cost and expense
of the Indemnifying Party, such Third Party Claim by all appropriate
proceedings, which proceedings shall be vigorously and diligently prosecuted by
the Indemnifying Party to a final conclusion or will be settled at the
discretion of the Indemnifying Party (but only with the consent of the
Indemnified Party in the case of any

23

settlement that provides for any relief other than the payment of monetary
damages or that provides for the payment of monetary damages as to which the
Indemnified Party shall not be indemnified in full pursuant to Section 9.2). The
Indemnifying Party shall have full control of such defense and proceedings,
including any compromise or settlement thereof; provided, however, that the
Indemnified Party may, at the sole cost and expense of the Indemnified Party, at
any time prior to the Indemnifying Party's delivery of the notice referred to in
the first sentence of this clause (i), file any motion, answer or other
pleadings or take any other action that the Indemnified Party reasonably
believes to be necessary or appropriate to protect its interests; and provided
further, that if requested by the Indemnifying Party, the Indemnified Party
will, at the sole cost and expense of the Indemnifying Party, provide reasonable
cooperation to the Indemnifying Party in contesting any Third Party Claim that
the Indemnifying Party elects to contest. The Indemnified Party may participate
in, but not control, any defense or settlement of any Third Party Claim
controlled by the Indemnifying Party pursuant to this clause (i), and except as
provided in the preceding sentence, the Indemnified Party shall bear its own
costs and expenses with respect to such participation. Notwithstanding the
foregoing, the Indemnified Party may takeover the control of the defense or
settlement of a Third Party Claim at any time if it irrevocably waives its right
to indemnity under Section 9.2 with respect to such Third Party Claim.

  

(ii)           If the Indemnifying Party fails to notify the Indemnified Party
within the Dispute Period that the Indemnifying Party desires to defend the
Third Party Claim pursuant to Section 9.3(a), or if the Indemnifying Party gives
such notice but fails to prosecute vigorously and diligently or settle the Third
Party Claim, or if the Indemnifying Party fails to give any notice whatsoever
within the Dispute Period, then the Indemnified Party shall have the right to
defend, at the sole cost and expense of the Indemnifying Party, the Third Party
Claim by all appropriate proceedings, which proceedings shall be prosecuted by
the Indemnified Party in a reasonable manner and in good faith or will be
settled at the discretion of the Indemnified Party (with the consent of the
Indemnifying Party, which consent will not be unreasonably withheld). The
Indemnified Party will have full control of such defense and proceedings,
including any compromise or settlement thereof; provided, however, that if
requested by the Indemnified Party, the Indemnifying Party will, at the sole
cost and expense of the Indemnifying Party, provide reasonable cooperation to
the Indemnified Party and its counsel in contesting any Third Party Claim which
the Indemnified Party is contesting. Notwithstanding the foregoing provisions of
this clause (ii), if the Indemnifying Party has notified the Indemnified Party
within the Dispute Period that the Indemnifying Party disputes its liability or
the amount of its liability hereunder to the Indemnified Party with respect to
such Third Party Claim and if such dispute is resolved in favor of the
Indemnifying Party in the manner provided in clause (iii) below, the
Indemnifying Party will not be required to bear the costs and expenses of the
Indemnified Party's defense pursuant to this clause (ii) or of the Indemnifying
Party's participation therein at the Indemnified Party's

24

request, and the Indemnified Party shall reimburse the Indemnifying Party in
full for all reasonable costs and expenses incurred by the Indemnifying Party in
connection with such litigation. The Indemnifying Party may participate in, but
not control, any defense or settlement controlled by the Indemnified Party
pursuant to this clause (ii), and the Indemnifying Party shall bear its own
costs and expenses with respect to such participation.

(iii)           If the Indemnifying Party notifies the Indemnified Party that it
does not dispute its liability or the amount of its liability to the Indemnified
Party with respect to the Third Party Claim under Section 9.2 or fails to notify
the Indemnified Party within the Dispute Period whether the Indemnifying Party
disputes its liability or the amount of its liability to the Indemnified Party
with respect to such Third Party Claim, the amount of Damages specified in the
Claim Notice shall be conclusively deemed a liability of the Indemnifying Party
under Section 9.2 and the Indemnifying Party shall pay the amount of such
Damages to the Indemnified Party on demand. If the Indemnifying Party has timely
disputed its liability or the amount of its liability with respect to such
claim, the Indemnifying Party and the Indemnified Party shall proceed in good
faith to negotiate a resolution of such dispute; provided, however, that if the
dispute is not resolved within thirty (30) days after the Claim Notice, either
party shall be entitled to institute such legal action as it deems appropriate.

 

(b)           In the event any Indemnified Party should have a claim under
Section 9.2 against the Indemnifying Party that does not involve a Third Party
Claim, the Indemnified Party shall deliver a written notification of a claim for
indemnity under Section 9.2 specifying the nature of and basis for such claim,
together with the amount or, if not then reasonably ascertainable, the estimated
amount, determined in good faith, of such claim (an "Indemnity Notice") with
reasonable promptness to the Indemnifying Party. The failure by any Indemnified
Party to give the Indemnity Notice shall not impair such party's rights
hereunder except to the extent that the Indemnifying Party demonstrates that it
has been irreparably prejudiced thereby. If the Indemnifying Party notifies the
Indemnified Party that it does not dispute the claim or the amount of the claim
described in such Indemnity Notice or fails to notify the Indemnified Party
within the Dispute Period whether the Indemnifying Party disputes the claim or
the amount of the claim described in such Indemnity Notice, the amount of
Damages specified in the Indemnity Notice will be conclusively deemed a
liability of the Indemnifying Party under Section 9.2 and the Indemnifying Party
shall pay the amount of such Damages to the Indemnified Party on demand. If the
Indemnifying Party has timely disputed its liability or the amount of its
liability with respect to such claim, the Indemnifying Party and the Indemnified
Party shall proceed in good faith to negotiate a resolution of such dispute;
provided, however, that if the dispute is not resolved within thirty (30) days
after the Claim Notice, either party shall be entitled to institute such legal
action as it deems appropriate.

(c)           The indemnity agreements contained herein shall be in addition to
(i) any cause of action or similar rights of the Indemnified Party against the
Indemnifying

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Party or others, and (ii) any liabilities the Indemnifying Party may be subject
to.

ARTICLE X

MISCELLANEOUS

Section 10.1         Governing Law; Jurisdiction. This Agreement shall be
governed by and interpreted in accordance with the laws of the State of New York
without regard to the principles of conflicts of law. Each of the Company and
Investor hereby submit to the exclusive jurisdiction of the United States
Federal and state courts located in New York County, New York with respect to
any dispute arising under this Agreement, the agreements entered into in
connection herewith or the transactions contemplated hereby or thereby.

Section 10.2         Jury Trial Waiver.  The Company and the Investor hereby
waive a trial by jury in any action, proceeding or counterclaim brought by
either of the parties hereto against the other in respect of any matter arising
out of or in connection with the Transaction Documents.

Section 10.3          Assignment. This Agreement shall be binding upon and inure
to the benefit of the Company and Investor and their respective successors and
permitted assigns. Neither this Agreement nor any rights of Investor or the
Company hereunder may be assigned by either party to any other Person without
the prior written consent of the other party.

 

Section 10.4          Third Party Beneficiaries. This Agreement is intended for
the benefit of the Company and Investor and their respective successors and
permitted assigns, and is not for the benefit of, nor may any provision hereof
be enforced by, any other Person.

Section 10.5         Termination.

(a)

Unless earlier terminated as provided hereunder, this Agreement shall terminate
automatically upon the expiration of the Commitment Period. Subject to
Section 10.5(c), this Agreement may be terminated at any time by the mutual
written consent of the parties, effective as of the date of such mutual written
consent unless otherwise provided in such written consent, it being hereby
acknowledged and agreed that the Investor may not consent to such termination
during a Pricing Period or prior to a Closing Date in the event the Investor has
instructed a broker-dealer to effect an open-market sale of Put Shares which are
subject to a pending Put Notice, but which have not yet been delivered by the
Company to the Investor in accordance with the terms and subject to the
conditions of this Agreement. Subject to Section 10.5(c), the Company may
terminate this Agreement effective upon one Trading Day’s prior written notice
to the Investor delivered as provided herein;  provided  however, that (i) such
termination shall not occur during a Pricing Period or, subsequent to the
issuance of a Put Notice, prior to the Closing Date related to such Put Notice
and (ii) prior to issuing any press release, or

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making any public statement or announcement, with respect to such termination,
the Company shall consult with the Investor and shall obtain the Investor’s
consent to the form and substance of such press release or other disclosure,
which consent shall not be unreasonably delayed or withheld.

(b)

Subject to Section 10.5(c), the Investor shall have the right to terminate this
Agreement in the event of any misrepresentation, breach of warranty or
nonfulfillment of or failure to perform any covenant or agreement on the part of
Company contained in this Agreement or any of the other Transaction Documents by
giving one Trading Day’s prior written notice to the Company delivered as
provided herein.

(c)

In the event of termination by the Company or the Investor pursuant to this
Section 10.5, written notice thereof shall forthwith be given to the other party
as provided herein and the transactions contemplated by this Agreement shall be
terminated without further action by either party and this Agreement shall
become void and of no further force and effect, except that (i) the provisions
of Article IX, Article X and Section 6.7 shall remain in full force and effect
notwithstanding such termination., (ii) if the Investor owns any shares of
Common Stock at the time of such termination, the covenants and agreements of
the Company and the Investor, as applicable, contained in  Article V and Article
VI shall remain in full force and effect notwithstanding such termination for a
period of 90 days following such termination. Notwithstanding anything in this
Agreement to the contrary, no termination of this Agreement by any party shall
affect any amounts paid to the Investor or its counsel pursuant to Section 10.7,
in each case all of which fees shall be non-refundable, regardless of whether
any Put Notices are issued by the Company or settled hereunder. Nothing in this
Section 10.5, shall be deemed to release the Company or the Investor from any
liability for any breach under this Agreement, or to impair the rights of the
Company and the Investor to compel specific performance by the other party of
its obligations under this Agreement.

Section 10.6         Entire Agreement, Amendment; No Waiver. This Agreement and
the instruments referenced herein contain the entire understanding of the
Company and Investor with respect to the matters covered herein and therein and,
except as specifically set forth herein or therein, neither the Company nor
Investor makes any representation, warranty, covenant or undertaking with
respect to such matters. No provision of this Agreement may be waived or amended
other than by an instrument in writing signed by the party to be charged with
enforcement.

Section 10.7        Fees And Expenses. Each of the Company and Investor agrees
to pay its own expenses in connection with the preparation of this Agreement and
performance of its obligations hereunder; provided however, that upon the
execution hereof the Company shall issue to the Investor’s counsel, the number
of shares of the Company’s Common Stock equal to $25,000 divided by the average
of the VWAP of the Common Stock for the five Trading Days immediately preceding
the date hereof. In addition, the

27

Company shall pay the Investor a commitment fee of $300,000, which shall be paid
by the Company issuing on the execution hereof, the number of shares of Common
Stock equal to such amount divided by the average of the VWAP on the five
Trading Days preceding the date hereof (the “Commitment Shares”).   In addition,
the Company shall pay all reasonable fees and expenses incurred by the Investor
in connection with any amendments, modifications or waivers of this Agreement or
the Registration Rights Agreement or incurred in connection with the enforcement
of this Agreement and the Registration Rights Agreement, including, without
limitation, all reasonable attorneys fees and expenses. The Company shall pay
all stamp or other similar taxes and duties levied in connection with issuance
of the Shares pursuant hereto.

 Section 10.8

      No Brokers.   Except for European American Equities (the fees and expenses
of which shall be borne by the Company), the Company represents to Investor that
it has had no dealings in connection with this transaction with any finder or
broker who will demand payment of any fee or commission from the other party.
 The Company on the one hand, and Investor, on the other hand, agree to
indemnify the other against and hold the other harmless from any and all
liabilities to any Persons claiming brokerage commissions or finder's fees on
account of services purported to have been rendered on behalf of the
indemnifying party in connection with this Agreement or the transactions
contemplated hereby.

Section 10.9       Counterparts. This Agreement may be executed in multiple
counterparts, and shall be deemed to be an original instrument which shall be
enforceable against the parties actually executing such counterparts and all of
which together shall constitute one and the same instrument. This Agreement may
be delivered to the other parties hereto by facsimile transmission or in
portable document format (.pdf).  

Section 10.10       Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that such severability shall be
ineffective if it materially changes the economic benefit of this Agreement to
any party.

Section 10.11      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 the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.

Section 10.12       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.

Section 10.13        Equitable Relief. The Company recognizes that in the event
that it fails to perform, observe, or discharge any or all of its obligations
under this Agreement, any remedy at law may prove to be inadequate relief to
Investor. The Company therefore

28

agrees that Investor shall be entitled to temporary and permanent injunctive
relief in any such case without the necessity of proving actual damages.

Section 10.14        Title and Subtitles. The titles and subtitles used in this
Agreement are used for the convenience of reference and are not to be considered
in construing or interpreting this Agreement.

Section 10.15         Publicity.   The Company and Investor shall consult with
each other in issuing any press releases or otherwise making public statements
with respect to the transactions contemplated hereby and no party shall issue
any such press release or otherwise make any such public statement without the
prior written consent of the other parties, which consent shall not be
unreasonably withheld or delayed, except that no prior consent shall be required
if such disclosure is required by law, in which such case the disclosing party
shall provide the other parties with prior notice of such public statement.
Notwithstanding the foregoing, the Company shall not publicly disclose the name
of Investor without the prior written consent of the Investor, except to the
extent required by law (including the Current Report on Form 8-K with respect to
this Agreement). Investor acknowledges that this Agreement and all or part of
the Transaction Documents may be deemed to be "material contracts" as that term
is defined by Item 601(b)(10) of Regulation S-K, and that the Company may
therefore be required to file such documents as exhibits to reports or
registration statements filed under the Securities Act or the Exchange Act.
Investor further agrees that the status of such documents and materials as
material contracts shall be determined solely by the Company, in consultation
with its counsel.

[the balance of this page is intentionally left blank]

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IN WITNESS WHEREOF, the parties hereto have caused this Equity Credit Agreement
to be executed by the undersigned, thereunto duly authorized, as of the date
first set forth above.

 

 

SAUER ENERGY, INC

 

 

 

 

 

        /s/ Dieter Sauer, Jr.

By: ______________________

Name: Dieter Sauer, Jr

Title: President

 

 

 

 

 

 

 

 

 

 

 

 

ECLIPSE ADVISORS, LLC

 

 

 

 

 

 

 

 

 

 

 

         /s/ Barry Patterson

By: ______________________

Name:   Barry Patterson

Title:      President

 

 

 

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