EXHIBIT 10.1
SECURITIES PURCHASE AGREEMENT
     SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of December 13,
2005, by and among NGAS Resources, Inc., a corporation incorporated under the
laws of the Province of British Columbia, with headquarters located at 120
Prosperous Place, Suite 201, Lexington, Kentucky 40509, and the investors listed
on the Schedule of Buyers attached hereto (individually, a “Buyer” and
collectively, the “Buyers”).
     WHEREAS:
     A. The Company and each Buyer is executing and delivering this Agreement in
reliance upon the exemption from securities registration afforded by
Section 4(2) of the Securities Act of 1933, as amended (the “1933 Act”),
Rule 506 of Regulation D (“Regulation D”) as promulgated by the United States
Securities and Exchange Commission (the “SEC”) under the 1933 Act.
     B. The Company has authorized a new series of convertible notes of the
Company which shall be convertible into shares of the Company’s common stock, no
par value (the “Common Shares”), in accordance with the terms of such notes.
     C. Each Buyer wishes to purchase, and (i) the Company wishes to sell, upon
the terms and conditions stated in this Agreement, that aggregate principal
amount of notes, in substantially the form attached hereto as Exhibit A (the
“Notes”), set forth opposite such Buyer’s name in column (3) on the Schedule of
Buyers (which aggregate amount for all Buyers shall be 30,000) (as converted for
Common Shares pursuant to the terms of the Notes, collectively, the “Conversion
Shares”) and (ii) the Company wishes to sell, upon the terms and conditions
stated in this Agreement, warrants, in substantially the form attached hereto as
Exhibit B (the “Warrants,” to acquire up to that number of additional shares of
Common Shares set forth opposite such Buyer’s name in column (4) of the Schedule
of Buyers (as exercised, collectively, the “Warrant Shares”).
     D. Contemporaneously with the execution and delivery of this Agreement, the
parties hereto are executing and delivering a Registration Rights Agreement,
substantially in the form attached hereto as Exhibit C (the “Registration Rights
Agreement”), pursuant to which the Company has agreed to provide certain
registration rights with respect to the Conversion Shares and the Warrant Shares
under the 1933 Act and the rules and regulations promulgated thereunder, and
applicable state securities laws.
     E. The Notes, the Conversion Shares, the Warrants and the Warrant Shares
collectively are referred to herein as the “Securities”.
     NOW, THEREFORE, the Company and each Buyer hereby agree as follows:
     1. PURCHASE AND SALE OF NOTES AND WARRANTS.
          (a) Purchase of Notes and Warrants.
               (i) Subject to the satisfaction (or waiver) of the conditions set
forth in Sections 6 and 7 below, on the Closing Date (as defined below), the
Company shall issue and sell to each Buyer, and each Buyer severally, but not
jointly, agrees to purchase from the Company, (A) one or more Notes with an
aggregate principal amount as is set forth opposite such Buyer’s name in column
(3) on the Schedule of Buyers and (B) one or more Warrants to acquire up to that
number of Warrant Shares as is set forth opposite such Buyer’s name in column
(4) on the Schedule of Buyers (the “Closing”).
               (ii) Purchase Price. The aggregate purchase price for each Buyer
of the Notes and the Warrants to be purchased by each such Buyer at the Closing
(the “Purchase Price”) shall be the amount set forth opposite such Buyer’s name
in column (5) of the Schedule of Buyers. Each Buyer shall pay $1,000 for each
Note and related Warrants to be purchased by such Buyer at the Closing.

 

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          (b) Closing Date. The date and time of the Closing (the “Closing
Date”) shall be 10:00 a.m., New York City time, on the date hereof after
notification of satisfaction (or waiver) of the conditions to the Closing set
forth in Sections 6(a) and 7(a) below (or such later date as is mutually agreed
to by the Company and each Buyer) at the offices of Schulte Roth & Zabel LLP,
919 Third Avenue, New York, New York 10022.
          (c) Form of Payment. On the Closing Date, each Buyer shall pay its
Purchase Price to the Company for the Notes and the Warrants to be issued and
sold to such Buyer at such Closing, by wire transfer of immediately available
funds in accordance with the Company’s written wire instructions. At the
Closing, the Company shall deliver to each Buyer (A) the Notes (allocated in the
principal amounts as such Buyer shall request) that such Buyer is then
purchasing and (B) the Warrants (allocated in the amounts as such Buyer shall
request) that such Buyer is purchasing, in each case duly executed on behalf of
the Company and registered in the name of such Buyer or its designee.
     2. BUYER’S REPRESENTATIONS AND WARRANTIES.
          Each Buyer represents and warrants, with respect to only itself, that:
          (a) No Public Sale or Distribution. Such Buyer is acquiring the Notes
and the Warrants and upon conversion of the Notes and exercise of the Warrants
(other than pursuant to a Cashless Exercise (as defined in the Warrants)), will
acquire the Conversion Shares issuable upon conversion of the Notes and the
Warrant Shares issuable upon exercise of the Warrants for its own account and
not with a view towards, or for resale in connection with, the public sale or
distribution thereof, except pursuant to sales registered or exempted under the
1933 Act; provided, however, that by making the representations herein, such
Buyer does not agree to hold any of the Securities for any minimum or other
specific term and reserves the right to dispose of the Securities at any time in
accordance with or pursuant to a registration statement or an exemption under
the 1933 Act. Such Buyer is acquiring the Securities hereunder in the ordinary
course of its business. Such Buyer does not presently have any agreement or
understanding, directly or indirectly, with any Person to distribute any of the
Securities.
          (b) Accredited Investor Status. Such Buyer is an “accredited investor”
as that term is defined in Rule 501(a) of Regulation D.
          (c) Reliance on Exemptions. Such Buyer understands that the Securities
are being offered and sold to it in reliance on specific exemptions from the
registration requirements of United States federal and state securities laws and
that the Company is relying in part upon the truth and accuracy of, and such
Buyer’s compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of such Buyer
to acquire the Securities.
          (d) Information. Such Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Securities
that have been requested by such Buyer. Such Buyer and its advisors, if any,
have been afforded the opportunity to ask questions of the Company. Neither such
inquiries nor any other due diligence investigations conducted by such Buyer or
its advisors, if any, or its representatives shall modify, amend or affect such
Buyer’s right to rely on the Company’s representations and warranties contained
herein. Such Buyer understands that its investment in the Securities involves a
high degree of risk. Such Buyer has sought such accounting, legal and tax advice
as it has considered necessary to make an informed investment decision with
respect to its acquisition of the Securities.
          (e) No Governmental Review. Such Buyer understands that no United
States federal or state agency or any other government or governmental agency
has passed on or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.
          (f) Transfer or Resale. Such Buyer understands that, except as
provided in the Registration Rights Agreement: (i) the Securities have not been
and are not being registered under the 1933 Act or any state securities laws or
qualified under Canadian securities laws; and (ii) such Buyer agrees that if it
decides to offer, sell or otherwise transfer any of the Notes, Conversion
Shares, Warrants or Warrant Shares, such Notes, Conversion

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Shares, Warrants and Warrant Shares may be offered, sold or otherwise
transferred only: (A) pursuant to an effective registration statement under the
1933 Act; or (B) (1) in accordance with the exemption from registration under
the 1933 Act provided by Rule 144 or Rule 144A thereunder, and in compliance
with any applicable state securities laws or (2) in a transaction that does not
require registration under the 1933 Act, or applicable state securities laws,
and the seller has provided the Company with reasonable assurance, prior to such
offer, sale or transfer, that such Securities may be so offered, sold or
transferred in a transaction that does not require registration under the 1933
Act or applicable state securities laws as applicable.
          (g) Legends. Such Buyer understands that the certificates or other
instruments representing the Notes and the Warrants and, until such time as the
resale of the Conversion Shares and the Warrant Shares have been registered
under the 1933 Act as contemplated by the Registration Rights Agreement, the
stock certificates representing the Conversion Shares and the Warrant Shares,
except as set forth below, shall bear any legend as required by the “blue sky”
laws of any state and a restrictive legend in substantially the following form
(and a stop-transfer order may be placed against transfer of such stock
certificates):
[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE] [EXERCISABLE]
HAVE BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN]
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD OR TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “1933 ACT”), OR
(B) REASONABLE ASSURANCE THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
(II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.
NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH
A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped, if, unless otherwise required by state securities laws, (i) such
Securities are registered for resale under the 1933 Act, (ii) in connection with
a sale, assignment or other transfer, such holder provides the Company with
reasonable assurance that the sale, assignment or transfer of the Securities may
be made without registration under the applicable requirements of the 1933 Act
or (iii) such holder provides the Company with reasonable assurance that the
Securities can be sold, assigned or transferred pursuant to Rule 144 or
Rule 144A.
          (h) Authorization; Validity; Enforcement. This Agreement and the
Registration Rights Agreement have been duly and validly authorized, executed
and delivered on behalf of such Buyer and shall constitute the legal, valid and
binding obligations of such Buyer enforceable against such Buyer in accordance
with their respective terms, except as such enforceability may be limited by
general principles of equity or to applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation and other similar laws relating to, or
affecting generally, the enforcement of applicable creditors’ rights and
remedies.
          (i) No Conflicts. The execution, delivery and performance by such
Buyer of this Agreement and the Registration Rights Agreement and the
consummation by such Buyer of the transactions contemplated hereby and thereby
will not (i) result in a violation of the organizational documents of such Buyer
or (ii) conflict with, or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which such Buyer is a party, or
(iii) result in a violation of any law, rule, regulation, order, judgment or
decree applicable to such Buyer, except in the case of clauses (ii) and
(iii) above, for such conflicts, defaults, rights or violations which would not,
individually or in the aggregate, reasonably be expected to have a material
adverse effect on the ability of such Buyer to perform its obligations
hereunder.

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          (j) Residency. Such Buyer is a resident of that jurisdiction specified
below its address on the Schedule of Buyers.
          (k) Certain Trading Activities. Neither the Buyer nor any Person
acting on behalf of, or pursuant to any understanding with or based upon any
information received from, the Buyer has, directly or indirectly, engaged in any
transactions in the securities of the Company (including, without limitation,
any Short Sales involving the Company’s securities) since the time that the
Buyer was first contacted by First Albany Capital (the “Agent”) with respect to
the transactions contemplated hereby. “Short Sales” include, without limitation,
all “short sales” as defined in Rule 200 promulgated under Regulation SHO under
the 1934 Act and all types of direct and indirect stock pledges, forward sale
contracts, options, puts, calls, short sales, swaps and similar arrangements
(including on a total return basis), and sales and other transactions through
non-US broker dealers or foreign regulated brokers. The Buyer covenants that
neither it, nor any Person acting on behalf of, or pursuant to any understanding
with or based upon any information received from, the Buyer will engage in any
transactions in the securities of the Company (including Short Sales) prior to
the time that the transactions contemplated by this Agreement are publicly
disclosed. Notwithstanding the foregoing, for avoidance of doubt, nothing
contained herein shall constitute a representation or warranty, or preclude any
actions, with respect to the identification of the availability of, or securing
of, available shares to borrow in order to effect Short Sales or similar
transactions in the future.
     3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
          The Company represents and warrants to each of the Buyers as follows:
          (a) Organization and Qualification. The Company and its “Subsidiaries”
(which for purposes of this Agreement means any entity in which the Company,
directly or indirectly, owns any capital stock or holds an equity or similar
interest) are up to date in all filings under the Business Corporations Act
(British Columbia) (the “BCCA”). The Company and its Subsidiaries are entities
duly organized and validly existing and in good standing under the laws of the
jurisdiction in which they are formed, and have the requisite power and
authorization to own their properties and to carry on their business as now
being conducted. Each of the Company and its Subsidiaries is duly qualified as a
foreign entity to do business and is in good standing in every jurisdiction in
which its ownership of property or the nature of the business conducted by it
makes such qualification necessary, except to the extent that the failure to be
so qualified or be in good standing would not have a Material Adverse Effect. As
used in this Agreement, “Material Adverse Effect” means any material adverse
effect on the business, properties, assets, operations, results of operations,
condition (financial or otherwise) or prospects of any of the Company or their
respective Subsidiaries, individually or taken as a whole, or on the
transactions contemplated hereby or in the other Transaction Documents (as
defined below) or by the agreements and instruments to be entered into in
connection herewith or therewith, or on the authority or ability of the Company
to perform its obligations under the Transaction Documents. The Company has no
Subsidiaries except as set forth on Schedule 3(a).
          (b) Authorization; Enforcement; Validity. The Company has the
requisite power and authority to enter into and perform its obligations under
this Agreement, the Notes, the Registration Rights Agreement, the Irrevocable
Transfer Agent Instructions (as defined in Section 5(b)), the Warrants and each
of the other agreements entered into by the parties hereto in connection with
the transactions contemplated by this Agreement (collectively, the “Transaction
Documents”) and to issue the Securities in accordance with the terms hereof and
thereof. The execution and delivery of 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 Notes and the
Warrants, the reservation for issuance and the issuance of the Conversion Shares
issuable upon conversion, or redemption of the Notes and the reservation for
issuance and issuance of Warrant Shares issuable upon exercise of the Warrants
have been duly authorized by the Company’s Board of Directors and, other than
(i) the filing with the SEC of one or more Registration Statements in accordance
with the requirements of the Registration Rights Agreement, (ii) the filing of a
Form D with respect to the Notes and the Warrants as required under Regulation D
and (iii) such filings required under applicable securities or “Blue Sky” laws
of the states of the United States (all of the foregoing, the “Required
Approvals”), no further filing, consent, or authorization is required by the
Company or of its Board of Directors or its shareholders. This Agreement and the
other Transaction Documents of even date herewith have been duly executed and
delivered by the Company and constitute the legal, valid and binding obligations
of the Company enforceable against the Company in accordance with their
respective terms, except as such enforceability may be limited by general
principles of equity or applicable bankruptcy, insolvency,

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reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally, the enforcement of applicable creditors’ rights and
remedies. As of the Closing, the Notes in the form attached as Exhibit A shall
have been filed on or prior to the Closing Date with the Ministry of Consumer
and Commercial Relations of the Province of British Columbia (or comparable
office) and shall be in full force and effect, enforceable against the Company
in with its terms and shall not have been amended.
          (c) Issuance of Securities. The issuance of the Notes and the Warrants
are duly authorized and are free from all taxes, liens and charges with respect
to the issue thereof. As of the Closing, the Company shall have reserved from
its duly authorized capital stock not less than the sum of 150% of the maximum
number of Common Shares (A) issuable upon conversion of the Notes (without
taking into account any limitations on the conversion, or redemption of the
Notes set forth in the Notes) and (B) issuable upon exercise of the Warrants
(without taking into account any limitations on the exercise of the Warrants set
forth in the Warrants). Upon issuance or conversion in accordance with the Notes
or exercise in accordance with the Warrants, as the case may be, the Conversion
Shares and the Warrant Shares, respectively, will be validly issued, fully paid
and nonassessable and free from all preemptive or similar rights, taxes, liens
and charges with respect to the issue thereof, with the holders being entitled
to all rights accorded to a holder of Common Shares. The offer and issuance by
the Company of the Securities is exempt from registration under the 1933 Act and
all Canadian securities laws are inapplicable to such offer and issuance.
          (d) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby (including, without limitation, the
issuance of the Notes and the Warrants and reservation for issuance and issuance
of the Conversion Shares and the Warrant Shares) will not (i) result in a
violation of the Articles of Incorporation, the terms of any capital stock of
the Company or any of its Subsidiaries, the bylaws or any of the organizational
documents of the Company or any of its Subsidiaries or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company or any of its Subsidiaries is a party, or
(iii) result in a violation of any law, rule, regulation, order, judgment or
decree (including U.S. federal and state securities laws or Canadian securities
laws and regulations and the rules and regulations of the Nasdaq Capital Markets
(the “Principal Market”)) applicable to the Company or any of its Subsidiaries
or by which any property or asset of the Company or any of its Subsidiaries is
bound or affected.
          (e) Consents. Neither the Company nor any of its Subsidiaries is
required to obtain any consent, authorization or order of, or make any filing or
registration with, any court, governmental agency or any regulatory or
self-regulatory agency or any other Person in order for it to execute, deliver
or perform any of its obligations under or contemplated by the Transaction
Documents, in each case in accordance with the terms hereof or thereof. All
consents, authorizations, orders, filings and registrations (which the Company
is required to obtain pursuant to the preceding sentence) have been obtained or
effected, or will have been obtained or effected, on or prior to the Closing
Date, and the Company and its Subsidiaries are unaware of any facts or
circumstances that might prevent the Company from obtaining or effecting any of
the registration, application or filings pursuant to the preceding sentence. The
Company is not in violation of the listing requirements of the Principal Market
and has no knowledge of any facts that would reasonably lead to delisting or
suspension of the Common Shares in the foreseeable future.
          (f) Acknowledgment Regarding Buyer’s Purchase of Securities. The
Company acknowledges and agrees that each Buyer is acting solely in the capacity
of arm’s length purchaser with respect to the Transaction Documents and the
transactions contemplated hereby and thereby and that no Buyer is (i) an officer
or director of the Company, (ii) an “affiliate” of the Company or any of its
Subsidiaries (as defined in Rule 144 under the 1933 Act) or (iii) to the
knowledge of the Company, a “beneficial owner” of more than 10% of the shares of
Common Shares (as defined for purposes of Rule 13d-3 of the Securities Exchange
Act of 1934, as amended (the “1934 Act”)). The Company further acknowledges that
no Buyer is acting as a financial advisor or fiduciary of the Company or any of
its Subsidiaries (or in any similar capacity) with respect to the Transaction
Documents and the transactions contemplated hereby and thereby, and any advice
given by a Buyer or any of its representatives or agents in connection with the
Transaction Documents and the transactions contemplated hereby and thereby is
merely incidental to such Buyer’s purchase of the Securities. The Company
further represents to each Buyer that the Company’s decision to enter into the
Transaction Documents has been based solely on the independent evaluation by the
Company and its representatives.

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          (g) No General Solicitation; Placement Agent’s Fees. Neither the
Company, nor any of its Subsidiaries or affiliates, nor any Person acting on its
or their behalf, has engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D) in connection with the offer or
sale of the Securities. The Company shall be responsible for the payment of any
placement agent’s fees, financial advisory fees, or brokers’ commissions (other
than for persons engaged by any Buyer or its investment advisor) relating to or
arising out of the transactions contemplated hereby. The Company shall pay, and
hold each Buyer harmless against, any liability, loss or expense (including,
without limitation, attorney’s fees and out-of-pocket expenses) arising in
connection with any such claim. The Company acknowledges that it has engaged the
Agent as placement agent in connection with the sale of the Securities. Other
than the Agent, neither the Company nor any of its Subsidiaries has engaged any
placement agent or other agent in connection with the sale of the Securities.
          (h) No Integrated Offering. None of the Company, its Subsidiaries, any
of their affiliates, or 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 any of
the Securities under the 1933 Act or cause this offering of the Securities to be
integrated with prior offerings by the Company for purposes of the 1933 Act or
any applicable shareholder 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. None of the
Company, its Subsidiaries, their affiliates or any Person acting on their behalf
will take any action or steps referred to in the preceding sentence that would
require registration of any of the Securities under the 1933 Act or cause the
offering of the Securities to be integrated with other offerings.
          (i) Dilutive Effect. The Company understands and acknowledges that the
number of Conversion Shares issuable upon conversion of the Notes and the
Warrant Shares issuable upon exercise of the Warrants will increase in certain
circumstances. The Company further acknowledges that its obligation to issue
Conversion Shares upon conversion of the Notes in accordance with this Agreement
and the Notes and its obligation to issue the Warrant Shares upon exercise of
the Warrants in accordance with this Agreement and the Warrants is, subject to
the terms and conditions of the applicable Transaction Documents, in each case,
absolute and unconditional regardless of the dilutive effect that such issuance
may have on the ownership interests of other shareholders of the Company.
          (j) Application of Takeover Protections; Rights Agreement. The Company
and its board of directors have taken all necessary action, if any, in order to
render inapplicable any control share acquisition, business combination, poison
pill (including any distribution under a rights agreement) or other similar
anti-takeover provision under the Articles of Incorporation or the laws of the
jurisdiction of its incorporation which is or could become applicable to any
Buyer as a result of the transactions contemplated by this Agreement, including,
without limitation, the Company’s issuance of the Securities and any Buyer’s
ownership of the Securities. The Company has not adopted a shareholder rights
plan or similar arrangement relating to accumulations of beneficial ownership of
Common Shares or a change in control of the Company.
          (k) SEC Documents; Financial Statements. During the two (2) years
prior to the date hereof, the Company has filed all reports, schedules, forms,
statements and other documents required to be filed by it with the SEC and the
Canadian Securities Administrators (the “CSA”) pursuant to the reporting
requirements of the 1934 Act and the securities legislation and regulations and
regulations of, and the instruments, policies, rules, orders, codes, notices and
published interpretation notes of, the securities regulatory authorities of the
provinces and territories of Canada (the “Canadian Securities Laws”) (all of the
foregoing filed prior to the date hereof and all exhibits included therein and
financial statements, notes and schedules thereto and documents incorporated by
reference therein being hereinafter referred to as the “SEC-CSA Documents”). The
Company has delivered to the Buyers or their respective representatives true,
correct and complete copies of all SEC-CSA Documents not available on the EDGAR
and SEDAR system, if any. As of their respective dates, the SEC-CSA Documents
complied in all material respects with the requirements of the 1934 Act and the
Canadian Securities Laws and the rules and regulations of the SEC and the CSA
promulgated thereunder applicable to the SEC-CSA Documents, and none of the
SEC-CSA Documents, at the time they were filed with the SEC or CSA as
applicable, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading. As of their respective dates, the financial
statements of the Company included in the SEC-CSA Documents complied as to form
in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC and the CSA with respect thereto.
Such financial statements have been prepared in accordance with generally
accepted accounting principles, consistently applied, during the periods
involved (except (i) as may be otherwise

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indicated in such financial statements or the notes thereto, or (ii) in the case
of unaudited interim statements, to the extent they may exclude footnotes or may
be condensed or summary statements) and fairly present in all material respects
the financial position of the Company as of the dates thereof and the results of
its operations and cash flows for the periods then ended (subject, in the case
of unaudited statements, to normal year-end audit adjustments). No other
information provided by or on behalf of the Company to the Buyers which is not
included in the SEC-CSA Documents, including, without limitation, information
referred to in Section 2(d) of this Agreement, contains any untrue statement of
a material fact or omits to state any material fact necessary in order to make
the statements therein, in the light of the circumstance under which they are or
were made, not misleading.
          (l) Absence of Certain Changes. Since December 31, 2004, there has
been no material adverse change and no material adverse development in the
business, properties, operations, condition (financial or otherwise), results of
operations or prospects of the Company. Except as disclosed in Schedule 3(l),
since December 31, 2004, neither the Company nor any of its Subsidiaries has
(i) declared or paid any dividends, (ii) sold any assets, individually or in the
aggregate, in excess of $100,000 outside of the ordinary course of business or
(iii) had capital expenditures, individually or in the aggregate, in excess of
$100,000. Neither the Company nor any of its Subsidiaries has taken any steps to
seek protection pursuant to any bankruptcy law nor does the Company have any
knowledge or reason to believe that its creditors intend to initiate involuntary
bankruptcy proceedings or any actual knowledge of any fact that would reasonably
lead a creditor to do so. The Company and its Subsidiaries, individually and on
a consolidated basis, are not as of the date hereof, and after giving effect to
the transactions contemplated hereby to occur at the Closing, will not be
Insolvent (as defined below). For purposes of this Section 3(l), “Insolvent”
means, with respect to any Person (as defined in Section 3(s)), (i) the present
fair saleable value of such Person’s assets is less than the amount required to
pay such Person’s total Indebtedness (as defined in Section 3(s)), (ii) such
Person is unable to pay its debts and liabilities, subordinated, contingent or
otherwise, as such debts and liabilities become absolute and matured, (iii) such
Person intends to incur or believes that it will incur debts that would be
beyond its ability to pay as such debts mature or (iv) such Person has
unreasonably small capital with which to conduct the business in which it is
engaged as such business is now conducted and is proposed to be conducted.
          (m) No Undisclosed Events, Liabilities, Developments or Circumstances.
No event, liability, development or circumstance has occurred or exists, or is
contemplated to occur with respect to the Company or its Subsidiaries or their
respective business, properties, prospects, operations or financial condition,
that would be required to be disclosed by the Company under applicable
securities laws on a registration statement on Form S-1 filed with the SEC
relating to an issuance and sale by the Company of its Common Shares and which
has not been publicly announced.
          (n) Conduct of Business; Regulatory Permits. Neither the Company nor
its Subsidiaries is in violation of any term of or in default under its Articles
of Incorporation or the Bylaws or their organizational charter or certificate of
incorporation or bylaws, respectively. Since December 31, 2003, neither the
Company, any of its Subsidiaries nor any officer or director thereof is or has
been in violation of any judgment, decree or order or any statute, ordinance,
rule or regulation applicable to the Company, its Subsidiaries or officer or
director thereof, and neither the Company, any of its Subsidiaries nor officer
or director thereof will conduct its business in violation of any of the
foregoing, except for possible violations that could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect. Without
limiting the generality of the foregoing, the Company is not in violation of any
of the rules, regulations or requirements of the Principal Market and has no
knowledge of any facts or circumstances that would reasonably lead to delisting
or suspension of the Common Shares by the Principal Market in the foreseeable
future. Since December 31, 2003, (i) the Common Shares have been designated for
quotation on the Principal Market, (ii) trading in the Common Shares has not
been suspended by the SEC, the CSA or the Principal Market and (iii) the Company
has received no communication, written or oral, from the SEC, the CSA or the
Principal Market regarding the suspension or delisting of the Common Shares from
the Principal Market. The Company and its Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate regulatory authorities
necessary to conduct their respective businesses, except where the failure to
possess such certificates, authorizations or permits would not have,
individually or in the aggregate, a Material Adverse Effect, and neither the
Company nor any such Subsidiary has received any notice of proceedings relating
to the revocation or modification of any such certificate, authorization or
permit. The Company is a reporting issuer not in default of any requirements
under applicable Canadian Securities Laws and is eligible to use the Short
Form Prospectus System, established under National Instrument 44-101 of the CSA
(the “POP System”).

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          (o) Foreign Corrupt Practices. Neither the Company, nor any of its
Subsidiaries, nor any director, officer, agent, employee or other Person acting
on behalf of the Company or any of its Subsidiaries has, in the course of its
actions for, or on behalf of, the Company or any of its Subsidiaries (i) used
any corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expenses relating to political activity; (ii) made any direct or
indirect unlawful payment to any foreign or domestic government official or
employee from corporate funds; (iii) violated or is in violation of any
provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or
(iv) made any unlawful bribe, rebate, payoff, influence payment, kickback or
other unlawful payment to any foreign or domestic government official or
employee.
          (p) Sarbanes-Oxley Act. The Company is in material compliance with any
and all applicable requirements of the Sarbanes-Oxley Act of 2002 that are
effective as of the date hereof, and any and all applicable rules and
regulations promulgated by the SEC thereunder that are effective as of the date
hereof.
          (q) Transactions With Affiliates. Except as set forth in the SEC-CSA
Documents filed at least ten days prior to the date hereof and other than the
grant of stock options and bonuses disclosed on Schedule 3(q), none of the
officers, directors or employees of the Company or any of its Subsidiaries is
presently a party to any transaction with the Company or any of its Subsidiaries
(other than for ordinary course services as employees, officers or directors),
including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any such
officer, director or employee or, to the knowledge of the Company or any of its
Subsidiaries, any corporation, partnership, trust or other entity in which any
such officer, director, or employee has a substantial interest or is an officer,
director, trustee or partner.
          (r) Equity Capitalization. As of the date hereof, the authorized
capital stock of the Company consists of (i) 100,000,000 Common Shares, of which
as of the date hereof, 20,499,718 are issued and outstanding, 5,630,896 shares
are reserved for issuance pursuant to the Company’s stock option and purchase
plans and 1,396,450 shares are reserved for issuance pursuant to securities
(other than the Notes and the Warrants) exercisable or exchangeable for, or
convertible into, Common Shares and (ii) 5,000,000 shares of preferred stock, no
par value, of which as of the date hereof none of which is issued and
outstanding or reserved for issuance. All of such outstanding shares have been,
or upon issuance will be, validly issued and are fully paid and nonassessable.
Except as disclosed in Schedule 3(r): (i) none of the Company’s capital stock is
subject to preemptive rights or any other similar rights or any liens or
encumbrances suffered or permitted by the Company; (ii) there are no outstanding
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into, or
exercisable or exchangeable for, any capital stock of the Company or any of its
Subsidiaries, or contracts, commitments, understandings or arrangements by which
the Company or any of its Subsidiaries is or may become bound to issue
additional capital stock of the Company or any of its Subsidiaries or options,
warrants, scrip, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into, or exercisable
or exchangeable for, any capital stock of the Company or any of its
Subsidiaries; (iii) there are no outstanding debt securities, notes, credit
agreements, credit facilities or other agreements, documents or instruments
evidencing Indebtedness (as defined in Section 3(s)) of the Company or any of
its Subsidiaries or by which the Company or any of its Subsidiaries is or may
become bound; (iv) there are no financing statements securing obligations in any
material amounts, either singly or in the aggregate, filed in connection with
the Company or any of its Subsidiaries; (v) there are no agreements or
arrangements under which the Company or any of its Subsidiaries is obligated to
register the sale of any of their securities under the 1933 Act (except pursuant
to the Registration Rights Agreement); (vi) there are no outstanding securities
or instruments of the Company or any of its Subsidiaries which contain any
redemption or similar provisions, and there are no contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to redeem a security of the Company or any of its
Subsidiaries; (vii) there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Securities; (viii) the Company does not have any stock appreciation rights
or “phantom stock” plans or agreements or any similar plan or agreement; and
(ix) the Company and its Subsidiaries have no liabilities or obligations
required to be disclosed in the SEC-CSA Documents but not so disclosed in the
SEC-CSA Documents, other than those incurred in the ordinary course of the
Company’s or its Subsidiaries’ respective businesses and which, individually or
in the aggregate, do not or could not reasonably be expected to have a Material
Adverse Effect. The Company has made available to the Buyer true, correct and
complete copies of the Company’s Notice of Articles, as amended and as in effect
on the date hereof (the “Articles of Incorporation”), and the Company’s
Articles, as amended and as in effect

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on the date hereof (the “Bylaws”), and the terms of all securities convertible
into, or exercisable or exchangeable for, shares of Common Shares and the
material rights of the holders thereof in respect thereto.
          (s) Indebtedness and Other Contracts. Except as disclosed in
Schedule 3(s), neither the Company nor any of its Subsidiaries (i) has any
outstanding Indebtedness (as defined below), (ii) is a party to any contract,
agreement or instrument, the violation of which, or default under which, by the
other party(ies) to such contract, agreement or instrument could reasonably be
expected to result in a Material Adverse Effect, (iii) is in violation of any
term of or in default under any contract, agreement or instrument relating to
any Indebtedness, except where such violations and defaults would not result,
individually or in the aggregate, in a Material Adverse Effect, or (iv) is a
party to any contract, agreement or instrument relating to any Indebtedness, the
performance of which, in the judgment of the Company’s officers, has or is
expected to have a Material Adverse Effect. Schedule 3(s) provides a detailed
description of the material terms of any such outstanding Indebtedness. For
purposes of this Agreement: (x) “Indebtedness” of any Person means, without
duplication (A) all indebtedness for borrowed money, (B) all obligations issued,
undertaken or assumed as the deferred purchase price of property or services,
including (without limitation) “capital leases” in accordance with generally
accepted accounting principles (other than trade payables entered into in the
ordinary course of business), (C) all reimbursement or payment obligations with
respect to letters of credit, surety bonds and other similar instruments,
(D) all obligations evidenced by notes, bonds, debentures or similar
instruments, including obligations so evidenced incurred in connection with the
acquisition of property, assets or businesses, (E) all indebtedness created or
arising under any conditional sale or other title retention agreement, or
incurred as financing, in either case with respect to any property or assets
acquired with the proceeds of such indebtedness (even though the rights and
remedies of the seller or bank under such agreement in the event of default are
limited to repossession or sale of such property), (F) all monetary obligations
under any leasing or similar arrangement which, in connection with generally
accepted accounting principles, consistently applied for the periods covered
thereby, is classified as a capital lease, (G) all indebtedness referred to in
clauses (A) through (F) above secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any mortgage, lien, pledge, charge, security interest or other encumbrance upon
or in any property or assets (including accounts and contract rights) owned by
any Person, even though the Person which owns such assets or property has not
assumed or become liable for the payment of such indebtedness, and (H) all
Contingent Obligations in respect of indebtedness or obligations of others of
the kinds referred to in clauses (A) through (G) above; (y) “Contingent
Obligation” means, as to any Person, any direct or indirect liability,
contingent or otherwise, of that Person with respect to any indebtedness, lease,
dividend or other obligation of another Person if the primary purpose or intent
of the Person incurring such liability, or the primary effect thereof, is to
provide assurance to the obligee of such liability that such liability will be
paid or discharged, or that any agreements relating thereto will be complied
with, or that the holders of such liability will be protected (in whole or in
part) against loss with respect thereto; and (z) “Person” means an individual, a
limited liability company, a partnership, a joint venture, a corporation, a
trust, an unincorporated organization and a government or any department or
agency thereof.
          (t) Absence of Litigation. Except as set forth in Schedule 3(t), there
is no action, suit, proceeding, inquiry or investigation before or by the
Principal Market, any court, public board, government agency, self-regulatory
organization or body pending or, to the knowledge of the Company, threatened
against or affecting the Company or any of its Subsidiaries, the Common Shares
or any of the Company’s Subsidiaries or any of the Company’s or its
Subsidiaries’ officers or directors in their capacities as such.
          (u) Insurance. The Company and each of its Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as management of the Company believes to be prudent and
customary in the businesses in which the Company and its Subsidiaries are
engaged. Neither the Company nor any such Subsidiary has been refused any
insurance coverage sought or applied for and neither the Company nor any such
Subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not have a Material Adverse Effect.
          (v) Employee Relations. (i) Neither the Company nor any of its
Subsidiaries is a party to any collective bargaining agreement or employs any
member of a union. The Company and its Subsidiaries believe that their relations
with their employees are good. No executive officer of the Company or any of its
Subsidiaries (as defined in Rule 501(f) of the 1933 Act) has notified the
Company or any such Subsidiary that such officer intends to leave the Company or
any such Subsidiary or otherwise terminate such officer’s employment with the
Company or any such Subsidiary. No executive officer of the Company or any of
its Subsidiaries, is, or is now expected to be, in

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violation of any material term of any employment contract, confidentiality,
disclosure or proprietary information agreement, non-competition agreement, or
any other contract or agreement or any restrictive covenant, and the continued
employment of each such executive officer does not subject the Company or any of
its Subsidiaries to any liability with respect to any of the foregoing matters.
               (ii) The Company and its Subsidiaries are in compliance with all
United States and Canadian federal, state, provincial, local and foreign laws
and regulations respecting labor, employment and employment practices and
benefits, terms and conditions of employment and wages and hours, except where
failure to be in compliance would not, either individually or in the aggregate,
reasonably be expected to result in a Material Adverse Effect.
          (w) Title. The Company and its Subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the Company
and its Subsidiaries, in each case free and clear of all liens, encumbrances and
defects except such as do not materially affect the value of such property and
do not interfere with the use made and proposed to be made of such property by
the Company and any of its Subsidiaries. Any real property and facilities held
under lease by the Company or any of its Subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of such
property and buildings by the Company and its Subsidiaries.
          (x) Intellectual Property Rights. The Company and its Subsidiaries own
or possess adequate rights or licenses to use all trademarks, service marks and
all applications and registrations therefor, trade names, patents, patent
rights, copyrights, original works of authorship, inventions, trade secrets,
licenses, approvals, governmental authorizations and other intellectual property
rights (“Intellectual Property Rights”) necessary to conduct their respective
businesses as now conducted. Except as set forth in Schedule 3(x), none of the
Company’s or its Subsidiaries’ Intellectual Property Rights have expired,
terminated or have been abandoned, or are expected to expire, terminate or be
abandoned, within three years from the date of this Agreement. The Company does
not have any knowledge of any infringement by the Company or any of its
Subsidiaries of Intellectual Property Rights of others. There is no claim,
action or proceeding being made or brought, or to the knowledge of the Company,
being threatened against the Company or any of its Subsidiaries regarding its
Intellectual Property Rights. The Company and its Subsidiaries are unaware of
any facts or circumstances which might give rise to any of the foregoing
infringements or claims, actions or proceedings. The Company and its
Subsidiaries have taken reasonable security measures to protect the secrecy,
confidentiality and value of all of their Intellectual Property Rights.
          (y) Environmental Laws. The Company and its Subsidiaries (i) are in
compliance with any and all Environmental Laws (as hereinafter defined),
(ii) have received all permits, licenses or other approvals required of them
under applicable Environmental Laws to conduct their respective businesses and
(iii) are in compliance with all terms and conditions of any such permit,
license or approval where, in each of the foregoing clauses (i), (ii) and (iii),
the failure to so comply could be reasonably expected to have, individually or
in the aggregate, a Material Adverse Effect. The term “Environmental Laws” means
all United States and Canadian federal, state, provincial, local or foreign laws
relating to pollution or protection of human health or the environment
(including, without limitation, ambient air, surface water, groundwater, land
surface or subsurface strata), including, without limitation, laws relating to
emissions, discharges, releases or threatened releases of chemicals, pollutants,
contaminants, or toxic or hazardous substances or wastes (collectively,
“Hazardous Materials”) into the environment, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials, as well as all authorizations,
codes, decrees, demands or demand letters, injunctions, judgments, licenses,
notices or notice letters, orders, permits, plans or regulations issued,
entered, promulgated or approved thereunder.
          (z) Subsidiary Rights. Except as set forth in Schedule 3(z), the
Company or one of its Subsidiaries has the unrestricted right to vote, and
(subject to limitations imposed by applicable law) to receive dividends and
distributions on, all capital securities of its Subsidiaries as owned by the
Company or such Subsidiary.
          (aa) Tax Status. The Company and each of its Subsidiaries (i) has made
or filed all foreign, United States and Canadian federal, state and provincial
income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject, (ii) has paid all taxes and other
governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except

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those being contested in good faith and (iii) has set aside on its books
provision reasonably adequate for the payment of all taxes for periods
subsequent to the periods to which such returns, reports or declarations apply.
There are no unpaid taxes in any material amount claimed to be due by the taxing
authority of any jurisdiction, and the officers of the Company know of no basis
for any such claim.
          (bb) Internal Accounting and Disclosure Controls. The Company and each
of its Subsidiaries maintain a system of internal accounting controls sufficient
to provide reasonable assurance that (i) transactions are executed in accordance
with management’s general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
and liability accountability, (iii) access to assets or incurrence of
liabilities is permitted only in accordance with management’s general or
specific authorization and (iv) the recorded accountability for assets and
liabilities is compared with the existing assets and liabilities at reasonable
intervals and appropriate action is taken with respect to any difference. The
Company maintains disclosure controls and procedures (as such term is defined in
Rule 13a-14 under the 1934 Act) that are effective in ensuring that information
required to be disclosed by the Company in the reports that it files or submits
under the 1934 Act is recorded, processed, summarized and reported, within the
time periods specified in the rules and forms of the SEC, including, without
limitation, controls and procedures designed in to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the 1934 Act is accumulated and communicated to the Company’s management,
including its principal executive officer or officers and its principal
financial officer or officers, as appropriate, to allow timely decisions
regarding required disclosure.
          (cc) Off Balance Sheet Arrangements. There is no transaction,
arrangement, or other relationship between the Company and an unconsolidated or
other off balance sheet entity that is required to be disclosed by the Company
in its 1934 Act and Canadian Securities Laws filings and is not so disclosed or
that otherwise would be reasonably likely to have a Material Adverse Effect.
          (dd) Transfer Taxes. On the Closing Date, all stock transfer or other
taxes (other than income or similar taxes) which are required to be paid in
connection with the sale and transfer of the Securities to be sold to each Buyer
hereunder will be, or will have been, fully paid or provided for by the Company,
and all laws imposing such taxes will be or will have been complied with.
          (ee) Acknowledgement Regarding Buyers’ Trading Activity. It is
understood and acknowledged by the Company (i) that none of the Buyers have been
asked by the Company or its Subsidiaries to agree, nor has any Buyer agreed, to
desist from purchasing or selling, long and/or short, securities of the Company,
or “derivative” securities based on securities issued by the Company or to hold
the Securities for any specified term; (ii) that any Buyer, and counter parties
in “derivative” transactions to which any such Buyer is a party, directly or
indirectly, presently may have a “short” position in the Common Shares, and
(iii) that each Buyer shall not be deemed to have any affiliation with or
control over any arm’s length counter-party in any “derivative” transaction. The
Company further understands and acknowledges that one or more Buyers may engage
in hedging and/or trading activities at various times during the period that the
Securities are outstanding, including, without limitation, during the periods
that the value of the Conversion Shares and the Warrant Shares deliverable with
respect to Securities are being determined and (b) such hedging and/or trading
activities, if any, can reduce the value of the existing Shareholders’ equity
interest in the Company both at and after the time the hedging and/or trading
activities are being conducted. The Company acknowledges that such
aforementioned hedging and/or trading activities do not constitute a breach of
this Agreement, the Notes, the Warrants or any of the documents executed in
connection herewith.
          (ff) Form S-3 Eligibility. The Company is eligible to register the
Conversion Shares and the Warrant Shares for resale by the Buyers using Form S-3
promulgated under the 1933 Act.
          (gg) Manipulation of Price. The Company has not, and to its knowledge
no one acting on its behalf has, (i) taken, directly or indirectly, any action
designed to cause or to result in the stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of any of the
Securities, (ii) sold, bid for, purchased, or paid any compensation for
soliciting purchases of, any of the Securities, or (iii) paid or agreed to pay
to any person any compensation for soliciting another to purchase any other
securities of the Company.

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          (hh) Disclosure. The Company confirms that neither it nor any other
Person acting on its behalf has provided any of the Buyers or their agents or
counsel with any information that constitutes or could reasonably be expected to
constitute material, nonpublic information. The Company understands and confirms
that each of the Buyers will rely on the foregoing representations in effecting
transactions in the Securities. All disclosure provided to the Buyers regarding
the Company and its Subsidiaries, their business and the transactions
contemplated hereby, including the Schedules to this Agreement, furnished by or
on behalf of the Company is true and correct and does not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading. Each press release issued by the
Company or its Subsidiaries during the twelve (12) months preceding the date of
this Agreement did not at the time of release contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. No event or
circumstance has occurred or information exists with respect to the Company or
any of its Subsidiaries or its or their business, properties, prospects,
operations or financial conditions, which, under applicable law, rule or
regulation, requires public disclosure or announcement by the Company but which
has not been so publicly announced or disclosed.
     4. COVENANTS.
          (a) Best Efforts. Each party shall use its best efforts timely to
satisfy each of the conditions to be satisfied by it as provided in Sections 6
and 7 of this Agreement.
          (b) Form D and Blue Sky. The Company agrees to file a Form D with
respect to the Securities as required under Regulation D and to provide a copy
thereof to each Buyer promptly after such filing. The Company shall, on or
before the Closing Date, take such action as the Company shall reasonably
determine is necessary in order to obtain an exemption for or to qualify the
Securities for sale to the Buyers at the Closing pursuant to this Agreement
under applicable securities or “Blue Sky” laws of the states of the United
States (or to obtain an exemption from such qualification), and shall provide
evidence of any such action so taken to the Buyers on or prior to the Closing
Date. The Company shall make all filings and reports relating to the offer and
sale of the Securities required under applicable securities or “Blue Sky” laws
of the states of the United States following the Closing Date.
          (c) Reporting Status. Until the date on which the Buyers shall have
sold all the Conversion Shares and Warrant Shares and none of the Notes or
Warrants is outstanding (the “Reporting Period”), the Company shall timely file
all reports required to be filed with the SEC pursuant to the 1934 Act and the
CSA under applicable Canadian Securities Laws, and the Company shall continue to
timely file reports under the 1934 Act even if the 1934 Act or the rules and
regulations thereunder would otherwise no longer require or permit such filings
and will remain in good standing under Canadian Securities Law and eligible to
use the POP System.
          (d) Use of Proceeds. The Company will use the proceeds from the sale
of the Securities for general corporate purposes, and not for the (i) repayment
of any outstanding Indebtedness of the Company or any of its Subsidiaries or
(ii) redemption or repurchase of any of its equity securities.
          (e) Financial Information. The Company agrees to send the following to
each Investor (as defined in the Registration Rights Agreement) during the
Reporting Period (i) unless the following are filed with the SEC through EDGAR
and are available to the public through the EDGAR system, within one
(1) Business Day after the filing thereof with the SEC, a copy of its Annual
Reports and Quarterly Reports on Form 10-K, 10-KSB, 10-Q or 10-QSB, any interim
reports or any consolidated balance sheets, income statements, shareholders’
equity statements and/or cash flow statements for any period other than annual,
any Current Reports on Form 8-K and any registration statements (other than on
Form S-8) or amendments filed pursuant to the 1933 Act, (ii) on the same day as
the release thereof, facsimile copies of all press releases issued by the
Company or any of its Subsidiaries, and (iii) copies of any notices and other
information made available or given to the shareholders of the Company
generally, contemporaneously with the making available or giving thereof to the
shareholders. As used herein “Business Day” means any other day other than a
Saturday, Sunday, or other day on which commercial banks in The City of New York
are authorized or required by law to remain closed.
          (f) Listing. The Company shall promptly secure the listing of all of
the Registrable Securities (as defined in the Registration Rights Agreement)
upon each national securities exchange and automated quotation system, if any,
upon which the Common Shares is then listed (subject to official notice of
issuance) and shall

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maintain such listing of all Registrable Securities from time to time issuable
under the terms of the Transaction Documents. The Company shall maintain the
Common Shares’ authorization for quotation on the Principal Market. Neither the
Company nor any of its Subsidiaries shall take any action which would be
reasonably expected to result in the delisting or suspension of the Common
Shares on the Principal Market; provided, however, that the Company makes no
covenant regarding the trading price of the Common Shares. The Company shall pay
all fees and expenses in connection with satisfying its obligations under this
Section 4(f).
          (g) Fees. Subject to Section 8 below, at the Closing, the Company
shall pay an expense allowance to Kings Road Investments Ltd. (a Buyer) or its
designee(s) (in addition to any other expense amounts paid to any Buyer prior to
the date of this Agreement) to cover expenses reasonably incurred by Kings Road
Investments Ltd. or any professionals engaged by Kings Road Investments Ltd. in
relation to due diligence and investment documentation, in an amount, without
prior notice to the Company, not to exceed $100,000 (in addition to any other
expense amounts paid to any Buyer prior to the date of this Agreement), which
amount may be withheld by such Buyer from its Purchase Price at the Closing. The
Company shall be responsible for the payment of any placement agent’s fees,
financial advisory fees, or broker’s commissions (other than for Persons engaged
by any Buyer) relating to or arising out of the transactions contemplated
hereby, including, without limitation, any fees or commissions payable to the
Agent. The Company shall pay, and hold each Buyer harmless against, any
liability, loss or expense (including, without limitation, reasonable attorney’s
fees and out-of-pocket expenses) arising in connection with any claim relating
to any such payment. Except as otherwise set forth in the Transaction Documents,
each party to this Agreement shall bear its own expenses in connection with the
sale of the Securities to the Buyers.
          (h) Pledge of Securities. The Company acknowledges and agrees that the
Securities may be pledged by an Investor (as defined in the Registration Rights
Agreement) in connection with a bona fide margin agreement or other loan or
financing arrangement that is secured by the Securities. The pledge of
Securities shall not be deemed to be a transfer, sale or assignment of the
Securities hereunder, and no Investor effecting a pledge of Securities shall be
required to provide the Company with any notice thereof or otherwise make any
delivery to the Company pursuant to this Agreement or any other Transaction
Document. The Company hereby agrees to execute and deliver such documentation as
a pledgee of the Securities may reasonably request in connection with a pledge
of the Securities to such pledgee by an Investor.
          (i) Disclosure of Transactions and Other Material Information. On or
before 8:30 a.m., New York time, on the first Business Day following the date of
this Agreement, the Company shall issue a press release reasonably acceptable to
the Buyers disclosing all material terms of the transactions contemplated hereby
and file a Current Report on Form 8-K describing the terms of the transactions
contemplated by the Transaction Documents in the form required by the 1934 Act
and attaching the material Transaction Documents (including, without limitation,
this Agreement, the form of the Notes, the form of Warrants and the Registration
Rights Agreement) as exhibits to such filing (including all attachments, the
“8-K Filing”) and a material change report on Form 51-102F3 in accordance with
National Instrument 51-102 of the CSA with respect thereto (the “Material Change
Report”). From and after the 8-K Filing with the SEC and the filing of the
Material Change Report with the CSA, no Buyer shall be in possession of any
material, nonpublic information received from the Company or any of its
Subsidiaries or any of its respective officers, directors, employees or agents,
that is not disclosed in the 8-K Filing. The Company shall not, and shall cause
each of its Subsidiaries and its and each of their respective officers,
directors, employees and agents, not to, provide any Buyer with any material,
nonpublic information regarding the Company or any of its Subsidiaries from and
after the 8-K Filing with the SEC and the filing of the Material Change Report
with the CSA without the express written consent of such Buyer. If a Buyer has,
or believes it has, received any such material, nonpublic information regarding
the Company or any of its Subsidiaries, it shall provide the Company with
written notice thereof. The Company shall, within five (5) Trading Days of
receipt of such notice, make public disclosure of such material, nonpublic
information. In the event of a breach of the foregoing covenant by the Company,
any of its Subsidiaries, or any of its or their respective officers, directors,
employees and agents, in addition to any other remedy provided herein or in the
Transaction Documents, a Buyer shall have the right to make a public disclosure,
in the form of a press release, public advertisement or otherwise, of such
material, nonpublic information without the prior approval by the Company, its
Subsidiaries, or any of its or their respective officers, directors, employees
or agents. No Buyer shall have any liability to the Company, its Subsidiaries,
or any of its or their respective officers, directors, employees, shareholders
or agents for any such disclosure. Subject to the foregoing, neither the
Company, its Subsidiaries nor any Buyer shall issue any press releases or any
other public statements with respect to the transactions contemplated hereby;
provided, however, that the Company shall be

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entitled, without the prior approval of any Buyer, to make any press release or
other public disclosure with respect to such transactions (i) in substantial
conformity with the 8-K Filing and contemporaneously therewith and (ii) as is
required by applicable law and regulations (provided that in the case of clause
(i) each Buyer shall be consulted by the Company in connection with any such
press release or other public disclosure prior to its release). Without the
prior written consent of any applicable Buyer, neither the Company nor any of
its Subsidiaries shall disclose the name of any Buyer in any filing,
announcement, release or otherwise.
          (j) Restriction on Redemption and Dividends. So long as any Notes or
Warrants are outstanding, the Company shall not, directly or indirectly, redeem,
repurchase or otherwise acquire for value or declare or pay any dividend or
distribution on, the Common Shares without the prior express written consent of
the holders of Notes representing not less than a majority of the then
outstanding Notes.
          (k) Additional Notes; Variable Securities; Dilutive Issuances. So long
as any Buyer beneficially owns any Securities, the Company will not issue any
Notes (other than to the Buyers as contemplated hereby) and the Company shall
not issue any other securities that would cause a breach or default under the
Notes. For so long as any Notes or Warrants remain outstanding, the Company
shall not, in any manner, issue or sell any rights, warrants or options to
subscribe for or purchase Common Shares or directly or indirectly convertible
into or exchangeable or exercisable for Common Shares at a price which varies or
may vary with the market price of the Common Shares, including by way of one or
more reset(s) to any fixed price unless the conversion, exchange or exercise
price of any such security cannot be less than the then applicable Conversion
Price (as defined in the Notes) with respect to the Common Shares into which any
Note is convertible or the then applicable Exercise Price (as defined in the
Warrants) with respect to the Common Shares into which any Warrant is
exercisable. For so long as any Notes or Warrants remain outstanding, the
Company shall not, in any manner, enter into or affect any Dilutive Issuance (as
defined in the Notes) if the effect of such Dilutive Issuance is to cause the
Company to be required to issue upon conversion of any Note or exercise of any
Warrant any shares of Common Shares in excess of that number of shares of Common
Shares which the Company may issue upon conversion of the Notes and exercise of
the Warrants without breaching the Company’s obligations under the rules or
regulations of any Eligible Market (as defined in the Notes).
          (l) Corporate Existence. So long as any Buyer beneficially owns any
Securities, the Company shall not be party to any Fundamental Transaction (as
defined in the Notes) unless the Company is in compliance with the applicable
provisions governing Fundamental Transactions set forth in the Notes and the
Warrants.
          (m) Reservation of Shares. The Company shall take all action necessary
to at all times have authorized, and reserved for the purpose of issuance, after
the Closing Date, the maximum number of (i) shares of Common Shares issuable
upon conversion of all of the Notes, (ii) shares of Common Shares issuable upon
exercise of the Warrants (without taking into account any limitations on the
conversion of the Notes or exercise of the Warrants set forth in the Notes and
Warrants, respectively) and (iii) any capital stock of the Company issued or
issuable with respect to the Conversion Shares, the Notes, the Warrant Shares or
the Warrants.
          (n) 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.
          (o) Additional Issuances of Securities.
               (i) For purposes of this Section 4(o), the following definitions
shall apply.
               (1) “Convertible Securities” means any stock or securities (other
than Options) convertible into or exercisable or exchangeable for shares of
Common Shares.
               (2) “Options” means any rights, warrants or options to subscribe
for or purchase shares of Common Shares or Convertible Securities.
               (3) “Common Share Equivalents” means, collectively, Options and
Convertible Securities.

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               (ii) From the date hereof until the date that is thirty
(30) Trading Days (as defined in the Notes) following the Effective Date (as
defined in the Registration Rights Agreement) (the “Trigger Date”), the Company
will not, directly or indirectly, offer, sell, grant any option to purchase, or
otherwise dispose of (or announce any offer, sale, grant or any option to
purchase or other disposition of) any of its or its Subsidiaries’ equity or
equity equivalent securities, including, without limitation, any debt, preferred
stock or other instrument or security that is, at any time during its life and
under any circumstances, convertible into or exchangeable or exercisable for
shares of Common Shares or Common Share Equivalents (any such offer, sale,
grant, disposition or announcement being referred to as a “Subsequent
Placement”).
               (iii) As long as 25% of the original Notes issued at the Closing
are outstanding, from the Trigger Date until the eighteen month anniversary of
the Closing Date, the Company will not, directly or indirectly, effect any
Subsequent Placement unless the Company shall have first complied with this
Section 4(o)(iii).
               (1) The Company shall deliver to each Buyer by facsimile a
written notice (the “Offer Notice”) of any proposed or intended issuance or sale
or exchange (the “Offer”) of the securities being offered (the “Offered
Securities”) in a Subsequent Placement within one Business Day of the
determination of the terms of such Subsequent Placement, which Offer Notice
shall (w) identify and describe the Offered Securities, (x) describe the price
and other final terms upon which they are to be issued, sold or exchanged, and
the number or amount of the Offered Securities to be issued, sold or exchanged,
(y) identify the persons or entities (if known) to which or with which the
Offered Securities are to be offered, issued, sold or exchanged and (z) offer to
issue and sell to or exchange with such Buyers (which offer being
non-transferable to any successor to such Buyer) a pro rata portion of at least
one-half of the Offered Securities allocated among such Buyers (a) based on such
Buyer’s pro rata portion of the Notes purchased hereunder (the “Basic Amount”),
and (b) with respect to each Buyer that elects to purchase its Basic Amount, any
additional portion of the Offered Securities attributable to the Basic Amounts
of other Buyers as such Buyer shall indicate it will purchase or acquire should
the other Buyers subscribe for less than their Basic Amounts (the
“Undersubscription Amount”).
               (2) To accept an Offer, in whole or in part, such Buyer must
deliver a written notice to the Company prior to the end of the first (1st) full
Business Day after such Buyer’s receipt of the Offer Notice (for purposes of
this Section 4(a)(iii)(2), notwithstanding the provisions of Section 9(f),
receipt of the Offer Notice shall not be deemed to have occurred until the Buyer
shall have physically received such Offer Notice) (the “Offer Period”), setting
forth the portion of such Buyer’s Basic Amount that such Buyer elects to
purchase and, if such Buyer shall elect to purchase all of its Basic Amount, the
Undersubscription Amount, if any, that such Buyer elects to purchase (in either
case, the “Notice of Acceptance”). If the Basic Amounts subscribed for by all
Buyers are less than the total of all of the Basic Amounts, then each Buyer who
has set forth an Undersubscription Amount in its Notice of Acceptance shall be
entitled to purchase, in addition to the Basic Amounts subscribed for, the
Undersubscription Amount it has subscribed for; provided, however, that if the
Undersubscription Amounts subscribed for exceed the difference between the total
of all the Basic Amounts and the Basic Amounts subscribed for (the “Available
Undersubscription Amount”), each Buyer who has subscribed for any
Undersubscription Amount shall be entitled to purchase only that portion of the
Available Undersubscription Amount as the Basic Amount of such Buyer bears to
the total Basic Amounts of all Buyers that have subscribed for Undersubscription
Amounts, subject to rounding by the Company to the extent it deems reasonably
necessary.
               (3) The Company shall have ten (10) Business Days from the
expiration of the Offer Period above to offer, issue, sell or exchange all or
any part of such Offered Securities as to which a Notice of Acceptance has not
been given by the Buyers (the “Refused Securities”), 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.
               (4) In the event the Company shall propose to sell less than all
the Refused Securities (any such sale to be in the manner and on the terms
specified in Section 4(o)(iii)(3) above), then each Buyer may, at its sole
option and in its sole discretion, reduce the number or amount of the Offered
Securities specified in its Notice of Acceptance to an amount that shall be not
less than the number or

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amount of the Offered Securities that such Buyer elected to purchase pursuant to
Section 4(o)(iii)(2) above multiplied by a fraction, (i) the numerator of which
shall be the number or amount of Offered Securities the Company actually
proposes to issue, sell or exchange (including Offered Securities to be issued
or sold to Buyers pursuant to Section 4(o)(iii)(3) above prior to such
reduction) and (ii) the denominator of which shall be the original amount of the
Offered Securities. In the event that any Buyer so elects to reduce the number
or amount of Offered Securities specified in its Notice of Acceptance, the
Company may not issue, sell or exchange more than the reduced number or amount
of the Offered Securities unless and until such securities have again been
offered to the Buyers in accordance with Section 4(o)(iii)(1) above.
               (5) Upon the closing of the issuance, sale or exchange of all or
less than all of the Refused Securities, the Buyers shall acquire from the
Company, and the Company shall issue to the Buyers, the number or amount of
Offered Securities specified in the Notices of Acceptance, as reduced pursuant
to Section 4(o)(iii)(3) above if the Buyers have so elected, upon the terms and
conditions specified in the Offer. The purchase by the Buyers of any Offered
Securities is subject in all cases to (i) the preparation, execution and
delivery by the Company and the Buyers of a purchase agreement relating to such
Offered Securities reasonably satisfactory in form and substance to the Buyers
and their respective counsel, (ii) the Buyers’ satisfaction, in their sole
discretion, with the final terms and/or conditions that differ from those
contained in the Offer Notice, and (iii) the Buyers’ reasonable satisfaction
with the identity of the other persons or entities to which the Offered
Securities will be sold.
               (6) Any Offered Securities not acquired by the Buyers or other
persons in accordance with this Section 4(o)(iii) may not be issued, sold or
exchanged until they are again offered to the Buyers under the procedures
specified in this Agreement.
               (iv) The restrictions contained in subsections (ii) and (iii) of
this Section 4(o) shall not apply in connection with the issuance of any
Excluded Securities (as defined in the Notes) and the restriction contained in
subsection (iii) of this Section 4(o) shall not apply to the extent that in the
written opinion of counsel to the Company (which opinion shall be reasonably
satisfactory to the Buyers), the exercising of the participation right (A) would
require the approval of the shareholders of the Company in accordance with the
rules of the Principal Market not otherwise required of the Company or (B) would
result in the Company not being able to offer or sell the Offered Securities
pursuant to an exemption from the registration requirements of the 1933 Act.
          (p) Holding Period. For the purposes of Rule 144, the Company
acknowledges that the holding period of the Conversion Shares, may be tacked
onto the holding period of the Notes and the Company agrees not to take a
position contrary to this Section 4(p).
          (q) Shareholder Approval. The Company shall provide each stockholder
entitled to vote at a special or annual meeting of stockholders of the Company
(the “Shareholder Meeting”), which shall be promptly called and held not later
than July 31, 2006 (the “Shareholder Meeting Deadline”), a proxy statement,
substantially in the form which has been previously reviewed by the Buyers and a
counsel of their choice, soliciting each such stockholder’s affirmative vote at
the Stockholder Meeting for approval of resolutions providing for the Company’s
issuance of all of the Securities as described in the Transaction Documents in
accordance with applicable law and the rules and regulations of the Principal
Market (such affirmative approval being referred to herein as the “Shareholder
Approval”), and the Company shall use its best efforts to solicit its
shareholders’ approval of such resolutions (which best efforts shall include,
without limitation, the requirement to hire a reputable proxy solicitor) and to
cause the Board of Directors of the Company to recommend to the shareholders
that they approve such resolutions. The Company shall be obligated to seek to
obtain the Shareholder Approval by the Shareholder Meeting Deadline. If, despite
the Company’s best efforts the Shareholder Approval is not obtained on or prior
to the Shareholder Meeting Deadline, the Company shall cause an additional
Shareholder Meeting to be held each calendar year thereafter until such
Shareholder Approval is obtained. The Company shall reimburse the Buyers for the
fees and disbursements of their legal counsel in connection with review of the
above mentioned proxy statement(s), which amount shall be limited to $10,000.
          (r) Additional Registration Statements. Until the date that the
Registration Statement (as defined in the Registration Rights Agreement) is
first declared effective by the SEC (the “Effective Date”), the Company shall
not file a registration statement under the 1933 Act relating to securities that
are not the Securities.

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     5. REGISTER; TRANSFER AGENT INSTRUCTIONS.
          (a) Register. The Company shall maintain at its principal executive
offices (or such other office or agency of the Company as it may designate by
notice to each holder of Securities), a register for the Notes and the Warrants
in which the Company shall record the name and address of the Person in whose
name the Notes and the Warrants have been issued (including the name and address
of each transferee), the principal amount of Notes held by such Person, the
number of Conversion Shares issuable upon conversion of the Notes and the number
of Warrant Shares issuable upon exercise of the Warrants held by such Person.
The Company shall keep the register open and available at all times during
business hours for inspection of any Buyer or its legal representatives.
          (b) Transfer Agent Instructions. The Company shall issue irrevocable
instructions to its transfer agent, and any subsequent transfer agent, to issue
certificates or credit shares to the applicable balance accounts at The
Depository Trust Company (“DTC”), registered in the name of each Buyer or its
respective nominee(s), for the Conversion Shares and the Warrant Shares issued
upon conversion of the Notes or exercise of the Warrants in such amounts as
specified from time to time by each Buyer to the Company upon conversion of the
Notes or exercise of the Warrants in the form of Exhibit D attached hereto (the
“Irrevocable Transfer Agent Instructions”). The Company warrants that no
instruction other than the Irrevocable Transfer Agent Instructions referred to
in this Section 5(b), and stop transfer instructions to give effect to Section
2(g) hereof, will be given by the Company to its transfer agent, and that the
Securities shall otherwise be freely transferable on the books and records of
the Company as and to the extent provided in this Agreement and the other
Transaction Documents. If a Buyer effects a sale, assignment or transfer of the
Securities in accordance with Section 2(f), the Company shall permit the
transfer and the Company shall promptly instruct its transfer agent to issue one
or more certificates or credit shares to the applicable balance accounts at DTC
in such name and in such denominations as specified by such Buyer to effect such
sale, transfer or assignment. In the event that such sale, assignment or
transfer involves Conversion Shares or Warrant Shares sold, assigned or
transferred pursuant to an effective registration statement or pursuant to
Rule 144, the transfer agent shall issue such Securities to the Buyer, assignee
or transferee, as the case may be, without any restrictive legend. The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to a Buyer. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Section 5(b) will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section 5(b), that a Buyer shall be entitled,
in addition to all other available remedies, to an order and/or injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required.
     6. CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL.
          The obligation of the Company hereunder to issue and sell the Notes
and the related Warrants to each Buyer at the Closing is subject to the
satisfaction, at or before the Closing Date, of each of the following
conditions, provided that these conditions are for the Company’s sole benefit
and may be waived by the Company at any time in its sole discretion by providing
each Buyer with prior written notice thereof:
          (a) Such Buyer shall have executed each of the Transaction Documents
to which it is a party and delivered the same to the Company.
          (b) Such Buyer and each other Buyer shall have delivered to the
Company the Purchase Price (less, in the case of Kings Road Investments Ltd.,
the amounts withheld pursuant to Section 4(g)) for the Notes and the related
Warrants being purchased by such Buyer at the Closing by wire transfer of
immediately available funds pursuant to the wire instructions provided by the
Company.
          (c) The representations and warranties of such Buyer shall be true and
correct in all material respects as of the date when made and as of the Closing
Date as though made at that time (except for representations and warranties that
speak as of a specific date), and such Buyer shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by such
Buyer at or prior to the Closing Date.

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     7. CONDITIONS TO EACH BUYER’S OBLIGATION TO PURCHASE.
     The obligation of each Buyer hereunder to purchase the Notes and the
related Warrants at the Closing is subject to the satisfaction, at or before the
Closing Date, of each of the following conditions, provided that these
conditions are for each Buyer’s sole benefit and may be waived by such Buyer at
any time in its sole discretion by providing the Company with prior written
notice thereof:
          (a) The Company shall have duly executed and delivered to such Buyer:
(A) the Notes (in such principal amounts as such Buyer shall request) and the
related Warrants (in such amounts as such Buyer shall request) being purchased
by such Buyer at the Closing pursuant to this Agreement and (B) each of the
other Transaction Documents.
          (b) Such Buyer shall have received the opinion of Stahl & Zelmanovitz,
the Company’s outside counsel, dated as of the Closing Date, in substantially
the form of Exhibit E-1 attached hereto. Such Buyer shall have received the
opinion of Maitland & Company, the Company’s Canadian counsel dated as of the
Closing Date, in substantially the form of Exhibit E-2 attached hereto.
          (c) The Company shall have delivered to such Buyer a copy of the
Irrevocable Transfer Agent Instructions, in the form of Exhibit D attached
hereto, which instructions shall have been delivered to and acknowledged in
writing by the Company’s transfer agent.
          (d) The Company shall have delivered to the Buyer a certificate of
status with the BCCA of the Company as of a date within 10 days of the Closing
Date.
          (e) The Company shall have delivered to such Buyer a certificate
evidencing the Company’s qualification as a foreign corporation and good
standing issued by the Secretary of State (or comparable office) of each
jurisdiction in which the Company, as applicable, conducts business, as of a
date within 10 days of the Closing Date.
          (f) The Company shall have delivered to such Buyer a certified copy of
the Articles of Incorporation of the Company as certified by the Ministry of
Consumer and Commercial Relations of the Province of British Columbia (or
comparable office) of the within ten (10) days of the Closing Date.
          (g) The Company shall have delivered to such Buyer a certificate,
executed by the Secretary of the Company dated as of the Closing Date, as to
(i) the resolutions consistent with Section 3(b) as adopted by the Company’s
Board of Directors in a form reasonably acceptable to such Buyer, (ii) the
Articles of Incorporation, as in effect at the Closing and (iii) the Bylaws, as
in effect at the Closing, in the form attached hereto as Exhibit F.
          (h) The representations and warranties of the Company shall be true
and correct in all material respects (except for those representations and
warranties that are qualified by materiality or Material Adverse Effect, which
shall be true and correct in all respects) as of the date when made and as of
the Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date) and the Company shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by the Transaction Documents to be performed,
satisfied or complied with by the Company at or prior to the Closing Date. Such
Buyer shall have received a certificate, executed by the Chief Executive Officer
of the Company, dated as of the Closing Date, to the foregoing effect and as to
such other matters as may be reasonably requested by such Buyer in the form
attached hereto as Exhibit G.
          (i) The Company shall have delivered to such Buyer a letter from the
Company’s transfer agent certifying the number of shares of Common Shares
outstanding as of a date within five days of the Closing Date.
          (j) The Common Shares (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, the CSA or the Principal Market from trading on the
Principal Market nor shall suspension by the SEC, the CSA]or the Principal
Market have been threatened, as of the Closing Date, either (A) in writing by
the SEC, the CSA or the Principal Market or (B) by falling below the minimum
listing maintenance requirements of the Principal Market.

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          (k) The Company shall have obtained all governmental, regulatory or
third party consents and approvals, if any, necessary for the sale of the
Securities.
          (l) The Notes in the form attached as Exhibit A shall have been filed
on or prior to the Closing Date with the Ministry of Consumer and Commercial
Relations of the Province of British Columbia (or comparable office) and shall
be in full force and effect, enforceable against the Company in accordance with
its terms and shall not have been amended.
          (m) The Company shall have delivered to such Buyer such other
documents relating to the transactions contemplated by this Agreement as such
Buyer or its counsel may reasonably request.
     8. TERMINATION.
     In the event that the Closing shall not have occurred with respect to a
Buyer on or before five (5) Business Days from the date hereof due to the
Company’s or such Buyer’s failure to satisfy the conditions set forth in
Sections 6 and 7 above (and the nonbreaching party’s failure to waive such
unsatisfied condition(s)), the nonbreaching party shall have the option to
terminate this Agreement with respect to such breaching party at the close of
business on such date without liability of any party to any other party;
provided, however, this if this Agreement is terminated pursuant to this
Section 8, the Company shall remain obligated to reimburse the non-breaching
Buyers for the expenses described in Section 4(g) above.
     9. MISCELLANEOUS.
          (a) Governing Law; Jurisdiction; Jury Trial. All questions concerning
the construction, validity, enforcement and interpretation of this Agreement
shall be governed by the internal laws of the State of New York, without giving
effect to any choice of law or conflict of law provision or rule (whether of the
State of New York or any other jurisdictions) that would cause the application
of the laws of any jurisdictions other than the State of New York. Each party
hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in The City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address for such notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY
WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF
THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.
          (b) Counterparts. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original, not
a facsimile signature.
          (c) Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
          (d) Severability. If any provision of this Agreement shall be invalid
or unenforceable in any jurisdiction, such invalidity or unenforceability shall
not affect the validity or enforceability of the remainder of this Agreement in
that jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
          (e) Entire Agreement; Amendments. This Agreement and the other
Transaction Documents supersede all other prior oral or written agreements
between the Buyers, the Company, their affiliates and Persons

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acting on their behalf with respect to the matters discussed herein and therein,
and this Agreement, the other Transaction Documents and the instruments
referenced herein contain the entire understanding of the parties with respect
to the matters covered herein and therein and, except as specifically set forth
herein or therein, neither the Company nor any Buyer makes any representation,
warranty, covenant or undertaking with respect to such matters. No provision of
this Agreement may be amended other than by an instrument in writing signed by
the Company and the holders of at least a majority of the aggregate principal
amount of Notes issued and issuable hereunder, and any amendment to this
Agreement made in conformity with the provisions of this Section 9(e) shall be
binding on all Buyers and holders of Securities, as applicable. No provision
hereof may be waived other than by an instrument in writing signed by the party
against whom enforcement is sought. No such amendment shall be effective to the
extent that it applies to less than all of the holders of the applicable
Securities then outstanding. No consideration shall be offered or paid to any
Person to amend or consent to a waiver or modification of any provision of any
of the Transaction Documents unless the same consideration also is offered to
all of the parties to the Transaction Documents, holders of Notes or holders of
the Warrants, as the case may be. The Company has not, directly or indirectly,
made any agreements with any Buyers relating to the terms or conditions of the
transactions contemplated by the Transaction Documents except as set forth in
the Transaction Documents. Without limiting the foregoing, the Company confirms
that, except as set forth in this Agreement, no Buyer has made any commitment or
promise or has any other obligation to provide any financing to the Company or
otherwise.
          (f) Notices. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered: (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one Business Day after deposit with
an overnight courier service, in each case properly addressed to the party to
receive the same. The addresses and facsimile numbers for such communications
shall be:
If to the Company:
NGAS Resources, Inc.
120 Prosperous Place
Suite 201
Lexington, Kentucky 40509
Telephone: (859) 263-3948
Facsimile: (859) 263-4228
Attention: William G. Barr, III, Vice President
With a copy (for informational purposes only) to:
Stahl & Zelmanovitz
767 Third Avenue
Suite 1401
New York, New York 10017
Telephone: (212)826-6435
Facsimile: (212)826-6402
Attention: Douglas Stahl, Esq.
If to the Transfer Agent:
Pacific Corporate Trust Company
625 Howe Street, 10th Floor
Vancouver, British Columbia
Canada V6C 2T6
Telephone: (604) 689-9853
Facsimile: (604) 689-8144
Attention: Jasmin Juma
If to a Buyer, to its address and facsimile number set forth on the Schedule of
Buyers, with copies to such Buyer’s representatives as set forth on the Schedule
of Buyers,

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with a copy (for informational purposes only) to:
Schulte Roth & Zabel LLP
919 Third Avenue
New York, New York 10022
Telephone: (212) 756-2000
Facsimile: (212) 593-5955
Attention: Eleazer N. Klein, Esq.
or to such other address and/or facsimile number 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, recipient
facsimile number and an image of the first page of such transmission or
(C) provided by an overnight courier service shall be rebuttable evidence of
personal service, receipt by facsimile or receipt from an overnight courier
service in accordance with clause (i), (ii) or (iii) above, respectively.
          (g) Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and assigns,
including any purchasers of the Notes or the Warrants. The Company shall not
assign this Agreement or any rights or obligations hereunder without the prior
written consent of the holders of at least a majority of the aggregate principal
amount of Notes issued and issuable hereunder, including by way of a Fundamental
Transaction (unless the Company is in compliance with the applicable provisions
governing Fundamental Transactions set forth in the Notes and the Warrants). A
Buyer may assign some or all of its rights hereunder without the consent of the
Company in which event such assignee shall be deemed to be a Buyer hereunder
with respect to such assigned rights.
          (h) No Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person.
          (i) Survival. Unless this Agreement is terminated under Section 8, the
representations and warranties of the Company and the Buyers contained in
Sections 2 and 3 and the agreements and covenants set forth in Sections 4, 5 and
9 shall survive the Closing. Each Buyer shall be responsible only for its own
representations, warranties, agreements and covenants hereunder.
          (j) Currency. Unless otherwise indicated, all dollar amounts referred
to in this Agreement are in United States Dollars (“US Dollars”). All amounts
owing under this Agreement or any Transaction Document shall be paid in US
Dollars. All amounts denominated in other currencies shall be converted in the
US 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 US Dollars pursuant to this Agreement, the US Dollar exchange
rate as published in the Wall Street Journal on the relevant date of
calculation.
          (k) 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.
          (l) Indemnification. In consideration of each Buyer’s execution and
delivery of the Transaction Documents and acquiring the Securities thereunder
and in addition to all of the Company’s other obligations under the Transaction
Documents, the Company shall defend, protect, indemnify and hold harmless each
Buyer and each other holder of the Securities and all of their shareholders,
partners, members, officers, directors, employees and direct or indirect
investors and any of the foregoing Persons’ agents or other representatives
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the “Indemnitees”)
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action
for which indemnification hereunder is sought), and including reasonable
attorneys’ fees and disbursements (the “Indemnified Liabilities”), incurred by
any Indemnitee as a result of, or arising out of, or

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relating to (a) any inaccuracy in any representation or warranty made by the
Company in the Transaction Documents, (b) any breach of any covenant, agreement
or obligation of the Company contained in the Transaction Documents, or (c) any
cause of action, suit or claim brought or made against such Indemnitee by a
third party (including for these purposes a derivative action brought on behalf
of the Company) and arising out of or resulting from (i) the execution,
delivery, performance or enforcement of the Transaction Documents, (ii) any
transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities, (iii) any
disclosure made by such Buyer pursuant to Section 4(i), or (iv) the status of
such Buyer or holder of the Securities as an investor in the Company pursuant to
the transactions contemplated by the Transaction Documents. To the extent that
the foregoing undertaking by the Company may be unenforceable for any reason,
the Company shall make the maximum contribution to the payment and satisfaction
of each of the Indemnified Liabilities that is permissible under applicable law.
Except as otherwise set forth herein, the mechanics and procedures with respect
to the rights and obligations under this Section 9(l) shall be the same as those
set forth in Section 6 of the Registration Rights Agreement.
          (m) No Strict Construction. The language used in this Agreement will
be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.
          (n) Remedies. Each Buyer and each holder of the Securities shall have
all rights and remedies set forth in the Transaction Documents and all rights
and remedies which such holders have been granted at any time under any other
agreement or contract and all of the rights which such holders have under any
law. Any Person having any rights under any provision of this Agreement shall be
entitled to enforce such rights specifically (without posting a bond or other
security), to recover damages by reason of any breach of any provision of this
Agreement and to exercise all other rights granted by law. Furthermore, the
Company recognizes that in the event that it fails to perform, observe, or
discharge any or all of its obligations under the Transaction Documents, any
remedy at law may prove to be inadequate relief to the Buyers. The Company
therefore agrees that the Buyers shall be entitled to seek temporary and
permanent injunctive relief in any such case without the necessity of proving
actual damages and without posting a bond or other security.
          (o) Rescission and Withdrawal Right. Notwithstanding anything to the
contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, whenever any Buyer exercises a right, election, demand or
option under a Transaction Document and the Company does not timely perform its
related obligations within the periods therein provided, then such Buyer may
rescind or withdraw, in its sole discretion from time to time upon written
notice to the Company, any relevant notice, demand or election in whole or in
part without prejudice to its future actions and rights.
          (p) Payment Set Aside. To the extent that the Company makes a payment
or payments to the Buyers hereunder or pursuant to any of the other Transaction
Documents or the Buyers enforce or exercise their rights hereunder or
thereunder, and such payment or payments or the proceeds of such enforcement or
exercise or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company, a trustee,
receiver or any other Person under any law (including, without limitation, any
bankruptcy law, United States or Canadian federal, state or provincial law,
foreign 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.
          (q) Independent Nature of Buyers’ Obligations and Rights. The
obligations of each Buyer under any Transaction Document are several and not
joint with the obligations of any other Buyer, and no Buyer shall be responsible
in any way for the performance of the obligations of any other Buyer under any
Transaction Document. Nothing contained herein or in any other Transaction
Document, and no action taken by any Buyer pursuant hereto or thereto, shall be
deemed to constitute the Buyers as a partnership, an association, a joint
venture or any other kind of entity, or create a presumption that the Buyers are
in any way acting in concert or as a group with respect to such obligations or
the transactions contemplated by the Transaction Documents and the Company
acknowledges that the Buyers are not acting in concert or as a group with
respect to such obligations or the transactions contemplated by the Transaction
Documents. Each Buyer confirms that it has independently participated in the
negotiation of the transaction contemplated hereby with the advice of its own
counsel and advisors. Each Buyer shall be entitled to independently protect and
enforce its rights, including, without limitation, the rights arising out of
this Agreement or

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out of any other Transaction Documents, and it shall not be necessary for any
other Buyer to be joined as an additional party in any proceeding for such
purpose.
          (r) Judgment Currency.
               (i) If for the purpose of obtaining or enforcing judgment against
the Company or any Subsidiary, in any court in any jurisdiction it becomes
necessary to convert into any other currency (such other currency being
hereinafter in this Section 9(r) referred to as the “Judgment Currency”) an
amount due in US Dollars under this Agreement, the conversion shall be made at
the Exchange Rate prevailing on the Business Day immediately preceding:
               (1) the date of actual payment of the amount due, in the case of
any proceeding in the courts of New York or in the courts of any other
jurisdiction that will give effect to such conversion being made on such date:
or
               (2) the date on which the foreign court determines, in the case
of any proceeding in the courts of any other jurisdiction (the date as of which
such conversion is made pursuant to this Section 9(r) being hereinafter referred
to as the “Judgment Conversion Date”).
               (ii) If in the case of any proceeding in the court of any
jurisdiction referred to in Section 9(r)(i)(2) above, there is a change in the
Exchange Rate prevailing between the Judgment Conversion Date and the date of
actual payment of the amount due, the applicable party shall pay such adjusted
amount as may be necessary to ensure that the amount paid in the Judgment
Currency, when converted at the Exchange Rate prevailing on the date of payment,
will produce the amount of US Dollars which could have been purchased with the
amount of Judgment Currency stipulated in the judgment or judicial order at the
Exchange Rate prevailing on the Judgment Conversion Date.
               (iii) Any amount due from the Company or any Subsidiary, under
this provision shall be due as a separate debt and shall not be affected by
judgment being obtained for any other amounts due under or in respect of this
Agreement.
[Signature Page Follows]

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

                  COMPANY:    
 
                NGAS RESOURCES, INC.    
 
           
 
  By:        
 
           
 
      Name:    
 
      Title:    

[Signature Page to Securities Purchase Agreement]

 

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

                  BUYERS:    
 
                KINGS ROAD INVESTMENTS LTD.    
 
           
 
  By:        
 
           
 
      Name:    
 
      Title:    

[Signature Page to Securities Purchase Agreement]

 

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

                  BUYERS:    
 
                PORTSIDE GROWTH & OPPORTUNITY FUND    
 
           
 
  By:        
 
           
 
      Name:    
 
      Title:    

[Signature Page to Securities Purchase Agreement]

 

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

                  BUYERS:    
 
                ADVISORY RESEARCH MICROCAP VALUE FUND, LP    
 
           
 
  By:        
 
           
 
      Name:    
 
      Title:    
 
                ADVISORY RESEARCH ENERGY FUND, LP    
 
           
 
  By:        
 
           
 
      Name:    
 
      Title:    

[Signature Page to Securities Purchase Agreement]

 

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

                  BUYERS:    
 
                SHEPHERD INVESTMENTS INTERNATIONAL, LTD.    
 
           
 
  By:        
 
           
 
      Name:    
 
      Title:    

[Signature Page to Securities Purchase Agreement]

 

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

                  BUYERS:    
 
                CAPITAL VENTURES INTERNATIONAL    
 
           
 
  By:        
 
           
 
      Name:    
 
      Title:    

[Signature Page to Securities Purchase Agreement]