EXECUTION COPY

 

SECURITIES PURCHASE AGREEMENT

 

This SECURITIES PURCHASE AGREEMENT (the “Agreement”), is entered into this 6th
day of May, 2013, by and among Aura Systems, Inc., a Delaware corporation as
issuer (the “Company”), and each investor listed on the Schedule of Buyers
attached hereto (individually, a “Buyer” and collectively, the “Buyers”).

 

RECITALS

 

WHEREAS, 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 and Rule 506 of Regulation D (“Regulation D”) as
promulgated by SEC under the Securities Act; and

 

WHEREAS, the Company has authorized the issuance of senior secured convertible
promissory notes in the aggregate original principal amount of $4,000,000, in
the form attached hereto as Exhibit 1 (the “Notes”), which Notes shall be
convertible into shares of Common Stock (as converted, collectively, the
“Conversion Shares”), in accordance with the terms of such Notes; and

 

WHEREAS, each Buyer, severally and not jointly wishes to purchase, and the
Company wishes to sell, upon the terms and conditions stated in this Agreement,
(i) the aggregate original principal amount of the Notes set forth opposite such
Buyer’s name in column (3) on the Schedule of Buyers and (ii) a warrant to
initially acquire up to the aggregate number of additional shares of Common
Stock set forth opposite such Buyer’s name in column (4) on the Schedule of
Buyers, in the form attached hereto as Exhibit 2 (the “Warrants”) (as exercised,
collectively, the “Warrant Shares”); and

 

WHEREAS, the Company has agreed to grant in favor of the Collateral Agent, as
secured party, for the benefit of all of the Buyers a first priority perfected
security interest in certain assets of the Company as evidenced by a security
agreement in the form attached hereto as Exhibit 3 (the “Security Agreement”),
to secure the payment and performance of all of the Company’s Obligations,
including the Company’s obligation to repay the Notes in full.

 

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

 

1.DEFINITIONS.

 

“1934 Act” means the Securities Exchange Act of 1934, as amended.

 

“Applicable Laws” means all applicable provisions of all (i) constitutions,
treaties, statutes, laws, rules, regulations and ordinances of any Governmental
Authority and all common law duties, (ii) Consents of any Governmental Authority
and (iii) orders, writs, decisions, rulings, judgments or decrees of any
Governmental Authority binding upon, or applicable to, the Company or Buyer, as
the case may be.

 

   

 

 

“Bankruptcy Laws” means Title 11 of the United States Code (11 U.S.C. Section
101 et seq.) or any other federal or state law relating to bankruptcy,
insolvency or reorganization or for the relief of debtors, in each case as
amended from time to time.

 

“Business Day” means any day that is not a Saturday, a Sunday or a day on which
banking institutions in the City of Los Angeles, California, are authorized or
required by law to close.

 

“Change in Control” means the occurrence of one or more of the following events:

 

(i)       any “person” or “group” (as such terms are used in Sections 13(d)(3)
and 14(d)(2) of the 1934 Act or any successor provisions to either of the
foregoing), including any group acting for the purpose of acquiring, holding,
voting or disposing of securities within the meaning of Rule 13d-5(b)(1) of the
1934 Act (other than a Buyer) becomes the “beneficial owner” (as such term is
defined in Rule 13d-3 of the 1934 Act (provided that a Person will be deemed to
have “beneficial ownership” of all shares that any such Person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time)), directly or indirectly, of fifty percent (50.0%) or more of the
outstanding securities of the Company; or

 

(ii)       any sale, transfer, assignment, lease, conveyance or other
disposition, directly or indirectly, of all or substantially all of the assets
or business of the Company to any Person other than the Company; or

 

(iii)       the Company is acquired by, or merges, consolidates or amalgamates
with or into, any other Person; or

 

(v)       the board of directors or the stockholders of the Company shall have
approved any plan of liquidation, dissolution or bankruptcy of the Company
(other than a plan of liquidation or dissolution of the Company which provides
that the assets of the Company are to be distributed to stakeholders of the
Company.

 

“Closing Sale Price” means, for any security as of any date, the last closing
trade price for such security on the Principal Market, as reported by Bloomberg,
or, if the Principal Market begins to operate on an extended hours basis and
does not designate the closing trade price then the last trade price of such
security prior to 4:00 p.m., New York time, as reported by Bloomberg, or, if the
Principal Market is not the principal securities exchange or trading market for
such security, the last trade price of such security on the principal securities
exchange or trading market where such security is listed or traded as reported
by Bloomberg, or if the foregoing do not apply, the last trade price of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no last trade price,
respectively, is reported for such security by Bloomberg, the average of the bid
prices, or the ask prices, respectively, of any market makers for such security
as reported in the “pink sheets” by OTC Markets Group Inc. If the Closing Sale
Price cannot be calculated for a security on a particular date on any of the
foregoing bases, the Closing Sale Price of such security on such date shall be
the fair market value as mutually determined in good faith by the Company’s
board of directors and the holder of the Note or Warrant, as appropriate,
provided however, that if the Company and the holder are unable to mutually
agree upon such Fair Market Value, then the Company shall cause, at its expense,
the Independent, Accountant to perform the necessary determinations or
calculations (as the case may be) and notify the Company and the Holder of the
results within ten (10) Business Days. Such Independent Accountant’s
determination or calculation (as the case may be) shall be binding upon all
parties absent demonstrable error.

 

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“Collateral” means the “Collateral” under the Collateral Documents, however
defined.

 

“Collateral Agency Agreement” means the Collateral Agency Agreement of even date
herewith by and among the Buyers, the Collateral Agent named therein and the
Company.

 

“Collateral Agent” means National Securities Corporation, a Washington
corporation, as collateral agent.

 

“Collateral Documents” means, collectively, the Security Agreement, the
Collateral Agency Agreement, UCC financing statements and any and all other
agreements, instruments and documents executed or delivered from time to time in
connection herewith or therewith to secure the Obligations under this Agreement,
the Note or any other Transaction Document, in each case as amended from time to
time.

 

“Common Stock” means (i) the Company’s shares of common stock, $0.0001 par value
per share, and (ii) any capital stock into which such common stock shall have
been changed or any share capital resulting from a reclassification of such
common stock.

 

“Consents” means all consents, approvals, authorizations, waivers, permits,
grants, franchises, licenses, findings of suitability, exemptions or orders of,
or any registrations, certificates, qualifications, declarations or filings
with, or any notices to, any Governmental Authority or other Person.

 

“Default” means any event or condition which, with the giving of notice or the
lapse of time or both, would become an Event of Default.

 

“Eligible Market” means The New York Stock Exchange, the NYSE Amex, the Nasdaq
Global Select Market, the Nasdaq Global Market, the Nasdaq Capital Market the
OTC Bulletin Board, or OTCQX.

 

“Environmental Laws” means all Applicable Laws relating to Hazardous Materials
or the protection of human health or safety or the environment, including all
requirements pertaining to reporting, permitting, investigating or remediating
Releases or threatened Releases of Hazardous Materials into the environment, or
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials.

 

“Fundamental Transaction” means (i) that the Company shall, directly or
indirectly, in one or more related transactions (1) effect any merger or
consolidation of the Company with or into another Person, (2) effect any sale of
all or substantially all of its assets in one or a series of related
transactions, (3) complete any tender offer or exchange offer (whether by the
Company or another Person) pursuant to which holders of Common Stock are
permitted to tender or exchange their shares for other securities, cash or
property, or (4) effect any reclassification of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock is effectively
converted into or exchanged for other securities, cash or property, or (ii) any
“person” or “group” (as these terms are used for purposes of Sections 13(d) and
14(d) of the 1934 Act and the rules and regulations promulgated thereunder) is
or shall become the “beneficial owner” (as defined in Rule 13d-3 under the 1934
Act), directly or indirectly, of 50% or more of the aggregate voting power
represented by issued and outstanding Voting Stock of the Company

 

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“GAAP” means U.S. generally accepted accounting principles and practices set
forth in the opinions and pronouncements of the Accounting Principles Board and
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as may be approved by a significant segment of
the accounting profession, all as in effect on the date in question, applied on
a basis consistent with prior periods.

 

“Governmental Authority” means any nation or government, and any state or
political subdivision thereof, any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government
(including the SEC and any court, tribunal or arbitrator(s) of competent
jurisdiction, and any other stock exchange or self-regulatory organization,
including the OTC Bulletin Board, OTC Markets Inc. and the Pink OTC Markets,
Inc.

 

“Hazardous Materials” means any substance (i) which is regulated or governed
under any Environmental Laws; (ii) that is defined or becomes defined as a
“hazardous waste” or “hazardous substance” under any Environmental Laws; (iii)
that is otherwise, to the extent not included in clause (i) or (ii) above,
toxic, explosive, corrosive, inflammable, infectious, radioactive, carcinogenic
or mutagenic; or (iv) that contains gasoline or other petroleum hydrocarbons,
polychlorinated biphenyls or asbestos.

 

“Indebtedness” means, with respect to any Person and without duplication, (i)
any indebtedness, liabilities or other obligations, contingent or otherwise, for
borrowed money (whether in the form of a term loan, revolving line of credit,
credit extension or otherwise); (ii) all obligations evidenced by any bonds,
notes, debentures or similar instruments; (iii) all obligations to pay the
deferred purchase or acquisition price of property or services (other than
obligations to trade creditors incurred in the ordinary course of business that
are not past due by more than ninety (90) days); (iv) all indebtedness created
or arising under any conditional sale or other title retention agreement with
respect to property acquired by such Person (even though the rights or remedies
of the seller or lender under such agreement in the event of default are limited
to repossession or sale of such property); (v) all capitalized lease
obligations; (vi) all obligations of others secured by a Lien to which any
property or assets owned by such Person is subject, whether or not the
obligations secured thereby have been assumed by such Person; (vii) all
reimbursement and other obligations in respect of any letters of credit,
bankers’ acceptances, bank guaranties, surety bonds (whether payment,
performance or otherwise) and similar instruments, whether or not matured,
issued for the account of such Person or as to which such Person is otherwise
liable for reimbursement of drawings or payments; (viii) any obligation,
contingent or otherwise, of such Person guaranteeing or having the economic
effect of guaranteeing any Indebtedness or other obligation payable or
performable by another Person in any manner, whether directly or indirectly, and
including any obligation of such Person, direct or indirect, and (ix) all other
obligations which are required to be classified as long-term liabilities on the
balance sheet of such Person under GAAP. The Indebtedness of any Person shall
include all recourse Indebtedness of any partnership or joint venture in which
such Person is a general partner or joint venturer.

 

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“Independent Accountant” shall mean an impartial nationally recognized firm of
independent certified public accountants mutually acceptable to the Company and
the Buyer, such approval not to be unreasonable withheld.

 

“Lien” means any lien (statutory or other), pledge, mortgage, deed of trust,
assignment, deposit arrangement, priority, security interest, or other charge or
encumbrance or other preferential arrangement of any kind or nature whatsoever
(including the interest of a lessor under a capitalized lease having
substantially the same economic effect), any conditional sale or other title
retention agreement, any lease in the nature thereof and the filing or existence
of any financing statement or other similar form of notice under the laws of any
jurisdiction or any security agreement authorizing any Person to file such a
financing statement, whether arising by contract, operation of law, or
otherwise.

 

“Material Adverse Effect” means any event, matter, condition or circumstance
which (a) has or could reasonably be expected to have a material adverse effect
on or material adverse change in, as the case may be, the business, assets,
condition (financial or otherwise), results of operations, properties (whether
real, personal or otherwise), profitability or prospects of the Company; (b)
could materially impair the ability of the Company to perform or observe its
obligations under this Agreement, the Note or any other Transaction Document to
which it is a party; (c) could materially impair the rights, powers or remedies
of the Buyers under this Agreement, the Note or any other Transaction Document;
(d) materially adversely affects the legality, binding affect, validity or
enforceability of this Agreement, the Note or any other Transaction Document; or
(e) materially adversely affects the validity, attachment, perfection, priority
or enforcement of any Liens granted to the Buyers.

 

“Obligations” means any and all present and future loans, advances,
Indebtedness, claims, guarantees, liabilities or obligations (monetary and
non-monetary) of the Company, or of any other Person for or on behalf of the
Company, owing to the Buyers, of whatever nature, character or description, the
payment and performance of which is provided for, arises under, related to or is
in connection with this Agreement, the Note or any other Transaction Document,
whether for principal, interest, premiums, fees, costs, expenses (including
attorneys’ fees) or other amounts incurred for administration, collection,
enforcement or otherwise, whether or not arising after the commencement of any
proceeding under the Bankruptcy Laws (including post-petition interest) and
whether or not allowed or allowable as a claim in any such proceeding, and
whether or not recovery of any such obligation or liability may be barred by any
statute of limitations or such Indebtedness, claim, liability or obligation may
otherwise be unenforceable.

 

“Organizational Documents” means, collectively, with respect to any Person that
is an entity, the articles of incorporation, certificate of incorporation,
certificate of formation, articles of organization, bylaws, limited liability
company agreement, operating agreement, partnership agreement and similar
organizational documents of such Person, as applicable.

 

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“Permitted Indebtedness” means (i) total Indebtedness of the Company (other than
as expressly specified in, and permitted by, clauses (ii) and (iii) below) not
to exceed $600,000 in the aggregate principal outstanding at any time, provided,
however, such Indebtedness shall be made expressly subordinate in right of
payment to the Indebtedness evidenced by the Notes; (ii) Indebtedness of the
Company existing on the Closing Date and (iii) Indebtedness evidenced by the
Notes.

 

“Permitted Liens” means (i) Lien(s) in favor of the Buyers and any Lien
constituting a renewal, extension or replacement thereof; (ii) any Lien for
Taxes not yet due or delinquent or being contested in good faith by appropriate
proceedings for which adequate reserves have been established in accordance with
GAAP; (iii) any Lien created by operation of law, such as materialmen’s Liens,
mechanics’ Liens and other similar Liens, arising in the ordinary course of
business with respect to a liability that is not yet due or delinquent or that
are being contested in good faith by appropriate proceedings; (iv) any statutory
Lien arising in the ordinary course of business by operation of law with respect
to a liability that is not yet due or delinquent and any Lien constituting a
renewal, extension or replacement thereof; (v) pledges or deposits by the
Company under worker’s compensation laws, unemployment insurance laws or similar
legislation; and (vi) existing Liens described on Schedule 4.14 to the
Disclosure Letter securing Indebtedness or other obligations identified on such
Schedule, other than Liens required by the Buyers to be terminated on or prior
to the Closing and any Lien constituting a renewal, extension or replacement
thereof.

 

“Person” means any entity, corporation, company, association, joint venture,
joint stock company, partnership, trust, organization, individual (including
personal representatives, executors and heirs of a deceased individual), nation,
state, government (including agencies, departments, bureaus, boards, divisions
and instrumentalities thereof), trustee, receiver or liquidator, as well as any
syndicate or group that would be deemed to be a Person under Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended.

 

“Principal Market” means the Eligible Market on which the Common Stock is
primarily listed on or quoted for trading, which, as of the date of this
Agreement and the Closing Date, shall be the OTC Bulletin Board.

 

“Purchase Price” means the aggregate purchase price for the Notes and the
Warrants to be purchased by each Buyer in the amount set forth opposite such
Buyer’s name in column (5) on the Schedule of Buyers.

 

“Real Property” means any real property or facility currently or formerly owned,
operated, leased or occupied by the Company.

 

“Registrable Securities” means (a) any shares of Common Stock issued or issuable
upon conversion of the Notes or exercise of the Warrants owned by the Buyers at
any time, and (b) any shares of Common Stock issued or issuable with respect to
any shares described in subsection (a) above by way of a stock dividend or stock
split or in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization (it being understood that for purposes of
this Agreement, a Person shall be deemed to be a holder of Registrable
Securities whenever such Person has the right to then acquire or obtain from the
Company any Registrable Securities, whether or not such acquisition has actually
been effected).

 

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“Registration Statement” means any registration statement of the Company which
covers any of the Registrable Securities pursuant to the provisions of this
Agreement, including the Prospectus, amendments and supplements to such
Registration Statement, including post-effective amendments, all exhibits and
all materials incorporated by reference in such Registration Statement.

 

“Release” means any release (whether threatened or actual), migration, spilling,
leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping,
seeping, leaching, dumping or disposing into the environment or the workplace of
any Hazardous Materials, and otherwise as defined in any Environmental Laws.

 

“Required Buyers” means Buyers holding or having the right to acquire at least
seventy-five percent (75%) of the Conversion Shares and the Warrant Shares on a
fully-diluted basis at the time any action of the Buyers is required.

 

“Restricted Payment” means, with respect to any Person, any one or more of the
following: (i) any declaration or payment of any dividend or other distribution
(whether in cash, securities or other property), or redemption or purchase, on
account of or with respect to any securities of the Company now or hereafter
outstanding (including a return of capital); (ii) any payment or prepayment of
principal of, premium, if any, or interest, fees or other charges on or with
respect to, or any redemption, purchase or other acquisition for value,
retirement, defeasance, sinking fund or similar payment with respect to, any
Indebtedness, whether now existing or hereafter entered into, that expressly
provides that such Indebtedness is subordinate in right of payment or rights
upon liquidation to any other Indebtedness; (iii) any prepayment of principal
of, premium, if any, or interest, fees or other charges on or with respect to,
or any redemption, purchase or other acquisition for value, retirement,
defeasance, sinking fund or similar payment with respect to, any other
Indebtedness of the Company, except for payments or redemptions of the
Obligations; and (iv) any payment, loan, loan repayment, contribution or other
transfer of funds or other property to any direct or indirect holder of
securities in the Company (other than payment of the Obligations).

 

“SEC” means the Securities and Exchange Commission, or any successor agency.

 

“Securities” means collectively the Notes, the Conversion Shares, the Warrants
and the Warrant Shares.

 

“Securities Act” means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder, all as the same shall be in effect at the
time.

 

“Selling Expenses” means all underwriting discounts, selling commissions and
stock transfer taxes applicable to the sale of Registrable Securities, and fees
and disbursements of counsel for any holder of Registrable Securities, except
for the reasonable fees and disbursements of counsel for the holders of
Registrable Securities required to be paid by the Company pursuant to Section
5.12.

 

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“Subordination Agreement” means the Subordination and Intercreditor Agreement of
even date herewith by and among the subordinator creditors named therein,
Buyers, and the Company

 

“Successor Entity” means the Person formed by, resulting from or surviving any
Fundamental Transaction or the Person with which such Fundamental Transaction
shall have been entered into.

 

“Tax” or “Taxes” means all income, gross receipts, license, payroll, employment,
excise, severance, stamp, occupation, premium, property, environmental, windfall
profit, customs, vehicle, airplane, boat, vessel or other title or registration,
capital stock, franchise, employees’ income withholding, foreign or domestic
withholding, social security, unemployment, disability, real property, personal
property, sales, use, transfer, value added, alternative, add-on minimum and
other tax, fee, assessment, levy, tariff, charge or duty of any kind whatsoever
and any interest, penalty, addition or additional amount thereon imposed,
assessed or collected by or under the authority of any governmental body or
payable under any tax-sharing agreement or any other contract.

 

“Trading Day” means any Business Day on which the Common Stock is traded on the
Principal Market on which the Common Stock is then traded, provided that
“Trading Day” shall not include any day on which the Common Stock is scheduled
to trade on such Principal Market for less than 4.5 hours or any day that the
Common Stock is suspended from trading during the final hour of trading on such
Principal Market (or if such Principal Market does not designate in advance the
closing time of trading on such Principal Market, then during the hour ending at
4:00:00 p.m., New York time) unless such day is otherwise designated as a
Trading Day in writing by the Holder.

 

“Transaction Documents” means, collectively, this Agreement, the Notes, the
Warrants, the Collateral Documents, the Subordiantion Agreement and each of the
other agreements and instruments entered into or delivered by any of the parties
hereto in connection with the transactions contemplated hereby and thereby, as
may be amended from time to time.

 

“Voting Stock” of a Person means capital stock of such Person of the class or
classes pursuant to which the holders thereof have the general voting power to
elect, or the general power to appoint, at least a majority of the board of
directors, managers, trustees or other similar governing body of such Person
(irrespective of whether or not at the time capital stock of any other class or
classes shall have or might have voting power by reason of the happening of any
contingency).

 

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2.PURCHASE AND SALE OF SECURITIES; CLOSING.

 

2.1.      Notes and Warrants. The Company has authorized the issuance and sale
to the Buyers, pursuant to the terms of this Agreement, of Notes in the
aggregate original principal amount of $4,000,000 together with Warrants, which
upon issuance will represent the right to purchase shares of the Company’s
Common Stock at an exercise price per share of $0.75, subject to certain
adjustment as set forth therein, for a period of eighty-four months. Subject to
the satisfaction (or waiver) of the conditions set forth in Sections 7 and 8
below, the Company shall issue and sell to each Buyer, and each Buyer severally,
but not jointly, shall purchase from the Company on the Closing Date, a Note in
the original principal amount as is set forth opposite such Buyer’s name in
column (3) on the Schedule of Buyers along with Warrants to initially acquire up
to the aggregate number of Warrant Shares as is set forth opposite such Buyer’s
name in column (4) on the Schedule of Buyers.

 

2.2.       Closing. The closing (the “Closing”) of the purchase of the Notes and
the Warrants by the Buyers under this Agreement shall occur at 10:00 a.m.,
California time, at the offices of the Company’s corporate counsel, the Law
Offices of Tamara M. Kurtzman, P.C., 8383 Wilshire Blvd., Suite 919, Beverly
Hills, California 90211 on the first (1st) Business Day on which the last of all
of the conditions precedent set forth in Sections 7 and 8 below are satisfied or
waived or such other Business Day as may be mutually agreed upon by the Company
and each Buyer (such date being referred to as the (“Closing Date”)).

 

2.3.       Payment of Purchase Price; Delivery of Notes and Warrants. At the
Closing: (i) each Buyer shall: (1) by wire transfer of immediately available
funds in accordance with the Company’s written wire instructions, pay its
respective Purchase Price to the Company for the respective Note and the
Warrants to be issued and sold to such Buyer pursuant to this Agreement, and (2)
duly execute this Agreement and each of the other Transaction Documents to which
it is a party and deliver the same to the Company; and (ii) the Company shall
deliver to each Buyer (A) a Note (in such amount as is set forth opposite such
Buyer’s name in column (3) on the Schedule of Buyers) and (B) a Warrant pursuant
to which such Buyer shall have the right to initially acquire up to the
aggregate number of Warrant Shares as is set forth opposite such Buyer’s name in
column (4) on the Schedule of Buyers, in all cases, duly executed on behalf of
the Company.

 

3.BUYER’S REPRESENTATIONS AND WARRANTIES. Each Buyer represents and warrants to
the Company with respect to only itself that:

 

3.1.      Organization; Authority. Such Buyer is an entity duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization with the requisite power and authority to enter into and to
consummate the transactions contemplated by this Agreement and the other
Transaction Documents to which it is a party and otherwise to carry out its
obligations hereunder and thereunder.

 

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3.2.       No Public Sale or Distribution. Such Buyer understands that: (i) the
Securities are being offered and sold to such Buyer in reliance upon specific
exemptions from the registration requirements of federal and state securities
laws; (ii) such exemption depends, in part, on the accuracy and truthfulness of
the representations of such Buyer made in this Agreement and the other
Transaction Documents and (iii) the Company is relying upon the truth and
accuracy of such representations, warranties, agreements, acknowledgments and
understandings of such Buyer set forth herein and therein. All information which
has been furnished to the Company with respect to such Buyer’s financial
position and business experience is correct and complete as of the date hereof.
Such Buyer (a) is acquiring its Note and Warrants, (b) upon conversion of its
Note will acquire the Conversion Shares issuable upon conversion thereof, and
(c) upon exercise of its Warrants will acquire the Warrant Shares issuable upon
exercise thereof, in each case, for its own account and not with a view towards,
or for resale in connection with, the public sale or distribution thereof in
violation of applicable securities laws except pursuant to sales registered or
exempted under the Securities Act; provided, however, by making the
representations herein, such Buyer does not agree, or make any representation or
warranty, 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
Securities Act. Such Buyer has no present or contemplated agreement, arrangement
or understanding, directly or indirectly, with any Person to distribute any of
the Securities in violation of applicable securities laws. Such Buyer was not
formed for the purpose of purchasing the Securities.

 

3.3.       Accredited Investor Status; Independent Investigation. Such Buyer is
an “accredited investor” as that term is defined in Rule 501 of Regulation D
under the Securities Act and is not (i) an officer or director of the Company,
(ii) an “affiliate” (as defined in Rule 144 of the Securities Act) of the
Company or (iii) a “beneficial owner” of more than 10% of the shares of Common
Stock (as defined for purposes of Rule 13d-3 of the 1934 Act) of the Company.
Such Buyer is not acting as a financial advisor or fiduciary of the Company (or
in any similar capacity) with respect to this Agreement or the other Transaction
Documents or the transactions contemplated hereby and thereby. By reason of its
business and financial experience, such Buyer has such knowledge, sophistication
and experience in business and financial matters so as to be capable of
evaluating the merits and risks of the investment in the Securities, has the
capacity to protect its own interests, and is able to bear the economic risk of
such investment (including the complete loss thereof). Such Buyer has conducted
its own investigation of the Company and to the extent deemed necessary or
advisable by such Buyer, has retained and relied upon qualified professional
advice regarding the investment, tax and legal merits and consequences of this
Agreement and an investment in the Securities. Such Buyer and its advisors, if
any, have been furnished with all materials relating to the business, finances
and operations of the Company and with all materials relating to the offer and
sale of the Securities which have been requested by such Buyer. Such Buyer and
its advisors, if any, have been afforded the opportunity to ask questions of the
Company.

 

3.4.       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 any investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.

 

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3.5.       Restricted Securities. Such Buyer understands that the Securities
being acquired hereunder are characterized as “restricted securities” under the
federal and state securities or “blue sky” laws inasmuch as they are being
acquired from the Company in a transaction not involving a public offering and
that under such laws and applicable regulations such securities may be resold
without registration under the Securities Act and applicable state securities or
“blue sky” laws only in certain limited circumstances. Such Buyer is familiar
with Rule 144 promulgated by the SEC, as presently in effect, and understands
the resale limitations imposed thereby and by the Securities Act and applicable
state securities laws, pursuant to which the Securities must be held
indefinitely unless a subsequent disposition thereof is registered under the
Securities Act and applicable state securities laws or is exempt from such
registration. Such Buyer further understands that the Securities have not been
registered under the Securities Act or any state securities laws and that
neither the Company nor any other Person is under any obligation to register the
Securities under the Securities Act or any state securities laws or to comply
with the terms and conditions of any exemption thereunder.

 

3.6.       Validity; Enforcement. The performance of this Agreement and of each
of the Transaction Documents to which such Buyer is a party, and the
consummation of the transactions contemplated hereby and thereby have been duly
and validly authorized by all necessary action on the part of such Buyer and
this Agreement and of each of the Transaction Documents to which such Buyer is a
party has been duly and validly authorized, executed and delivered on behalf of
such Buyer. At the Closing, this Agreement and each Transaction Document to
which such Buyer is a party will be a legal, valid and binding obligation of
such Buyer, enforceable against such Buyer in accordance with its terms, except
as enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer or conveyance or similar laws relating to or
limiting creditors’ rights generally or by equitable principles relating to
enforceability and except as rights of indemnity or contribution may be limited
by federal or state securities or other laws or the public policy underlying
such laws.

 

3.7.       No Conflicts. The execution, delivery and performance by such Buyer
of this Agreement and each of the Transactional Documents to which it is a
party, and the consummation by such Buyer of the transactions contemplated
hereby and thereby, do not violate and will not result in or cause (upon the
giving of notice or the passage of time or both) a default or violation under
(i) the Organizational Documents of such Buyer, (ii) any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which such Buyer is a party or (iii) any Applicable Law applicable
to such Buyer.

 

3.8.       Consents. The execution and delivery by such Buyer of this Agreement
and each of the Transaction Documents to which it is a party, and the
consummation by such Buyer of the transactions contemplated hereby, do not and
will not require the Consent of any Governmental Authority or any other Person,
other than Consents that have already been obtained or made.

 

3.9.       Brokers. Such Buyer has not paid and is not obligated to pay any fee
or commission to any broker, finder, investment banker or other intermediary in
connection with this Agreement, any Transaction Document or any of the
transactions contemplated hereby or thereby.

 

3.10.       No Solicitation. No Securities were offered or sold to such Buyer by
means of any form of general solicitation or general advertising, and in
connection therewith such Buyer has not (i) received or reviewed any
advertisement, article, notice or other communication published in a newspaper
or magazine or similar media or broadcast over television or radio whether
closed circuit, or generally available, or (ii) attended any seminar meeting or
industry investor conference whose attendees were invited by any general
solicitation or general advertising.

 

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4.       REPRESENTATIONS AND WARRANTIES OF THE COMPANY. In connection with the
following representations and warranties, the Company has delivered to each
Buyer disclosure schedules comprising schedules corresponding to the section
numbers of the following representations and warranties. The Company hereby
represents and warrants to each Buyer that:

 

4.1.        Organization and Qualification. The Company is duly organized and
validly existing and in good standing under the laws of the jurisdiction in
which it is formed, and has the requisite power and authorization to own its
properties and to carry on its business as now being conducted and as presently
proposed to be conducted. The Company 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. The
Company has no subsidiaries.

 

4.2.       Authorization; Enforcement; Validity. The Company has the requisite
power and authority to execute, deliver, carry out and perform its obligations
under this Agreement and each other Transaction Document to which it is a party,
including, the power and authority to issue, sell and deliver the Securities to
be issued and sold by it hereunder. The execution and delivery of this Agreement
and the other Transaction Documents by the Company, and the consummation by the
Company of the transactions contemplated hereby and thereby, have been duly
authorized by the Company’s board of directors, and no further filing, consent
or authorization is required by the Company, its boards of directors or its
stockholders. This Agreement has been duly executed and delivered by the Company
and, at the Closing, each of the Securities and the Transaction Documents to
which the Company is a party and which is delivered as of that date will be duly
executed and delivered by the Company. At the Closing, this Agreement and each
Transaction Document will be, a legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer or conveyance or similar laws relating to or
limiting creditors’ rights generally or by equitable principles relating to
enforceability, and except as rights of indemnity or contribution may be limited
by federal or state securities laws or the public policy underlying such law.

 

4.3.       Issuance of Securities. The issuance of the Notes and the Warrants is
duly authorized, and upon issuance in accordance with the terms of the
Transaction Documents, will be validly issued, and free from all preemptive or
similar rights, taxes, liens, charges and other encumbrances with respect to the
issue thereof. Upon 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, when issued, will be validly issued, fully paid
and non-assessable and free from all preemptive or similar rights, taxes, liens,
charges and other encumbrances with respect to the issue thereof, with the
holders being entitled to all rights accorded to a holder of Common Stock. The
Company has reserved from its duly authorized capital stock not less than 110%
of the sum of (i) the maximum number of Conversion Shares issuable upon
conversion of the Notes (assuming for purposes hereof that the Notes are
convertible at the Conversion Price (as defined in the Notes) in effect on the
date hereof and without taking into account any limitations on the conversion of
the Notes set forth therein) and (ii) the maximum number of Warrant Shares
issuable upon exercise of the Warrants.

 

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4.4.       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 does not and will not (upon the
giving of notice or the passage of time or both): (i) result in a violation of
the Company’s Organizational Documents, (ii) conflict with, or constitute 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 is a party or (iii) result in a violation of any Applicable Law
applicable to the Company or by which any property or asset of the Company is
bound or affected except to the extent such violations or conflict could not
reasonably be expected to have a Material Adverse Effect.

 

4.5.       Consents. The Company is not required to obtain any Consent from,
authorization or order of, or make any filing or registration with (other than
the filing with the SEC of a Form D and any other filings as may be required by
any state securities agencies), any court, governmental agency or any regulatory
or self-regulatory agency or any other Person in order for it to execute,
deliver or perform any of its respective obligations under, or contemplated by,
the Transaction Documents, in each case, in accordance with the terms hereof or
thereof. All consents, authorizations, orders, filings and registrations which
the Company is required to obtain at or prior to the Closing have been obtained
or effected on or prior to the Closing Date, and the Company is not aware of any
facts or circumstances which might prevent the Company from obtaining or
effecting any of the registration, application or filings contemplated by the
Transaction Documents. The Company is not in violation of the requirements of
the Principal Market and has no knowledge of any facts or circumstances which
could reasonably lead to delisting or suspension of the Common Stock in the
foreseeable future..

 

4.6.       No General Solicitation; Placement Agent’s Fees. Neither the Company,
nor any of its 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 of the Securities Act) in connection with the offer or
sale of the Securities. Except for National Securities Corporation (the
“Placement Agent”) (the fees and expenses of which will be borne solely by the
Company), the Company has not paid nor is obligated to pay any fee or commission
to any broker, finder, investment banker or other intermediary, in connection
with this Agreement or any other Transaction Documents or any of the
transactions contemplated hereby or thereby.

 

4.7.       No Integrated Offering. None of the Company, or any of its
affiliates, nor any Person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of the
issuance of any of the Securities under the Securities Act, whether through
integration with prior offerings or otherwise, or would cause this offering of
the Securities to require approval of stockholders of the Company under any
applicable stockholder approval provisions, including, without limitation, under
the rules and regulations of any exchange or automated quotation system on which
any of the securities of the Company are listed or designated for quotation.
Neither the Company nor any Person acting on its behalf will take any action or
steps that would require registration of the issuance of any of the Securities
under the Securities Act or cause the offering of any of the Securities to be
integrated with other offerings of securities of the Company.

 

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4.8.       Dilutive Effect. The Company understands and acknowledges that the
number of Warrant Shares may increase in certain circumstances. The Company
further acknowledges that its obligation to issue the Warrant Shares upon
exercise of the Warrants in accordance with this Agreement and the Warrants is
absolute and unconditional, regardless of the dilutive effect that such issuance
may have on the ownership interests of other stockholders of the Company.

 

4.9.       Application of Takeover Protections. The Company and its board of
directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, interested stockholder, business
combination, poison pill (including, without limitation, any distribution under
a rights agreement) or other similar anti-takeover provision under the Company’s
Organizational Documents or the laws of the jurisdiction of its incorporation or
otherwise 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.

 

4.10.       SEC Documents; Financial Statements. Since February 28, 2012, the
Company has filed when due (including any applicable extensions) all reports,
schedules, forms, statements and other documents required to be filed by it with
the SEC pursuant to the reporting requirements of the 1934 Act (all of the
foregoing filed prior to the date hereof and all exhibits included therein and
financial statements, notes and schedules thereto and documents incorporated by
reference therein being hereinafter referred to as the “SEC Documents”). The
Company has delivered to the Buyers or their respective representatives true,
correct and complete copies of each of the SEC Documents not available on the
EDGAR system. Except to the extent that any SEC Document has been revised or
superseded by a later-filed SEC Document, as of their respective dates: (i) the
SEC Documents complied in all material respects with the requirements of the
Securities Act or 1934 Act, as the case may be; (ii) none of the SEC Documents,
when filed, 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; and (iii) the financial statements of the Company
included in the SEC Documents complied in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto as in effect as of the time of filing. The financial statements
of the Company included in the SEC Documents have been prepared in accordance
with U.S. generally accepted accounting principles, consistently applied, during
the periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto, or (ii) in the case of unaudited interim
statements, to the extent they may 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 which will not be
material, either individually or in the aggregate). No other information
provided by or on behalf of the Company to any of the Buyers which is not
included in the SEC Documents contains any untrue statement of a material fact
or omits to state any material fact necessary in order to make the statements
therein not misleading, in the light of the circumstance under which they are or
were made.

 

 14 

 

 

4.11.       Absence of Certain Changes. Except as set forth on Schedule 4.11
attached to the Disclosure Letter, since February 28, 2012, there has not been:
(i) any material adverse change in the business, assets, liabilities,
operations, or condition (financial or otherwise) or of the Company; (ii) any
material damage or destruction to, or loss of, or sale of, any material asset of
the Company, outside of the ordinary course of business; (iii) any declaration
or payment of any dividend or other distribution of assets of the Company to its
stockholders, or the adoption or consideration of any plan or arrangement with
respect thereto; or (iv) any other event or condition of any character that
could reasonably be expected to have a Material Adverse Effect. The Company has
not taken any steps to seek protection pursuant to any law or statute relating
to bankruptcy, insolvency, reorganization, receivership, liquidation or winding
up, nor does the Company have any knowledge or reason to believe that any of
their respective creditors intend to initiate involuntary bankruptcy proceedings
or any actual knowledge of any fact which would reasonably lead a creditor to do
so.

 

4.12.       Conduct of Business; Regulatory Permits. The Company is not in
violation of (a) any term of or in default under its Organizational Documents or
(b) any Applicable Laws. Since February 28, 2012, (i) the Common Stock has been
listed or designated for quotation on the Principal Market, (ii) trading in the
Common Stock has not been suspended by the SEC or the Principal Market and (iii)
the Company has received no communication, written or oral, from the SEC or the
Principal Market regarding the suspension or delisting of the Common Stock from
the Principal Market. The Company possesses 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 the Company has not received any
notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit.

 

4.13.       Transactions With Affiliates. Except as set forth in the SEC
Documents or in Schedule 4.13 attached to the Disclosure Letter, none of the
officers, directors, employees or “affiliates” (as defined in Rule 405 of the
Securities Act and calculated based on the assumption that only officers,
directors and holders of at least 10% of the Company’s issued and outstanding
Common Stock are “affiliates” without conceding that any such Persons are
“affiliates” for purposes of federal securities laws) of the Company is
presently a party to any agreement, transaction, financial or other arrangement,
obligation or commitment with the Company other than for the payment of
employment compensation in the ordinary course of business or other ordinary
course services. The Company has not loaned or advanced funds to any officer,
director, employee or stockholder of the Company.

 

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4.14.       Equity Capitalization. As of the date hereof, the authorized capital
stock of the Company consists solely of 150,000,000 shares of Common Stock, of
which, 84,331,848 shares are issued and outstanding and 44,974,623 shares are
reserved for issuance (other than for the Notes and the Warrants) pursuant to
Convertible Securities (as defined in the Note). All of such outstanding shares
are duly authorized and have been, or upon issuance will be, validly issued and
are fully paid and non-assessable. As of the date hereof, 29,464,039 shares of
the Company’s issued and outstanding Common Stock are owned by Persons who are
“affiliates” (as defined in Rule 405 of the Securities Act and calculated based
on the assumption that only officers, directors and holders of at least 10% of
the Company’s issued and outstanding Common Stock are “affiliates” without
conceding that any such Persons are “affiliates” for purposes of federal
securities laws) of the Company. Except as set forth in the SEC Documents or in
Schedule 4.14 attached to the Disclosure Letter: (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 contracts, commitments, understandings or arrangements by which the
Company is or may become bound to issue additional capital stock of the Company
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; (iii) there
are no outstanding debt securities, notes, credit agreements, credit facilities
or other agreements, documents or instruments evidencing Indebtedness of the
Company or by which the Company is or may become bound; (iv) there are no
financing statements securing obligations in any amounts filed in connection
with the Company; (v) there are no agreements or arrangements under which the
Company is obligated to register the sale of any of their securities under the
Securities Act (except pursuant to the piggy-back registration rights set forth
herein); (vi) there are no outstanding securities or instruments of the Company
which contain any redemption or similar provisions, and there are no contracts,
commitments, understandings or arrangements by which the Company is or may
become bound to redeem a security of the Company; (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 does not have any liabilities or
obligations required to be disclosed in the SEC Documents which are not so
disclosed in the SEC Documents, other than those incurred in the ordinary course
of the Company’s businesses and which, individually or in the aggregate, do not
or could not have a Material Adverse Effect. The Company has furnished to the
Buyers true, correct and complete copies of the Company’s Organizational
Documents, as amended and as in effect on the date hereof.

 

4.15.       Indebtedness and Other Contracts. The Company (i) except as set
forth in the SEC Documents or in Schedule 4.15 attached to the Disclosure
Letter, does not have any outstanding Indebtedness, (ii) is not 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, and (iii) is not
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.

 

4.16.       Absence of Litigation. Except as set forth in the SEC Documents or
in Schedule 4.16 attached to the Disclosure Letter, there is no action, suit,
proceeding, inquiry or investigation before or by any court or Governmental
Authority pending or, to the knowledge of the Company, threatened against the
Company or any of the Company’s officers or directors. There is not in effect
any order, judgment, decree, injunction or ruling of any Governmental Authority
against, relating to or affecting the Company or any officer, or director
thereof, enjoining, barring, suspending, prohibiting or otherwise limiting the
same from conducting or engaging in any aspect of the business of the Company.
The Company is not in default under any order, judgment, decree, injunction or
ruling of any Governmental Authority, nor is the Company subject to or a party
to any order, judgment, decree or ruling arising out of any action, suit,
arbitration or other proceeding under any Applicable Laws, respecting antitrust,
monopoly, restraint of trade, unfair competition or similar matters.

 

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4.17.       Insurance. There is in full force and effect one or more policies of
insurance issued by insurers of recognized national standing insuring the
properties and business of the Company 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 is engaged.

 

4.18.       Employee Relations. The Company is not a party to any collective
bargaining agreement, there is no unfair labor practice or labor arbitration
proceeding pending or, to the best knowledge of the Company, threatened, with
respect to the Company, and there are no facts or circumstances known to the
Company that could reasonably be expected to give rise to such complaint or
claim. There has been no work stoppage, strike or other concerted action by
employees of the Company. The completion of the transactions contemplated by
this Agreement will not result in any payment or increased payment becoming due
from the Company to any officer, director, or employee of the Company. Except as
set forth in the SEC Documents or in Schedule 4.18 attached the Disclosure
Letter, the Company does not maintain or contribute to, and does not have any
outstanding liability to or in respect of or obligation under, any pension,
profit-sharing, deferred compensation, bonus, stock option, share appreciation
right, severance, group or individual health, dental, medical, life insurance,
survivor benefit, or similar plan, policy or arrangement, whether formal or
informal, written or oral, for the benefit of any director, officer, consultant
or employee, whether active or terminated, of the Company. Except as set forth
in the SEC Documents or in Schedule 4.18 attached to the Disclosure Letter, to
the best of the knowledge of the Company, no employee of the Company has made
any threat, or otherwise revealed any intent, to terminate said employee’s
relationship with the Company, for any reason, including because of the
consummation of the transactions contemplated by this Agreement. The Company is
in compliance with all federal, state, and local 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.

 

4.19.       Title. The Company holds good title to all real property owned by
the Company and all leases in real property, or other interests in real property
owned or held by the Company (collectively the “Real Property”) are legal,
valid, binding and enforceable against the parties thereto 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. The Company has not
assigned, transferred, conveyed, mortgaged, deeded in trust or encumbered any
interest to any Real Property and, except as set forth in Schedule 4.19 attached
to the Disclosure Letter, no party to any lease of Real Property is in breach or
default thereof, and no event has occurred which, with notice or lapse of time,
would constitute a breach or default or permit termination, modification, or
acceleration thereunder. The Company has good and merchantable title to, or a
valid leasehold interest in, the tangible personal property, equipment,
improvements, fixtures, and other personal property and appurtenances that are
used by the Company in connection with the conduct of its business in each case
free and clear of any and all Liens other than the Permitted Liens, and there
are no facts, circumstances or conditions known to the Company that may result
in any other Liens imposed on any properties (whether real or otherwise) of the
Company.

 

 17 

 

 

4.20.       Intellectual Property Rights. The Company owns or possesses adequate
rights or licenses to use all trademarks, trade names, service marks, service
mark registrations, service names, patents, patent rights, copyrights, original
works, inventions, licenses, approvals, governmental authorizations, trade
secrets and other intellectual property rights and all applications and
registrations therefor (“Intellectual Property Rights”) necessary to conduct its
businesses as now conducted and as presently proposed to be conducted. The
Company has no knowledge of any infringement by the Company of Intellectual
Property Rights of any other Person. There is no claim, action or proceeding
being made or brought, or to the knowledge of the Company, threatened against
the Company, regarding Intellectual Property Rights. The Company has taken
reasonable security measures to protect the secrecy, confidentiality and value
of all of its Intellectual Property Rights.

 

4.21.       Environmental Matters. The Company has not ever caused or permitted
any Hazardous Materials to be disposed of on or under any Real Property, and no
Real Property has ever been used (by the Company or, to the best knowledge of
the Company, by any other Person) as a disposal site or storage site for any
Hazardous Materials. The Company has been issued and is in compliance with all
material operating licenses relating to environmental matters and necessary or
desirable for its business, and has filed all notifications and reports relating
to chemical substances, air emissions, underground storage tanks, effluent
discharges and Hazardous Materials waste storage, treatment and disposal
required in connection with the operation of its businesses. All Hazardous
Materials used or generated by the Company or any business merged into or
otherwise acquired by the Company has been generated, accumulated, stored,
transported, treated, recycled and disposed of in compliance with all
Environmental Laws. The Company has no liabilities with respect to Hazardous
Materials, and to the best knowledge of the Company, no facts or circumstances
exist which could give rise to liabilities with respect to the violation
(whether by the Company or any other Person) of any Environmental Laws.

 

4.22.       Tax Status. Except as set forth in the SEC Documents or in Schedule
4.22 attached to the Disclosure Letter, the Company (i) has made or filed all
foreign, federal and state income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject within the
required time periods therefor, (ii) has paid all Taxes that are material in
amount, shown or determined to be due prior to the date hereof, except those
being contested in good faith and (iii) has set aside on its books provisions
reasonably adequate for the payment of all taxes for periods subsequent to the
periods to which such returns, reports or declarations apply, except, in the
case of clauses (i) and (ii) above, where the failure to so pay or file any such
tax, assessment, charge or return would not have a Material Adverse Effect.
There are no unpaid taxes in any material amount claimed to be due by the
Company by the taxing authority of any jurisdiction. There is no pending or, to
the best knowledge of the Company, threatened audit or investigation of the
Company by any Governmental Authority relating to any Taxes or assessments, or
any claims for additional Taxes or assessments and there are no actions, suits,
proceedings or claims now pending by or against the Company in respect of any
Taxes or assessments. The Company is not a party to or bound by any Tax sharing,
Tax indemnity or Tax allocation agreement or other similar arrangement.

 

 18 

 

 

4.23.       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 filings and is not so disclosed or that otherwise could be
reasonably likely to have a Material Adverse Effect.

 

4.24.       Internal Accounting and Disclosure Controls. The Company maintains
internal control over financial reporting (as such term is defined in Rule
13a-15(f) under the 1934 Act) that is effective to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally
accepted accounting principles, including 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 U.S. generally accepted accounting principles and
to maintain asset and liability accountability, (iii) access to assets or
incurrence of liabilities is permitted only in accordance with management’s
general or specific authorization and (iv) the recorded accountability for
assets and liabilities is compared with the existing assets and liabilities at
reasonable intervals and appropriate action is taken with respect to any
difference. The Company maintains disclosure controls and procedures (as such
term is defined in Rule 13a-15(e) under the 1934 Act) that are effective in
ensuring that information required to be disclosed by the Company in the reports
that it files or submits under the 1934 Act is recorded, processed, summarized
and reported, within the time periods specified in the rules and forms of the
SEC, including, without limitation, controls and procedures designed to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the 1934 Act is accumulated and communicated to the
Company’s management, including its principal executive officer or officers and
its principal financial officer or officers, as appropriate, to allow timely
decisions regarding required disclosure.

 

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

 

4.26.       Acknowledgement Regarding Buyers’ Trading Activity. It is understood
and acknowledged by the Company that (i) following the public disclosure of the
transactions contemplated by the Transaction Documents in accordance with the
terms thereof, none of the Buyers have been asked by the Company to agree, nor
has any Buyer agreed with the Company, to desist from effecting any transactions
in or with respect to (including, without limitation, purchasing or selling,
long and/or short) any securities of the Company, or “derivative” securities
based on securities issued by the Company or to hold any of the Securities for
any specified term; (ii) any Buyer, and counterparties in “derivative”
transactions to which any such Buyer is a party, directly or indirectly,
presently may have a “short” position in the Common Stock which was established
prior to such Buyer’s knowledge of the transactions contemplated by the
Transaction Documents; and (iii) each Buyer shall not be deemed to have any
affiliation with or control over any arm’s length counterparty in any
“derivative” transaction. The Company further understands and acknowledges that
following the public disclosure of the transactions contemplated by the
Transaction Documents pursuant to the Press Release (as defined below) 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 and/or number of Conversion Shares
or Warrant Shares deliverable with respect to the Securities are being
determined and such hedging and/or trading activities, if any, can reduce the
value of the existing stockholders’ equity interest in the Company both at and
after the time the hedging and/or trading activities are being conducted. The
Company acknowledges that such aforementioned hedging and/or trading activities
do not constitute a breach of this Agreement or any other Transaction Document
or any of the documents executed in connection herewith or therewith.

 

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4.27.       Manipulation of Price. Neither the Company nor, to the knowledge of
the Company, any Person acting on its behalf has, directly or indirectly, (i)
taken any action designed to cause or to result in the stabilization or
manipulation of the price of any security of the Company 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 (other than the
Placement Agent), or (iii) paid or agreed to pay to any Person any compensation
for soliciting another to purchase any other securities of the Company.

 

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

 

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

 

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

 

4.31.       No Illegal or Unauthorized Payments; No Political Contributions.
Neither the Company nor, to the best of the Company’s knowledge (after
reasonable inquiry of its officers and directors), any of the officers,
directors, employees, agents or other representatives of the Company has,
directly or indirectly, made or authorized any payment, contribution or gift of
money, property, or services, whether or not in contravention of applicable law,
(a) as a kickback or bribe to any Person or (b) to any political organization,
or the holder of or any aspirant to any elective or appointive public office
except for personal political contributions not involving the direct or indirect
use of funds of the Company.

 

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4.32.       Ranking of Notes and Collateral Security. Except as set forth in
Schedule 4.32 attached to the Disclosure Letter, no Indebtedness of the Company,
will, at the Closing, be senior to, or pari passu with, the Notes in right of
payment, whether with respect to payment or redemptions, interest, damages, upon
liquidation or dissolution or otherwise. There are no agreements, indentures,
instruments or other documents to which the Company is a party or by which it or
they may be bound that requires the subordination in right of payment or rights
upon liquidation of any Indebtedness under the Note or any other Obligations to
the repayment of any other existing or future Indebtedness of the Company. The
Liens granted in favor of the Buyers under the Collateral Documents constitute
valid, enforceable and continuing first priority security interests and Liens
in, on and to the Collateral and secure the payment and performance in full of
all Obligations, including all Indebtedness under the Note.

 

4.33.       Disclosure. After due inquiry of the directors and officers of the
Company, no representation, warranty, statement or information (whether
regarding the Company or otherwise) made or furnished to the Buyers by or on
behalf of the Company or its representatives and agents, whether written or
oral, whether included in any materials or documents furnished to the Buyers
prior to the date hereof or included in this Agreement or any Transaction
Document or in any Exhibit or Schedule, is untrue with respect to any material
fact or omits to state a material fact necessary in order to make the statement
made herein or therein, in light of the circumstances in which such statement
was made, not misleading. The Company confirms that neither it nor any other
Person acting on its behalf has provided any of the Buyers or their agents or
counsel with any information that constitutes or could reasonably be expected to
constitute material, non-public information concerning the Company, other than
the existence of the transactions contemplated by this Agreement and the other
Transaction Documents. The Company understands and confirms that each of the
Buyers will rely on the foregoing representations in effecting transactions in
securities of the Company.

 

5.COVENANTS.

 

5.1.       Reporting Status. Until latter of (i) such date as the Buyers have
sold all Conversion Shares and Warrant Shares issued to the Buyers or (ii) the
Notes and Warrants no longer remain outstanding, the Company shall timely file
with the SEC all Company SEC Documents as are specified in the Securities Act or
the 1934 Act and the Company shall not terminate its status as an issuer
required to file reports under the 1934 Act even if the 1934 Act or the rules
and regulations thereunder would no longer require or otherwise permit such
termination. Each Company SEC Document to be filed by the Company, when filed
with the SEC, will comply with all applicable requirements of the Securities Act
or the 1934 Act and will not 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 light of the circumstances under which
they were made, not misleading. The financial statements of the Company to be
included in each Company SEC Document to be filed by the Company will comply as
to form, as of the date of its filing with the SEC, with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto, will be prepared in accordance with GAAP (except, in the case of
unaudited statements, as permitted by the SEC) and will fairly present in all
material respects the consolidated financial position of the Company as of the
dates thereof and the consolidated results of its operations and cash flows for
the periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments, which will not be material, consistent with past
practices and consistently applied

 

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5.2.       Use of Proceeds. The Company shall use the proceeds from the sale of
the Securities for general corporate purposes. So long as any portion of the
Notes shall remain unpaid or outstanding, the Company shall not, directly or
indirectly, make any Restricted Payment except as expressly set forth on
Schedule 5.2 attached to the Disclosure Letter.

 

5.3.       Conduct of Business. The business of the Company shall not be
conducted in violation of any Applicable Law, except where such violations would
not result, either individually or in the aggregate, in a Material Adverse
Effect. So long as the Notes remain outstanding, the Company shall not engage in
any material line of business substantially different from those lines of
business conducted by the Company on the Closing Date or any business
substantially related or incidental thereto.

 

5.4.       Fundamental Transactions. So long as the Notes remain outstanding,
the Company shall not enter into or be party to any Fundamental Transaction
unless the Successor Entity assumes in writing all of the obligations of the
Company under the Notes and the other Transaction Documents in accordance with
the provisions of this Section 5.4 pursuant to written agreements, reasonably
acceptable to the Required Buyers, including agreements to deliver to each
holder of Notes in exchange for such Notes a security of the Successor Entity
evidenced by a written instrument substantially similar in form and substance to
the Notes, including, without limitation, having a principal amount and interest
rate equal to the principal amounts then outstanding and the interest rates of
the Notes held by such holder, having similar conversion rights as the Notes and
having similar ranking to the Notes. Upon the occurrence of any Fundamental
Transaction, the Successor Entity shall succeed to, and be substituted for (so
that from and after the date of such Fundamental Transaction, the provisions of
this Note and the other Transaction Documents referring to the “Company” shall
refer instead to the Successor Entity), and may exercise every right and power
of the Company and shall assume all of the obligations of the Company under this
Note and the other Transaction Documents with the same effect as if such
Successor Entity had been named as the Company herein. The provisions of this
Section 5.4 shall apply similarly and equally to successive Fundamental
Transactions occurring during the period in which this Note remains outstanding.
So long as this Note remains outstanding, the Company shall, no later than ten
(10) Business Days prior to the consummation of a Fundamental Transaction (but
not prior to the public announcement of such Fundamental Transaction) deliver
written notice thereof via facsimile and overnight courier to the Holder.

 

5.5.       Restriction on Transfer of Assets. The Company shall not, directly or
indirectly, sell, lease, license, assign, transfer, convey or otherwise dispose
of any assets or rights of the Company owned or hereafter acquired whether in a
single transaction or a series of related transactions, other than (i) sales,
leases, licenses, assignments, transfers, conveyances and other dispositions of
such assets or rights by the Company that, in the aggregate, do not have a fair
market value in excess of $75,000 in any twelve (12) month period and (ii) sales
of inventory in the ordinary course of business.

 

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5.6.       No Liens. The Company shall not, directly or indirectly, allow or
suffer to exist any Liens upon or in any property or assets (other than the
Excluded Assets as defined in the Security Agreement) other than Permitted
Liens.

 

5.7.       Corporate Existence. So long as any portion of the Notes shall remain
unpaid or outstanding, the Company shall at all times do or cause to be done all
things necessary to (a) maintain and preserve its legal existence and its
rights, franchises and privileges and (b) become or remain duly qualified and in
good standing in each jurisdiction in which the character of the properties
owned or leased by it or in which the transaction of its business makes such
qualification necessary.

 

5.8.       Notice of Qualified Financing. At least five (5) Business Days prior
to any proposed or intended Qualified Financing (as defined in the Notes), the
Company shall deliver to each Buyer a written notice of its proposal or
intention to effect a Qualified Financing (the “Offer Notice”). The Offer Notice
shall (i) identify and describe the securities being offered in the Qualified
Financing, (ii) describe the price and other terms upon which such securities
are to be issued, sold or exchanged, and the number or amount of the securities
to be issued, sold or exchanged, and (iii) offer to issue and sell to or
exchange with such Buyer in accordance with the terms of the Offer Notice such
number of securities as is equal to the quotient of (x) the Conversion Balance
(as defined in the Notes) of such Buyer’s Note divided by (y) the purchase price
of such securities offered pursuant to such Qualified Financing.

 

5.9.       Disclosure of Transactions and Other Material Information. The
Company shall, on or before 8:30 a.m., California time, on the second (2nd)
Business Day after the date of this Agreement, (x) issue a press release (the ”
Press Release” ) reasonably acceptable to the Buyers disclosing all the material
terms of the transactions contemplated by the Transaction Documents and (y) file
a Current Report on Form 8-K (the “8-K Filing”) describing all the material
terms of the transactions contemplated by the Transaction Documents in the form
required by the 1934 Act and attaching all the material Transaction Documents
(including, without limitation, this Agreement, the form of the Security
Agreement, the Collateral Agency Agreement, the form of the Notes and the form
of the Warrants). From and after the issuance of the Press Release, the Company
shall have disclosed all material, non-public information (if any) delivered to
any of the Buyers by the Company, or any of its officers, directors, employees
or agents in connection with the transactions contemplated by the Transaction
Documents. The Company shall not, and the Company shall cause each of its
officers, directors, employees and agents not to, provide any Buyer with any
material, non-public information regarding the Company from and after the
issuance of the Press Release without the express prior written consent of such
Buyer. Neither the Company nor any Buyer shall issue any press releases or any
other public statements with respect to the transactions contemplated hereby;
provided, however, the Company shall be entitled, without the prior approval of
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
the applicable Buyer, the Company shall not disclose the name of such Buyer in
any filing (other than the 8-K Filing or as otherwise required by Applicable
Law), announcement, release or otherwise. Notwithstanding anything contained in
this Agreement to the contrary and without implication that the contrary would
otherwise be true, the Company expressly acknowledges and agrees that no Buyer
has had, and no Buyer shall have (unless expressly agreed to by a particular
Buyer after the date hereof in a written definitive and binding agreement
executed by the Company and such particular Buyer (it being understood and
agreed that no Buyer may bind any other Buyer with respect thereto)), any duty
of confidentiality with respect to, or a duty not to trade on the basis of, any
information regarding the Company.

 

 23 

 

 

5.10.        Form D and Blue Sky. The Company shall 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. Without limiting
any other obligation of the Company under this Agreement, the Company shall
timely make all filings and reports relating to the offer and sale of the
Securities required under all applicable securities laws (including, without
limitation, all applicable federal securities laws and all applicable “Blue Sky”
laws), and the Company shall comply with all applicable federal, foreign, state
and local laws, statutes, rules, regulations and the like relating to the
offering and sale of the Securities to the Buyers.

 

5.11.       Reservation of Shares. From and after the date hereof until the date
on which the Qualified Financing is consummated (but only so long as any of the
Notes or Warrants remain outstanding), the Company shall take all action
necessary to at all times have authorized, and reserved for the purpose of
issuance, no less than 5,866,667 shares of Common Stock for issuance upon
conversion of the Notes and exercise of the Warrants. From and after the date on
which the Qualified Financing is consummated (but only so long as any of the
Warrants remain outstanding), the Company shall take all action necessary to at
all times have authorized, and reserved for the purpose of issuance, no less
than 110% of the maximum number of shares of Common Stock issuable upon exercise
of all the Warrants (without regard to any limitations on the exercise of the
Warrants set forth therein).

 

5.12.       Piggyback Registration Rights

 

(a) Whenever the Company proposes to register any shares of its Common Stock
under the Securities Act (other than a registration effected solely to implement
an employee benefit plan or a transaction to which Rule 145 of the Securities
Act is applicable, or a Registration Statement on Form S-4, S-8 or any successor
form thereto or another form not available for registering the Registrable
Securities for sale to the public), whether for its own account or for the
account of one or more stockholders of the Company and the form of Registration
Statement to be used may be used for any registration of Registrable Securities
(a “Piggyback Registration”), the Company shall give prompt written notice (in
any event no later than fifteen (15) days prior to the filing of such
Registration Statement) to the holders of Registrable Securities of its
intention to effect such a registration and, subject to Section 5.12(b) and
5.12(c), shall include in such registration all Registrable Securities with
respect to which the Company has received written requests for inclusion from
the holders of Registrable Securities within ten (10) days after the Company’s
notice has been given to each such holder, provided however, that the Company
shall not be required to register any Registrable Securities pursuant to this
Section 5.12 that are (i) eligible for resale pursuant to Rule 144 without
restriction (including, without limitation, volume restrictions) or (ii) that
are the subject of a then-effective Registration Statement. The Company may
postpone or withdraw the filing or the effectiveness of a Piggyback Registration
at any time in its sole discretion.

 

 24 

 

 

(b) If a Piggyback Registration is initiated as a primary underwritten offering
on behalf of the Company and the managing underwriter advises the Company and
the holders of Registrable Securities (if any holders of Registrable Securities
have elected to include Registrable Securities in such Piggyback Registration)
in writing that in its opinion the number of shares of Common Stock proposed to
be included in such registration, including all Registrable Securities and all
other shares of Common Stock proposed to be included in such underwritten
offering, exceeds the number of shares of Common Stock which can be sold in such
offering and/or that the number of shares of Common Stock proposed to be
included in any such registration would adversely affect the price per share of
the Common Stock to be sold in such offering, the Company shall include in such
registration (i) first, the number of shares of Common Stock that the Company
proposes to sell; (ii) second, the number of shares of Common Stock requested to
be included therein by holders of Registrable Securities, allocated pro rata
among all such holders on the basis of the number of Registrable Securities
owned by each such holder or in such manner as they may otherwise agree; and
(iii) third, the number of shares of Common Stock requested to be included
therein by holders of Common Stock (other than holders of Registrable
Securities), allocated among such holders in such manner as they may agree;
provided, that in any event the holders of Registrable Securities shall be
entitled to register at least 25% of the securities to be included in any such
registration.

 

(c) If a Piggyback Registration is initiated as an underwritten offering on
behalf of a holder of Common Stock other than Registrable Securities, and the
managing underwriter advises the Company in writing that in its opinion the
number of shares of Common Stock proposed to be included in such registration,
including all Registrable Securities and all other shares of Common Stock
proposed to be included in such underwritten offering, exceeds the number of
shares of Common Stock which can be sold in such offering and/or that the number
of shares of Common Stock proposed to be included in any such registration would
adversely affect the price per share of the Common Stock to be sold in such
offering, the Company shall include in such registration (i) first, the number
of shares of Common Stock requested to be included therein by the holder(s)
requesting such registration and by the holders of Registrable Securities,
allocated pro rata among such holders on the basis of the number of shares of
Common Stock (on a fully diluted, as converted basis) and the number of
Registrable Securities, as applicable, owned by all such holders or in such
manner as they may otherwise agree; and (ii) second, the number of shares of
Common Stock requested to be included therein by other holders of Common Stock,
allocated among such holders in such manner as they may agree.

 

(d) If and whenever the holders of Registrable Securities request that any
Registrable Securities be registered pursuant to the provisions of this
Agreement, the Company shall use its reasonable best efforts to effect the
registration and the sale of such Registrable Securities in accordance with the
intended method of disposition thereof, and pursuant thereto the Company shall
as soon as reasonably practicable:

 

 25 

 

 

(i)       within a reasonable time before filing such Registration Statement,
Prospectus or amendments or supplements thereto, furnish to one counsel selected
by holders of such Registrable Securities copies of such documents proposed to
be filed, which documents shall be subject to the review, comment and approval
of such counsel;

 

(ii) notify each selling holder of Registrable Securities, promptly after the
Company receives notice thereof, of the time when such Registration Statement
has been declared effective or a supplement to any Prospectus forming a part of
such Registration Statement has been filed;

 

(iii) furnish to each selling holder of Registrable Securities such number of
copies of the Prospectus included in such Registration Statement (including each
preliminary Prospectus) and any supplement thereto (in each case including all
exhibits and documents incorporated by reference therein) and such other
documents as such seller may reasonably request in order to facilitate the
disposition of the Registrable Securities owned by such seller;

 

(iv)       use its reasonable best efforts to register or qualify such
Registrable Securities under such other securities or “blue sky” laws of such
jurisdictions as any selling holder reasonably requests and do any and all other
acts and things which may be reasonably necessary or advisable to enable such
holders to consummate the disposition in such jurisdictions of the Registrable
Securities owned by such holders; provided, that the Company shall not be
required to qualify generally to do business, subject itself to general taxation
or consent to general service of process in any jurisdiction where it would not
otherwise be required to do so but for this Section 5.12(d)(iv);

 

(v)       notify each selling holder of such Registrable Securities, at any time
when a Prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
Prospectus included in such Registration Statement contains an untrue statement
of a material fact or omits any fact necessary to make the statements therein
not misleading;

 

(vi)       advise the holders of Registrable Securities, promptly after it shall
receive notice or obtain knowledge thereof, of the issuance of any stop order by
the Commission suspending the effectiveness of such Registration Statement or
the initiation or threatening of any proceeding for such purpose and promptly
use its reasonable best efforts to prevent the issuance of any stop order or to
obtain its withdrawal at the earliest possible moment if such stop order should
be issued;

 

(vii)       permit any holder of Registrable Securities which holder, in its
sole and exclusive judgment, might be deemed to be an underwriter or a
controlling person of the Company, to participate in the preparation of such
Registration Statement and to require the insertion therein of language,
furnished to the Company in writing, which in the reasonable judgment of such
holder and its counsel should be included; and

 

 26 

 

 

(viii) otherwise use its reasonable best efforts to take all other steps
necessary to effect the registration of such Registrable Securities contemplated
hereby.

 

(e) All expenses (other than Selling Expenses) incurred by the Company in
complying with its obligations pursuant to this Agreement and in connection with
the registration and disposition of Registrable Securities, including, without
limitation, all registration and filing fees, underwriting expenses (other than
fees, commissions or discounts), expenses of any audits incident to or required
by any such registration, fees and expenses of complying with securities and
“blue sky” laws, printing expenses, fees and expenses of the Company’s counsel
and accountants and reasonable fees and expenses of one counsel for the holders
of Registrable Securities participating in such registration as a group
(selected by the holders of a majority of the Registrable Securities included in
the registration), shall be paid by the Company. All Selling Expenses relating
to Registrable Securities registered pursuant to this Agreement shall be borne
and paid by the holders of such Registrable Securities, in proportion to the
number of Registrable Securities registered for each such holder.

 

6.REGISTER; LEGEND.

 

6.1.       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 the 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 reasonable times
during business hours for inspection of any Buyer or its legal representatives.

 

6.2.       Transfer Agent Instructions. The Company shall issue irrevocable
instructions to its transfer agent and any subsequent transfer agent in a form
acceptable to each of the Buyers (the “Irrevocable Transfer Agent Instructions”)
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 in such
amounts as specified from time to time by each Buyer to the Company upon
conversion of the Notes or the exercise of the Warrants (as the case may be).
The Company represents and warrants that no instruction other than the
Irrevocable Transfer Agent Instructions referred to in this Section 6.2, and
stop transfer instructions to give effect to Section 3.5 hereof, will be given
by the Company to its transfer agent with respect to the Securities, and that
the Securities shall otherwise be freely transferable on the books and records
of the Company, as applicable, to the extent provided in this Agreement and the
other Transaction Documents. If a Buyer effects a sale, assignment or transfer
of the Securities in accordance with Section 3.5, the Company shall permit the
transfer and shall promptly instruct its transfer agent to issue one or more
certificates or credit shares to the applicable balance accounts at DTC in such
name and in such denominations as specified by such Buyer to effect such sale,
transfer or assignment. In the event that such sale, assignment or transfer
involves Conversion Shares or Warrant Shares sold, assigned or transferred
pursuant to an effective registration statement or in compliance with Rule 144,
the transfer agent shall issue such shares to such Buyer, assignee or transferee
(as the case may be) without any restrictive legend in accordance with Section
6.4 below. The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to each Buyer. Accordingly, the Company
acknowledges that the remedy at law for a breach of its obligations under this
Section 6.2 will be inadequate and agrees, in the event of a breach or
threatened breach by the Company of the provisions of this Section 6.2, that
each 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..

 

 27 

 

 

6.3.       Legends. Each Buyer understands that the Securities have been issued
(or will be issued in the case of the Conversion Shares and the Warrant Shares)
pursuant to an exemption from registration or qualification under the Securities
Act and applicable state securities laws, and except as set forth below, the
Securities 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, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL TO THE HOLDER (IF REQUESTED BY THE COMPANY), IN A FORM REASONABLY
ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
(II) UNLESS SOLD OR ELIGIBLE TO BE 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.

 

6.4. Removal of Legends. Certificates evidencing Securities shall not be
required to contain the legend set forth in Section 6.3 above or any other
legend (i) while a registration statement covering the resale of such Securities
is effective under the Securities Act, (ii) following any sale of such
Securities pursuant to Rule 144 (assuming the transferor is not an affiliate of
the Company), (iii) if such Securities are eligible to be sold, assigned or
transferred under Rule 144 (provided that a Buyer provides the Company with
reasonable assurances that such Securities are eligible for sale, assignment or
transfer under Rule 144 which shall not include an opinion of counsel), (iv) in
connection with a sale, assignment or other transfer (other than under Rule
144), provided that such Buyer provides the Company with an opinion of counsel
to such Buyer, in a generally acceptable form, to the effect that such sale,
assignment or transfer of the Securities may be made without registration under
the applicable requirements of the Securities Act or (v) if such legend is not
required under applicable requirements of the Securities Act (including, without
limitation, controlling judicial interpretations and pronouncements issued by
the SEC). If a legend is not required pursuant to subsections (i), (ii), (iii)
or (v) above, the Company shall no later than four (4) Business Days, or, in the
case of subsection (iv) above no later than two (2) Business Days following the
delivery by a Buyer to the Company or the transfer agent (with notice to the
Company) of a legended certificate representing such Securities (endorsed or
with stock powers attached, signatures guaranteed, and otherwise in form
necessary to affect the reissuance and/or transfer, if applicable), together
with any other deliveries from such Buyer as may be required above in this
Section 6.4, as directed by such Buyer, either: (A) provided that the Company’s
transfer agent is participating in the DTC Fast Automated Securities Transfer
Program and such Securities are Conversion Shares or Warrant Shares, credit the
aggregate number of shares of Common Stock to which such Buyer shall be entitled
to such Buyer’s or its designee’s balance account with DTC through its
Deposit/Withdrawal at Custodian system or (B) if the Company’s transfer agent is
not participating in the DTC Fast Automated Securities Transfer Program, issue
and deliver (via reputable overnight courier) to such Buyer, a certificate
representing such Securities that is free from all restrictive and other
legends, registered in the name of such Buyer or its designee (the date by which
such credit is so required to be made to the balance account of such Buyer’s or
such Buyer’s nominee with DTC or such certificate is required to be delivered to
such Buyer pursuant to the foregoing is referred to herein as the “Required
Delivery Date”).

 

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7.       CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL. The obligations of the
Company to consummate the transactions contemplated hereby, including the
obligation to issue and sell the Note and Warrant to each Buyer at the Closing,
is subject to the following conditions precedent, each of which shall be
satisfied or waived in the sole and absolute discretion of the Company on or
prior to the Closing Date:

 

7.1.       Execution of Documents. Such Buyer shall have duly executed this
Agreement and each of the other Transaction Documents to which it is a party and
delivered the same to the Company.

 

7.2.       Payment for Securities. Such Buyer and each other Buyer shall have
delivered to the Company the Purchase Price for the Note 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.

 

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

 

7.4.       Purchase Permitted by Applicable Law. The consummation of the
transactions contemplated by this Agreement and the other Transaction Documents
shall not be prohibited by or violate any Applicable Laws, and shall not be
enjoined (temporarily or permanently) under, or prohibited by or contrary to,
any injunction, order, decree or ruling.

 

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8.       CONDITIONS TO EACH BUYER’S OBLIGATION TO PURCHASE. The obligation of
each Buyer hereunder to purchase its Note and its related Warrants at the
Closing is subject to the following conditions precedent, each of which shall be
satisfied or waived in the sole and absolute discretion of the Buyer on or prior
to the Closing Date:

 

8.1.       Closing Documents. The Company shall have duly executed and delivered
to such Buyer each of the Transaction Documents to which it is a party and the
Company shall have duly executed and delivered to such Buyer a Note (in such
original principal amount as is set forth across from such Buyer’s name in
column (3) of the Schedule of Buyers) and the related Warrants (for such
aggregate number of Warrant Shares as is set forth across from such Buyer’s name
in column (4) of the Schedule of Buyers) being purchased by such Buyer at the
Closing pursuant to this Agreement.

 

8.2.       Collateral Documents. The Company shall have duly executed and
delivered to such Buyer the Security Agreement and the Collateral Agency
Agreement, duly executed by the Company, together with all exhibits and
schedules thereto.

 

8.3.       Opinion of Counsel. Such Buyer shall have received an opinion of the
Company’s counsel, dated as of the Closing Date, in a form reasonably acceptable
to such Buyer.

 

8.4.       Good Standing. The Company shall have delivered to such Buyer a
certificate evidencing the formation and good standing of the Company in such
entity’s jurisdiction of formation issued by the Secretary of State (or
comparable office) of such jurisdiction of formation as of a date within thirty
(30) days of the Closing Date.

 

8.5.       Foreign Qualification. The Company shall have delivered to such Buyer
a certificate evidencing the Company’s qualification as a foreign corporation
and good standing issued by the Secretary of State (or comparable office) of
each jurisdiction in which the Company conducts business and is required to so
qualify, as of a date within thirty (30) days of the Closing Date.

 

8.6.       Certificate of Incorporation. The Company shall have delivered to
such Buyer a certified copy of the Certificate of Incorporation as certified by
the Secretary of State of the Company’s jurisdiction of incorporation within
thirty (30) days of the Closing Date.

 

8.7.       Secretary’s Certificate. The Company shall have delivered to such
Buyer a certificate, in a form reasonably acceptable to such Buyer, executed by
the Secretary of the Company and dated as of the Closing Date, as to (i) the
resolutions consistent with Section 4.2 as adopted by the Company’s board of
directors in a form reasonably acceptable to such Buyer, (ii) the Certificate of
Incorporation of the Company and (iii) the Bylaws of the Company, each as in
effect at the Closing.

 

8.8.       Representations and Warranties. Each of the representations and
warranties made by the Company in this Agreement shall be true and correct in
all material respects as of the date when made and as of the Closing Date as
though originally made at that time and the Company shall have performed,
satisfied and complied in all material respects with each of the covenants and
obligations of the Company in this Agreement to be performed or satisfied by it
on 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 acceptable to such Buyer. No Default or
Event of Default shall have occurred and be continuing or will occur as a result
of the execution and delivery of this Agreement or any other Transaction
Document or the consummation of the other transactions contemplated hereby or
thereby.

 

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8.9.       Third Party Consents. The Company shall have obtained all
governmental, regulatory or third party consents and approvals, if any,
necessary for the sale of the Securities, including without limitation, those
required by the Principal Market.

 

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

 

8.11.       UCC Search. Within ten (10) days prior to the Closing, the Company
shall have delivered or caused to be delivered to each Buyer, true copies of UCC
search results, listing all effective financing statements which name as debtor
the Company filed in the prior five years to perfect an interest in any assets
thereof, together with copies of such financing statements, none of which,
except as otherwise agreed in writing by the Buyers, shall cover any of the
Collateral (as defined in the Collateral Documents) and the results of searches
for any tax lien and judgment lien filed against the Company or its property,
which results, except as otherwise agreed to in writing by the Buyers shall not
show any such Liens currently in effect. The Company shall provide an update to
such UCC search no more than two (2) days prior to Closing.

 

8.12.       Disclosure Letter. The Company shall have delivered to such Buyer a
letter dated as of the Closing Date, in the form acceptable to such Buyer,
executed by the Company (the “Disclosure Letter”).

 

9.DEFAULTS AND REMEDIES.

 

9.1.       Events of Default. The occurrence of any one or more of the following
events, acts or occurrences shall constitute an event of default (each an “Event
of Default”):

 

9.1.1.       The Company shall fail to pay, within five (5) Business Days of the
due date (whether at stated maturity or upon acceleration, demand, required
prepayment or otherwise), any principal amount of the Note; or

 

9.1.2.       The Company shall breach or fail to pay interest or any other
amount (including fees, costs, expenses or other amounts) under this Agreement
or any other Transaction Document (other than any Note as provided in Section
9.1.1) within five (5) Business Days after the due date thereof; or

 

9.1.3.        The suspension from trading or the failure (or threatened failure)
of the Common Stock to be trading or listed (as applicable) on an Eligible
Market for a period of five (5) consecutive Trading Days or for more than an
aggregate of ten (10) Trading Days in any 365-day period; or

 

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9.1.4.       The Company shall breach or fail to perform, comply with or
observe, or be in default under, any covenant or obligation required to be
performed by it (other than as provided in Sections 9.1.1 and 9.1.2) under any
Transaction Document and, if such breach or failure may be cured, such breach or
failure shall not have been cured within ten (10) Business Days after the
receipt of written notice that such breach or failure shall have occurred; or

 

9.1.5.       Any representation or warranty made by the Company in this
Agreement or by the Company in any other Transaction Document shall be false or
misleading in any material respect when made (or deemed made); or

 

9.1.6.       (i) the Company either (i) fails to pay, when due, or within any
applicable grace period, any payment with respect to any Indebtedness in excess
of $600,000 due to any third party (other than payments contested by the Company
in good faith by proper proceedings and with respect to which adequate reserves
have been set aside for the payment thereof in accordance with GAAP) or is
otherwise in breach or violation of any agreement for monies owed or owing in an
amount in excess of $600,000, which breach or violation permits the other party
thereto to declare a default or otherwise accelerate amounts due thereunder, or
(ii) suffer to exist any other circumstance or event that would, with or without
the passage of time or the giving of notice, result in a default or event of
default under any agreement binding the Company, which default or event of
default would or is likely to have a Material Adverse Effect on the business,
assets, operations (including results thereof), liabilities, properties,
condition (including financial condition) or prospects of the Company; or

 

9.1.7.       There shall be commenced against the Company an involuntary case
seeking the liquidation or reorganization under the Bankruptcy Laws or any
similar proceeding under any other Applicable Laws or an involuntary case or
proceeding seeking the appointment of a receiver, custodian, trustee or similar
official for it, or to take possession of all or a substantial portion of its
property or to operate all or a substantial portion of its business, and any of
the following events occur: (i) the Company consents to such involuntary case or
proceeding or fails to diligently contest it in good faith; (ii) the petition
commencing the involuntary case or proceeding is not timely controverted; (iii)
the petition commencing the involuntary case or proceeding remains undismissed
or unstayed for a period of sixty (60) calendar days; or (iv) an order for
relief shall have been issued or entered therein or a receiver, custodian,
trustee or similar official appointed; or

 

9.1.8.       The Company shall institute a voluntary case seeking liquidation or
reorganization under the Bankruptcy Laws or any similar proceeding under any
other Applicable Laws, or shall consent thereto; or shall consent to the
conversion of an involuntary case to a voluntary case; or shall file a petition,
answer a complaint or otherwise institute any proceeding seeking, or shall
consent or acquiesce to the appointment of, a receiver, custodian, trustee or
similar official for it, or to take possession of all or a substantial portion
of its property or to operate all or a substantial portion of its business; or
shall make a general assignment for the benefit of creditors; or shall generally
not pay its debts as they become due or shall admit in writing its inability to
pay its debts generally; or the board of directors of the Company (or any
committee thereof) adopts any resolution or otherwise authorizes action to
approve any of the foregoing; or

 

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9.1.9.       The Company shall suffer any money judgment, writ, warrant of
attachment or other order that involves an amount or value, individually or in
the aggregate, in excess of $200,000 to the extent not covered by insurance, and
such judgment, writ, warrant or other order shall continue unsatisfied and
unstayed for a period of ninety (90) calendar days, or any non-monetary
judgment, writ, warrant or other order shall be rendered against the Company and
continues unsatisfied and unstayed for a period of ninety (90) calendar days; or

 

9.1.10.        The Collateral Documents shall for any reason fail or cease to
create a separate valid and perfected and, except to the extent permitted by the
terms hereof or thereof, first priority Lien on the Collateral (as defined in
the Security Agreement) in favor of each of the Secured Parties (as defined in
the Security Agreement) and such breach remains uncured for a period of five (5)
Business Days; or

 

9.1.11.       There shall occur and continue for more than five (5) Business
Days any event, matter, condition or circumstance which constitutes a Material
Adverse Change; or

 

9.1.12.       There shall occur a Change in Control.

 

9.2.       Acceleration. If any Event of Default (other than an Event of Default
specified in clause 9.1.7 or 9.1.8 of Section 9.1) occurs and is continuing, the
Required Buyers may, without notice, declare all outstanding principal of,
accrued and unpaid interest on, and all other amounts under, the Note, and all
other Obligations, to become immediately due and payable. Upon any such
declaration of acceleration, such principal, interest, and other Obligations,
shall become immediately due and payable. If an Event of Default specified in
clause 9.1.7 or 9.1.8 of Section 9.1 occurs, all outstanding principal of, and
accrued and unpaid interest on, and all other amounts under, the Note, and all
other Obligations, shall become immediately due and payable without any
declaration or other act on the part of the Required Buyers. The Company hereby
waives all presentment for payment, demand, protest, notice of protest and
notice of dishonor, and all other notices of any kind to which it may be
entitled under Applicable Laws or otherwise.

 

9.3.       Other Remedies. If any Default or Event of Default shall occur and be
continuing, the Buyer may proceed to protect and enforce its rights and remedies
under this Agreement and any other Transaction Document by exercising all rights
and remedies available under this Agreement, any other Transaction Document or
Applicable Laws (including the UCC), either by suit in equity or by action at
law, or both, whether for the collection of principal of or interest on the
Note, to enforce the specific performance of any covenant or other term
contained in this Agreement or any Transaction Document. No remedy conferred in
this Agreement upon any Buyer is intended to be exclusive of any other remedy,
and each and every such remedy shall be cumulative and shall be in addition to
every other remedy conferred herein or now or hereafter existing at law or in
equity or by statute or otherwise.

 

9.4.       Waiver of Past Defaults. A Buyer may, by providing a writing to the
Company, waive any Default or Event of Default and its consequences with respect
to this Agreement, the Note or any other Transaction Document in each case with
respect to such Buyer; provided however, that no such waiver will extend to any
other Buyer or to any subsequent or other Default or Event of Default or impair
any rights of such Buyer or other Buyers which may arise as a result of such
other Default or Event of Default.

 

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10.        TERMINATION.

 

In the event that the Closing shall not have occurred with respect to a Buyer
within ten (10) days after the date hereof, then such Buyer shall have the right
to terminate its obligations under this Agreement with respect to itself at any
time on or after the close of business on such date without liability of such
Buyer to any other party by providing written notice of such termination to the
Company and all other Buyers; provided, however, (i) the right to terminate this
Agreement under this Section 10 shall not be available to such Buyer if the
failure of the transactions contemplated by this Agreement to have been
consummated by such date is the result of such Buyer’s breach of this Agreement
(including, without limitation, a failure by such Buyer to perform any
obligation under this Agreement) and (ii) the abandonment of the sale and
purchase of the Notes and the Warrants shall be applicable only to such Buyer
providing such written notice. Nothing contained in this Section 10 shall be
deemed to release any party from any liability for any breach by such party of
the terms and provisions of this Agreement or the other Transaction Documents or
to impair the right of any party to compel specific performance by any other
party of its obligations under this Agreement or the other Transaction
Documents.

 

11.       MISCELLANEOUS.

 

11.1.       Governing Law. IN ALL RESPECTS, INCLUDING ALL MATTERS OF
CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF
CALIFORNIA APPLICABLE TO CONTRACTS MADE AND PERFORMED IN THAT STATE (WITHOUT
REGARD TO CHOICE OF LAW OR CONFLICTS OF LAW PROVISIONS) AND ANY APPLICABLE LAWS
OF THE UNITED STATES OF AMERICA.

 

11.2.       Consent to Jurisdiction and Venue. ANY SUIT, LEGAL ACTION OR SIMILAR
PROCEEDING ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT SHALL BE BROUGHT
EXCLUSIVELY IN THE COURTS OF THE STATE OF CALIFORNIA SITTING IN THE CITY OF LOS
ANGELES OR IN THE COURTS OF THE UNITED STATES FOR THE CENTRAL DISTRICT OF
CALIFORNIA SITTING IN THE CITY OF LOS ANGELES. BUYER CONSENTS, FOR ITSELF AND IN
RESPECT OF ITS PROPERTY, TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS 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. NOTHING
CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS
IN ANY MANNER PERMITTED BY LAW.

 

11.3.       Waiver of Jury Trial. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE
LAW, EACH PARTY HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY EXPRESSLY WAIVES
ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION
ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS RELATED
THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING.

 

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11.4.       Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same instrument. In the event that any
signature is delivered by facsimile transmission or by an e-mail which contains
a portable document format (.pdf) file of an executed signature page, such
signature page shall create a valid and binding obligation of the party
executing (or on whose behalf such signature is executed) with the same force
and effect as if such signature page were an original thereof. Any party
delivering an executed counterpart of this Agreement by facsimile or other
electronic method of transmission also shall deliver an original executed
counterpart of this Agreement, but the failure to deliver an original executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Agreement. This Agreement shall become effective upon the execution of a
counterpart thereof by each of the parties.

 

11.5.       Attorneys Fees. In any action, suit or other proceeding to enforce
or interpret any of the provisions of this Agreement, the prevailing party shall
be entitled to recover its attorneys’ fees and expenses incurred in connection
therewith.

 

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

 

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

 

11.8.       Maximum Lawful Rate. In no event shall any payment made to any
Buyer, any obligation on the part of the Company to pay any amount, or any
collection by any Buyer pursuant to this Agreement or any other Transaction
Documents, exceed the maximum amount or rate permissible under Applicable Law.
Accordingly, if any obligation to pay, payment made to any Buyer, or collection
by any Buyer pursuant the Transaction Documents is determined to be contrary to
any such Applicable Law, such obligation to pay, payment or collection shall be
deemed to have been made by mutual mistake of such Buyer and the Company and
such amount shall be deemed to have been adjusted with retroactive effect to the
maximum amount or rate of interest, as the case may be, as would not be so
prohibited by Applicable Law. Such adjustment shall be effected, to the extent
necessary, by reducing or refunding, at the option of the Company, the amount of
interest or any other amounts which would constitute unlawful amounts required
to be paid or actually paid to Buyers under the Transaction Documents.

 

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11.9.       Entire Agreement. This Agreement, the Securities, the other
Transaction Documents and the schedules and exhibits attached hereto and thereto
and the instruments referenced herein and therein constitute the entire
understanding and agreement between the Buyers and the Company with respect to
the subject matter hereof and thereof and supersede all other prior oral or
written agreements, understandings, negotiations, discussions and undertakings
between the Buyers and the Company relating to the subject matter hereof or
thereof.

 

11.10.       Publicity. Each party will consult with the other before issuing,
and provide each other the opportunity to review, comment upon and concur with
and use reasonable efforts to agree on, any press release or other public
statement with respect to the transactions contemplated by this Agreement, and
shall not issue any such press release or make such other public announcement
prior to such consultation, except as either party may determine is required
under Applicable Laws.

 

11.11.       Consent to Amendments. No provision of this Agreement, the Notes,
or the other Transaction Documents may be amended, supplemented, or otherwise
modified other than by an instrument in writing signed by the Company and the
Required Buyers, and any amendment to any provision of this Agreement, the
Notes, or other Transaction Document made in conformity with the provisions of
this Section 10.11 shall be binding on all Buyers and holders of Securities, as
applicable, provided that no such amendment shall be effective to the extent
that it applies to less than all of the holders of the Securities then
outstanding.

 

11.12.       Waiver. No waiver shall be effective unless it is in writing and
signed by an authorized representative of the waiving party, provided that the
Required Buyers may waive any provision of this Agreement, and any waiver of any
provision of this Agreement made in conformity with the provisions of this
Section 10.12 shall be binding on all Buyers and holders of Securities, as
applicable, provided that no such waiver shall be effective to the extent that
it applies to less than all of the holders of the Securities then outstanding
(unless a party gives a waiver as to itself only). 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.

 

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11.13.       Notices. All notices, requests, demands and other communications
which are required or may be given under this Agreement shall be in writing and
shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile prior
to 4:00 p.m. California time on a Business Day, (ii) the next Business Day after
the date of transmission, if such notice or communication is delivered via
facsimile on a day which is not a Business Day or later than 4:00 p.m.
California time on a Business Day; (iii) the second Business Day following the
date of mailing, if sent by nationally recognized overnight courier service, or
(iv) upon actual receipt by the party to whom such notice is required to be
given, in each case properly addressed to the party to receive the same and,
provided confirmation of transmission, deposit, or delivery, as the case may be,
is mechanically or electronically generated and kept on file by the sending
party. The addresses, and facsimile numbers for such communications shall be:

 

If to the Company:

 

Aura Systems, Inc.
1310 E. Grand Avenue
El Segundo, CA 90245
Attention: Chief Executive Officer
Telephone: (310) 643-5300
Facsimile: (310) 643-7457

 

With a copy (for informational purposes only) to:

 

The Law Offices of Tamara M. Kurtzman, P.C.
8383 Wilshire Boulevard, Suite 919
Beverly Hills, CA 90211
Attention: Tamara M. Kurtzman, Esq.

                    Kerrigan B. Hennings, Esq.

Telephone: (323) 782-6999
Facsimile: (323) 782-8587

 

If to a Buyer:

 

to its address, facsimile number or e-mail address set forth on the Schedule of
Buyers, with copies to such Buyer’s representatives as set forth on the Schedule
of Buyers,

 

or at such other address or addresses or facsimile number and/or to the
attention of such other Person as the recipient party may specify by written
notice given in accordance with this Section 10.13.

 

11.14.       Successors and Assigns. The Company shall not sell, assign,
transfer or delegate any of its rights or obligations hereunder or under any
other Transaction Document, or any interest herein or therein, by operation of
law or otherwise, without the prior written consent of the Required Buyers. This
Agreement shall otherwise inure to the benefit of, and be binding upon, the
parties and its respective successors and assigns.

 

11.15.       No Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, other than the Company Indemnitees and Buyer Indemnitees
referred to in Section 10.18 below.

 

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11.16.       Survival. The representations, warranties, agreements and covenants
shall survive the Closing. Each Buyer shall be responsible only for its own
representations, warranties, agreements and covenants hereunder.

 

11.17.       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.

 

11.18.       Indemnification. (a) 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 holder of any Securities and all of their stockholders, partners,
members, officers, directors, employees and direct or indirect investors and any
of the foregoing Persons’ agents or other representatives (including, without
limitation, those retained in connection with the transactions contemplated by
this Agreement) (collectively, the ” Indemnitees “) from and against any and all
actions, causes of action, suits, claims, losses, costs, penalties, fees,
liabilities and damages, and expenses in connection therewith (irrespective of
whether any such Indemnitee is a party to the action for which indemnification
hereunder is sought), and including reasonable attorneys’ fees and disbursements
(the “Indemnified Liabilities”), incurred by any Indemnitee as a result of, or
arising out of, or relating to (i) any misrepresentation or breach of any
representation or warranty made by the Company in any of the Transaction
Documents, (ii) any breach of any covenant, agreement or obligation of the
Company contained in any of the Transaction Documents or (iii) any cause of
action, suit, proceeding or claim brought or made against such Indemnitee by a
third party (including for these purposes a derivative action brought on behalf
of the Company) or which otherwise involves such Indemnitee that arises out of
or results from (x) the execution, delivery, performance or enforcement of any
of the Transaction Documents, (y) any transaction financed or to be financed in
whole or in part, directly or indirectly, with the proceeds of the issuance of
the Securities, or (z) the status of such Buyer or holder of the Securities
either as an investor in the Company pursuant to the transactions contemplated
by the Transaction Documents or as a party to this Agreement (including, without
limitation, as a party in interest or otherwise in any action or proceeding for
injunctive or other equitable relief). To the extent that the foregoing
undertaking by 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 which is permissible under applicable law, provided
however, that the Company shall have no liability to any Indemnitee for any
Indemnified Liability that arises out of or is based on any action of or failure
to act by such Indemnitee and that is finally determined by a court of competent
jurisdiction to have resulted from the fraud, gross negligence, or willful
misconduct of such Indemnitee.

 

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(b) Promptly after receipt by any Indemnitee of notice of any demand, claim or
circumstances which would or might give rise to a claim or the commencement of
any action, proceeding or investigation in respect of which indemnity may be
sought pursuant to this Section 11.18, such Indemnitee shall promptly notify the
Company in writing and the Company shall assume the defense thereof, including
the employment of counsel reasonably satisfactory to such Indemnitee, and shall
assume the payment of all fees and expenses; provided, however, that the failure
of any Indemnitee so to notify the Company shall not relieve the Company of its
obligations hereunder except to the extent that the Company is actually and
materially prejudiced by such failure to notify. In any such proceeding, any
Indemnitee shall have the right to retain its own counsel, but the fees and
expenses of such counsel shall be at the expense of such Indemnitee unless: (i)
the Company and the Indemnitee shall have mutually agreed to the retention of
such counsel; (ii) the Company shall have failed promptly to assume the defense
of such proceeding and to employ counsel reasonably satisfactory to such
Indemnitee in such proceeding; or (iii) in the reasonable judgment of counsel to
such Indemnitee, representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them. The
Company shall not be liable for any settlement of any proceeding effected
without its written consent, which consent shall not be unreasonably withheld,
delayed or conditioned. Without the prior written consent of the Indemnitee,
which consent shall not be unreasonably withheld, delayed or conditioned, the
Company shall not effect any settlement of any pending or threatened proceeding
in respect of which any Indemnitee is or could have been a party and indemnity
could have been sought hereunder by such Indemnified Party, unless such
settlement includes an unconditional release of such Indemnitee from all
liability arising out of such proceeding.

 

11.19.       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. This Agreement
shall be deemed to be jointly drafted by the Company and each of the Buyers and
shall not be construed against any Person as the drafter hereof.

 

11.20.       Remedies. Each Buyer and each holder of any 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 specific performance
and/or temporary, preliminary and permanent injunctive or other equitable relief
from any court of competent jurisdiction in any such case without the necessity
of proving actual damages and without posting a bond or other security.

 

11.21.       USA Patriot Act. Each Buyer hereby notifies the Company that
pursuant to the requirements of the USA PATRIOT Act (Title III of Pub. L. 107-56
(signed into law October 26, 2001)), it may be required to obtain, verify and
record information that identifies the Company in accordance with said Act.

 

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11.22.       Currency. Unless otherwise expressly indicated, all dollar amounts
referred to in this Agreement and the other Transaction Documents are in United
States Dollars (“U.S. Dollars”), and all amounts owing under this Agreement and
all other Transaction Documents shall be paid in U.S. Dollars.

 

11.23.       Independent Nature of Buyers’ Obligations and Rights. The
obligations of each Buyer under the Transaction Documents are several and not
joint with the obligations of any other Buyer, and no Buyer shall be responsible
in any way for the performance of the obligations of any other Buyer under any
Transaction Document. Nothing contained herein or in any other Transaction
Document, and no action taken by any Buyer pursuant hereto or thereto, shall be
deemed to constitute the Buyers as, and the Company acknowledges that the Buyers
do not so constitute, a partnership, an association, a joint venture or any
other kind of group or entity, or create a presumption that the Buyers are in
any way acting in concert or as a group or entity with respect to such
obligations or the transactions contemplated by the Transaction Documents or any
matters, and the Company acknowledges that the Buyers are not acting in concert
or as a group, and the Company shall not assert any such claim, with respect to
such obligations or the transactions contemplated by the Transaction Documents.
The decision of each Buyer to purchase Securities pursuant to the Transaction
Documents has been made by such Buyer independently of any other Buyer. Each
Buyer acknowledges that no other Buyer has acted as agent for such Buyer in
connection with such Buyer making its investment hereunder and that no other
Buyer will be acting as agent of such Buyer in connection with monitoring such
Buyer’s investment in the Securities or enforcing its rights under the
Transaction Documents. The Company and each Buyer confirms that each Buyer has
independently participated with the Company in the negotiation of the
transaction contemplated hereby with the advice of its own counsel and advisors.
Each Buyer shall be entitled to independently protect and enforce its rights,
including, without limitation, the rights arising out of this Agreement or out
of any other Transaction Documents, and it shall not be necessary for any other
Buyer to be joined as an additional party in any proceeding for such purpose.
The use of a single agreement to effectuate the purchase and sale of the
Securities contemplated hereby was solely in the control of the Company, not the
action or decision of any Buyer, and was done solely for the convenience of the
Company and not because it was required or requested to do so by any Buyer. It
is expressly understood and agreed that each provision contained in this
Agreement and in each other Transaction Document is between the Company and a
Buyer, solely, and not between the Company and the Buyers collectively and not
between and among the Buyers.

 

[signature pages follow]

 

 40 

 

 

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

 

  COMPANY:         AURA SYSTEMS, INC.         By:             Name:     Title:  

 

   

 

 

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

 

  BUYER:         [NAME]         By:     Its:                        By:  

 

   

 

 

SCHEDULE OF BUYERS

 

(1)   (2)   (3)   (4)   (5)   (6)                       Buyer   Address, E-mail
and/or Facsimile
Number   Original
Principal
Amount of Note   Warrant
Shares   Purchase
Price   Legal Representative’s
Address and Facsimile Number