EXECUTION COPY

 

SUBSCRIPTION AGREEMENT

 

This SUBSCRIPTION AGREEMENT (the “Agreement”), dated as of February 23, 2012, is
by and between Net Element, Inc., a Delaware corporation (the “Company”), and
Kenges Rakishev (the “Buyer”).

 

RECITALS

 

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

 

B.          Buyer wishes to purchase, and the Company wishes to sell, upon the
terms and conditions stated in this Agreement, 13,333,334 shares of Common Stock
(as defined below) (such 13,333,334 shares of Common Stock are collectively
referred to herein as the “Common Shares”).

 

AGREEMENT

 

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

 

1.            PURCHASE AND SALE OF COMMON SHARES.

 

(a)          Common Shares. Subject to the satisfaction (or waiver) of the
conditions set forth in Sections 6 and 7 below, the Company shall issue and sell
to Buyer, and Buyer shall purchase from the Company on the Closing Date (as
defined below), the Common Shares.

 

(b)          Closing. The closing (the “Closing”) of the purchase of the Common
Shares by the Buyer shall occur at the offices of Greenberg Traurig, LLP, 200
Park Avenue, Florham Park, NJ 07932. The date and time of the Closing (the
“Closing Date”) shall be 10:00 a.m., New York time, on the first (1st) Business
Day (as defined below) on which the conditions to the Closing set forth in
Sections 6 and 7

below are satisfied or waived (or such later date as is mutually agreed to by
the Company and Buyer). “Business Day” means any day other than a Saturday,
Sunday or other day on which commercial banks in New York, New York are
authorized or required by law to remain closed.

 

(c)          Purchase Price. The aggregate purchase price for the Common Shares
to be purchased by Buyer shall be $2,000,000.10 (the “Purchase Price”).

 

 

 

 

(d)          Payment of Purchase Price; Deliveries. On the Closing Date, (i) (A)
Buyer shall pay the Purchase Price to the Company for the Common Shares to be
issued and sold to Buyer at the Closing, by wire transfer of immediately
available funds in accordance with the Company’s written wire instructions, and
(B) Buyer shall deliver to the Company a duly completed and executed Internal
Revenue Service Form W-8BEN or other appropriate Form W-8, and (ii) the Company
shall deliver to Buyer one or more stock certificates, free and clear of all
restrictive and other legends (except as expressly provided in Section
5(c) hereof), evidencing the Common Shares, duly executed on behalf of the
Company and registered in the name of Buyer or its designee.

 

2.            BUYER’S REPRESENTATIONS AND WARRANTIES.

 

Buyer represents and warrants to the Company that:

 

(a)          Authority. Buyer has the requisite power and authority to enter
into and to consummate the transactions contemplated by the Transaction
Documents (as defined below) to which it is a party and otherwise to carry out
its obligations hereunder and thereunder. “Transaction Documents” means,
collectively, this Agreement, the Irrevocable Transfer Agent Instructions (as
defined below) and each of the other agreements and instruments entered into or
delivered by any of the parties hereto in connection with the transactions
contemplated hereby and thereby, as may be amended from time to time.

 

(b)          No Public Sale or Distribution. Buyer is acquiring the Common
Shares for its own account and not with a view towards, or for resale in
connection with, the public sale or distribution thereof in violation of
applicable securities laws, except pursuant to sales registered or exempted
under the 1933 Act; provided, however, by making the representations herein,
Buyer does not agree, or make any representation or warranty, to hold any of the
Common Shares for any minimum or other specific term and reserves the right to
dispose of the Common Shares at any time in accordance with or pursuant to a
registration statement or an exemption under the 1933 Act. Buyer does not
presently have any agreement or understanding, directly or indirectly, with any
Person (as defined below) to distribute any of the Common Shares in violation of
applicable securities laws. “Person” means an individual, a limited liability
company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization, any other entity and a government or any department
or agency thereof.

 

(c)          Accredited Investor Status; Residence. Buyer is an “accredited
investor” as that term is defined in Rule 501(a) of Regulation D (“Regulation
D”) as promulgated by the United States Securities and Exchange Commission (the
“SEC”) under the 1933 Act. Buyer has such knowledge and experience in financial
and business matters that he is capable of evaluating the merits and risks of
his investment in the Company through his purchase of the Common Shares. Buyer
is able to bear the economic risk of such investment for an indefinite period of
time. At the present time, Buyer can afford a complete loss of such investment
and has no need for liquidity in such investment. Buyer is a resident of the
Republic of Kazakhstan.

 

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

 

(e)          Information. Buyer acknowledges that he has carefully reviewed this
Agreement and the Company’s filings with the SEC since January 1, 2011, which
are available on the Internet at www.sec.gov, all of which filings Buyer
acknowledges have been made available to him. Buyer and his advisors, if any,
have been furnished with all materials relating to the business, finances and
operations of the Company and materials relating to the offer and sale of the
Common Shares which have been requested by Buyer. Buyer and his advisors, if
any, have been afforded the opportunity to ask questions of the Company. Buyer
has sought such accounting, legal and tax advice as he has considered necessary
to make an informed investment decision with respect to his acquisition of the
Common Shares. Buyer understands that his investment in the Common Shares
involves a high degree of risk in that: (i) the Company is a development stage
company and has a limited operating history upon which an evaluation of its
prospects can be made; (ii) an investment in the Company is highly speculative
and only investors who can afford the loss of their entire investment should
consider investing in the Company and securities of the Company; (iii)
transferability of the Common Shares is limited; (iv) the Company has
experienced recurring losses and it must raise substantial additional capital in
order to continue operating its business; (v) subsequent equity financings will
dilute the ownership and voting interests of Buyer and his affiliates and equity
securities issued by the Company to other persons or entities may have rights,
preferences or privileges senior to the rights of Buyer; (vi) any debt financing
that may be obtained by the Company must be repaid regardless of whether the
Company generates revenues or cash flows from operations and may be secured by
substantially all of the Company’s assets; (vii) there is absolutely no
assurance that any type of financing on terms acceptable to the Company will be
available to the Company or otherwise obtained by the Company; and (viii) if the
Company is unable to obtain additional financing or is unable to obtain
additional financing on terms acceptable to it, then the Company may be unable
to implement its business plans or take advantage of business opportunities,
which could have a material adverse effect on the Company’s business prospects,
financial condition and results of operations and may ultimately require the
Company to suspend or cease operations.

 

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

 

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(g)          Transfer or Resale. Buyer understands that: (i) the Common Shares
have not been and are not being registered under the 1933 Act or any state
securities laws, and may not be offered for sale, sold, assigned or transferred
unless (A) subsequently registered thereunder, (B) Buyer shall have delivered to
the Company (if requested by the Company) an opinion of counsel to Buyer, in a
form reasonably acceptable to the Company, to the effect that the applicable
Common Shares to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption from such registration, or (C) Buyer
provides the Company with reasonable assurance that the applicable Common Shares
can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A
promulgated under the 1933 Act (or a successor rule thereto) (collectively,
“Rule 144”); (ii) any sale of Common Shares made in reliance on Rule 144 may be
made only in accordance with the terms of Rule 144, and further, if Rule 144 is
not applicable, any resale of Common Shares under circumstances in which the
seller (or the Person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the 1933 Act) may require compliance
with some other exemption under the 1933 Act or the rules and regulations of the
SEC promulgated thereunder; and (iii) neither the Company nor any other Person
is under any obligation to register the Common Shares under the 1933 Act or any
state securities laws or to comply with the terms and conditions of any
exemption thereunder.

 

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

 

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

 

(k)          OFAC. Buyer is not (i) a Person included in the Specially
Designated Nationals and Blocked Persons lists, as published from time to time
by the U.S. Office of Foreign Assets Control (“OFAC”), (ii) currently subject to
any U.S. economic sanctions administered by OFAC, (iii) to Buyer’s knowledge, a
Person with whom the Company is prohibited from dealing or otherwise engaging in
any transaction by any anti-money laundering laws or anti-terrorism laws,
including the USA Patriot Act of 2001 and the Executive Order 13224 of September
23, 2001 entitled, “Blocking Property and Prohibiting Transactions With Persons
Who Commit, Threaten to Commit, or Support Terrorism” (66 Fed. Reg. 49079
(2001)), (iv) to Buyer’s knowledge, a Person covered by or subject to (or is
resident, organized or otherwise located in any country that is covered by or
subject to) sanctions under the International Emergency Economic Powers Act, the
Trading with the Enemy Act or any other applicable laws imposing economic
sanctions against or prohibiting transacting business with, for or on behalf of
any country, region or individual pursuant to United States law or United
Nations resolution, or (v) to Buyer’s knowledge, named on any applicable list of
known suspected terrorists, terrorist organizations or of other sanctioned
Persons issued by any governmental authority of any jurisdiction in which the
Company has conducted or is conducting business.

 

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3.            REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

 

The Company represents and warrants to the Buyer that:

 

(a)          Organization and Standing. Each of the Company and each of its
Subsidiaries (as defined below) is duly organized, validly existing and in good
standing under the laws of the jurisdiction of their respective incorporation,
organization or formation. Each of the Company and each of its Subsidiaries has
full corporate power and authority and all necessary government approvals to
own, lease and operate its respective properties and assets and to conduct its
respective businesses as presently conducted. Each of the Company and each of
its Subsidiaries is duly qualified to do business as a foreign corporation or
other entity and is in good standing in each jurisdiction where the character of
the properties owned, leased or operated by it or the nature of its respective
business makes such qualification necessary, except that where any such failure
has not had, or could not reasonably be expected to have a material adverse
effect on the business, assets, condition (financial or otherwise), results of
operations or prospects of the Company and its Subsidiaries, taken as a whole (a
“Material Adverse Effect”). Other than the Persons set forth on Schedule 3(a),
the Company has no Subsidiaries. “Subsidiaries” means any Person in which the
Company, directly or indirectly, (I) owns any of the outstanding capital stock
or holds any equity or similar interest of such Person or (II) controls or
operates all or any part of the business, operations or administration of such
Person, and each of the foregoing, is individually referred to herein as a
“Subsidiary.”

 

(b)          Capital Stock of the Company. As of the date hereof, the Company
has authorized capital stock consisting of 2,500,000,000 shares of Common Stock,
of which 747,674,446 shares are issued and outstanding, and 100,000,000 shares
of preferred stock, $.001 par value, of which no shares are issued and
outstanding. As of such date, 149,970,000 shares of the Company’s capital stock
were reserved for issuance upon the exercise of outstanding stock options. All
of the issued and outstanding shares of capital stock of the Company and of each
of its Subsidiaries have been duly authorized and validly issued, are fully paid
and non-assessable, and are free of preemptive rights. The Company has 6,250,000
treasury shares. Except as set forth on Schedule 3(b)(i) attached hereto, the
Company owns all of the outstanding capital stock, membership interests,
partnership interests or other equity interests in its Subsidiaries. Except as
set forth on Schedule 3(b)(ii) attached hereto, neither the Company nor any
Subsidiary has outstanding any subscriptions, options, warrants, or other rights
to purchase, or securities or other obligations convertible into or exchangeable
for, or contracts, commitments, agreements, arrangements, or understandings, to
issue, any shares of its capital stock, membership interests or other
securities. Schedule 3(b)(ii) hereto sets forth the number of (i) warrants to
purchase shares of the Common Stock and (ii) options to purchase and securities
convertible into shares of the Common Stock. “Common Stock” means (i) the
Company’s shares of common stock, $.001 par value per share, and (ii) any
capital stock into which such common stock shall have been changed or any share
capital resulting from a reclassification of such common stock.

 

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(c)          No Violation. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby (including, without limitation, the
issuance of the Common Shares) will not violate (with or without the giving of
notice or the lapse of time or both), conflict with, or result in any violation
of or default under (i) any provision or restriction of the Company’s
certificate of incorporation, as amended and as in effect on the date hereof
(the “Certificate of Incorporation”) (including, without limitation, any
certificates of designation contained therein), the Company’s bylaws, as amended
and as in effect on the date hereof (the “Bylaws”) or other organizational
documents of the Company or any of its Subsidiaries, (ii) any agreement,
indenture or other instrument to which the Company or any Subsidiary is a party
or may be bound or (iii) any shareholders’ agreement, voting trust, proxy or
other similar agreement to which the Company or any of its Subsidiaries is a
party or may be bound. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby will not (A) violate any judgment,
decree, order or award of any court, governmental body or other authority to
which the Company is subject or (B) violate any statute, regulation, ordinance
or code of any foreign, federal, state or local government or other governmental
department or agency.

 

(d)          Legal Compliance. Each of the Company and its Subsidiaries is in
material compliance with, and the respective businesses of the Company and its
Subsidiaries are being conducted in compliance with, all applicable laws, orders
and permits which are necessary to conduct the businesses now operated by them,
and, neither the Company nor any of its Subsidiaries has received written notice
of any litigation alleging any failure to so comply, except in each case such as
could not reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect. The material permits under which the Company and its
Subsidiaries are operating or bound (i) constitute all material permits used or
required in the conduct of the respective businesses of the Company and its
Subsidiaries as presently conducted and (ii) are in full force and effect,
except in each case as could not reasonably be expected to have, individually or
in the aggregate, a Material Adverse Effect.

 

(e)          Material Contracts. Except as set forth in Schedule 3(e) attached
hereto, neither the Company nor any of its Subsidiaries is in default, and no
event has occurred which, with due notice or lapse of time or both, would
constitute such a default under, any material contract, agreement, instrument,
commitment and other arrangement to which the Company or any Subsidiary is a
party or otherwise relating to or affecting any of their respective assets,
including, without limitation, employment, severance or consulting agreements,
loan, credit or security agreements, joint venture agreements and license and
distribution agreements, except in each case such as could not reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect.

 

(f)          Reports and Financial Statements.

 

(i)          Except as set forth in Schedule 3(f)(i) attached hereto, the
Company has filed with the SEC true and complete copies of all reports,
schedules, forms, statements and any definitive proxy or information statements
required to be filed by the Company pursuant to the Securities Exchange Act of
1934, as amended (the “1934 Act”), since January 1, 2011 (the “SEC Filings”),
each of which has complied in all material respects with the 1934 Act and the
rules and regulations promulgated thereunder, as in effect on the date so filed,
except to the extent updated, amended, restated or corrected by a subsequent SEC
Filing filed or furnished to the SEC by the Company and in either case, publicly
available prior to the date hereof. None of the SEC Filings (including, any
financial statements or schedules included or incorporated by reference therein)
contained when filed any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except to the extent updated, amended, restated or corrected by
a subsequent SEC Filing.

 

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(ii)          Except to the extent updated, amended, restated or corrected by a
subsequent SEC Filing, all of the financial statements included in the SEC
Filings, in each case, including any related notes thereto, as filed with the
SEC (those filed with the SEC are collectively referred to as the “Financial
Statements”), have been prepared in accordance with generally accepted
accounting principles (“GAAP”) applied on a consistent basis throughout the
periods involved (except as may be indicated in the notes thereto or, in the
case of the unaudited statements, as may be permitted by Form 10-Q of the SEC
and subject, in the case of the unaudited statements, to normal, year-end audit
adjustments which could not reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect). (i) The consolidated balance sheets
(including the related notes) included in the Financial Statements (if
applicable, as updated, amended, restated or corrected in a subsequent SEC
Filing) fairly present, in all material respects, the consolidated financial
position of the Company and its consolidated Subsidiaries at the respective
dates thereof, and (ii) the consolidated statements of operations, stockholders’
equity (in the audited financial statements of the Company) and cash flows (in
each case, including the related notes) included in the Financial Statements (if
applicable, as updated, amended, restated or corrected in a subsequent SEC
Filing) fairly present, in all material respects, the consolidated statements of
operations, stockholders’ equity (in the audited financial statements of the
Company) and cash flows of the Company and its consolidated Subsidiaries for the
periods indicated, subject, in the case of the unaudited statements, to normal,
year-end audit adjustments which could not reasonably be expected to be material
in the aggregate.

 

(iii)          The Company has designed and maintains a system of “internal
control over financial reporting” (as defined in Rules 13a-15(f) and 15d-15(f)
of the 1934 Act). However, as described in Item 9A of the Company’s Transition
Report, as amended, on Form 10-KT/A for the period ended December 31, 2010, the
Company’s management has identified material weaknesses in the Company’s
internal control over financial reporting, which have not been fully remediated
as of the date of this Agreement.

 

(iv)          Subject to the disclosure set forth in the Company’s latest filed
Form 10-Q with the SEC regarding the Company’s disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under
the 1934 Act), the management of the Company has (i) implemented disclosure
controls and procedures that comply in all material respects with the
requirements of the 1934 Act, and (ii) has disclosed, based on its most recent
evaluation of internal control over financial reporting (as defined in Rule
13a-15(f) promulgated under the 1934 Act), to the Company’s outside auditors and
the board of directors of the Company (A) all significant deficiencies and
material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the
Company’s ability to record, process, summarize and report financial information
and (B) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company’s internal control over
financial reporting. Neither the Company nor any of its consolidated
Subsidiaries has any liabilities or obligations of any kind whatsoever, whether
or not accrued and whether or not contingent or absolute, that are material to
the Company and its consolidated Subsidiaries, taken as a whole, other than (i)
liabilities or obligations disclosed or provided for in the consolidated
financial statements of the Company and its consolidated subsidiaries as of June
30, 2011, including the notes thereto, contained in the SEC Filings, (ii)
liabilities or obligations incurred in the ordinary course of business
consistent with past practice since July 1, 2011, (iii) liabilities or
obligations disclosed in SEC Filings since July 1, 2011, and (iv) other
liabilities or obligations that were not, or could not reasonably be expected to
be, material and adverse to the businesses of the Company and its consolidated
Subsidiaries, taken as a whole.

 

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(g)          Broker’s Fees. Neither the Company nor any of its officers or
directors has retained or authorized any investment banker, broker, finder or
other intermediary to act on behalf of the Company or incurred any liability for
any banker’s, broker’s or finder’s fees or commissions in connection with the
transactions contemplated by this Agreement.

 

(h)          Litigation. Except as set forth on Schedule 3(h) attached hereto,
there is no action, suit, proceeding, inquiry or investigation before or by any
court, public board, government agency, self-regulatory organization or body
pending or, to the knowledge of the Company, threatened against or affecting the
Company or any of its Subsidiaries, the Common Stock or any of the Company’s or
Subsidiaries’ officers or directors in their capacities as such, that could
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect.

 

(i)          Bankruptcy. Neither the Company nor any of its Subsidiaries has
taken any steps to seek protection pursuant to any bankruptcy law nor does the
Company or any of its Subsidiaries have (i) any knowledge or reason to believe
that any creditors of the Company or any of its Subsidiaries intend to initiate
involuntary bankruptcy proceedings with respect to the Company or any of its
Subsidiaries or (ii) any actual knowledge of any fact which would reasonably
lead a creditor to initiate involuntary bankruptcy proceedings with respect to
the Company or any of its Subsidiaries.

 

(j)          Actions in the Ordinary Course of Business. Except as disclosed in
the SEC Filings and except for an aggregate of $100,785 which has been advanced
to the Company by Mike Zoi or one or more entities controlled by him to fund
continuing operations of the Company, since January 1, 2011, neither the Company
nor any of its Subsidiaries (i) has taken any action or entered into any
material transaction, other than contemplated hereby, outside the ordinary and
usual course of business; (ii) has borrowed any money or become contingently
liable for any obligation or liability of another outside the ordinary and usual
course of business; (iii) has failed to pay any of its uncontested debts and
obligations as they become due; (iv) has incurred any debt, liability, or
obligation of any nature to any party, except for obligations arising from the
purchase of goods or the rendition of services in the ordinary and usual course
of business; (v) has failed to use its best efforts to preserve its business
organization intact, to keep available the services of its employees and
independent contractors, or to preserve its relationships with its customers,
suppliers, and others with which it deals; (vi) has sold, transferred, leased,
or encumbered any of its assets or properties outside the ordinary and usual
course of business; (vii) has waived any material right, (viii) has written off
any assets or properties; or (ix) has hired any employees or, other than
decreasing in 2011 and then increasing later in 2011 the compensation of certain
employees of the Company, increased the compensation of any employees outside
the ordinary and usual course of business.

 

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(k)          No Prohibited Payments. Neither the Company nor any of its
Subsidiaries nor any officer, director, employee, independent contractor, or
agent, acting on behalf of the Company or any of its Subsidiaries, has at any
time (i) made any contributions to any candidate for political office in
violation of law or failed to disclose fully any contributions to any candidate
for political office in accordance with any applicable statute, rule,
regulation, or ordinance requiring such disclosure, (ii) made any payment to any
local, state, federal, or foreign governmental officer or official, or other
Person charged with similar public or quasi-public duties, other than payments
required or allowed by applicable law, (iii) made any payment outside the
ordinary course of business to any purchasing or selling agent or Person charged
with similar duties of any entity to which the Company or any of its
Subsidiaries sells products or renders services or from which the Company or any
of its Subsidiaries buys products or services for the purpose of influencing
such agent or Person to buy products or services from or sell products or
services to the Company or any of its Subsidiaries, or (iv) engaged in any
transaction, maintained any bank account, or used any corporate funds, except
for transactions, bank accounts, and funds that have been and are reflected in
the normally maintained books and records of the Company or any of its
Subsidiaries.

 

(l)          Authorization; Enforcement; Validity. The Company has the requisite
power and authority to enter into and perform its obligations under this
Agreement and the other Transaction Documents and to issue the Common Shares in
accordance with the terms hereof and thereof. The execution and delivery of this
Agreement and the other Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby
(including, without limitation, the issuance of the Common Shares) have been
duly authorized by the Company’s board of directors and (other than any filings
as may be required by the SEC or any state securities agencies) no further
filing, consent or authorization is required by the Company, its board of
directors or its stockholders or other governing body. This Agreement has been,
and the other Transaction Documents will be prior to the Closing, duly executed
and delivered by the Company, and each constitutes the legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
its respective terms, except as such enforceability may be limited by general
principles of equity or applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation or similar laws relating to, or affecting generally, the
enforcement of applicable creditors’ rights and remedies and except as rights to
indemnification and to contribution may be limited by federal or state
securities law.

 

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(m)          Consents. The Company is not required to obtain any consent from,
authorization or order of, or make any filing or registration with (other than
any filings as may be required by the SEC or any state securities agencies), any
court, governmental agency or any regulatory or self-regulatory agency or any
other Person in order for it to execute, deliver or perform any of its
obligations under, or contemplated by, the Transaction Documents, in each case,
in accordance with the terms hereof or thereof. All consents, authorizations,
orders, filings and registrations which the Company is required to obtain at or
prior to the Closing have been obtained or effected on or prior to the Closing
Date, and neither the Company nor any of its Subsidiaries are aware of any facts
or circumstances which might prevent the Company from obtaining or effecting any
of the registration, application or filings contemplated by the Transaction
Documents. The Company is not in violation of the requirements of the Principal
Market (as defined below) and has no knowledge of any facts or circumstances
which could reasonably lead to delisting or suspension of the Common Stock in
the foreseeable future. There has not been, and to the knowledge of the Company,
there is not pending or contemplated, any investigation by the SEC involving the
Company, any of its Subsidiaries or any current of former director or officer of
the Company or any of its Subsidiaries.

 

(o)          Issuance of Common Shares. The issuance of the Common Shares is
duly authorized and, upon issuance in accordance with the terms of the
Transaction Documents, will be validly issued, fully paid and non-assessable and
free from all preemptive or similar rights, taxes, liens, charges and other
encumbrances with respect to the issue thereof. Subject to the accuracy of the
representations and warranties of the Buyer in this Agreement, the offer and
issuance by the Company of the Common Shares is exempt from registration under
the 1933 Act.

 

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

 

(q)          No General Solicitation; No Integrated Offering. Neither the
Company, nor any of its Subsidiaries or affiliates, nor any Person acting on its
or their behalf, has engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D) in connection with the offer or
sale of the Common Shares. None of the Company, its Subsidiaries or any of their
affiliates, nor any Person acting on their behalf has, directly or indirectly,
made any offers or sales of any security or solicited any offers to buy any
security, under circumstances that would require registration of the issuance of
any of the Common Shares under the 1933 Act, whether through integration with
prior offerings or otherwise, or cause this offering of the Common Shares to
require approval of stockholders of the Company under any applicable stockholder
approval provisions, including, without limitation, under the rules and
regulations of any exchange or automated quotation system on which any of the
securities of the Company are listed or designated for quotation. None of the
Company, its Subsidiaries, their affiliates nor any Person acting on their
behalf will take any action or steps that would require registration of the
issuance of any of the Common Shares under the 1933 Act or cause the offering of
any of the Common Shares to be integrated with other offerings of securities of
the Company.

 

10

 

 

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

 

(s)          Investment Company Status. The Company is not, and upon
consummation of the sale of the Common Shares will not be, an “investment
company,” an affiliate of an “investment company,” a company controlled by an
“investment company” or an “affiliated person” of, or “promoter” or “principal
underwriter” for, an “investment company” as such terms are defined in the
Investment Company Act of 1940, as amended.

 

(t)          Manipulation of Price. Neither the Company nor any of its
Subsidiaries has, and, to the knowledge of the Company, no Person acting on
their behalf has, directly or indirectly, (i) taken any action designed to cause
or to result in the stabilization or manipulation of the price of any security
of the Company or any of its Subsidiaries to facilitate the sale or resale of
any of the Common Shares, (ii) sold, bid for, purchased, or paid any
compensation for soliciting purchases of, any of the Common Shares, or (iii)
paid or agreed to pay to any Person any compensation for soliciting another to
purchase any other securities of the Company or any of its Subsidiaries.

 

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

 

(v)          OFAC. Neither the Company or any of its Subsidiaries, nor, to the
Company’s actual knowledge, is any affiliate, principal, director, officer,
employee of, or any Person acting on behalf of or controlled by, the Company or
any of its Subsidiaries, (i) a Person included in the Specially Designated
Nationals and Blocked Persons lists, as published from time to time by OFAC,
(ii) currently subject to any U.S. economic sanctions administered by OFAC,
(iii) to the Company’s knowledge, a Person with whom the Buyer is prohibited
from dealing or otherwise engaging in any transaction by any anti-money
laundering laws or anti-terrorism laws, including the USA Patriot Act of 2001
and the Executive Order 13224 of September 23, 2001 entitled, “Blocking Property
and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or
Support Terrorism” (66 Fed. Reg. 49079 (2001)), (iv) to the Company’s knowledge,
a Person covered by or subject to (or is resident, organized or otherwise
located in any country that is covered by or subject to) sanctions under the
International Emergency Economic Powers Act, the Trading with the Enemy Act or
any other applicable laws imposing economic sanctions against or prohibiting
transacting business with, for or on behalf of any country, region or individual
pursuant to United States law or United Nations resolution, or (v) to the
Company’s knowledge, named on any applicable list of known suspected terrorists,
terrorist organizations or of other sanctioned Persons issued by any
governmental authority of any jurisdiction in which the Buyer has conducted or
is conducting business. 

 

11

 

 

The Company acknowledges and agrees that Buyer is not making, and has not made,
any representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in Section 2.

 

4.            COVENANTS.

 

(a)          Best Efforts. Buyer shall use its best efforts to timely satisfy
each of the conditions to be satisfied by it as provided in Section 6 of this
Agreement. The Company shall use its best efforts to timely satisfy each of the
conditions to be satisfied by it as provided in Section 7

of this Agreement.

 

(b)          Form D and Blue Sky. The Company shall file a Form D with respect
to the Common Shares as required under Regulation D and to provide a copy
thereof to Buyer promptly after such filing. The Company shall, on or before the
Closing Date, take such action as the Company shall reasonably determine is
necessary in order to obtain an exemption for, or to, qualify the Common Shares
for sale to the Buyer at the Closing pursuant to this Agreement under applicable
securities or “Blue Sky” laws of the states of the United States (or to obtain
an exemption from such qualification), and shall provide evidence of any such
action so taken to the Buyer on or prior to the Closing Date. Without limiting
any other obligation of the Company under this Agreement, the Company shall
timely make all filings and reports relating to the offer and sale of the Common
Shares required under all applicable securities laws (including, without
limitation, all applicable federal securities laws and all applicable “Blue Sky”
laws), and the Company shall comply with all applicable foreign, federal, state
and local laws, statutes, rules, regulations and the like relating to the
offering and sale of the Common Shares to the Buyer.

 

(c)          Reporting Status. Until the first date after the Closing Date on
which the Buyer no longer holds any of the Common Shares (the “Reporting
Period”), the Company shall timely file all reports required to be filed with
the SEC pursuant to the 1934 Act, and the Company shall not terminate its status
as an issuer required to file reports under the 1934 Act even if the 1934 Act or
the rules and regulations thereunder would no longer require such filings or
would otherwise permit such termination.

 

(d)          Use of Proceeds. The Company shall use the proceeds from the sale
of the Common Shares hereunder solely for general working capital purposes.

 

(e)          Listing. The Company shall promptly secure the listing or
designation for quotation (as the case may be) of all of the Common Shares upon
each national securities exchange and automated quotation system, if any, upon
which the Common Stock is then listed or designated for quotation (as the case
may be) (subject to official notice of issuance) (but in no event later than the
Closing Date) and shall maintain such listing or designation for quotation (as
the case may be) of all the Common Shares from time to time issuable under the
terms of the Transaction Documents on such national securities exchange or
automated quotation system. The Company shall maintain the Common Stock’s
listing or designation for quotation (as the case may be) on the OTCQB (the
“Principal Market”), the OTCQX, the OTC Bulletin Board, The New York Stock
Exchange, the NYSE Amex, the Nasdaq Global Select Market, the Nasdaq Global
Market or the Nasdaq Capital Market (each, an “Eligible Market”). Neither the
Company nor any of its Subsidiaries shall take any action which could be
reasonably expected to result in the delisting or suspension of the Common Stock
on an Eligible Market. The Company shall pay all fees and expenses in connection
with satisfying its obligations under this Section 4(e).

 

12

 

 

(f)          Fees. The Company shall be responsible for the payment of any
placement agent’s fees, financial advisory fees, or broker’s commissions (other
than for Persons engaged by Buyer, which Buyer acknowledges there are no such
Persons) relating to or arising out of the transactions contemplated hereby, if
any. The Company shall pay, and hold Buyer harmless against, any liability, loss
or expense (including, without limitation, reasonable attorneys’ fees and
out-of-pocket expenses) arising in connection with any claim relating to any
such payment. Except as provided for herein, each party to this Agreement shall
bear its own fees, costs and expenses in connection with the transactions
contemplated by this Agreement.

 

(g)          Pledge of Common Shares. Notwithstanding anything to the contrary
contained in this Agreement (but subject to any limitations imposed by
applicable securities laws), the Company acknowledges and agrees that the Common
Shares may be pledged by Buyer in connection with a bona fide margin agreement
or other loan or financing arrangement that is secured by the Common Shares. The
pledge of Common Shares shall not be deemed to be a transfer, sale or assignment
of the Common Shares hereunder, and if Buyer effects a pledge of Common Shares,
Buyer shall not be required to provide the Company with any notice thereof or
otherwise make any delivery to the Company pursuant to this Agreement or any
other Transaction Document. The Company hereby agrees to execute and deliver
such documentation as a pledgee of the Common Shares may reasonably request in
connection with a pledge of the Common Shares to such pledgee by Buyer.

 

(h)          Disclosure of Transactions and Other Material Information. The
Company shall, on or before 8:30 a.m., New York time, on the fourth (4th)
Business Day after the date of this Agreement, file a Current Report on Form 8-K
describing all the material terms of the transactions contemplated by the
Transaction Documents in the form required by the 1934 Act and attaching all the
material Transaction Documents (including, without limitation, this Agreement
(and all schedules to this Agreement)) (including all attachments, the “8-K
Filing”). Except for the 8-K Filing, neither the Company, its Subsidiaries nor
Buyer shall issue any press releases or any other public statements with respect
to the transactions contemplated hereby; provided, however, the Company shall be
entitled, without the prior approval of Buyer, to make any press release or
other public disclosure with respect to such transactions in substantial
conformity with the 8-K Filing, provided that Buyer shall be consulted by the
Company in connection with any such press release or other public statement
prior to its release).

 

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

 

13

 

 

(j)          Variable Rate Transaction. From the date hereof through the first
date after the Closing Date on which the Buyer, together with Buyer’s
Affiliates, cease to have “beneficial ownership” (as determined under Section
13(d) of the 1934 Act and the rules and regulations thereunder) greater than
five percent (5%) of the Common Stock, the Company and each Subsidiary shall be
prohibited from effecting or entering into an agreement to effect any Subsequent
Placement (as defined below) involving a Variable Rate Transaction. “Variable
Rate Transaction” means a transaction in which the Company or any Subsidiary (i)
issues or sells any Convertible Securities either (A) at a conversion, exercise
or exchange rate or other price that is based upon and/or varies with the
trading prices of, or quotations for, the shares of Common Stock at any time
after the initial issuance of such Convertible Securities, or (B) with a
conversion, exercise or exchange price that is subject to being reset at some
future date after the initial issuance of such Convertible Securities or upon
the occurrence of specified or contingent events directly or indirectly related
to the business of the Company or the market for the Common Stock, other than
pursuant to a customary “weighted average” anti-dilution provision or (ii)
enters into any agreement (including, without limitation, an “equity line of
credit” which has non-customary or disproportionately dilutive provisions or an
“at-the-market offering”) whereby the Company or any Subsidiary may sell
securities at a future determined price (other than standard and customary
“preemptive” or “participation” rights). Buyer shall be entitled to obtain
injunctive relief against the Company and its Subsidiaries to preclude any such
issuance, which remedy shall be in addition to any right to collect damages.

 

(k)          Participation Right. From the date hereof through the first date
after the Closing Date on which the Buyer, together with Buyer’s Affiliates,
cease to have “beneficial ownership” (as determined under Section 13(d) of the
1934 Act and the rules and regulations thereunder) of greater than five percent
(5%) of the Common Stock, neither the Company nor any of its Subsidiaries shall,
directly or indirectly, issue, offer, sell, grant any option or right to
purchase, or otherwise dispose of (or announce any issuance, offer, sale, grant
of any option or right to purchase or other disposition of) any equity security
or any equity-linked or related security (including, without limitation, any
“equity security” (as that term is defined under Rule 405 promulgated under the
1933 Act), any Convertible Securities (as defined below), any preferred stock or
any purchase rights (any such issuance, offer, sale, grant, disposition or
announcement is referred to as a “Subsequent Placement”) unless the Company
shall have first complied with this Section 4(k). Buyer may elect, in its sole
and absolute discretion, to assign its rights under the Section 4(k) to an
Affiliate of Buyer, provided that such Affiliate shall be an “accredited
investor” as that term is defined in Rule 501(a) of Regulation D and shall
execute an instrument in form and substance reasonably acceptable to the Company
pursuant to which such Affiliate joins in and agrees to be bound by the
provisions of this Section 4(k).

 

(i)          At least five (5) Business Days prior to each proposed or intended
Subsequent Placement, the Company shall deliver to Buyer an irrevocable written
notice (the “Offer Notice”) of such proposed or intended issuance or sale or
exchange (the “Offer”) of the securities being offered (the “Offered
Securities”) in such Subsequent Placement, which Offer Notice shall (w) identify
and describe the Offered Securities, (x) describe the price and other terms upon
which they are to be issued, sold or exchanged, and the number or amount of the
Offered Securities to be issued, sold or exchanged, (y) identify the Persons (if
known) to which or with which the Offered Securities are to be offered, issued,
sold or exchanged and (z) offer to issue and sell to or exchange with Buyer (or
Buyer’s Affiliate) in accordance with the terms of the Offer 100% of the Offered
Securities.

 

14

 

 

(ii)          To accept an Offer, in whole or in part, Buyer must deliver a
written notice to the Company prior to the end of the fifth (5th) Business Day
after the Company’s delivery to Buyer of the applicable Offer Notice (the “Offer
Period”), setting forth all or any portion of the Offered Securities that Buyer
elects to purchase (the “Notice of Acceptance”). Notwithstanding the foregoing,
if the Company desires to modify or amend the terms and conditions of the Offer
prior to the expiration of the Offer Period, the Company may deliver to Buyer a
new Offer Notice and the Offer Period shall expire on the fifth (5th) Business
Day after the Company’s delivery to Buyer of such new Offer Notice.

 

(iii)          The Company shall have thirty (30) days from the expiration of
the Offer Period above (i) to offer, issue, sell or exchange all or any part of
such Offered Securities as to which a Notice of Acceptance has not been given by
Buyer (the “Refused Securities”) pursuant to a definitive agreement(s) (the
“Subsequent Placement Agreement”), but only to the offerees described in the
Offer Notice (if so described therein) and only upon terms and conditions
(including, without limitation, unit prices and interest rates) that are not
more favorable to the acquiring Person or Persons or less favorable to the
Company than those set forth in the Offer Notice and (ii) to publicly announce,
if required by applicable law, (a) the execution of such Subsequent Placement
Agreement, and (b) either (x) the consummation of the transactions contemplated
by such Subsequent Placement Agreement or (y) the termination of such Subsequent
Placement Agreement, which shall be filed with the SEC on a Current Report on
Form 8-K with such Subsequent Placement Agreement and any documents contemplated
therein filed as exhibits thereto.

 

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

 

(v)          Upon the closing of the issuance, sale or exchange of all or less
than all of the Refused Securities, Buyer shall acquire from the Company, and
the Company shall issue to Buyer, the number or amount of Offered Securities
specified in its Notice of Acceptance. The purchase by Buyer of any Offered
Securities is subject in all cases to the preparation, execution and delivery by
the Company and Buyer of a separate purchase agreement relating to such Offered
Securities reasonably satisfactory in form and substance to Buyer and its
counsel.

 

15

 

 

(vi)          Any Offered Securities not acquired by Buyer or other Persons in
accordance with this Section 4(k) may not be issued, sold or exchanged until
they are again offered to Buyer under the procedures specified in this
Agreement.

 

(vii)         The Company and Buyer agree that if Buyer elects to participate in
the Offer, neither the Subsequent Placement Agreement with respect to such Offer
nor any other transaction documents related thereto (collectively, the
“Subsequent Placement Documents”) shall include any term or provision whereby
Buyer shall be required to agree to any restrictions on trading as to any
securities of the Company or be required to consent to any amendment to or
termination of, or grant any waiver, release or the like under or in connection
with, any agreement previously entered into with the Company or any instrument
received from the Company.

 

(viii)        Notwithstanding anything to the contrary in this Section 4(k) and
unless otherwise agreed to by Buyer, the Company shall either confirm in writing
to Buyer that the transaction with respect to the Subsequent Placement has been
abandoned or shall publicly disclose, if required by applicable law, its
intention to issue the Offered Securities, in either case in such a manner such
that Buyer will not be in possession of any material, non-public information, by
the fifth (5th) Business Day following delivery of the Offer Notice. If by such
fifth (5th) Business Day, no public disclosure regarding a transaction with
respect to the Offered Securities has been made, and no notice regarding the
abandonment of such transaction has been received by Buyer, such transaction
shall be deemed to have been abandoned and Buyer shall not be in possession of
any material, non-public information with respect to the Company or any of its
Subsidiaries. Should the Company decide to pursue such transaction with respect
to the Offered Securities, the Company shall provide Buyer with another Offer
Notice in accordance with, and subject to, the terms of this Section 4(k) and
Buyer will again have the right of participation set forth in this Section 4(k).

 

16

 

 

(ix)          The restrictions contained in this Section 4(k) shall not apply in
connection with the issuance of any Excluded Securities (as defined below).
“Excluded Securities” means, collectively, (A) shares of Common Stock or options
to purchase Common Stock to directors, officers, employees or consultants
(provided that, (1) any such consultant may not be an Affiliate of either Mike
Zoi or TGR Capital, LLC, may not be an officer, director or employee of the
Company, and may not be providing, directly or indirectly, any capital to the
Company, and (2) such shares or options must be issued or granted pursuant to a
written, arms’ length agreement between the consultant and the Company in
connection with bona fide services provided to the Company by such consultant)
of the Company in their capacity as such pursuant to an Approved Share Plan (as
defined below); and (B) shares of Common Stock issued upon the conversion or
exercise of Convertible Securities (other than options to purchase Common Stock
issued pursuant to an Approved Share Plan that are covered by clause (A) above)
issued prior to the date of this Agreement, provided that the conversion or
exercise (as the case may be) of any such Convertible Security is made solely
pursuant to the conversion or exercise (as the case may be) provisions of such
Convertible Security that were in effect on the date immediately prior to the
date of this Agreement, the conversion or exercise price of any such Convertible
Securities (other than options to purchase Common Stock issued pursuant to an
Approved Share Plan that are covered by clause (A) above) is not lowered, none
of such Convertible Securities are (other than options to purchase Common Stock
issued pursuant to an Approved Share Plan that are covered by clause (A) above)
(nor is any provision of any such Convertible Securities) amended or waived in
any manner (whether by the Company or the holder thereof) to increase the number
of shares issuable thereunder and none of the terms or conditions of any such
Convertible Securities (other than options to purchase Common Stock issued
pursuant to an Approved Share Plan that are covered by clause (A) above) are
otherwise materially changed or waived (whether by the Company or the holder
thereof) in any manner that adversely affects the Buyer. “Approved Share Plan”
means any employee benefit plan which has been approved by the board of
directors of the Company prior to or subsequent to the date hereof pursuant to
which shares of Common Stock and options to purchase Common Stock may be issued
to any employee, officer, director or consultant (provided that, (1) any such
consultant may not be an Affiliate of either Mike Zoi or TGR Capital, LLC, may
not be an officer, director or employee of the Company, and may not be
providing, directly or indirectly, any capital to the Company), and (2) such
shares or options must be issued or granted pursuant to a written, arms’ length
agreement between the consultant and the Company in connection with bona fide
services provided to the Company by such consultant) for services provided to
the Company in their capacity as such. “Convertible Securities” means any
capital stock or other security of the Company or any of its Subsidiaries that
is, or may be, at any time and under any circumstances directly or indirectly
convertible into, exercisable or exchangeable for, or which otherwise entitles
the holder thereof to acquire, any capital stock or other security of the
Company (including, without limitation, Common Stock) or any of its
Subsidiaries.

 

(l)          Passive Foreign Investment Company. The Company shall conduct its
business in such a manner as will ensure that the Company will not be deemed to
constitute a passive foreign investment company within the meaning of Section
1297 of the U.S. Internal Revenue Code of 1986, as amended.

 

5.           REGISTER; TRANSFER AGENT INSTRUCTIONS; LEGEND.

 

(a)          Register. The Company shall maintain or cause to be maintained at
its principal executive offices (or such other office or agency of the Company
as it may designate to Buyer), a register for its Common Stock in which the
Company or its agent shall record the name and address of the Person in whose
name the Common Shares have been issued (including the name and address of each
assignee and transferee) and the number of Common Shares held by such Person.
The Company shall keep the register open and available at all times during
business hours for inspection of Buyer or its legal representatives. 

 

17

 

 

(b)          Transfer Agent Instructions. The Company shall issue irrevocable
instructions to its transfer agent and any subsequent transfer agent (the
“Irrevocable Transfer Agent Instructions”) to issue one or more certificates or
credit shares to the applicable balance accounts at The Depository Trust Company
(“DTC”), registered in the name of Buyer or its respective nominee(s), for the
Common Shares in such amounts as specified from time to time by Buyer to the
Company upon delivery of the Common Shares. The Company represents and warrants
that no instructions other than the Irrevocable Transfer Agent Instructions
referred to in this Section 5(b), instructions to include a standard 1933 Act
restrictive securities legend as contemplated by Section 5(c) and stop transfer
instructions to give effect to Section 2(h) hereof, will be given by the Company
to its transfer agent with respect to the Common Shares, and that the Common
Shares shall otherwise be freely transferable on the books and records of the
Company, as applicable, to the extent provided in this Agreement and the other
Transaction Documents. If Buyer effects a sale, assignment or transfer of the
Common Shares in accordance with Section 2(h), subject to Buyer and his broker
providing customary certificates and other documentation in connection with such
sale, assignment or transfer, the Company shall permit the sale, assignment or
transfer (as applicable) and shall promptly instruct its transfer agent to issue
one or more certificates or credit shares to the applicable balance accounts at
DTC in such name and in such denominations as specified by Buyer to effect such
sale, transfer or assignment (as applicable). In the event that such sale,
assignment or transfer involves Common Shares sold, assigned or transferred
pursuant to an effective registration statement or in compliance with Rule 144,
the transfer agent shall issue such shares to Buyer or such assignee or
transferee (as the case may be) without any restrictive legend in accordance
with Section 5(d) below. The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to Buyer. Accordingly, the
Company acknowledges that the remedy at law for a breach of its obligations
under this Section 5(b) will be inadequate and agrees, in the event of a breach
or threatened breach by the Company of the provisions of this Section 5(b), that
Buyer shall be entitled, in addition to all other available remedies, to an
order and/or injunction restraining any breach and requiring immediate issuance
and transfer, without the necessity of showing economic loss and without any
bond or other security being required. If required by the Company’s transfer
agent, the Company shall cause its counsel to issue a legal opinion to the
Company’s transfer agent in connection with the sale, assignment or transfer of
the Common Shares. Any fees (with respect to the transfer agent, counsel to the
Company or otherwise) associated with the issuance of such opinion or the
removal of any such legend shall be borne by the Company.

 

(c)          Legends. Buyer understands that the Common Shares will be issued
pursuant to an exemption from registration or qualification under the 1933 Act
and applicable state securities laws, and except as set forth below, the Common
Shares shall bear any legend as required by the “blue sky” laws of any state and
a restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of such stock certificates):

 

THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT
AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT WITH RESPECT TO THE SHARES OR AN EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF SAID ACT THAT IS THEN APPLICABLE TO THE SHARES,
AS TO WHICH A PRIOR OPINION OF COUNSEL MAY BE REQUIRED BY THE ISSUER OR THE
TRANSFER AGENT.

 

18

 

 

(d)          Removal of Legends. Certificates evidencing Common Shares shall not
be required to contain the legend set forth in Section 5(c) above or any other
legend (i) if such Common Shares are being sold pursuant to an effective
registration statement under the 1933 Act covering the resale of the Common
Shares, (ii) following the sale of Common Shares pursuant to Rule 144 (provided
that Buyer shall deliver a customary "144 rep letter" to the Company in
connection with each sale of Common Shares pursuant to Rule 144), (iii) if the
Common Shares are eligible to be sold, assigned or transferred under Rule 144
(provided that such Common Shares are eligible to be sold without any
restriction or limitation on the amount of securities to be sold or the manner
of sale pursuant to Rule 144 and Buyer provides the Company with reasonable
assurances that the Common Shares are so eligible), (iv) in connection with a
sale, assignment or other transfer (other than under Rule 144), provided that
Buyer provides the Company with an opinion of counsel to Buyer, in a generally
acceptable form, to the effect that such sale, assignment or transfer of the
Common Shares may be made without registration under the applicable requirements
of the 1933 Act or (v) if such legend is not required under applicable
requirements of the 1933 Act (including, without limitation, controlling
judicial interpretations and pronouncements issued by the SEC and its staff). If
a legend is not required pursuant to the foregoing, the Company shall no later
than two (2) Business Days following the delivery by Buyer to the Company or the
transfer agent (with notice to the Company) of a legended certificate
representing the Common Shares (endorsed or with stock powers attached,
signatures medallion guaranteed, and otherwise in form necessary to affect the
reissuance and/or transfer, if applicable), together with any other deliveries
from Buyer as may be required pursuant to this Section 5(d), as directed by
Buyer, either: (A) provided that the Company’s transfer agent is participating
in the DTC Fast Automated Securities Transfer Program, credit the aggregate
number of Common Shares to which Buyer shall be entitled to Buyer’s or its
designee’s balance account with DTC through its Deposit/Withdrawal at Custodian
system or (B) if the Company’s transfer agent is not participating in the DTC
Fast Automated Securities Transfer Program, issue and deliver (via reputable
overnight courier) to Buyer, a certificate representing the Common Shares that
is free from all restrictive and other legends, registered in the name of Buyer
or its designee.

 

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

 

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

 

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

 

(ii)         Buyer shall deliver to the Company a duly completed and executed
Internal Revenue Service Form W-8BEN or other appropriate Form W-8.

 

19

 

 

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

 

7.           CONDITIONS TO BUYER’S OBLIGATION TO PURCHASE.

 

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

 

(i)          The Company shall have duly executed and delivered to Buyer
(A) each of the other Transaction Documents and (B) the Common Shares at the
Closing pursuant to this Agreement.

 

(ii)         Buyer shall have received the opinion of Curtis Wolfe, the
Company’s corporate counsel, dated as of the Closing Date, in the form
reasonably acceptable to Buyer.

 

(iii)        The Company shall have delivered to Buyer a copy of the Irrevocable
Transfer Agent Instructions, in the form reasonably acceptable to Buyer, which
instructions shall have been delivered to the Company’s transfer agent.

 

(iv)         The Company shall have delivered to Buyer a certificate, in the
form acceptable to Buyer, executed by the Secretary of the Company and dated as
of the Closing Date, as to (i) the resolutions consistent with Section 3(d) as
adopted by the Company’s board of directors in a form reasonably acceptable to
Buyer, (ii) the Certificate of Incorporation and (iii) the Bylaws, each as in
effect at the Closing.

 

(v)         Each and every representation and warranty of the Company shall be
true and correct as of the date when made and as of the Closing Date as though
originally made at that time (except for representations and warranties that
speak as of a specific date, which shall be true and correct as of such date)
and the Company shall have performed, satisfied and complied in all respects
with the covenants, agreements and conditions required to be performed,
satisfied or complied with by the Company at or prior to the Closing Date.

 

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

 

20

 

 

(vii)         The Company shall have obtained all governmental, regulatory or
third party consents and approvals, if any, necessary for the sale of the Common
Shares, including without limitation, those required by the Principal Market.

 

(viii)        No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction that prohibits the
consummation of any of the transactions contemplated by the Transaction
Documents.

 

(ix)          Since the date of execution of this Agreement, no event or series
of events shall have occurred that reasonably would have or result in a Material
Adverse Effect.

 

(x)          The Company shall have obtained approval of the Principal Market to
list or designate for quotation (as the case may be) the Common Shares, if any
approval is required to obtain such listing or designation.

 

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

 

8.           TERMINATION.

 

In the event that the Closing shall not have occurred within ten (10) days after
the date hereof, then Buyer shall have the right to terminate this Agreement at
any time on or after the close of business on such date without liability of
Buyer to the Company; provided, however, the right to terminate this Agreement
under this Section 8 shall not be available to Buyer if the failure of the
transactions contemplated by this Agreement to have been consummated by such
date is the result of Buyer’s breach of this Agreement. Nothing contained in
this Section 8 shall be deemed to release any party from any liability for any
breach by such party of the terms and provisions of this Agreement or the other
Transaction Documents or to impair the right of any party to compel specific
performance by any other party of its obligations under this Agreement or the
other Transaction Documents.

 

9.           MISCELLANEOUS.

 

(a)          Governing Law; Jurisdiction; Jury Trial. All questions concerning
the construction, validity, enforcement and interpretation of this Agreement
shall be governed by the internal laws of the State of Delaware, without giving
effect to any choice of law or conflict of law provision or rule (whether of the
State of Delaware or any other jurisdictions) that would cause the application
of the laws of any jurisdictions other than the State of Delaware. Each party
hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in The City of Wilmington, Delaware, for the adjudication
of any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and
agrees not to assert in any suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of any such court, that such suit, action
or proceeding is brought in an inconvenient forum or that the venue of such
suit, action or proceeding is improper. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof to such party at the
address for such notices to it under this Agreement and agrees that such service
shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law. Nothing contained herein shall be deemed
or operate to preclude Buyer from bringing suit or taking other legal action
against the Company in any other jurisdiction to collect on the Company’s
obligations to Buyer or to enforce a judgment or other court ruling in favor of
Buyer. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO, AND AGREES
NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED
HEREBY.

 

21

 

 

(b)          Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party. In the event that any signature is delivered by
facsimile transmission or by an e-mail which contains a portable document format
(.pdf) file of an executed signature page, such signature page shall create a
valid and binding obligation of the party executing (or on whose behalf such
signature is executed) with the same force and effect as if such signature page
were an original thereof.

 

(c)          Headings; Gender. The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement. Unless the context clearly indicates
otherwise, each pronoun herein shall be deemed to include the masculine,
feminine, neuter, singular and plural forms thereof. The terms “including,”
“includes,” “include” and words of like import shall be construed broadly as if
followed by the words “without limitation.” The terms “herein,” “hereunder,”
“hereof” and words of like import refer to this entire Agreement instead of just
the provision in which they are found.

 

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

 

22

 

 

(e)          Entire Agreement; Amendments. This Agreement, the other Transaction
Documents and the schedules and exhibits attached hereto and thereto and the
instruments referenced herein and therein supersede all other prior oral or
written agreements between the Buyer, the Company, their affiliates and Persons
acting on their behalf solely with respect to the matters contained herein and
therein, and this Agreement, the other Transaction Documents, the schedules and
exhibits attached hereto and thereto and the instruments referenced herein and
therein contain the entire understanding of the parties solely with respect to
the matters covered herein and therein. Except as expressly set forth herein or
therein, neither the Company nor Buyer makes any representation, warranty,
covenant or undertaking, express or implied, with respect to such matters. For
clarification purposes, the Recitals are part of this Agreement. Provisions of
this Agreement may be amended only with the written consent of the Company and
the Buyer. No waiver shall be effective unless it is in writing and signed by an
authorized representative of the waiving party. The Company confirms that,
except as set forth in this Agreement, Buyer has not made any commitment or
promise or has any other obligation to provide any financing to the Company, any
Subsidiary or otherwise. As a material inducement for Buyer to enter into this
Agreement, the Company expressly acknowledges and agrees that (i) no due
diligence or other investigation or inquiry conducted by Buyer, any of its
advisors or any of its representatives, nor any representation of Buyer
contained herein, shall affect Buyer’s right to rely on, or shall modify or
qualify in any manner or be an exception to any of, the Company’s
representations and warranties contained in this Agreement or any other
Transaction Document and (ii) unless a provision of this Agreement or any other
Transaction Document is expressly preceded by the phrase “except as disclosed in
the SEC Filings,” nothing contained in any of the SEC Filings shall affect
Buyer’s right to rely on, or shall modify or qualify in any manner or be an
exception to any of, the Company’s representations and warranties contained in
this Agreement or any other Transaction Document.

 

(f)          Notices. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered: (i) upon receipt, if
delivered personally; (ii) when sent, if sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); (iii) when sent, if sent by e-mail (provided
that such sent e-mail is kept on file (whether electronically or otherwise) by
the sending party and the sending party does not receive an automatically
generated message from the recipient’s e-mail server that such e-mail could not
be delivered to such recipient) and (iv) if sent by overnight courier service,
one (1) Business Day after deposit with an overnight courier service with next
day delivery specified, in each case, properly addressed to the party to receive
the same. The addresses, facsimile numbers and e-mail addresses for such
communications shall be:

 

If to the Company:

 

Net Element, Inc.

1450 S. Miami Avenue

Miami, Florida 33130

E-mail addresses: mzoi@enerfund.com and jn@netelement.com

Facsimile: (305) 358-7876

Attention: Chief Executive Officer and Chief Financial Officer

 

23

 

 

If to Buyer:

 

11, Ondasynov street

050051

Almaty

Kazakhstan

E-mail address: KRakhishev@yahoo.co.uk

 

with a copy (for informational purposes only) to:

 

Greenberg Traurig, LLP

200 Park Avenue

Florham Park, NJ 07932

E-mail addresses: wexler@gtlaw.com

Facsimile: (312) 456-8435

Attention: Robert I. Wexler, Esq.

 

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

 

(g)          Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and
permitted assigns, including, as contemplated below, any assignee or transferee
of any of the Common Shares. The Company shall not assign this Agreement or any
rights or obligations hereunder without the prior written consent of the Buyer.
Buyer may assign some or all of its rights hereunder to an Affiliate of Buyer in
connection with any assignment or transfer of any of its Common Shares without
the consent of the Company, in which event such assignee or transferee (as the
case may be) shall be deemed to be a Buyer hereunder with respect to such
assigned rights, provided, however, that such Affiliate shall be an “accredited
investor” as that term is defined in Rule 501(a) of Regulation D and shall
execute an instrument in form and substance reasonably acceptable to the Company
pursuant to which such Affiliate joins in and agrees to be bound by the
provisions of this Agreement.

 

(h)          No Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, other than the Indemnitees referred to in Section 9(k).

 

24

 

 

(i)          Survival. The representations, warranties, agreements and covenants
shall survive the Closing.

 

(j)          Further Assurances. Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
any other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.

 

(k)          Indemnification.

 

(i)          Each of the parties to this Agreement (each, an “Indemnitor”) shall
defend, protect, indemnify and hold harmless the other party to this Agreement
and, in the case of Buyer, his agents or other representatives (including,
without limitation, those retained in connection with the transactions
contemplated by this Agreement)(collectively, the “Indemnitees”) from and
against any and all actions, causes of action, suits, claims, losses, costs,
penalties, fees, liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Indemnitee is a party to the action for which
indemnification hereunder is sought), and including reasonable attorneys’ fees
and disbursements (the “Indemnified Liabilities”), incurred by any Indemnitee as
a result of, or arising out of, or relating to (a) any misrepresentation or
breach of any representation or warranty made by the Company in any of the
Transaction Documents, and (b) any breach of any covenant, agreement or
obligation of the Company contained in any of the Transaction Documents. In
addition, the Company will defend, protect, indemnify and hold harmless each
Buyer Indemnitee for any Indemnified Liabilities incurred by any such Indemnitee
as a result of, or arising out of, or relating to any cause of action, suit,
proceeding or claim brought or made against such Indemnitee by a third party
(including for these purposes a derivative action brought on behalf of the
Company or any Subsidiary) or which otherwise involves such Indemnitee that
arises out of, relates to or results from (i) the execution, delivery,
performance or enforcement of any of the Transaction Documents, (ii) any
transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Common Shares or (iii) the
status of Buyer or holder of the Common Shares either as an investor in the
Company pursuant to the transactions contemplated by the Transaction Documents
or as a party to this Agreement (including, without limitation, as a party in
interest or otherwise in any action or proceeding for injunctive or other
equitable relief). To the extent that the foregoing undertaking by an Indemnitor
may be unenforceable for any reason, the Indemnitor shall make the maximum
contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law.

 

25

 

 

(ii)         Promptly after receipt by an Indemnitee under this Section 9(k) of
notice of the commencement of any action or proceeding (including any
governmental action or proceeding) involving an Indemnified Liability, such
Indemnitee shall, if a claim in respect thereof is to be made against an
Indemnitor under this Section 9(k), deliver to the Indemnitor a written notice
of the commencement thereof, and the Indemnitor shall have the right to
participate in, and, to the extent the Indemnitor so desires, to assume control
of the defense thereof with counsel mutually satisfactory to the Indemnitor and
the Indemnitee; provided, however, that an Indemnitee shall have the right to
retain its own counsel with the fees and expenses of such counsel to be paid by
the Indemnitor if: (i) the Indemnitor has agreed in writing to pay such fees and
expenses; (ii) the Indemnitor shall have failed promptly to assume the defense
of such Indemnified Liability and to employ counsel reasonably satisfactory to
such Indemnitee in any such Indemnified Liability; or (iii) the named parties to
any such Indemnified Liability (including any impleaded parties) include both
such Indemnitee and the Indemnitor, and such Indemnitee shall have been advised
by counsel that a conflict of interest is likely to exist if the same counsel
were to represent such Indemnitee and the Indemnitor (in which case, if such
Indemnitee notifies the Indemnitor in writing that it elects to employ separate
counsel at the expense of the Indemnitor, then the Indemnitor shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnitor), provided further, that in the case of clause (iii) above the
Indemnitor shall not be responsible for the reasonable fees and expenses of more
than one (1) separate legal counsel for such Indemnitee. The Indemnitee shall
reasonably cooperate with the Indemnitor in connection with any negotiation or
defense of any such action or Indemnified Liability by the Indemnitor and shall
furnish to the Indemnitor all information reasonably available to the Indemnitee
which relates to such action or Indemnified Liability. The Indemnitor shall keep
the Indemnitee reasonably apprised at all times as to the status of the defense
or any settlement negotiations with respect thereto. The Indemnitor shall not be
liable for any settlement of any action, claim or proceeding effected without
its prior written consent, provided, however, that the Indemnitor shall not
unreasonably withhold, delay or condition its consent. The Indemnitor shall not,
without the prior written consent of the Indemnitee, consent to entry of any
judgment or enter into any settlement or other compromise which does not include
as an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnitee of a release from all liability in respect to such Indemnified
Liability or litigation, and such settlement shall not include any admission as
to fault on the part of the Indemnitee. Following indemnification as provided
for hereunder, the Indemnitor shall be subrogated to all rights of the
Indemnitee with respect to all third parties, firms or corporations relating to
the matter for which indemnification has been made. The failure to deliver
written notice to the Indemnitor within a reasonable time of the commencement of
any such action shall not relieve the Indemnitor of any liability to the
Indemnitee under this Section 9(k), except to the extent that the Indemnitor is
materially and adversely prejudiced in its ability to defend such action.

 

(iii)        The indemnification required by this Section 9(k) shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or Indemnified Liabilities are
incurred. The indemnity agreement contained herein shall be in addition to (A)
any cause of action or similar right of an Indemnitee against the Indemnitor or
others and (B) any liabilities the Indemnitor may be subject to pursuant to
applicable law.

 

(l)          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. No specific
representation or warranty shall limit the generality or applicability of a more
general representation or warranty. Each and every reference to share prices,
shares of Common Stock and any other numbers in this Agreement that relate to
the Common Stock shall be automatically adjusted for stock splits, stock
combinations and other similar transactions that occur with respect to the
Common Stock after the date of this Agreement.

 

26

 

 

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

 

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

 

(o)          Payment Set Aside; Currency. To the extent that the Company makes a
payment or payments to Buyer hereunder or pursuant to any of the other
Transaction Documents or the Buyer enforces or exercises its rights hereunder or
thereunder, and such payment or payments or the proceeds of such enforcement or
exercise or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company, a trustee,
receiver or any other Person under any law (including, without limitation, any
bankruptcy law, foreign, state or federal law, common law or equitable cause of
action), then to the extent of any such restoration the obligation or part
thereof originally intended to be satisfied shall be revived and continued in
full force and effect as if such payment had not been made or such enforcement
or setoff had not occurred. Unless otherwise expressly indicated, all dollar
amounts referred to in this Agreement and the other Transaction Documents are in
United States Dollars (“U.S. Dollars”), and all amounts owing under this
Agreement and all other Transaction Documents shall be paid in U.S. Dollars. All
amounts denominated in other currencies (if any) shall be converted into the
U.S. Dollar equivalent amount in accordance with the Exchange Rate on the date
of calculation. “Exchange Rate” means, in relation to any amount of currency to
be converted into U.S. Dollars pursuant to this Agreement, the U.S. Dollar
exchange rate as published in the Wall Street Journal on the relevant date of
calculation.

 

27

 

 

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

 

  COMPANY:       NET ELEMENT, INC.           By: /s/ Mike Zoi     Name: Mike Zoi
    Title: CEO           KENGES RAKISHEV, individually           By: /s/ Kenges
Rakishev     KENGES RAKISHEV

 

28

 

 

Schedule 3(a)

 

See the subsidiaries depicted in Schedule 3(b)(i).

 

In addition, as of February 22, 2012, the Company has advanced an aggregate of
$196,557 to Stratuscore, Inc., a State of Washington corporation. As
consideration for amounts advanced to Stratuscore, Inc., Stratuscore, Inc. has
agreed to issue the Company a convertible promissory note convertible into
equity in Stratuscore, Inc.

 

29

 

 

Schedule 3(b)

 

(i)           Ownership of Subsidiaries.

 

Except as set forth on the Company’s Organizational Chart as of 10/24/11 on the
following page, all subsidiaries of Net Element, Inc. are wholly-owned by Net
Element, Inc.

 

In addition, as of February 22, 2012, the Company has advanced an aggregate of
$196,557 to Stratuscore, Inc., a State of Washington corporation. As
consideration for amounts advanced to Stratuscore, Inc., Stratuscore, Inc. has
agreed to issue the Company a convertible promissory note convertible into
equity in Stratuscore, Inc., which would not constitute all of the outstanding
equity interests in Stratuscore, Inc.

 

30

 

 

[chart.jpg]

 

31

 

 

Notes to the Chart:

 

Music1, LLC owns 97% of the membership interests in A&R Music Live, LLC, a
Georgia limited liability company. The remaining 3% of the membership interests
in A&R Music Live, LLC is owned by Stephen Strother, the founder and president
of A&R Music Live, LLC.

 

Motorsport, LLC purchased the remaining 20% of the outstanding common stock of
Motorsport.com, Inc. and now owns 100% of the outstanding common stock of
Motorsport.com, Inc.

 

The Company owns a 70% interest in LegalGuru LLC, a Florida limited liability
company, and Curtis Wolfe owns a 30% interest in LegalGuru LLC.

 

(ii)          Issued and outstanding warrants, options, etc.:

 

See attached Capitalization Chart.

 

32

 

 

Stock Ownership Breakdown        February 15, 2012

 

            Options &                      Convertible        Fully Name  Basic 
Shares  Warrants  Notes  Total     Diluted Mike Zoi   87.6%   655,144,503  
 214,545,455    32,727,273    902,417,230    Mike Zoi    89.3% Dmitiry Kozko 
 3.3%   24,950,000    -    250,121    25,200,121    Dmitiry Kozko    2.5%
Richard Lappenbusch   0.8%   6,100,000    -    434,943    6,534,943    Richard
Lappenbusch    0.6% Curtis Wolfe   0.1%   1,000,000    -    3,288,928  
 4,288,928    Curtis Wolfe    0.4% Jonathan New   0.1%   475,100    -  
 2,278,084    2,753,184    Jonathan New    0.3% Felix Vilus   0.2%   1,466,667  
 2,000,000    -    3,466,667    Felix Vilus    0.3% Yapik Conversion Option 
 0.0%   -    -    1,500,000    1,500,000    Yapik Conversion    0.1% All Others 
 8.0%   60,004,843    -    4,788,274    64,793,117    All Others    6.4% Total 
 100.0%   747,674,446    216,545,455    45,267,623    1,010,954,190       
 100.0%

 

[chart1.jpg] [chart2.jpg]

 

   OPTIONS &       Option and Warrant Summary:  CONV NOTE  WARRANTS  TOTAL 2004
Plan Options   5,071,500    -    5,071,500  2011 Plan Options   2,968,850    -  
 2,968,850  C. Wolfe Option from Guru Investment   3,000,000    -    3,000,000 
TGR Warrants from Sub-Agreement   -    100,000,000    100,000,000  Enerfund
Warrants Sub Agreement   -    100,000,000    100,000,000  Enerfund Warrants
$3.6M Notes   32,727,273         32,727,273  Enerfund Warrants on $1.6M Note (if
converted)   -    14,545,455    14,545,455  Felix Warrants        2,000,000  
 2,000,000  Yapik Conversion Option   1,500,000    -    1,500,000    
 45,267,623    216,545,455    261,813,077 

 

 

 

 

Shares owned by TGR Capital, LLC

 

Acct # Former Acct Name Shares TGR Energy Certificate # Warrants % Strike
Price 177 Spinex 62,995,000 1016, 1017, 1018 & 1019       177 Splinex
102,875,000 1014       24 BZINFIN BVI 4,000,000 must buy bond to reissue      
27 Clay Real Estate 4,000,000 must buy bond to reissue       45 Ener1 Group
3,162,334 1013       87 Ketevan Kezua 2,000,000 1013       88 Galina Hartchenko
3,000,000 Needs medallion by Galina       111 Alexander Malovik 16,000,000 1028
      130 Elena Novak 1,000,000 Needs Medallion by Elena       204 Sabina Zoidze
2,000,000 1013           201,032,334                       177 TGR Capital
1,000,000 1027                     78 Itochu Corp 231,415 1013                  
  177 TGR Energy, LLC 5,157,600 1030 2,578,800   $0.05 177 TGR Energy, LLC
66,870,485 1029 33,434,743   $0.05 177 TGR Energy, LLC 10,697,250 1034 5,348,625
  $0.05 177 TGR Energy, LLC 4,077,700 1043 2,038,850   $0.05 177 TGR Energy, LLC
5,395,600 1042 2,697,800   $0.05 177 TGR Energy, LLC 6,713,215 1045 3,357,107  
$0.05 177 TGR Energy, LLC 10,037,315 1051 5,019,157   $0.05 177 TGR Energy, LLC
2,240,450 1052 1,120,225   $0.05 178 TGR Energy, LLC 88,810,385 1060 44,404,693
        200,000,000                         TOTAL OWNED by TGR Capital
402,263,749 STOCK 100,000,000   WARRANTS               Shares owned by Enerfund,
LLC             Enerfund 111,000,000 1061 100,000,000   $          0.05    
66,875,000                       Shares owned by Mike Zoi             Mike Zoi
5,754 1031 -                   Shares owned by MZ Capital, LLC (FL) 29,062,500
1053 -                   Shares owned by MZ Capital, LLC (DE) 45,937,500 1067
Cert is missing -             200,000,000   Total warrants beneficially owned by
Mike Zoi   TOTAL SHARES BENEFICIALLY OWNED BY MIKE ZOI 655,144,503   855,144,503
90.8% Total Stock and Warrants Beneficially Owned                 TOTAL NETE
OUTSTANDING at 12/31/11 742,341,113 TOTY STOCK 941,444,363   Total TOTY Stock
and Warrants Outstanding
(does not include employee stock options)                 88.4% % of Stock Mike
owns beneficially (no warrants included)

 

 

    number of shares     number of shares        TGR per Reconciliation      
 402,263,749       Adjustments:                BZINFIN and Clay   8,000,000  
     Lost cert  Galina and Elena Novak   4,000,000        Wont go to bank 
Shares in Mikes name   9,473,300        Mistake to be corrected  Sub-Total      
 21,473,300       Adjusted Total        380,790,449       Total per Transfer
Agent Report        380,790,449       Proof        -      

 

 

 

 

NETE Investment Summary at December 31, 2011

 

Source of Funds  Amount  Comment    Splinex Equity Contributions  $2,000,000  
              Debt converted to Equity   4,091,394   Not including 500k for
restructuring (pushed down to TGR Capital)           Splinex Investment 
$6,091,394                            Convertible Feature:       $1.6M Loan from
Enerfund   1,600,000   If converted, 14,545,455 warrants are issued 
 14,545,455   Shares @ $0.11/share  $2M Loan from Enerfund   2,000,000       
 18,181,818   Shares @ $0.11/share  ZOI Equity   6,000,000   subscription
agreements with TGR Capital and Enerfund           Zoi Investment  $8,000,000  
              Debt and Equity Investment in Openfilm by Zoi prior to 12/2010 
$2,844,824                 Total Investment to Date  $16,936,218                

 

 

 

 

Net Element, Inc Stock Options to Employees

 

Option Life in Years     7     10     5    5    5    5    5    5    5           
Strike Price   $ 0.25   $ 0.10   $ 0.06   $  0.37   $ 0.15   $ 0.15   $ 0.21  
$ 0.60   $0.20           First   Last    08/13/08    03/31/11    07/31/11  
 08/31/11    09/30/11    10/31/11    11/30/11    12/31/11    02/14/12    TOTAL  
 TOTAL  Name   Name    # of Options    # of Options    # of Options    # of
Options    # of Options    # of Options    # of Options    # of Options    # of
Options    # of Options    # of Shares  Jon   New    1,000,000    94,000  
 58,333    6,306    46,667    46,667    22,222    3,889    1,000,000  
 2,278,084    475,100  Ivan   Onuchin    -    376,000    50,000    5,405  
 26,667    26,667    14,286    3,333    250,000    752,358    100  Brenda 
 Nieborsky    -    376,000    19,375    2,095    19,806    19,806    11,438  
 3,056         451,576    100  Richard   Lappenbusch    -    -    125,000  
 13,514    100,000    100,000    71,429    25,000         434,943    6,100,000 
Regan   Morgan    -    376,000    -    2,027    5,000    5,000    3,571    -  
 -    391,598    -  Peter   Burg    -    117,500    29,063    3,142    29,708  
 29,708    5,536    1,938    300,000    516,595    100  Curtis   Wolfe  
 100,000    94,000    50,000    5,405    13,333    13,333    9,524    3,333  
      288,928    1,000,000  Dmitry   Kozko    -    94,000    50,000    5,406  
 40,000    40,000    19,048    1,667         250,121    24,950,100  Steve 
 Strother    -    141,000    -    -    -    -    -              141,000    100 
Robert   Lyon    -    117,500    8,333    901    2,222    2,222    794       
 50,000    181,972    100  Philipp   Tur    -    47,000    6,250    676  
 5,417    5,417    2,530    417         67,707    100  Sergey   Kaplan    -  
 14,100    18,750    2,027    5,000    5,000    3,571    1,250         49,698  
 1,045  Christoph   Guenther                             33,334    2,222       
      35,556       Sabina   Zoidze    -    -    7,500    811    6,500    6,500  
 4,643    1,625    -    27,579    -           1,100,000    1,847,100  
 422,604    47,715    300,320    333,654    170,814    45,508    1,600,000  
 5,867,715    32,526,845                                                      
         PLAN        2004 Plan     2004 Plan    2011 Plan    2011 Plan    2011
Plan    2011 Plan    2011 Plan    2011 Plan    2011 Plan           

 

 

 

 

Schedule 3(e)

 

Contracts

 

Even though listed on this schedule, the Company does not consider any of these
items material:

 

1.David Reitman Consulting, Inc. for Net Element, 3dn.net project - Completed
consulting engineering work for 3DN.net project a 3D optimized CDN for the
Russian and Eastern European market. Project was tabled pending additional
investors. Final invoice of $10,050 was presented to the Company on 7/13. The
Company agreed to pay 50% up front and 50% within 2 months. The Company paid the
first half on 7/14 and has not paid the remainder.

 

2.DLA Piper for Net Element, 3dn.net project - Legal services related to
commercial contract negotiation with Beijing Blue IT a.k.a. China Cache. 
Retainer of $25,000 was provided on 5/20. First billing on 7/18 was over agreed
amounts and entire budget and all project work was stopped and the bill was
disputed. Negotiations pending DLA proof of documented work by party and what
the total is to be paid. Intention is to pay, as soon as accurate billing is
provided within original agreed upon budget of $45,000.

 

3.NueMeta – Music1 LLC - Contracted a consulting company to design and build a
system that would allow Music1.com to ingest, offer, and publish music catalogs
complying with industry standards specifically DDEX IP licensed patents. Total
contract was $150,000 and the Company paid the initial upfront payment of
$30,000 on 5/20.  Shortly after starting on 6/1, the Company asked NueMeta to
pause their work until further notice and hold all assets as collateral. The
Company’s request was denied and NueMeta requested entire contract cost to be
paid in full.  This dispute has been settled.

 

4.Digital Data Exchange LLC – Music1 LLC – Licensed patent pool of IP for $1,000
and pre-paid 1 yr. of membership dues for XML-based music standard patents on
3/31. This IP license was required to implement the NueMeta-based solution #3
above. $1,000 is currently unpaid.

 

5.Regus – A&R Music Live, LLC - office space rented in Atlanta for ARlive
project on 4/11 for $7,300, a deposit of two months rent.  During company-wide
expense reductions, the Company decided to terminate the lease and return the
office space. Regus refused to prorate and claims the entire lease period of one
year.  The Company issued a termination letter and returned its keys, parking
and security access cards, June 9, 2011 and moved out on June 8, 2011. The
Company’s termination letter provided that the termination is effective, June
10. The Company’s position is that the Company paid a prorated share of the
lease in advance.

 

6.Pensara LLC – Music1 LLC. Pensara was contrated for program management
services per contract of 3/31 for Music1 Product Plan documentation. Total
contract was for 200 hrs. at $90/hr. Contract completed 6/1. Pensara overbilled
by $1,395 without prior approval. Paid $8,730 to date. Pensara filed a lawsuit
in Miami claiming that approximately $10,000 is due to Pensara. This dispute has
been settled.

 

 

 

 

7.Compuware d.b.a. Gomez. – Net Element – hired firm to perform Internet test
and measurement services on 5/27 for $15,552 for one year of monitoring
credits.  Notified them of cancelation 8/30.  Live monitoring of all 15 sites in
NETE portfolio.  Unpaid.

 

8.RightHIRE Staffing Solutions – Net Element – hired professional placement
agency for recruiting of CRO.  CRO hired @ 200,000 with 15% placement fee for
$30,000.  Paid $5,000 on 6/22.

 

9.Munger, Tolles & Olson LLP – Openfilm LLC – hired legal representation to
resolve employment dispute.  Invoiced $7,150 on 6/15.  Unpaid.

 

10.The Pancake Movement LLC – Spark Lab LLC – hired web site design, social
media strategy, and branding firm on 3/11 to create website design for spark lab
project for $25,000 of which they were paid half upfront.  The remaining $12,500
was to be paid on final delivery. Project was partially completed @ 75% when the
contract was cancelled.  The Pancake Movement LLC is seeking $7,500 for the
incomplete work to deliver artwork as is.  Work delivery and settlement amount
of is in dispute.  Unpaid on remainder of contract.

 

 

 

 

Schedule 3(f)(i)

 

SEC Filings

 

1.  The Form 8-K filed by the Company on February 22, 2011 was filed late.  That
Form 8-K reported the appointment on February 15, 2011 of Richard Lappenbusch as
President and Chief Operating Officer of the Company.

 

2.  The Form 8-K filed by the Company on January 18, 2012 was filed late.  That
Form 8-K reported the increase in compensation of certain executive officers of
the Company effective as of November 16, 2011.  As reported in a Form 8-K filed
by the Company on August 19, 2011, the compensation of those executive officers
was previously reduced on August 15, 2011.

 

3.  The Company did not file a Form 8-K reporting under Items 1.01 and 3.02
thereof the entry into a subscription agreement on December 31, 2010 pursuant to
which it sold 200,000,000 shares of Common Stock and warrants to purchase up to
100,000,000 shares of Common Stock to Enerfund, LLC, a company controlled by
Mike Zoi.

 

4.  The Company did not file a Form 8-K reporting under Item 5.07 thereof the
approval by a majority-in-interest of the Company's stockholders by written
consent dated February 1, 2011 of an amendment to the Company's Certificate of
Incorporation to increase the authorized number of shares of Common Stock to
2,500,000,000.

 

5.  The Company did not file a Form 8-K reporting under Items 1.01 and 2.03
thereof the entry into a joint venture arrangement on March 29, 2011 with one of
the Company's directors, Curtis Wolfe, to develop a website intended to allow
legal professionals to market their services using the Company's technologies.

 

6.  The Company has not yet filed a Form 8-K reporting under Items 1.01 and 2.03
thereof the entry into an amendment dated November 16, 2011 to the lease
agreement for its principal executive office.  The Company also has not yet
filed that amendment or its original lease agreement dated October 8, 2010 for
its principal executive office as exhibits to its periodic reports.

 

7.  The Company did not file a preliminary information statement in connection
with the stockholder approval described in 4 above.  The definitive information
statement relating to that action was filed on February 4, 2011.

 

 

 

 

Schedule 3(h)

 

Claims

 

1.See disclosures set forth on Schedule 3.5 which are incorporated by this
reference to this Schedule 3.8. Even though listed on this schedule, the Company
does not consider any of these items material.

 

2.The Company was levied approximately $53,488.79 in penalties for late filing
of IRS Form 5471 for the tax years of the Company ending March 31, 2007, March
31, 2008 and March 31, 2009. The company has requested an abatement of such late
filing fees due to reasonable cause.