Exhibit 10.1

 

SECURITIES PURCHASE AGREEMENT

 

This Securities Purchase Agreement (this “Agreement”) is dated as of September
23, 2014, by and among Baxano Surgical, Inc., a Delaware corporation (the
“Company”), and each purchaser identified on the signature pages hereto (each,
including its successors and assigns, a “Purchaser” and collectively, the
“Purchasers”).

 

RECITALS

 

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

 

B.           Each Purchaser, severally and not jointly, wishes to purchase, and
the Company wishes to sell, upon the terms and conditions stated in this
Agreement, that aggregate principal amount of subordinated convertible
debentures of the Company, in substantially the form attached hereto as Exhibit
A (the “Debentures”), set forth below such Purchaser’s name on the signature
page of this Agreement (which aggregate principal amount for all Purchasers
together shall be $1,384,801.10), which Debentures shall be convertible into
shares of the Company’s common stock, par value $0.0001 per share (the “Common
Stock”)(as converted, the “Conversion Shares”) in accordance with the terms of
the Debentures.

 

C.           The Debentures are entitled to interest, amortization payments and
certain other amounts, which, at the option of the Company and subject to
certain conditions, may be paid in shares of Common Stock (the “Interest
Shares”) or in cash.

 

D.           The Debentures, the Conversion Shares and the Interest Shares
collectively are referred to herein as the “Securities”.

 

E.           The Company has engaged Summer Street to act as placement agent
(the “Placement Agent”) for the offering of the Debentures on a “best efforts”
basis.

 

F.           Contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Registration Rights
Agreement, substantially in the form attached hereto as Exhibit B (the
“Registration Rights Agreement”), pursuant to which, among other things, the
Company will agree to provide certain registration rights with respect to the
Underlying Shares under the Securities Act and the rules and regulations
promulgated thereunder and applicable state securities laws.

 

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Agreement, and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the Company and the Purchasers hereby
agree as follows:

 

ARTICLE I.
DEFINITIONS

 

1.1         Definitions. In addition to the terms defined elsewhere in this
Agreement, for all purposes of this Agreement, the following terms shall have
the meanings indicated in this Section 1.1:

 

“Action” means any action, suit, inquiry, notice of violation, proceeding
(including any partial proceeding such as a deposition) or investigation pending
or, to the Company’s Knowledge, threatened in writing against the Company, any
Subsidiary or any of their properties or any executive officer, director or
employee of the Company or any Subsidiary acting in his or her capacity as an
executive officer, director or employee before or by any federal, state, county,
local or foreign court, arbitrator, governmental or administrative agency,
regulatory authority, stock market, stock exchange or trading facility.

 

 

 

 

“Affiliate” means, with respect to any Person, any other Person that, directly
or indirectly through one or more intermediaries, Controls, is controlled by or
is under common control with such Person, as such terms are used in and
construed under Rule 405 under the Securities Act. With respect to a Purchaser,
any investment fund or managed account that is managed on a discretionary basis
by the same investment manager as such Purchaser will be deemed to be an
Affiliate of such Purchaser.

 

“Agreement” has the meaning set forth in the Preamble.

 

“Board of Directors” means the board of directors of the Company.

 

“Business Day” means any day except Saturday, Sunday, any day which is a federal
legal holiday in the United States or any day on which banking institutions in
the State of New York are authorized or required by law or other governmental
action to close.

 

“Buy-In” has the meaning set forth in Section 4.1(f).

 

“Cash Payment Cap” means, with respect to any Person, an amount equal to the
product of (i) the aggregate maximum permitted amount of cash payments by the
Company under the Transaction Documents, as set forth in Section 3(c) of the
Subordination Agreement, multiplied by (ii) the quotient of (x) the initial
principal amount of the Debentures then held by such Person divided by (y) the
aggregate initial principal amount of all Debentures issued pursuant to this
Agreement. In the event that such Person is not the initial holder of any
Debentures then held by such Person, the amount of the Cash Payment Cap with
respect to such Person shall be reduced by the amount of any cash payment of any
kind made by the Company to any prior holder of such Debentures under any of the
Transaction Documents.

 

“Closing” means the closing of the purchase and sale of the Debentures pursuant
to this Agreement.

 

“Closing Bid Price” means, for any security as of any date, (a) the last
reported closing bid price per share of Common Stock for such security on the
Principal Trading Market, as reported by Bloomberg Financial Markets, or, (b) if
the Principal Trading Market begins to operate on an extended hours basis and
does not designate the closing bid price then the last bid price of such
security prior to 4:00 P.M., New York City time, as reported by Bloomberg
Financial Markets, or (c) if the foregoing do not apply, the last closing price
of such security in the over-the-counter market on the electronic bulletin board
for such security as reported by Bloomberg Financial Markets, or (d) if no
closing bid price is reported for such security by Bloomberg Financial Markets,
the average of the bid prices of any market makers for such security as reported
in the “pink sheets” by Pink Sheets LLC. If the Closing Bid Price cannot be
calculated for a security on a particular date on any of the foregoing bases,
the Closing Bid Price of such security on such date shall be the fair market
value as mutually determined by the Company and the holder of such security. All
such determinations shall be appropriately adjusted for any stock dividend,
stock split, stock combination or other similar transaction during the
applicable calculation period.

 

“Closing Date” means the Trading Day on which all of the Transaction Documents
have been executed and delivered by the applicable parties thereto, and all of
the conditions set forth in Sections 2.1, 2.2, 5.1 and 5.2 hereof are satisfied
or waived, as the case may be, or such other date as the parties may agree.

 

“Commission” has the meaning set forth in the Recitals.

 

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“Common Stock” has the meaning set forth in the Recitals, and also includes any
other class of securities into which the Common Stock may hereafter be
reclassified or changed.

 

“Common Stock Equivalents” means any securities of the Company or any Subsidiary
which would entitle the holder thereof to acquire at any time Common Stock,
including, without limitation, any debt, preferred stock, rights, options,
warrants or other instrument that is at any time convertible into or
exchangeable for, or otherwise entitles the holder thereof to receive, Common
Stock or other securities that entitle the holder to receive, directly or
indirectly, Common Stock.

 

“Company” has the meaning set forth in the Preamble.

 

“Company Board Recommendation” has the meaning set forth in Section 4.15(b).

 

“Company Counsel” means Goodwin Procter LLP, with offices located at 53 State
Street

Boston, Massachusetts 02109.

 

“Company Deliverables” has the meaning set forth in Section 2.2(a).

 

“Company’s Knowledge” means with respect to any statement made to the Company’s
Knowledge, that the statement is based upon the actual knowledge of the
executive officers of the Company having responsibility for the matter or
matters that are the subject of the statement.

 

“Contingent Obligation” means, as to any Person, any direct or indirect
liability, contingent or otherwise, of that Person with respect to any
indebtedness, lease, dividend or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the primary
effect thereof, is to provide assurance to the obligee of such liability that
such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be
protected (in whole or in part) against loss with respect thereto.

 

“Control” (including the terms “controlling”, “controlled by” or “under common
control with”) means the possession, direct or indirect, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise.

 

“Conversion Shares” has the meaning set forth in the Recitals.

 

“Deadline Date” has the meaning set forth in Section 4.1(f).

 

“Debentures” has the meaning set forth in the Recitals.

 

“Debenture Amount” means, with respect to each Purchaser, the aggregate
principal amount set forth below such Purchaser’s name on the signature page
hereto next to the heading “Aggregate Principal Amount of Debentures to be
Acquired.”

 

“Disclosure Materials” has the meaning set forth in Section 3.1(h).

 

“Disclosure Schedules” has the meaning set forth in Section 3.1.

 

“DTC” has the meaning set forth in Section 4.1(c).

 

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“Effective Date” means the earliest of the date that (a) the initial
Registration Statement has been declared effective by the Commission, (b) all of
the Underlying Shares have been sold pursuant to Rule 144 or may be sold
pursuant to Rule 144 without the requirement for the Company to be in compliance
with the current public information required under Rule 144 and without volume
or manner-of-sale restrictions or (c) following the one year anniversary of the
Closing Date provided that a holder of Shares or Underlying Shares is not an
Affiliate of the Company, all of the Shares and Underlying Shares may be sold
pursuant to an exemption from registration under Section 4(1) of the Securities
Act without volume or manner-of-sale restrictions and Company counsel has
delivered to such holders a standing written unqualified opinion that resales
may then be made by such holders of the Underlying Shares pursuant to such
exemption which opinion shall be in form and substance reasonably acceptable to
such holders.

 

“EGS” means Ellenoff Grossman & Schole LLP, with offices located at 1345 Avenue
of the Americas, New York, New York 10105-0302.

 

“Environmental Laws” has the meaning set forth in Section 3.1(dd).

 

“Escrow Account” has the meaning set forth in Section 2.1(c).

 

“Escrow Agent” has the meaning set forth in Section 2.1(c).

 

“Escrow Amount” has the meaning set forth in Section 2.1(c).

 

“Evaluation Date” has the meaning set forth in Section 3.1(t).

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended, or any
successor statute, and the rules and regulations promulgated thereunder.

 

“Existing Debentures” means the subordinated convertible debentures due April
22, 2017, issued by the Company to the Purchasers on April 22, 2014 pursuant to
the March 11, 2014 Purchase Agreement.

 

“Existing Warrants” means the Common Stock purchase warrants issued to the
Purchasers pursuant to the March 11, 2014 Purchase Agreement.

 

“FDA” has the meaning set forth in Section 3.1(ll).

 

“GAAP” means U.S. generally accepted accounting principles, as applied by the
Company.

 

“Governmental Licenses” has the meaning set forth in Section 3.1(ll).

 

“Indebtedness” of any Person means, without duplication (i) all indebtedness for
borrowed money, (ii) all obligations issued, undertaken or assumed as the
deferred purchase price of property or services, including (without limitation)
“capital leases” in accordance with generally accepted accounting principles
(other than trade payables entered into in the ordinary course of business),
(iii) all reimbursement or payment obligations with respect to letters of
credit, surety bonds and other similar instruments, (iv) all obligations
evidenced by notes, bonds, debentures or similar instruments, and (v) all
guaranties, endorsements and Contingent Obligations in respect of indebtedness
or obligations of others of the kinds referred to in clauses (i) through (iv)
above, except guaranties by endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business.

 

“Indemnified Person” has the meaning set forth in Section 4.9.

 

“Intellectual Property Rights” has the meaning set forth in Section 3.1(p).

 

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“Interest Shares” has the meaning set forth in the Recitals.

 

“Irrevocable Transfer Agent Instructions” means, with respect to the Company,
the Irrevocable Transfer Agent Instructions, in substantially the form of
Exhibit F, executed by the Company and delivered to and acknowledged in writing
by the Transfer Agent.

 

“Legend Removal Date” has the meaning set forth in Section 4.1(c).

 

“Lien” means any lien, charge, claim, encumbrance, security interest, right of
first refusal, preemptive right or other restrictions of any kind.

 

“Lock-Up Agreement” has the meaning set forth in Section 2.2(a)(ix).

 

“Material Adverse Effect” means a material adverse effect on the results of
operations, assets, prospects, business or financial condition of the Company
and the Subsidiaries, taken as a whole, except that any of the following, either
alone or in combination, shall not be deemed a Material Adverse Effect:
(i) effects caused by changes or circumstances affecting general market
conditions in the U.S. economy or which are generally applicable to the industry
in which the Company operates, provided that such effects are not borne
disproportionately by the Company, (ii) effects resulting from or relating to
the announcement or disclosure of the sale of the Securities or other
transactions contemplated by this Agreement, (iii) effects caused by any event,
occurrence or condition resulting from or relating to the taking of any action
in accordance with this Agreement, (iv) effects arising in connection with
earthquakes, hostilities, acts of war, sabotage or terrorism or military actions
or any escalation or material worsening of any such hostilities, acts of war,
sabotage or terrorism or military actions existing as of the date hereof, (v)
effects resulting from decreases in the Company’s stock price as a result of the
transactions contemplated by the Transaction Documents or the Debentures issued
thereunder, or as a result of sales of the Securities or securities issuable
upon conversion or exercise, as applicable, of the Existing Debentures or the
Existing Warrants into the open market.

 

“Material Contract” means any contract of the Company that has been filed as an
exhibit to the SEC Reports pursuant to Item 601(b)(4) or Item 601(b)(10) of
Regulation S-K.

 

“Material Permits” has the meaning set forth in Section 3.1(n).

 

“New York Courts” means the state and federal courts sitting in the City of New
York, Borough of Manhattan.

 

“OFAC” has the meaning set forth in Section 3.1(kk).

 

“Outside Date” means the seventh (7th) day after the date hereof.

 

“Person” means an individual, corporation, partnership, limited liability
company, trust, business trust, association, joint stock company, joint venture,
sole proprietorship, unincorporated organization, governmental authority or any
other form of entity not specifically listed herein.

 

“Placement Agent” has the meaning set forth in the Recitals.

 

“Principal Trading Market” means the Trading Market on which the Common Stock is
primarily listed on and quoted for trading, which, as of the date of this
Agreement and the Closing Date, shall be the NASDAQ Global Market.

 

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“Proceeding” means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition).

 

“Proposals” has the meaning set forth in Section 4.15(a).

 

“Proxy Statement” has the meaning set forth in Section 4.15(a).

 

“Purchase Price” means the aggregate purchase price for the Debentures to be
purchased by each Purchaser and shall be the amount set forth below such
Purchaser’s name on the signature page of this Agreement on the line titled
“Aggregate Purchase Price”.

 

“Purchaser” or “Purchasers” has the meaning set forth in the Preamble.

 

“Purchaser Deliverables” has the meaning set forth in Section 2.2(b).

 

“Purchaser Party” has the meaning set forth in Section 4.9.

 

“Registration Rights Agreement” has the meaning set forth in the Recitals.

 

“Registration Statement” means a registration statement meeting the requirements
set forth in the Registration Rights Agreement and covering the resale by the
Purchasers of the Registrable Securities (as defined in the Registration Rights
Agreement).

 

“Regulation D” has the meaning set forth in the Recitals.

 

“Required Approvals” has the meaning set forth in Section 3.1(e).

 

“Rule 144” means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.

 

“SEC Reports” has the meaning set forth in Section 3.1(h).

 

“Secretary’s Certificate” has the meaning set forth in Section 2.2(a)(vii).

 

“Securities” has the meaning set forth in the Recitals.

 

“Securities Act” has the meaning set forth in the Recitals.

 

“Shares Authorization Approval” has the meaning set forth in Section 4.15(a).

 

“Short Sales” include, without limitation, (i) all “short sales” as defined in
Rule 200 promulgated under Regulation SHO under the Exchange Act, whether or not
against the box, and all types of direct and indirect stock pledges, forward
sale contracts, options, puts, calls, short sales, swaps, “put equivalent
positions” (as defined in Rule 16a-1(h) under the Exchange Act) and similar
arrangements (including on a total return basis), and (ii) sales and other
transactions through non-U.S. broker dealers or foreign regulated brokers (but
shall not be deemed to include the location and/or reservation of borrowable
shares of Common Stock).

 

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“Subordination Agreements” means, collectively, (i) that certain Subordination
Agreement, dated as of September 24, 2014, among the Purchasers, the Company,
and Hercules Technology Growth Capital, Inc., as the same may, from time to
time, be amended, modified, supplemented, restated or replaced and (ii) that
certain Subordination Agreement, dated as of September 24, 2014, among the
Purchasers, the Company, and DAFNA Lifescience L.P., as the same may, from time
to time, be amended, modified, supplemented, restated or replaced .

 

“Subscription Amount” means, with respect to each Purchaser, the aggregate
amount to be paid for the Debentures purchased hereunder as indicated on such
Purchaser’s signature page to this Agreement next to the heading “Aggregate
Purchase Price (Subscription Amount)” in United States dollars and in
immediately available funds.

 

“Subsidiary” means any subsidiary of the Company as set forth on Schedule
3.1(a), and shall, where applicable, include any subsidiary of the Company
formed or acquired after the date hereof.

 

“Subsidiary Guarantee” means the Subsidiary Guarantee, dated the date hereof, by
each Subsidiary in favor of the Purchasers, in the form of Exhibit C attached
hereto.

 

“Trading Affiliates” has the meaning set forth in Section 3.2(h).

 

“Trading Day” means (i) a day on which the Common Stock is listed or quoted and
traded on its Principal Trading Market (other than the OTC Bulletin Board), or
(ii) if the Common Stock is not listed on a Trading Market (other than the OTC
Bulletin Board), a day on which the Common Stock is traded in the
over-the-counter market, as reported by the OTC Bulletin Board, or (iii) if the
Common Stock is not quoted on any Trading Market, a day on which the Common
Stock is quoted in the over-the-counter market as reported in the “pink sheets”
by Pink Sheets LLC (or any similar organization or agency succeeding to its
functions of reporting prices); provided, that in the event that the Common
Stock is not listed or quoted as set forth in (i), (ii) and (iii) hereof, then
Trading Day shall mean a Business Day.

 

“Trading Market” means whichever of the New York Stock Exchange, the NYSE Amex
Equities (formerly the American Stock Exchange), the NASDAQ Global Select
Market, the NASDAQ Global Market, the NASDAQ Capital Market or the OTC Bulletin
Board on which the Common Stock is listed or quoted for trading on the date in
question.

 

“Transaction Documents” means this Agreement, the schedules and exhibits
attached hereto, the Debentures, the Registration Rights Agreement, the
Subsidiary Guarantee, the Irrevocable Transfer Agent Instructions and any other
documents or agreements explicitly contemplated hereunder.

 

“Transfer Agent” means American Stock Transfer & Trust Company, LLC, the current
transfer agent of the Company, with a mailing address of 10150 Mallard Creek
Road, Suite 307, Charlotte, North Carolina 28262, and a facsimile number of
(718) 765-8743, or any successor transfer agent for the Company.

 

“Underlying Shares” means the Conversion Shares and the Interest Shares.

 

“VWAP” means, for any date, the price determined by the first of the following
clauses that applies: (a) if the Common Stock is then listed or quoted on a
Trading Market, the daily volume weighted average price of the Common Stock for
such date (or the nearest preceding date) on the Trading Market on which the
Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a
Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City
time)), (b)  if the OTC Bulletin Board is not a Trading Market, the volume
weighted average price of the Common Stock for such date (or the nearest
preceding date) on the OTC Bulletin Board, (c) if the Common Stock is not then
listed or quoted for trading on the OTC Bulletin Board and if prices for the
Common Stock are then reported in the “Pink Sheets” published by Pink OTC
Markets, Inc. (or a similar organization or agency succeeding to its functions
of reporting prices), the most recent bid price per share of the Common Stock so
reported, or (d) in all other cases, the fair market value of a share of Common
Stock as determined by an independent appraiser selected in good faith by the
Purchasers of a majority in interest of the Securities then outstanding and
reasonably acceptable to the Company, the fees and expenses of which shall be
paid by the Company.

 

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ARTICLE II.
PURCHASE AND SALE

 

2.1         Closing.

 

(a)          Amount. Subject to the terms and conditions set forth in this
Agreement, at the Closing, the Company shall issue and sell to each Purchaser,
and each Purchaser shall, severally and not jointly, purchase from the Company,
a Debenture in aggregate principal amount set forth below such Purchaser’s name
on the signature page hereto.

 

(b)          Closing. The Closing of the purchase and sale of the Debentures
shall take place at the offices of EGS or at such other locations or remotely by
facsimile transmission or other electronic means as the parties may mutually
agree.

 

(c)          Form of Payment. Except as may otherwise be agreed to among the
Company and one or more of the Purchasers, on the Closing Date, each Purchaser
shall wire its Subscription Amount, in United States dollars and in immediately
available funds, to an account established by the Company . The Company and the
Placement Agent shall provide to each Purchaser no later than one Business Day
prior to the Closing Date the wire transfer information for the Company’s
account. On the Closing Date, (a) the Company shall deliver, in immediately
available funds, to Sabby Capital Management., LLC (“Sabby”), $35,000 for its
legal fees and due diligence expenses and (b) the Company shall deliver to each
Purchaser, one or more Debentures in aggregate principal amount equal to the
Debenture Amount. In the event that the Company fails to issue to any Purchaser
such Purchaser’s Debentures (which issuance, for the avoidance of doubt, must be
an original), for any reason on the Closing Date, and provided that all other
conditions set forth in this Agreement for the issuance of such securities to
such Purchaser shall have been satisfied or waived, as the case may be, the
Company shall pay to such Purchaser, in cash, as liquidated damages and not as a
penalty, for each $1,000 of Debentures that the Company shall have failed to
issue to such Purchaser, $10 per Trading Day for each Trading Day after the
Closing Date until such Debentures are delivered.

 

2.2         Closing Deliveries.   (a) On or prior to the Closing, the Company
shall issue, deliver or cause to be delivered to each Purchaser the following
(the “Company Deliverables”):

 

(i)          this Agreement, duly executed by the Company;

 

(ii)         one or more original Debentures, executed by the Company and
registered in the name of such Purchaser as set forth on the Securities
Questionnaire included as Exhibit D hereto, in aggregate principal amount equal
to the Debenture Amount;

 

(iii)        [Intentionally Omitted];

 

(iv)        the Subsidiary Guarantee, duly executed by the parties thereto;

 

(v)         the Subordination Agreements, duly executed by the parties thereto
(other than the Purchasers);

 

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(vi)        the Registration Rights Agreement;

 

(vii)       duly executed Irrevocable Transfer Agent Instructions acknowledged
in writing by the Transfer Agent;

 

(viii)      a certificate of the Secretary of the Company (the “Secretary’s
Certificate”), dated as of the Closing Date, (a) certifying the resolutions
adopted by the Board of Directors of the Company or a duly authorized committee
thereof approving the transactions contemplated by this Agreement and the other
Transaction Documents and the issuance of the Securities, (b) certifying the
current versions of the certificate of incorporation, as amended, and by-laws of
the Company and (c) certifying as to the signatures and authority of persons
signing the Transaction Documents and related documents on behalf of the
Company, in the form attached hereto as Exhibit G;

 

(ix)         the Compliance Certificate referred to in Section 5.1(i);

 

(x)          a certificate evidencing the formation and good standing of the
Company issued by the Secretary of State of the State of Delaware, as of a date
within three (3) Business Days of the Closing Date;

 

(xi)         a certified copy of the certificate of incorporation, as certified
by the Secretary of State of the State of Delaware, as of a date within five (5)
Business Days of the Closing Date (along with bringdown good standings, if
applicable);

 

(xii)        a certified copy of the certificate of incorporation, as certified
by the Secretary of State of the State of Delaware, as of a date within three
(3) Business Days of the Closing Date; and

 

(b)          On or prior to the Closing, each Purchaser shall deliver or cause
to be delivered to the Company the following, with respect to such Purchaser
(the “Purchaser Deliverables”):

 

(i)          this Agreement, duly executed by such Purchaser;

 

(ii)         its Subscription Amount, in United States dollars and in
immediately available funds, by wire transfer to the account of the Company,
which shall not be less than $1,500,000, in the aggregate amount such Purchaser
and its Affiliates;

 

(iii)        the Registration Rights Agreement, duly executed by such Purchaser;

 

(iv)        a fully completed and duly executed Selling Stockholder
Questionnaire in the form attached as Annex B to the Registration Rights
Agreement;

 

(v)         the Subordination Agreements duly executed by such Purchaser; and

 

(vi)        a fully completed and duly executed Accredited Investor
Questionnaire, satisfactory to the Company, and Securities Questionnaire in the
forms attached hereto as Exhibits D-1 and D-2, respectively.

 

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ARTICLE III.
REPRESENTATIONS AND WARRANTIES

 

3.1         Representations and Warranties of the Company. Except as set forth
in the schedules delivered herewith (the “Disclosure Schedules”), which
Disclosure Schedules shall be deemed a part hereof and shall qualify any
representation made herein to the extent of the disclosure contained in the
corresponding section of the Disclosure Schedules or other representations
relating to the subject matter of such disclosures, the Company hereby
represents and warrants as of the date hereof and the Closing Date (except for
the representations and warranties that speak as of a specific date, which shall
be made as of such date), to each of the Purchasers and to the Placement Agent:

 

(a)          Subsidiaries. The Company has no direct or indirect Subsidiaries
other than those listed in Schedule 3.1(a) hereto. Except as disclosed in
Schedule 3.1(a) hereto, the Company owns, directly or indirectly, all of the
capital stock or comparable equity interests of each Subsidiary free and clear
of any and all Liens, and all the issued and outstanding shares of capital stock
or comparable equity interest of each Subsidiary are validly issued and are
fully paid, non-assessable and free of preemptive and similar rights to
subscribe for or purchase securities.

 

(b)          Organization and Qualification. The Company and each of its
Subsidiaries is an entity duly incorporated or otherwise organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or organization (as applicable), with the requisite corporate
power and authority to own or lease and use its properties and assets and to
carry on its business as currently conducted. Neither the Company nor any
Subsidiary is in violation or default of any of the provisions of its respective
certificate or articles of incorporation or bylaws or other organizational or
charter documents. The Company and each of its Subsidiaries is duly qualified to
conduct business and is in good standing as a foreign corporation or other
entity in each jurisdiction in which the nature of the business conducted or
property owned by it makes such qualification necessary, except where the
failure to be so qualified or in good standing, as the case may be, would not
have or reasonably be expected to result in a Material Adverse Effect, and no
Proceeding has been instituted, is pending, or, to the Company’s Knowledge, has
been threatened in writing in any such jurisdiction revoking, limiting or
curtailing or seeking to revoke, limit or curtail such power and authority or
qualification.

 

(c)          Authorization; Enforcement; Validity. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by each of the Transaction Documents to which it is a party and
otherwise to carry out its obligations hereunder and thereunder. The Company’s
execution and delivery of each of the Transaction Documents to which it is a
party and the consummation by it of the transactions contemplated hereby and
thereby (including, but not limited to, the sale and delivery of the Debentures
and the reservation for issuance and the subsequent issuance of the Conversion
Shares upon conversion of the Debentures, the Interest Shares (if interest under
the Debentures is paid in Interest Shares)) have been duly authorized by all
necessary corporate action on the part of the Company, and no further corporate
action is required by the Company, its Board of Directors or its stockholders in
connection therewith other than in connection with the Required Approvals. Each
of the Transaction Documents to which it is a party has been (or upon delivery
will have been) duly executed by the Company and is, or when delivered in
accordance with the terms hereof, will constitute the legal, valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms, except (i) as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally the enforcement of, creditors’ rights and
remedies or by other equitable principles of general application, (ii) as
limited by laws relating to the availability of specific performance, injunctive
relief or other equitable remedies and (iii) insofar as indemnification and
contribution provisions may be limited by applicable law.

 

10

 

 

(d)          No Conflicts. The execution, delivery and performance by the
Company of the Transaction Documents to which it is a party and the consummation
by the Company of the transactions contemplated hereby or thereby (including,
without limitation, the issuance of the Debentures and the reservation for
issuance and issuance of the Conversion Shares and the Interest Shares) do not
and will not (i) conflict with or violate any provisions of the Company’s or any
Subsidiary’s certificate or articles of incorporation, bylaws or otherwise
result in a violation of the organizational documents of the Company, (ii)
conflict with, or constitute a default (or an event that with notice or lapse of
time or both would result in a default) under, result in the creation of any
Lien upon any of the properties or assets of the Company or any Subsidiary or
give to others any rights of termination, amendment, acceleration or
cancellation (with or without notice, lapse of time or both) of, any Material
Contract, or (iii) subject to the Required Approvals, conflict with or result in
a violation of any law, rule, regulation, order, judgment, injunction, decree or
other restriction of any court or governmental authority to which the Company or
a Subsidiary is subject (including federal and state securities laws and
regulations and the rules and regulations, assuming the correctness of the
representations and warranties made by the Purchasers herein, of any
self-regulatory organization to which the Company or its securities are subject,
including all applicable Trading Markets), or by which any property or asset of
the Company or a Subsidiary is bound or affected, except in the case of clauses
(ii) and (iii) such as would not, individually or in the aggregate, have or
reasonably be expected to result in a Material Adverse Effect.

 

(e)          Filings, Consents and Approvals. Neither the Company nor any of its
Subsidiaries is required to obtain any consent, waiver, authorization or order
of, give any notice to, or make any filing or registration with, any court or
other federal, state, local or other governmental authority or other Person in
connection with the execution, delivery and performance by the Company of the
Transaction Documents (including the issuance of the Securities), other than (i)
the filing with the Commission of one or more Registration Statements in
accordance with the requirements of the Registration Rights Agreement, (ii)
filings required by applicable state securities laws, (iii) the filing of a
Notice of Sale of Securities on Form D with the Commission under Regulation D of
the Securities Act, (iv) the filing of any requisite notices and/or
application(s) to the Principal Trading Market for the issuance and sale of the
Securities and the listing of the Conversion Shares and Interest Shares for
trading or quotation, as the case may be, thereon in the time and manner
required thereby, (v) the filings required in accordance with Section 4.5 of
this Agreement and (vi) those that have been made or obtained prior to the date
of this Agreement (collectively, the “Required Approvals”).

 

(f)          Issuance of the Securities. The Debentures have been duly
authorized and, when issued and paid for in accordance with the terms of the
Transaction Documents, will be duly and validly issued, free and clear of all
Liens, other than restrictions on transfer provided for in the Transaction
Documents or imposed by applicable securities laws, and shall not be subject to
preemptive or similar rights of stockholders. The Conversion Shares issuable
upon conversion of the Debentures have been duly authorized and, when issued and
paid for in accordance with the terms of the Transaction Documents and the
Debentures will be duly and validly issued, fully paid and nonassessable, free
and clear of all Liens, other than restrictions on transfer provided for in the
Transaction Documents or imposed by applicable securities laws, and shall not be
subject to preemptive or similar rights of stockholders. Assuming the accuracy
of the representations and warranties of the Purchasers in this Agreement, the
Securities will be issued in compliance with all applicable federal and state
securities laws. As of the Closing Date, the Company shall have reserved from
its duly authorized capital stock the number of shares of Common Stock then
issuable upon conversion of the Debentures (without taking into account any
limitations on the conversion of the Debentures set forth in the Debentures).
The Company shall, so long as any of the Debentures, Existing Debentures and
Existing Warrants are outstanding, take all action necessary to reserve and keep
available out of its authorized and unissued capital stock, solely for the
purpose of effecting the conversion of the Debentures and the Existing
Debentures or the exercise of the Existing Warrants, the number of shares of
Common Stock then issuable upon conversion of the Debentures and the Existing
Debentures or the exercise of the Existing Warrants (without taking into account
any limitations on the conversion of the Debentures or the Existing Debentures
set forth in the Debentures or the Existing Debentures, as applicable, and
without taking into account any limitations on the exercise of the Existing
Warrants set forth in the Existing Warrants). The Company shall reserve from its
duly authorized capital stock the number of shares of Common Stock issuable upon
payment of interest in Interest Shares under the Debentures. When issued, such
Interest Shares shall have been duly authorized and will be duly and validly
issued, fully paid and nonassessable, free and clear of all Liens, other than
restrictions on transfer provided for in the Transaction Documents or imposed by
applicable securities laws, and shall not be subject to preemptive or similar
rights of stockholders.

 

11

 

 

(g)          Capitalization. The number of shares and type of all authorized,
issued and outstanding capital stock, options and other securities of the
Company (whether or not presently convertible into or exercisable or
exchangeable for shares of capital stock of the Company) is set forth in
Schedule 3.1(g) hereto. The Company has not issued any capital stock since the
date of its most recently filed SEC Report. Except as set forth on Schedule
3.1(g), no Person has any right of first refusal, preemptive right, right of
participation, or any similar right to participate in the transactions
contemplated by the Transaction Documents that have not been effectively waived
as of the Closing Date. Except as set forth on Schedule 3.1(g) or a result of
the purchase and sale of the Debentures, there are no outstanding options,
warrants, scrip rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities, rights or obligations convertible into or
exercisable or exchangeable for, or giving any Person any right to subscribe for
or acquire any shares of Common Stock, or contracts, commitments, understandings
or arrangements by which the Company or any Subsidiary is or may become bound to
issue additional shares of Common Stock or Common Stock Equivalents. The
issuance and sale of the Debentures will not obligate the Company to issue
shares of Common Stock or other securities to any Person (other than the
Purchasers) and will not result in a right of any holder of Company securities
to adjust the exercise, conversion, exchange or reset price under any of such
securities. All of the outstanding shares of capital stock of the Company are
validly issued, fully paid and nonassessable, have been issued in compliance
with all applicable federal and state securities laws, and none of such
outstanding shares was issued in violation of any preemptive rights or similar
rights to subscribe for or purchase securities. No further approval or
authorization of any stockholder, the Board of Directors or others is required
for the issuance and sale of the Securities. There are no stockholders
agreements, voting agreements or other similar agreements with respect to the
Company’s capital stock to which the Company is a party or, to the Company’s
Knowledge, between or among any of the Company’s stockholders.

 

(h)          SEC Reports; Disclosure Materials. The Company has filed all
reports, schedules, forms, statements and other documents required to be filed
by it under the Exchange Act, including pursuant to Section 13(a) or 15(d)
thereof, for the 12 months preceding the date hereof (or such shorter period as
the Company was required by law or regulation to file such material) (the
foregoing materials, including the exhibits thereto and documents incorporated
by reference therein, being collectively referred to herein as the “SEC
Reports”, and the SEC Reports, together with the Disclosure Schedules, being
collectively referred to as the “Disclosure Materials”) on a timely basis or has
received a valid extension of such time of filing and has filed any such SEC
Reports prior to the expiration of any such extension, except where the failure
to file on a timely basis would not have or reasonably be expected to result in
a Material Adverse Effect (including, for this purpose only, any failure to
qualify to register the Underlying Shares for resale on Form S-3 or that would
prevent any Purchaser from using Rule 144 to resell any Securities). As of their
respective filing dates, or to the extent corrected by a subsequent amendment,
the SEC Reports complied in all material respects with the requirements of the
Securities Act and the Exchange Act and the rules and regulations of the
Commission promulgated thereunder, and none of the SEC Reports, 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 light of the circumstances under which they were made, not
misleading. The Company has never been an issuer subject to Rule 144(i) under
the Securities Act.

 

12

 

 

(i)          Financial Statements.

 

(i)          The financial statements of the Company included in the SEC Reports
comply in all material respects with applicable accounting requirements and the
rules and regulations of the Commission with respect thereto as in effect at the
time of filing (or to the extent corrected by a subsequent amendment). Such
financial statements have been prepared in accordance with GAAP applied on a
consistent basis during the periods involved, except as may be otherwise
specified in such financial statements or the notes thereto and except that
unaudited financial statements may not contain all footnotes required by GAAP,
and fairly present in all material respects the financial position of the
Company and its consolidated subsidiaries taken as a whole as of and for the
dates thereof and the results of operations and cash flows for the periods then
ended, subject, in the case of unaudited statements, to normal, immaterial
year-end audit adjustments.

 

(ii)         The financial statements of Baxano, Inc., a Delaware corporation,
and the related notes thereto filed as Exhibit 99.2 and Exhibit 99.3 to
Amendment No. 1 to the Current Report on Form 8-K filed with the Commission on
June 26, 2013 comply in all material respects with applicable accounting
requirements and the rules and regulations of the Commission with respect
thereto as in effect at the time of filing (or to the extent corrected by a
subsequent amendment). Such financial statements have been prepared in
accordance with GAAP applied on a consistent basis during the periods involved,
except as may be otherwise specified in such financial statements or the notes
thereto and except that unaudited financial statements may not contain all
footnotes required by GAAP, and fairly present in all material respects the
financial position of Baxano, Inc. as of and for the dates thereof and the
results of operations and cash flows for the periods then ended, subject, in the
case of unaudited statements, to normal, immaterial year-end audit adjustments.

 

(iii)        The pro forma financial statements of the Company and the related
notes thereto filed as Exhibit 99.4 to Amendment No. 1 to the Current Report on
Form 8-K filed with the Commission on June 26, 2013 comply in all material
respects with applicable accounting requirements and the rules and regulations
of the Commission with respect thereto as in effect at the time of filing (or to
the extent corrected by a subsequent amendment) and have been properly presented
on the bases described therein, and the assumptions used in the preparation
thereof are reasonable and the adjustments used therein are appropriate to give
effect to the transactions and circumstances referred to therein.

 

(iv)        Except as included therein, no historical or pro forma financial
statements or supporting schedules are required to be included or incorporated
by reference in the SEC Reports under the Securities Act or the Exchange Act.

 

(j)          Material Changes. Since the date of the latest financial statements
included within the SEC Reports, except as specifically disclosed in a
subsequent SEC Report filed prior to the date hereof or as contemplated by the
Transaction Documents or as set forth on Schedule 3.1(j), (i) there have been no
events, occurrences or developments that have had or would reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect, (ii) the Company has not incurred any material liabilities (contingent
or otherwise) other than (A) trade payables and accrued expenses incurred in the
ordinary course of business consistent with past practice and (B) liabilities
not required to be reflected in the Company's financial statements pursuant to
GAAP or disclosed in filings made with the Commission, (iii) the Company has not
altered materially its method of accounting or the manner in which it keeps its
accounting books and records, (iv) the Company has not declared or made any
dividend or distribution of cash or other property to its stockholders or
purchased, redeemed or made any agreements to purchase or redeem any shares of
its capital stock (other than in connection with repurchases of unvested stock
issued to employees of the Company), and (v) the Company has not issued any
equity securities to any officer, director or Affiliate, except Common Stock
issued pursuant to existing Company stock option or stock purchase plans or
executive and director compensation arrangements disclosed in the SEC Reports.
Except for the issuance of the Debentures contemplated by this Agreement, no
event, liability or development has occurred or exists with respect to the
Company or its Subsidiaries or their respective businesses, properties,
operations or financial condition, that would be required to be disclosed by the
Company under applicable securities laws at the time this representation is made
that has not been publicly disclosed at least one (1) Trading Day prior to the
date that this representation is made.

 

13

 

 

(k)          Litigation. There is no Action which (i) adversely affects or
challenges the legality, validity or enforceability of any of the Transaction
Documents or the Securities or (ii) except as specifically disclosed in the SEC
Reports, would, if there were an unfavorable decision, individually or in the
aggregate, have or reasonably be expected to result in a Material Adverse
Effect. Neither the Company nor any Subsidiary nor, to the Company’s Knowledge,
any director or officer thereof, is or has been the subject of any Action
involving a claim of violation of or liability under federal or state securities
laws or a claim of breach of fiduciary duty. There has not been, and to the
Company’s Knowledge there is not pending or contemplated, any investigation by
the Commission involving the Company or any current or former director or
executive officer of the Company. The Commission has not issued any stop order
or other order suspending the effectiveness of any registration statement filed
by the Company or any of its Subsidiaries under the Exchange Act or the
Securities Act.

 

(l)          Employment Matters. No material labor dispute exists or, to the
Company’s Knowledge, is imminent with respect to any of the employees of the
Company which would have or reasonably be expected to result in a Material
Adverse Effect. None of the Company’s or any Subsidiary’s employees is a member
of a union that relates to such employee’s relationship with the Company, and
neither the Company nor any of its Subsidiaries is a party to a collective
bargaining agreement, and the Company and each Subsidiary believes that its
relationship with its employees is good. No executive officer of the Company (as
defined in Rule 501(f) of the Securities Act) has notified the Company or any
such Subsidiary that such officer intends to leave the Company or any such
Subsidiary or otherwise terminate such officer's employment with the Company or
any such Subsidiary. To the Company’s Knowledge, no executive officer, is, or is
now expected to be, in violation of any material term of any employment
contract, confidentiality, disclosure or proprietary information agreement or
non-competition agreement, or any other contract or agreement or any restrictive
covenant in favor of a third party, and to the Company’s Knowledge, the
continued employment of each such executive officer does not subject the Company
or any Subsidiary to any liability with respect to any of the foregoing matters,
except in each case, matters that, individually or in the aggregate, would not
reasonably be expected to result in a Material Adverse Effect. The Company and
each of its Subsidiaries is in compliance with all U.S. federal, state, local
and foreign laws and regulations relating to employment and employment
practices, terms and conditions of employment and wages and hours, except where
the failure to be in compliance would not, individually or in the aggregate,
have or reasonably be expected to result in a Material Adverse Effect.

 

(m)          Compliance. Except as disclosed on Schedule 3.1(m), neither the
Company nor any of its Subsidiaries (i) is in default under or in violation of
(and no event has occurred that has not been waived that, with notice or lapse
of time or both, would result in a default by the Company or any of its
Subsidiaries under), nor has the Company or any of its Subsidiaries received
written notice of a claim that it is in default under or that it is in violation
of, any Material Contract (whether or not such default or violation has been
waived), (ii) is in violation of any order of any court, arbitrator or
governmental body having jurisdiction over the Company or its properties or
assets, or (iii) is in violation of, or in receipt of written notice that it is
in violation of, any statute, rule or regulation of any governmental authority
applicable to the Company, except in each case as would not, individually or in
the aggregate, have or reasonably be expected to result in a Material Adverse
Effect.

 

14

 

 

(n)          Regulatory Permits. The Company and each of its Subsidiaries
possess all certificates, authorizations and permits issued by the appropriate
federal, state, local or foreign regulatory authorities necessary to conduct its
respective businesses as currently conducted and as described in the SEC
Reports, except where the failure to possess such permits, individually or in
the aggregate, has not and would not have or reasonably be expected to result in
a Material Adverse Effect (“Material Permits”), and neither the Company nor any
of its Subsidiaries has received any notice of Proceedings relating to the
revocation or modification of any such Material Permits.

 

(o)          Title to Assets. Neither the Company nor any of its Subsidiaries
owns any real property. The Company and its Subsidiaries have good and
marketable title to all tangible personal property owned by them that is
material to the business of the Company and its Subsidiaries, taken as a whole,
in each case free and clear of all Liens except as set forth on Schedule 3.1(o)
or such as do not materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by the
Company and any of its Subsidiaries. Any real property and facilities held under
lease by the Company and any of its Subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property and
buildings by the Company and its Subsidiaries.

 

(p)          Patents and Trademarks. To the Company’s Knowledge, the Company and
the Subsidiaries own, possess, license or have other rights to use, all patents,
patent applications, trade and service marks, trade and service mark
applications and registrations, trade names, trade secrets, inventions,
copyrights, licenses, technology, know-how and other intellectual property
rights and similar rights described in the SEC Reports as necessary or material
for use in connection with their respective businesses and which the failure to
so have would have or reasonably be expected to result in a Material Adverse
Effect (collectively, the “Intellectual Property Rights”). Neither the Company
nor any Subsidiary has received a notice (written or otherwise) that any of the
Intellectual Property Rights used by the Company or any Subsidiary violates or
infringes upon the rights of any Person. There is no pending or, to the
Company’s Knowledge, threatened action, suit, proceeding or claim by any Person
that the Company’s business as now conducted infringes or otherwise violates any
patent, trademark, copyright, trade secret or other proprietary rights of
another. To the Company’s Knowledge, there is no existing infringement by
another Person of any of the Intellectual Property Rights that would have or
would reasonably be expected to have a Material Adverse Effect. To the Company’s
Knowledge, all patent applications and patents within the Intellectual Property
Rights have been prosecuted with a duty of candor, and there is no material fact
known by the Company that would preclude the issuance of patents with respect to
said patent applications or that would render any issued patents invalid or
unenforceable. There is no pending or, to the Company’s Knowledge, threatened
action, suit, proceeding or claim by another Person challenging the Company’s
rights in or to any material Intellectual Property Rights, or challenging
inventorship, validity or scope of any such Intellectual Property Rights. The
Company and its Subsidiaries have taken reasonable security measures to protect
the secrecy, confidentiality and value of all of their Intellectual Property
Rights, except where failure to do so would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect. None of the
technology employed by the Company or its Subsidiaries has been obtained or is
being used by the Company or the respective Subsidiary, as applicable, in
violation of any contractual obligation binding on the Company or the respective
Subsidiary, as applicable, or, to the Company’s Knowledge, any of its executive
officers, directors or employees or otherwise in violation of the rights of any
Person.

 

(q)          Insurance. The Company and each of its Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as the Company believes to be prudent and customary in the
businesses and locations in which the Company and the Subsidiaries are engaged,
including, but not limited to, directors and officers insurance coverage.
Neither the Company nor any of its Subsidiaries has received any notice of
cancellation of any such insurance, nor, to the Company’s Knowledge, will it or
any Subsidiary be unable to renew their respective existing insurance coverage
as and when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business without a significant
increase in cost.

 

15

 

 

(r)          Transactions With Affiliates and Employees. Except as set forth in
the SEC Reports, none of the executive officers or directors of the Company and,
to the Company’s Knowledge, none of the employees of the Company is presently a
party to any transaction with the Company or any Subsidiary (other than for
services as employees, executive officers and directors), that would be required
to be disclosed pursuant to Item 404 of Regulation S-K.

 

(s)          Internal Accounting Controls. The Company maintains a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with GAAP and to maintain
asset 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 differences.

 

(t)          Sarbanes-Oxley; Disclosure Controls. The Company is in compliance
in all material respects with all of the provisions of the Sarbanes-Oxley Act of
2002 which are applicable to it as of the Closing Date. The Company has
established disclosure controls and procedures (as such term is defined in Rule
13a-15(e) and 15d-15(e) under the Exchange Act) for the Company and designed
such disclosure controls and procedures to ensure that information required to
be disclosed by the Company in the reports it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Commission’s rules and forms. The Company’s certifying
executive officers have evaluated the effectiveness of the Company’s disclosure
controls and procedures as of the end of the period covered by the Company’s
most recently filed periodic report under the Exchange Act (such date, the
“Evaluation Date”). The Company presented in its most recently filed periodic
report under the Exchange Act the conclusions of the certifying executive
officers about the effectiveness of the disclosure controls and procedures based
on their evaluations as of the Evaluation Date. Since the Evaluation Date, there
have been no changes in the Company’s internal control over financial reporting
(as such term is defined in the Exchange Act) that has materially affected, or
is reasonably likely to materially affect, the Company’s internal control over
financial reporting.

 

(u)          Certain Fees. Except as described on Schedule 3.1(u), no person or
entity will have, as a result of the transactions contemplated by this
Agreement, any valid right, interest or claim against or upon the Company or a
Purchaser for any commission, fee or other compensation pursuant to any
agreement, arrangement or understanding entered into by or on behalf of the
Company, other than the Placement Agent with respect to the offer and sale of
the Debentures (which placement agent fees are being paid by the Company). The
Purchasers shall have no obligation with respect to any fees or with respect to
any claims made by or on behalf of other Persons for fees of a type contemplated
in this paragraph (u) that may be due in connection with the transactions
contemplated by the Transaction Documents.

 

(v)         Private Placement. Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.2 of this Agreement and
the accuracy of the information disclosed in the Accredited Investor
Questionnaires provided by the Purchasers, no registration under the Securities
Act is required for the offer and sale of the Securities by the Company to the
Purchasers under the Transaction Documents. The issuance and sale of the
Securities hereunder does not contravene the rules and regulations of the
Principal Trading Market.

 

16

 

 

(w)          Investment Company The Company is not, and is not an Affiliate of,
and immediately after receipt of payment for the Debentures will not be, or be
an Affiliate of, an “investment company” within the meaning of the Investment
Company Act of 1940, as amended. The Company shall conduct its business in a
manner so that it will not become subject to the Investment Company Act of 1940,
as amended.

 

(x)          Registration Rights. Other than each of the Purchasers or as set
forth in Schedule 3.1(x) hereto, no Person has any right to cause the Company to
effect the registration under the Securities Act of any securities of the
Company other than those securities which are currently registered on an
effective registration statement on file with the Commission.

 

(y)          Listing and Maintenance Requirements. The Company’s Common Stock is
registered pursuant to Section 12(b) or 12(g) of the Exchange Act, and the
Company has taken no action designed to terminate the registration of the Common
Stock under the Exchange Act nor has the Company received any notification that
the Commission is contemplating terminating such registration. Except as set
forth in Schedule 3.1(y) hereto, the Company is, and has no reason to believe
that it will not in the foreseeable future continue to be, in compliance in all
material respects with all listing and maintenance requirements of the Principal
Trading Market on the date hereof. The Common Stock is currently eligible for
electronic transfer through the Depository Trust Company or another established
clearing corporation and the Company is current in payment of the fees to the
Depository Trust Company (or such other established clearing corporation) in
connection with such electronic transfer.

 

(z)          Application of Takeover Protections; Rights Agreements. The Company
and the Board of Directors have taken all necessary action, if any, in order to
render inapplicable any control share acquisition, business combination, poison
pill (including any distribution under a rights agreement) or other similar
anti-takeover provision under the Company's charter documents or the laws of its
state of incorporation that is or would reasonably be expected to become
applicable to any of the Purchasers as a result of the Purchasers and the
Company fulfilling their obligations or exercising their rights under the
Transaction Documents, including, without limitation, the Company's issuance of
the Securities and the Purchasers' ownership of the Securities.

 

(aa)        Disclosure. The Company confirms that it has not provided, and to
the Company’s Knowledge, none of its executive officers or directors nor any
other Person acting on its or their behalf has provided, and it has not
authorized the Placement Agents to provide, any Purchaser or its respective
agents or counsel with any information that it believes constitutes material,
non-public information except insofar as the existence, provisions and terms of
the Transaction Documents and the proposed transactions hereunder may constitute
such information, all of which will be disclosed by the Company in the Form 8-K
as contemplated by Section 4.5 hereof. The Company understands and confirms that
the Purchasers will rely on the foregoing representations in effecting
transactions in securities of the Company. All disclosure furnished by or on
behalf of the Company to the Purchasers regarding the Company, its business and
the transactions contemplated hereby, including the Disclosure Schedules to this
Agreement, is true and correct and does not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading. The Company acknowledges and agrees that no Purchaser
makes or has made any representations or warranties with respect to the
transactions contemplated hereby other than those specifically set forth in
Section 3.2 hereto.

 

17

 

 

(bb)       No Integrated Offering. Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.2, none of the Company,
its Subsidiaries nor, to the Company’s Knowledge, any Person acting on its
behalf has, directly or indirectly, made any offers or sales of any Company
security or solicited any offers to buy any security under circumstances that
would (i) eliminate the availability of the exemption from registration under
Regulation D under the Securities Act in connection with the offer and sale by
the Company of the Securities as contemplated hereby or (ii) cause the offering
of the Securities pursuant to the Transaction Documents to be integrated with
prior offerings by the Company for purposes of any applicable law, regulation or
stockholder approval provisions, including, without limitation, under the rules
and regulations of the Principal Trading Market.

 

(cc)        Solvency. Schedule 3.1(cc) sets forth as of the date hereof all
outstanding secured and unsecured Indebtedness of the Company or any Subsidiary,
or for which the Company or any Subsidiary has commitments.

 

(dd)       Tax Matters. The Company and each of its Subsidiaries (i) has
accurately and timely prepared and filed (or requested valid extensions thereof)
all foreign, federal and state income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject, (ii) has paid
all taxes and other governmental assessments and charges that are material in
amount, shown or determined to be due on such returns, reports and declarations,
except those being contested in good faith, with respect to which adequate
reserves have been set aside on the books of the Company 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 or
reasonably be expected to result in a Material Adverse Effect. There are no
unpaid taxes in any material amount claimed to be due by the Company or any of
its Subsidiaries by the taxing authority of any jurisdiction.

 

(ee)        Environmental Matters. To the Company’s Knowledge, neither the
Company nor any of its Subsidiaries (i) is in violation of any statute, rule,
regulation, decision or order of any governmental agency or body or any court,
domestic or foreign, relating to the use, disposal or release of hazardous or
toxic substances or relating to the protection or restoration of the environment
or human exposure to hazardous or toxic substances (collectively, “Environmental
Laws”), (ii) owns or operates any real property contaminated with any substance
that is in violation of any Environmental Laws, (iii) is liable for any off-site
disposal or contamination pursuant to any Environmental Laws, or (iv) is subject
to any claim relating to any Environmental Laws; which violation, contamination,
liability or claim has had or would have, individually or in the aggregate, a
Material Adverse Effect; and there is no pending investigation or, to the
Company’s Knowledge, investigation threatened in writing that might lead to such
a claim.

 

(ff)         No General Solicitation. Neither the Company nor, to the Company’s
Knowledge, any person acting on behalf of the Company has offered or sold any of
the Securities by any form of general solicitation or general advertising. The
Company has offered the Securities for sale only to the Purchasers and certain
other “accredited investors” within the meaning of Rule 501 under the Securities
Act.

 

(gg)       Foreign Corrupt Practices. Neither the Company, nor to the Company’s
Knowledge, any agent or other person acting on behalf of the Company, has:
(i) directly or indirectly, used any funds for unlawful contributions, gifts,
entertainment or other unlawful expenses related to foreign or domestic
political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to any foreign or domestic political
parties or campaigns from corporate funds, (iii) failed to disclose fully any
contribution made by the Company (or made by any person acting on its behalf of
which the Company is aware) which is in violation of law or (iv) violated in any
material respect any provision of the Foreign Corrupt Practices Act of 1977, as
amended.

 

(hh)       Off Balance Sheet Arrangements. There is no transaction, arrangement,
or other relationship between the Company (or any Subsidiary) and an
unconsolidated or other off balance sheet entity that is required to be
disclosed by the Company in SEC Reports and is not so disclosed and would have
or reasonably be expected to result in a Material Adverse Effect.

 

18

 

 

(ii)          Acknowledgment Regarding Purchasers’ Purchase of Securities.  The
Company acknowledges and agrees that each of the Purchasers is acting solely in
the capacity of an arm’s length purchaser with respect to the Transaction
Documents and the transactions contemplated hereby and thereby.  The Company
further acknowledges that no Purchaser is acting as a financial advisor or
fiduciary of the Company (or in any similar capacity) with respect to the
Transaction Documents and the transactions contemplated thereby and any advice
given by any Purchaser or any of their respective representatives or agents in
connection with the Transaction Documents and the transactions contemplated
thereby is merely incidental to the Purchasers’ purchase of the Securities. The
Company further represents to each Purchaser that the Company’s decision to
enter into this Agreement and the other Transaction Documents has been based
solely on the independent evaluation of the transactions contemplated hereby by
the Company and its representatives.

 

(jj)          Acknowledgment Regarding Purchaser’s Trading Activity. Anything in
this Agreement or elsewhere herein to the contrary notwithstanding (except for
Sections 3.2(h) and 4.13 hereof), it is understood and acknowledged by the
Company that: (i) none of the Purchasers has been asked by the Company to agree,
nor has any Purchaser agreed, to desist from purchasing or selling, long and/or
short, securities of the Company, or “derivative” securities based on securities
issued by the Company or to hold the Securities for any specified term, (ii)
past or future open market or other transactions by any Purchaser, specifically
including, without limitation, Short Sales or “derivative” transactions, before
or after the closing of this or future private placement transactions, may
negatively impact the market price of the Company’s publicly-traded securities,
(iii) any Purchaser, and counter-parties in “derivative” transactions to which
any such Purchaser is a party, directly or indirectly, may presently have a
“short” position in the Common Stock and (iv) each Purchaser shall not be deemed
to have any affiliation with or control over any arm’s length counter-party in
any “derivative” transaction. The Company further understands and acknowledges
that, subject to Sections 3.2(h) and 4.13 hereof, (y) one or more Purchasers may
engage in hedging activities at various times during the period that the
Securities are outstanding, including, without limitation, during the periods
that the value of the Underlying Shares deliverable with respect to Securities
are being determined, and (z) such hedging activities (if any) could reduce the
value of the existing stockholders' equity interests in the Company at and after
the time that the hedging activities are being conducted.  The Company
acknowledges that such aforementioned hedging activities do not constitute a
breach of any of the Transaction Documents.

 

(kk)        Regulation M Compliance.  The Company has not, and to the Company’s
Knowledge no one acting on its behalf has, (i) taken, directly or indirectly,
any action designed to cause or to result in the stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
any of the Securities, (ii) sold, bid for, purchased, or paid any compensation
for soliciting purchases of, any of the securities of the Company or (iii) paid
or agreed to pay to any Person any compensation for soliciting another to
purchase any other securities of the Company, other than, in the case of clauses
(ii) and (iii), compensation paid to the Placement Agent in connection with the
placement of the Debentures.

 

(ll)          PFIC. Neither the Company nor any Subsidiary is or intends to
become a “passive foreign investment company” within the meaning of Section 1297
of the U.S. Internal Revenue Code of 1986, as amended.

 

(mm)      OFAC. Neither the Company nor any Subsidiary nor, to the Company’s
Knowledge, any director, executive officer, agent, employee, Affiliate or Person
acting on behalf of the Company or any Subsidiary is currently subject to any
U.S. sanctions administered by the Office of Foreign Assets Control of the U.S.
Treasury Department (“OFAC”); and the Company will not directly or indirectly
use the proceeds of the sale of the Securities, or lend, contribute or otherwise
make available such proceeds to any Subsidiary, joint venture partner or other
Person or entity, towards any sales or operations in Cuba, Iran, Syria, Sudan,
Myanmar or any other country sanctioned by OFAC or for the purpose of financing
the activities of any Person currently subject to any U.S. sanctions
administered by OFAC.

 

19

 

 

(nn)       Government Licenses. The Company possesses such permits,
certificates, licenses, approvals, consents and other authorizations
(collectively, “Governmental Licenses”) issued by the appropriate federal,
state, local or foreign regulatory agencies or bodies necessary to conduct the
business of the Company as described in the SEC Reports, including without
limitation, all such approvals, certificates, authorizations and permits
required by the United States Food and Drug Administration (the “FDA”) and/or
other federal, state, local or foreign agencies or bodies engaged in the
regulation of clinical trials, medical devices, or biohazardous substances or
materials, except where the failure so to possess would not, individually or in
the aggregate, have or reasonably be expected to have a Material Adverse Effect;
the Company is in compliance with the terms and conditions of all such
Governmental Licenses, except where the failure so to comply would not,
individually or in the aggregate, have or reasonably be expected to have a
Material Adverse Effect; all of the Governmental Licenses are valid and in full
force and effect, except when the invalidity of such Governmental Licenses or
the failure of such Governmental Licenses to be in full force and effect would
not, individually or in the aggregate, have or reasonably be expected to have a
Material Adverse Effect; and the Company has not received any written notice of
proceedings relating to the revocation or modification of any such Governmental
Licenses which, individually or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have or reasonably be expected to
have a Material Adverse Effect. Where required by applicable laws and
regulations of the FDA or any foreign regulatory authority, the Company has
submitted to the FDA or any foreign regulatory authority any application, or
amendment or supplement thereto, for a clinical trial it has conducted or
sponsored or is conducting or sponsoring, except where such failure would not,
individually or in the aggregate, have or reasonably be expected to have a
Material Adverse Effect; all such submissions were in material compliance with
applicable laws and rules and regulations when submitted and no material
deficiencies have been asserted by the FDA or such foreign regulatory authority
with respect to any such submissions, except any deficiencies which would not,
individually or in the aggregate, have or reasonably be expected to have a
Material Adverse Effect.

 

(oo)       Shell Company. The Company is not, and was not in the past, an
“ineligible issuer” (as defined in Rule 405 promulgated under the Securities
Act).

 

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

 

(qq)       Use of Form S-3. The Company meets the registration and transaction
requirements for use of Form S-3 for the registration of the resale of the
Underlying Shares by the Purchasers, subject to the Commission’s guidance and
interpretations regarding secondary offerings being considered primary
offerings.

 

(rr)         No Disqualification Events. With respect to the Securities to be
offered and sold hereunder in reliance on Rule 506 under the Securities Act,
none of the Company, any of its predecessors, any affiliated issuer, any
director, executive officer, other officer of the Company participating in the
offering hereunder, any beneficial owner of 20% or more of the Company’s
outstanding voting equity securities, calculated on the basis of voting power,
nor any promoter (as that term is defined in Rule 405 under the Securities Act)
connected with the Company in any capacity at the time of sale (each, an "Issuer
Covered Person" and, together, "Issuer Covered Persons") is subject to any of
the "Bad Actor" disqualifications described in Rule 506(d)(1)(i) to (viii) under
the Securities Act (a "Disqualification Event"), except for a Disqualification
Event covered by Rule 506(d)(2) or (d)(3). The Company has exercised reasonable
care to determine whether any Issuer Covered Person is subject to a
Disqualification Event. The Company has complied, to the extent applicable, with
its disclosure obligations under Rule 506(e), and has furnished to the
Purchasers a copy of any disclosures provided thereunder.

 

20

 

 

(ss)        Other Covered Persons. Other than the Placement Agent, the Company
is not aware of any person (other than any Issuer Covered Person) that has been
or will be paid (directly or indirectly) remuneration for solicitation of
purchasers in connection with the sale of any Regulation D Securities.

 

(tt)         Notice of Disqualification Events. The Company will notify the
Purchasers and the Placement Agent in writing, prior to the Closing Date of (i)
any Disqualification Event relating to any Issuer Covered Person and (ii) any
event that would, with the passage of time, become a Disqualification Event
relating to any Issuer Covered Person.

 

(uu)       Ranking of Debentures. Except as set forth on Schedule 3.1(uu), no
Indebtedness, as of the Closing, will be senior to, or pari passu with, the
Debentures in right of payment.

 

3.2         Representations and Warranties of the Purchasers. Each Purchaser
hereby, for itself and for no other Purchaser, represents and warrants as of the
date hereof and as of the Closing Date to the Company and the Placement Agents
as follows:

 

(a)          Organization; Authority. Such Purchaser is an entity duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization with the requisite corporate or partnership
power and authority to enter into and to consummate the transactions
contemplated by the applicable Transaction Documents and otherwise to carry out
its obligations hereunder and thereunder. The execution and delivery of this
Agreement by such Purchaser and performance by such Purchaser of the
transactions contemplated by this Agreement have been duly authorized by all
necessary corporate or, if such Purchaser is not a corporation, such
partnership, limited liability company or other applicable like action, on the
part of such Purchaser. Each Transaction Document to which it is a party has
been duly executed by such Purchaser, and when delivered by such Purchaser in
accordance with the terms hereof, will constitute the valid and legally binding
obligation of such Purchaser, enforceable against it in accordance with its
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating to,
or affecting generally the enforcement of, creditors’ rights and remedies or by
other equitable principles of general application.

 

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

 

21

 

 

(c)          Investment Intent. Such Purchaser understands that the Securities
are “restricted securities” and have not been registered under the Securities
Act or any applicable state securities law and (i) is acquiring the Debentures,
(ii) upon conversion of the Debentures, will acquire the Conversion Shares
issuable upon conversion thereof and (iii) will acquire the Interest Shares (to
the extent interest under the Debentures is paid in Interest Shares) as
principal for its own account and not with a view to, or for distributing or
reselling such Securities or any part thereof in violation of the Securities Act
or any applicable state securities laws, provided, however, that by making the
representations herein, such Purchaser does not agree to hold any of the
Securities for any minimum period of time and reserves the right, subject to the
provisions of this Agreement and the Registration Rights Agreement, at all times
to sell or otherwise dispose of all or any part of such Securities pursuant to
an effective registration statement under the Securities Act or under an
exemption from such registration and in compliance with applicable federal and
state securities laws. Such Purchaser is acquiring the Securities hereunder in
the ordinary course of its business. Such Purchaser does not presently have any
agreement, plan or understanding, directly or indirectly, with any Person to
distribute or effect any distribution of any of the Securities (or any
securities which are derivatives thereof) to or through any person or entity;
such Purchaser is not a registered broker-dealer under Section 15 of the
Exchange Act or an entity engaged in a business that would require it to be so
registered as a broker-dealer.

 

(d)          Purchaser Status. At the time such Purchaser was offered the
Debentures, it was, and at the date hereof it is, an “accredited investor” as
defined in Rule 501(a) under the Securities Act.

 

(e)          General Solicitation. Such Purchaser is not purchasing the
Securities as a result of any advertisement, article, notice or other
communication regarding the Securities published in any newspaper, magazine or
similar media or broadcast over television or radio or presented at any seminar
or any other general advertisement.

 

(f)          Experience of Such Purchaser. Such Purchaser, either alone or
together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Securities, and has so
evaluated the merits and risks of such investment. Such Purchaser is able to
bear the economic risk of an investment in the Securities and, at the present
time, is able to afford a complete loss of such investment.

 

(g)          Access to Information. Such Purchaser acknowledges that it has had
the opportunity to review the Disclosure Materials and has been afforded (i) the
opportunity to ask such questions as it has deemed necessary of, and to receive
answers from, representatives of the Company concerning the terms and conditions
of the offering of the Securities and the merits and risks of investing in the
Securities; (ii) access to information about the Company and the Subsidiaries
and their respective financial condition, results of operations, business,
properties, management and prospects sufficient to enable it to evaluate its
investment; and (iii) the opportunity to obtain such additional information that
the Company possesses or can acquire without unreasonable effort or expense that
is necessary to make an informed investment decision with respect to the
investment. Neither such inquiries nor any other investigation conducted by or
on behalf of such Purchaser or its representatives or counsel shall modify,
amend or affect such Purchaser's right to rely on the truth, accuracy and
completeness of the Disclosure Materials and the Company's representations and
warranties contained in the Transaction Documents. Such Purchaser has sought
such accounting, legal and tax advice as it has considered necessary to make an
informed decision with respect to its acquisition of the Securities.

 

(h)          Certain Trading Activities. Other than with respect to the
transactions contemplated herein, since the time that such Purchaser was first
contacted by the Company, the Placement Agent or any other Person regarding the
transactions contemplated hereby, neither the Purchaser nor any Affiliate of
such Purchaser which (x) had knowledge of the transactions contemplated hereby,
(y) has or shares discretion relating to such Purchaser’s investments or trading
or information concerning such Purchaser’s investments, including in respect of
the Securities, and (z) is subject to such Purchaser’s review or input
concerning such Affiliate’s investments or trading (collectively, “Trading
Affiliates”) has directly or indirectly, nor has any Person acting on behalf of
or pursuant to any understanding with such Purchaser or Trading Affiliate,
effected or agreed to effect any purchases or sales of the securities of the
Company (including, without limitation, any Short Sales involving the Company’s
securities). Notwithstanding the foregoing, in the case of a Purchaser and/or
Trading Affiliate that is, individually or collectively, a multi-managed
investment bank or vehicle whereby separate portfolio managers manage separate
portions of such Purchaser's or Trading Affiliate’s assets and the portfolio
managers have no direct knowledge of the investment decisions made by the
portfolio managers managing other portions of such Purchaser's or Trading
Affiliate’s assets, the representation set forth above shall apply only with
respect to the portion of assets managed by the portfolio manager that have
knowledge about the financing transaction contemplated by this Agreement. Other
than to other Persons party to this Agreement, such Purchaser has maintained the
confidentiality of all disclosures made to it in connection with this
transaction (including the existence and terms of this transaction).
Notwithstanding the foregoing, for avoidance of doubt, nothing contained herein
shall constitute a representation or warranty, or preclude any actions, with
respect to the identification of the availability of, or securing of, available
shares to borrow in order to effect short sales or similar transactions in the
future.

 

22

 

 

(i)          Brokers and Finders. No Person will have, as a result of the
transactions contemplated by this Agreement, any valid right, interest or claim
against or upon the Company or any Purchaser for any commission, fee or other
compensation pursuant to any agreement, arrangement or understanding entered
into by or on behalf of the Purchaser.

 

(j)          Independent Investment Decision. Such Purchaser has independently
evaluated the merits of its decision to purchase Securities pursuant to the
Transaction Documents, and such Purchaser confirms that it has not relied on the
advice of any other Purchaser’s business and/or legal counsel in making such
decision. Such Purchaser understands that nothing in this Agreement or any other
materials presented by or on behalf of the Company to the Purchaser in
connection with the purchase of the Securities constitutes legal, tax or
investment advice. Such Purchaser has consulted such legal, tax and investment
advisors as it, in its sole discretion, has deemed necessary or appropriate in
connection with its purchase of the Securities. Such Purchaser understands that
the Placement Agent has acted solely as the agent of the Company in this
placement of the Debentures and such Purchaser has not relied on the business or
legal advice of the Placement Agent or any of its agents, counsel or Affiliates
in making its investment decision hereunder, and confirms that none of such
Persons has made any representations or warranties to such Purchaser in
connection with the transactions contemplated by the Transaction Documents.

 

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

 

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

 

(m)         Regulation M. Such Purchaser is aware that the anti-manipulation
rules of Regulation M under the Exchange Act may apply to sales of Common Stock
and other activities with respect to the Common Stock by the Purchasers.

 

(n)         Residency. Such Purchaser’s residence (if an individual) or offices
in which its investment decision with respect to the Securities was made (if an
entity) are located at the address immediately below such Purchaser’s name on
its signature page hereto.

 

23

 

 

(o)         Accuracy of Accredited Investor Questionnaire.  The Accredited
Investor Questionnaire delivered by the Purchaser in connection with this
Agreement is complete and accurate in all respects as of the date of this
Agreement and will be correct as of the Closing Date and the effective date of
the Registration Statement; provided, that the Purchaser shall be entitled to
update such information by providing written notice thereof to the Company.

 

The Company and each of the Purchasers acknowledge and agree that no party to
this Agreement has made or makes any representations or warranties with respect
to the transactions contemplated hereby other than those specifically set forth
in this Article III and the Transaction Documents.

 

ARTICLE IV.
OTHER AGREEMENTS OF THE PARTIES

 

4.1         Transfer Restrictions.

 

(a)          Compliance with Laws. Notwithstanding any other provision of this
Article IV, each Purchaser covenants that the Securities may be disposed of only
pursuant to an effective registration statement under, and in compliance with
the requirements of, the Securities Act, or pursuant to an available exemption
from, or in a transaction not subject to, the registration requirements of the
Securities Act, and in compliance with any applicable state and federal
securities laws. In connection with any transfer of the Securities other than
(i) pursuant to an effective registration statement, (ii) to the Company, (iii)
pursuant to Rule 144 or (iv) in connection with a bona fide pledge as
contemplated in Section 4.1(b), the Company may require the transferor thereof
to provide to the Company an opinion of counsel selected by the transferor and
reasonably acceptable to the Company, the form and substance of which opinion
shall be reasonably satisfactory to the Company, to the effect that such
transfer does not require registration of such transferred Securities under the
Securities Act. As a condition of transfer, any such transferee shall agree in
writing to be bound by the terms of this Agreement and the Registration Rights
Agreement and shall have the rights of a Purchaser under this Agreement and the
Registration Rights Agreement with respect to such transferred Securities.

 

(b)          Legends. Certificates evidencing 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, until such time as they are not required
under Section 4.1(c):

 

[NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON CONVERSION OF THESE
SECURITIES HAVE BEEN REGISTERED] [THESE SECURITIES HAVE NOT BEEN REGISTERED]
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR
APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OR (B) AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS OR BLUE SKY LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE COMPANY AND ITS TRANSFER AGENT. 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.

 

24

 

 

The Company acknowledges and agrees that a Purchaser may from time to time
pledge, and/or grant a security interest in, some or all of the legended
Securities in connection with applicable securities laws, pursuant to a bona
fide margin agreement in compliance with a bona fide margin loan. Such a pledge
would not be subject to approval or consent of the Company and no legal opinion
of legal counsel to the pledgee, secured party or pledgor shall be required in
connection with the pledge, but such legal opinion shall be required in
connection with a subsequent transfer or foreclosure following default by the
Purchaser transferee of the pledge. No notice shall be required of such pledge,
but Purchaser’s transferee shall promptly notify the Company of any such
subsequent transfer or foreclosure of such legended Securities. Each Purchaser
acknowledges that the Company shall not be responsible for any pledges relating
to, or the grant of any security interest in, any of the Securities or for any
agreement, understanding or arrangement between any Purchaser and its pledgee or
secured party. At the appropriate Purchaser’s expense, the Company will execute
and deliver such reasonable documentation as a pledgee or secured party of
Securities may reasonably request in connection with a pledge or transfer of the
Securities, including the preparation and filing of any required prospectus
supplement under Rule 424(b)(3) of the Securities Act or other applicable
provision of the Securities Act to appropriately amend the list of Selling
Stockholders thereunder. Each Purchaser acknowledges and agrees that, except as
otherwise provided in Section 4.1(c), any Securities subject to a pledge or
security interest as contemplated by this Section 4.1(b) shall continue to bear
the legend set forth in this Section 4.1(b) and be subject to the restrictions
on transfer set forth in Section 4.1(a).

 

(c)          Removal of Legends. The legend set forth in Section 4.1(b) above
shall be removed and the Company shall issue a certificate without such legend
or any other legend to the holder of the applicable Securities upon which it is
stamped or issue to such holder by electronic delivery at the applicable balance
account at the Depository Trust Company (“DTC”), if (i) such Securities are
registered for resale under the Securities Act (provided that, if the Purchaser
is selling pursuant to the effective registration statement registering the
Securities for resale, the Purchaser agrees to only sell such Securities during
such time that such registration statement is effective and not withdrawn or
suspended, and only as permitted by such registration statement), (ii) such
Securities are sold or transferred pursuant to Rule 144 (if the transferor is
not an Affiliate of the Company), or (iii) such Securities are eligible for sale
under Rule 144. Following the Effective Date, the Company shall cause Company
Counsel to issue to the Transfer Agent the legal opinion referred to in the
Irrevocable Transfer Agent Instructions. Any fees (with respect to the Transfer
Agent, Company Counsel or otherwise) associated with the issuance of such
opinion or the removal of such legend shall be borne by the Company. Following
the Effective Date, or at such earlier time as a legend is no longer required
for certain Securities, the Company will no later than three (3) Trading Days
(such third (3rd) Trading Day, the “Legend Removal Date”) following the delivery
by a Purchaser to the Company (with notice to the Company) of (i) a legended
certificate representing the Underlying Shares or (ii) a Conversion Notice in
the manner stated in the Debentures to effect the conversion of such Debenture
in accordance with its terms, and, in each case, an opinion of counsel to the
extent required by Section 4.1(a), deliver or cause to be delivered to the
transferee of such Purchaser or such Purchaser, as applicable, a certificate
representing such Securities that is free from all restrictive and other
legends. The Company may not make any notation on its records or give
instructions to the Transfer Agent that enlarge the restrictions on transfer set
forth in this Section 4.1(c). Certificates for Underlying Shares subject to
legend removal hereunder may be transmitted by the Transfer Agent to the
Purchasers by crediting the account of the Purchaser’s prime broker with DTC as
directed by such Purchaser. In addition to such Purchaser’s other available
remedies, the Company shall pay to a Purchaser, in cash, as partial liquidated
damages and not as a penalty, for each $1,000 of Underlying Shares (based on the
VWAP of the Common Stock on the date such Securities are submitted to the
Transfer Agent) delivered for removal of the restrictive legend and subject to
this Section 4.1(c), $10 per Trading Day (increasing to $20 per Trading Day five
(5) Trading Days after such damages have begun to accrue) for each Trading Day
after the Legend Removal Date until such certificate is delivered without a
legend. Nothing herein shall limit such Purchaser’s right to pursue actual
damages for the Company’s failure to deliver certificates representing any
Securities as required by the Transaction Documents, and such Purchaser shall
have the right to pursue all remedies available to it at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief.

 

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(d)          Irrevocable Transfer Agent Instructions. The Company shall issue
irrevocable instructions to the Transfer Agent, and any subsequent transfer
agent, in substantially the form of Exhibit F attached hereto (the “Irrevocable
Transfer Agent Instructions”). The Company represents and warrants that no
instruction other than the Irrevocable Transfer Agent Instructions referred to
in this Section 4.1(d) (or instructions that are consistent therewith) will be
given by the Company to the Transfer Agent in connection with this Agreement,
and that the Securities shall otherwise be freely transferable on the books and
records of the Company as and to the extent provided in this Agreement and the
other Transaction Documents and applicable law. The Company acknowledges that a
breach by it of its obligations under this Section 4.1(d) will cause irreparable
harm to a Purchaser. Accordingly, the Company acknowledges that the remedy at
law for a breach of its obligations under this Section 4.1(d) will be inadequate
and agrees, in the event of a breach or threatened breach by the Company of the
provisions of this Section 4.1(d), that a Purchaser 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.

 

(e)          Acknowledgement. Each Purchaser hereunder acknowledges its primary
responsibilities under the Securities Act and accordingly will not sell or
otherwise transfer the Securities or any interest therein without complying with
the requirements of the Securities Act and applicable law. While the
Registration Statement remains effective, each Purchaser hereunder may sell the
Underlying Shares in accordance with the plan of distribution contained in the
Registration Statement and if it does so it will comply therewith and with the
related prospectus delivery requirements unless an exemption therefrom is
available. Each Purchaser, severally and not jointly with the other Purchasers,
agrees that if it is notified by the Company in writing at any time that the
Registration Statement registering the resale of the Underlying Shares is not
effective or that the prospectus included in such Registration Statement no
longer complies with the requirements of Section 10 of the Securities Act, the
Purchaser will refrain from selling such Underlying Shares until such time as
the Purchaser is notified by the Company that such Registration Statement is
effective or such prospectus is compliant with Section 10 of the Securities Act,
unless such Purchaser is able to, and does, sell such Underlying Shares pursuant
to an available exemption from the registration requirements of Section 5 of the
Securities Act. Both the Company and the Transfer Agent, and their respective
directors, executive officers, employees and agents, may rely on this Section
4.1(e).

 

(f)          Buy-In. If the Company shall fail for any reason or for no reason
to issue to a Purchaser unlegended certificates within three (3) Trading Days of
receipt of all documents necessary for the removal of the legend set forth above
(the “Deadline Date”), then, in addition to all other remedies available to such
Purchaser, if on or after the Trading Day immediately following such three (3)
Trading Day period, such Purchaser purchases (in an open market transaction or
otherwise) shares of Common Stock to deliver in satisfaction of a sale by the
holder of shares of Common Stock that such Purchaser anticipated receiving from
the Company without any restrictive legend (a “Buy-In”), then the Company shall,
within three (3) Trading Days after such Purchaser’s request promptly honor its
obligation to deliver to such Purchaser a certificate or certificates
representing such shares of Common Stock and pay cash to the Purchaser in an
amount equal to the excess (if any) of the Purchaser’s total purchase price for
such shares over the product of (a) such number of shares of Common Stock, times
(b) the Closing Bid Price on the Deadline Date.

 

4.2         Reservation of Common Stock. The Company shall take all action
necessary to at all times during the period the Debentures are outstanding have
authorized, and reserved for the purpose of issuance from and after the Closing
Date, the number of shares of Common Stock then issuable upon conversion of the
Debentures issued at the Closing (without taking into account any limitations on
conversion of the Debentures set forth in the Debentures).

 

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4.3         Furnishing of Information. In order to enable the Purchasers to sell
the Securities under Rule 144, until the date that the Securities cease to be
Registrable Securities (as defined in the Registration Rights Agreement) (and
for no less than twelve (12) months from the Closing), the Company shall use its
commercially reasonable efforts to timely file (or obtain extensions in respect
thereof and file within the applicable grace period) all reports required to be
filed by the Company after the date hereof pursuant to the Exchange Act. During
such period, if the Company is not required to file reports pursuant to the
Exchange Act, it will prepare and furnish to the Purchasers and make publicly
available in accordance with Rule 144(c) such information as is required for the
Purchasers to sell the Securities under Rule 144.

 

4.4         Integration. The Company shall not, and shall use its commercially
reasonable efforts to ensure that no Affiliate of the Company shall, sell, offer
for sale or solicit offers to buy or otherwise negotiate in respect of any
security (as defined in Section 2 of the Securities Act) that will be integrated
with the offer or sale of the Securities in a manner that would require the
registration under the Securities Act of the sale of the Securities to the
Purchasers, or that will be integrated with the offer or sale of the Securities
for purposes of the rules and regulations of the Principal Trading Market such
that it would require stockholder approval prior to the closing of such other
transaction unless stockholder approval is obtained before the closing of such
subsequent transaction.

 

4.5         Securities Laws Disclosure; Publicity. By 9:00 A.M., New York City
time, on the Trading Day immediately following the date hereof, the Company
shall file a Current Report on Form 8-K with the Commission describing the terms
of the Transaction Documents (and including as exhibits to such Current Report
on Form 8-K the material Transaction Documents (including, without limitation,
this Agreement, the form of Debenture and the Registration Rights Agreement)).
Notwithstanding the foregoing, the Company shall not publicly disclose the name
of any Purchaser or an Affiliate of any Purchaser, or include the name of any
Purchaser or an Affiliate of any Purchaser in any press release or filing with
the Commission (other than the Registration Statement) or any regulatory agency
or Trading Market, without the prior written consent of such Purchaser, except
(i) as required by federal securities law in connection with (A) any
registration statement contemplated by the Registration Rights Agreement and (B)
the filing of final Transaction Documents (including signature pages thereto)
with the Commission and (ii) to the extent such disclosure is required by law,
request of the Staff of the Commission or Principal Trading Market regulations,
in which case the Company shall provide the Purchasers with prior written notice
of such disclosure permitted under this subclause (ii). From and after the
issuance of the Form 8-K set forth in this Section 4.5, no Purchaser shall be in
possession of any material, non-public information received from the Company,
any Subsidiary or any of their respective executive officers, directors,
employees or agents,that is not disclosed in the Form 8-K set forth in this
Section 4.5. In addition, effective upon the issuance of the Form 8-K set forth
in this Section 4.5, the Company acknowledges and agrees that any and all
confidentiality or similar obligations under any agreement, whether written or
oral, between the Company, any of its Subsidiaries or any of their respective
officers, directors, affiliates or agents, on the one hand, and any of the
Purchasers or any of their affiliates, on the other hand, shall terminate. Each
Purchaser, severally and not jointly with the other Purchasers, covenants that
until such time as the transactions contemplated by this Agreement are required
to be publicly disclosed by the Company as described in this Section 4.5, such
Purchaser will maintain the confidentiality of all disclosures made to it in
connection with this transaction (including the existence and terms of this
transaction).

 

4.6         Shareholder Rights Plan. No claim will be made or enforced by the
Company or, with the consent of the Company, any other Person, that any
Purchaser is an “acquiring person” under any control share acquisition, business
combination, poison pill (including any distribution under a rights agreement)
or similar anti-takeover plan or arrangement in effect or hereafter adopted by
the Company, or that any Purchaser could be deemed to trigger the provisions of
any such plan or arrangement, in either case solely by virtue of receiving
Securities under the Transaction Documents or under any other written agreement
between the Company and the Purchasers; provided, however, that no such
Purchaser owns any equity in the Company prior to its purchase of the Securities
hereunder.

 

27

 

 

4.7         Non-Public Information. Except with respect to the material terms
and conditions of the transactions contemplated by the Transaction Documents,
including this Agreement, or as expressly required by any applicable securities
law, the Company covenants and agrees that neither it, nor any other Person
acting on its behalf, will provide any Purchaser or its agents or counsel with
any information regarding the Company that the Company believes constitutes
material non-public information without the express written consent of such
Purchaser, unless prior thereto such Purchaser shall have executed a written
agreement regarding the confidentiality and use of such information. The Company
understands and confirms that each Purchaser shall be relying on the foregoing
covenant in effecting transactions in securities of the Company.

 

4.8         Use of Proceeds. The Company shall use the net proceeds from the
sale of the Debentures hereunder primarily for working capital and general
corporate purposes, and shall not use such proceeds for: (a) the satisfaction of
any portion of the Company’s debt (other than payment of trade payables in the
ordinary course of the Company’s business and prior practices, (b) the
redemption of any Common Stock or Common Stock Equivalents or (c) the settlement
of any outstanding litigation.

 

4.9         Indemnification of Purchasers. Subject to the provisions of this
Section 4.9, the Company will indemnify and hold each Purchaser and its
directors, officers, shareholders, members, partners, employees and agents (and
any other Persons with a functionally equivalent role of a Person holding such
titles notwithstanding a lack of such title or any other title), each Person who
controls such Purchaser (within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act), and the directors, officers, shareholders,
agents, members, partners or employees (and any other Persons with a
functionally equivalent role of a Person holding such titles notwithstanding a
lack of such title or any other title) of such controlling persons (each, a
“Purchaser Party”) harmless from any and all losses, liabilities, obligations,
claims, contingencies, damages, costs and expenses, including all judgments,
amounts paid in settlements, court costs and reasonable attorneys’ fees and
costs of investigation that any such Purchaser Party may suffer or incur as a
result of or relating to (a) any breach of any of the representations,
warranties, covenants or agreements made by the Company in this Agreement or in
the other Transaction Documents or (b) any action instituted against the
Purchaser Parties in any capacity, or any of them or their respective
Affiliates, by any stockholder of the Company who is not an Affiliate of such
Purchaser Party, with respect to any of the transactions contemplated by the
Transaction Documents (unless such action is based upon a breach of such
Purchaser Party’s representations, warranties or covenants under the Transaction
Documents or any agreements or understandings such Purchaser Party may have with
any such stockholder or any violations by such Purchaser Party of state or
federal securities laws or any conduct by such Purchaser Party which constitutes
fraud, gross negligence, willful misconduct or malfeasance). If any action shall
be brought against any Purchaser Party in respect of which indemnity may be
sought pursuant to this Agreement, such Purchaser Party shall promptly notify
the Company in writing, and the Company shall have the right to assume the
defense thereof with counsel of its own choosing reasonably acceptable to the
Purchaser Party. Any Purchaser Party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of such Purchaser Party
except to the extent that (i) the employment thereof has been specifically
authorized by the Company in writing, (ii) the Company has failed after a
reasonable period of time to assume such defense and to employ counsel or (iii)
in such action there is, in the reasonable opinion of counsel, a material
conflict on any material issue between the position of the Company and the
position of such Purchaser Party, in which case the Company shall be responsible
for the reasonable fees and expenses of no more than one such separate counsel.
The Company will not be liable to any Purchaser Party under this Agreement (y)
for any settlement by a Purchaser Party effected without the Company’s prior
written consent, which shall not be unreasonably withheld or delayed; or (z) to
the extent, but only to the extent that a loss, claim, damage or liability is
attributable to any Purchaser Party’s breach of any of the representations,
warranties, covenants or agreements made by such Purchaser Party in this
Agreement or in the other Transaction Documents. The indemnification required by
this Section 4.9 shall be made by periodic payments of the amount thereof during
the course of the investigation or defense, as and when bills are received or
are incurred. The indemnity agreements contained herein shall be in addition to
any cause of action or similar right of any Purchaser Party against the Company
or others and any liabilities the Company may be subject to pursuant to law.

 

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4.10       Principal Trading Market Listing. In the time and manner required by
the Principal Trading Market, the Company shall prepare and file with such
Principal Trading Market an additional shares listing application covering all
of the Underlying Shares and shall use its commercially reasonable efforts to
take all steps necessary to cause all of the Underlying Shares to be approved
for listing on the Principal Trading Market as promptly as possible thereafter.

 

4.11       Form D; Blue Sky. The Company agrees to timely file a Form D with
respect to the Securities as required under Regulation D and to provide a copy
thereof, promptly upon the written request of any Purchaser. The Company, on or
before the Closing Date, shall 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 Purchasers 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 such actions promptly upon the
written request of any Purchaser.

 

4.12       [Intentionally Omitted]

 

4.13       Short Sales and Confidentiality After The Date Hereof. Such Purchaser
shall not, and shall cause its Trading Affiliates not to, engage, directly or
indirectly, in any transactions in the Company’s securities (including, without
limitation, any Short Sales involving the Company’s securities) during the
period from the date hereof until the earlier of such time as (i) the
transactions contemplated by this Agreement are first publicly announced as
described in Section 4.5 or (ii) this Agreement is terminated in full pursuant
to Section 6.18. Each Purchaser, severally and not jointly with the other
Purchasers, covenants that until such time as the transactions contemplated by
this Agreement are publicly disclosed by the Company as described in Section
4.5, such Purchaser will maintain the confidentiality of the existence and terms
of this transaction and the information included in the Transaction Documents
and Disclosure Schedules. Notwithstanding the foregoing, no Purchaser makes any
representation, warranty or covenant hereby that it will not engage in Short
Sales in the securities of the Company after the time that the transactions
contemplated by this Agreement are first publicly announced as described in
Section 4.5. Notwithstanding the foregoing, in the event that a Purchaser is a
multi-managed investment vehicle whereby separate portfolio managers manage
separate portions of such Purchaser's assets and the portfolio managers have no
direct knowledge of the investment decisions made by the portfolio managers
managing other portions of such Purchaser's assets, the representation set forth
above shall apply only with respect to the portion of assets managed by the
portfolio manager that have knowledge about the financing transaction
contemplated by this Agreement. Moreover, notwithstanding the foregoing, in the
event that a Purchaser has sold Securities pursuant to Rule 144 prior to the
Effective Date of the initial Registration Statement and the Company has failed
to deliver certificates without legends prior to the settlement date for such
sale (assuming that such certificates meet the requirements set forth in Section
4.1(c) for the removal of legends), the provisions of this Section 4.13 shall
not prohibit the Purchaser from entering into Net Short Sales for the purpose of
delivering shares of Common Stock in settlement of such sale.

 

4.14       Subsequent Equity Sales.

 

(a)          From the date hereof until 90th day after the Effective Date,
neither the Company nor any Subsidiary shall issue, enter into any agreement to
issue or announce the issuance or proposed issuance of any shares of Common
Stock or Common Stock Equivalents; provided, however, the Company may enter into
the $25 Million Offering (as defined in Section 4.21), provided, that, such
agreement is entered into within 4 Trading Days from the date of this Agreement
and the material terms of such offering are including the in Current Report on
Form 8-K to be filed pursuant to Section 4.5 herein.

 

29

 

 

(b)          From the date hereof until such time as no Purchaser holds any of
Debentures, the Company shall be prohibited from effecting or entering into an
agreement to effect any issuance by the Company or any of its Subsidiaries of
Common Stock or Common Stock Equivalents (or a combination of units thereof)
involving a Variable Rate Transaction. “Variable Rate Transaction” means a
transaction in which the Company (i) issues or sells any debt or equity
securities that are convertible into, exchangeable or exercisable for, or
include the right to receive, additional shares of Common Stock either (A) at a
conversion price, exercise price or exchange rate or other price that is based
upon, and/or varies with, the trading prices of or quotations for the shares of
Common Stock at any time after the initial issuance of such debt or equity
securities or (B) with a conversion, exercise or exchange price that is subject
to being reset at some future date after the initial issuance of such debt or
equity security or upon the occurrence of specified or contingent events
directly or indirectly related to the business of the Company or the market for
the Common Stock or (ii) enters into any agreement, including, but not limited
to, an equity line of credit, whereby the Company may issue securities at a
future determined price. Any Purchaser shall be entitled to obtain injunctive
relief against the Company to preclude any such issuance, which remedy shall be
in addition to any right to collect damages.

 

(c)          Notwithstanding the foregoing, in no event shall this Section 4.14
prohibit the Company from issuing shares of Common Stock or Common Stock
Equivalents (i) upon the exercise of any options or warrants outstanding on the
date hereof, (ii) upon the conversion of the Debentures or in payment of
interest pursuant to the Debentures, (iii) to employees or directors pursuant to
any stock option or equity incentive or employee stock purchase plan, (iv) upon
a firm commitment underwritten public offering of Common Stock (each such
issuance, an “Exempt Issuance”), except that no Variable Rate Transaction shall
be an Exempt Issuance.

 

4.15       [Intentionally Omitted]

 

4.16       Cash Payment Cap; Subordination. Notwithstanding anything contained
herein or in any other of the Transaction Documents to the contrary, while the
Senior Indebtedness (as defined in the Debentures) is outstanding, (i) the
Company shall not make, or be required to make, any cash payment of any kind to
any Person under any of the Transaction Documents to the extent that such cash
payment, when aggregated with all other cash payments to such Person under the
Transaction Documents, would exceed such Person’s Cash Payment Cap and (ii) to
the extent that any provision of the Subordination Agreements conflicts with any
provision of any of the Transaction Documents, such provision of the
Subordination Agreements shall control. To the extent that any cash payment
otherwise required to be paid by the Company to any Person pursuant to any of
the Transaction Documents is not payable as a result of the application of the
foregoing sentence, such payment shall be accrued and held in abeyance for such
Person until such time as the Senior Indebtedness is no longer outstanding.

 

4.17       Equal Treatment of Purchasers. No consideration (including any
modification of any Transaction Document) shall be offered or paid to any Person
to amend or consent to a waiver or modification of any provision of this
Agreement unless the same consideration is also offered to all of the parties to
this Agreement. Further, the Company shall not make any payment of principal or
interest on the Debentures in amounts which are disproportionate to the
respective principal amounts outstanding on the Debentures at any applicable
time. For clarification purposes, this provision constitutes a separate right
granted to each Purchaser by the Company and negotiated separately by each
Purchaser, and is intended for the Company to treat the Purchasers as a class
and shall not in any way be construed as the Purchasers acting in concert or as
a group with respect to the purchase, disposition or voting of Securities or
otherwise.

 

30

 

 

4.18       Conversion Procedures. The form of Notice of Conversion included in
the Debentures set forth the totality of the procedures required of the
Purchasers in order to convert the Debentures. Without limiting the preceding
sentences, no ink-original Notice of Conversion shall be required, nor shall any
medallion guarantee (or other type of guarantee or notarization) of any Notice
of Conversion form be required in order to convert the Debentures. No additional
legal opinion, other information or instructions shall be required of the
Purchasers to convert their Debentures. The Company shall honor conversions of
the Debentures and shall deliver Underlying Shares in accordance with the terms,
conditions and time periods set forth in the Transaction Documents.

 

4.19       Adjustment to Existing Conversion and Exercise Prices. The Company
hereby agrees and acknowledges that upon the Closing, (i) the Conversion Price
(as defined in the Existing Debentures) of $382,055.25 of the Existing
Debentures held by the Purchasers is hereby reduced to equal $0.05 and (ii) the
Exercise Price (as defined in the Existing Warrants) of Existing Warrants to
exercise up to 2,303,978 Warrant Shares held by the Purchasers is hereby reduced
to equal $0.05. Such reductions shall be allocated ratably according to each
Purchasers participation hereunder. The adjustments to are immediate upon
Closing and require no further action by the Purchaser. Furthermore, the Company
hereby agrees and acknowledges that such adjustments shall occur only to
Existing Debentures and Existing Warrants held by a Purchaser hereunder and no
such adjustments shall be made to any other Existing Debentures and Existing
Warrants.

 

4.20       Participation in Future Financing.

 

(a)          From the date hereof until the date that the Debentures are no
longer outstanding, upon any issuance by the Company or any of its Subsidiaries
of Common Shares or Common Share Equivalents for cash consideration,
Indebtedness or a combination of units thereof (a “Subsequent Financing”), each
Purchaser shall have the right to participate in up to an amount of the
Subsequent Financing equal to 50% of the Subsequent Financing (the
“Participation Maximum”) on the same terms, conditions and price provided for in
the Subsequent Financing.

 

(b)          Approximately (5) Trading Days prior to the closing of the
Subsequent Financing, the Company shall deliver to each Purchaser a written
notice of its intention to effect a Subsequent Financing (a “Subsequent
Financing Notice”). The Subsequent Financing Notice shall describe in reasonable
detail the proposed terms of such Subsequent Financing, the amount of proceeds
intended to be raised thereunder and the Person or Persons through or with whom
such Subsequent Financing is proposed to be effected and shall include a term
sheet or similar document relating thereto as an attachment.

 

(c)          Any Purchaser desiring to participate in such Subsequent Financing
must provide written notice to the Company by not later than 5:30 p.m. (New York
City time) on the third (3rd) Trading Day after all of the Purchasers have
received the Subsequent Financing Notice that the Purchaser is willing to
participate in the Subsequent Financing, the amount of such Purchaser’s
participation, and representing and warranting that such Purchaser has such
funds ready, willing, and available for investment on the terms set forth in the
Subsequent Financing Notice. If the Company receives no such notice from a
Purchaser as of such third (3rd) Trading Day, such Purchaser shall be deemed to
have notified the Company that it does not elect to participate.

 

31

 

 

(d)          If by 5:30 p.m. (New York City time) on the third (3rd) Trading Day
after all of the Purchasers have received the Subsequent Financing Notice,
notifications by the Purchasers of their willingness to participate in the
Subsequent Financing (or to cause their designees to participate) is, in the
aggregate, less than the total amount of the Subsequent Financing, then the
Company may effect the remaining portion of such Subsequent Financing on the
terms and with the Persons set forth in the Subsequent Financing Notice.

 

(e)          If by 5:30 p.m. (New York City time) on the third (3rd) Trading Day
after all of the Purchasers have received the Subsequent Financing Notice, the
Company receives responses to the Subsequent Financing Notice from Purchasers
seeking to purchase more than the aggregate amount of the Participation Maximum,
each such Purchaser shall have the right to purchase its Pro Rata Portion (as
defined below) of the Participation Maximum. “Pro Rata Portion” means the ratio
of (x) the Subscription Amount of Securities purchased on the Closing Date by a
Purchaser participating under this Section 4.20 and (y) the sum of the aggregate
Subscription Amounts of Securities purchased on the Closing Date by all
Purchasers participating under this Section 4.20.

 

(f)          The Company must provide the Purchasers with a second Subsequent
Financing Notice, and the Purchasers will again have the right of participation
set forth above in this Section 4.20, if the Subsequent Financing subject to the
initial Subsequent Financing Notice is not consummated for any reason on the
terms set forth in such Subsequent Financing Notice within 30 Trading Days after
the date of the initial Subsequent Financing Notice.

 

(g)          The Company and each Purchaser agree that if any Purchaser elects
to participate in the Subsequent Financing, the transaction documents related to
the Subsequent Financing shall not include any term or provision whereby such
Purchaser shall be required to agree to any restrictions on trading as to any of
the Securities purchased hereunder or be required to consent to any amendment to
or termination of, or grant any waiver, release or the like under or in
connection with, this Agreement, without the prior written consent of such
Purchaser.

 

(h)          Notwithstanding anything to the contrary in this Section 4.20 and
unless otherwise agreed to by such Purchaser, the Company shall either confirm
in writing to such Purchaser that the transaction with respect to the Subsequent
Financing has been abandoned or shall publicly disclose its intention to issue
the securities in the Subsequent Financing, in either case in such a manner such
that such Purchaser will not be in possession of any material, non-public
information, by the sixth (6th) Business Day following delivery of the
Subsequent Financing Notice. If by such sixth (6th) Business Day, no public
disclosure regarding a transaction with respect to the Subsequent Financing has
been made, and no notice regarding the abandonment of such transaction has been
received by such Purchaser, such transaction shall be deemed to have been
abandoned and such Purchaser shall not be deemed to be in possession of any
material, non-public information with respect to the Company or any of its
Subsidiaries.

 

(i)          Notwithstanding the foregoing, this Section 4.20 shall not apply in
respect of issuances pursuant to clauses (i) through (iii) of the definition of
Exempt Issuance.

 

4.21       Obligation to Participate in $25 Million Offering. Each Purchaser,
severally and not jointly, hereby covenants and agrees with the Company that it
will participate in any offering by the Company of senior secured convertible
debentures entered into within 4 Trading Days from the date of this Agreement
(the “$25 Million Offering”) for a subscription, when combined with the
subscriptions of each Purchaser’s Affiliates, of not less than $8 million,
provided that the terms and conditions of the $25 Million Offering are
acceptable to a majority in interest of the Purchasers, including but not
limited to include gross proceeds to the Company of at least $25 million
(including the proceeds of this transaction) and the Company shall have obtained
a financial viability exception under NASDAQ Listing Rule 5635(f) to the NASDAQ
shareholder approval requirements for such $25 Million Offering. In the event
that the $25 Million Offering is not entered into within 4 Trading Days from the
date of this Agreement, the $25 Million Offering shall be deemed to have been
abandoned and the Purchasers will not be in possession of any material,
non-public information upon the filing of the Current Report on Form 8-K to be
filed pursuant to Section 4.5.

 

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4.22       Exercise of Existing Warrants. The Purchasers hereby acknowledge and
agree, that upon the Closing, to exercise their Existing Warrants, at an
effective exercise price of $0.05 per share, for an aggregate exercise price of
$115,198.90, provided that the registration statement registering the resale of
the Warrant Shares is then effective (and effective for the foreseeable future)
and available for use by the Purchaser.

 

4.23       Lock-Up Agreements. On or before the 7th Trading Day following the
Closing Date, the Company shall deliver to the Purchasers a Lock-Up Agreement,
substantially in the form of Exhibit I hereto (the “Lock-Up Agreement”) executed
by each person listed on Exhibit J hereto, and each such Lock-Up Agreement shall
be in full force and effect on the Closing Date.

 

ARTICLE V.

CONDITIONS PRECEDENT TO CLOSING

 

5.1         Conditions Precedent to the Obligations of the Purchasers to
Purchase Securities. The obligation of each Purchaser to acquire Debentures at
the Closing is subject to the fulfillment to such Purchaser’s satisfaction, on
or prior to the Closing Date, of each of the following conditions, any of which
may be waived by such Purchaser (as to itself only):

 

(a)          Representations and Warranties. The representations and warranties
of the Company contained herein shall be true and correct in all material
respects (except for those representations and warranties which are qualified as
to materiality, in which case such representations and warranties shall be true
and correct in all respects) as of the date when made and as of the Closing
Date, as though made on and as of such date, except for such representations and
warranties that speak as of a specific date.

 

(b)          Performance. The Company shall have performed, satisfied and
complied in all material respects with all covenants, agreements and conditions
required by the Transaction Documents to be performed, satisfied or complied
with by it at or prior to the Closing.

 

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

 

(d)          Consents. The Company shall have obtained in a timely fashion any
and all consents, permits, approvals, registrations and waivers necessary for
consummation of the purchase and sale of the Debentures (including all Required
Approvals), all of which shall be and remain so long as necessary in full force
and effect.

 

(e)          Adverse Changes. Since the date of execution of this Agreement, no
event or series of events shall have occurred that has had or would reasonably
be expected to have a Material Adverse Effect.

 

(f)          Listing. The NASDAQ Global Market shall have received the
application for the listing of additional shares for the Conversion Shares and
Interest Shares.

 

33

 

 

(g)          No Suspensions of Trading in Common Stock. The Common Stock shall
not have been suspended, as of the Closing Date, by the Commission or the
Principal Trading Market from trading on the Principal Trading Market nor shall
suspension by the Commission or the Principal Trading Market have been
threatened, as of the Closing Date, either (A) in writing by the Commission or
the Principal Trading Market or (B) by falling below the minimum listing
maintenance requirements of the Principal Trading Market.

 

(h)          Company Deliverables. The Company shall have delivered the Company
Deliverables in accordance with Section 2.2(a).

 

(i)           Compliance Certificate. The Company shall have delivered to each
Purchaser a certificate, dated as of the Closing Date and signed by its Chief
Executive Officer or its Chief Financial Officer, dated as of the Closing Date,
certifying to the fulfillment of the conditions specified in Sections 5.1(a) and
(b) in the form attached hereto as Exhibit H.

 

(j)           Termination. This Agreement shall not have been terminated as to
such Purchaser in accordance with Section 6.18 herein.

 

5.2         Conditions Precedent to the Obligations of the Company to sell
Securities. The Company's obligation to sell and issue the Debentures at the
Closing to each Purchaser is subject to the fulfillment to the satisfaction of
the Company on or prior to the Closing Date of the following conditions, any of
which may be waived by the Company:

 

(a)          Representations and Warranties. The representations and warranties
made by the Purchasers in Section 3.2 hereof shall be true and correct in all
material respects (except for those representations and warranties which are
qualified as to materiality, in which case such representations and warranties
shall be true and correct in all respects) as of the date when made, and as of
the Closing Date as though made on and as of such date, except for
representations and warranties that speak as of a specific date.

 

(b)          Performance. Such Purchaser shall have performed, satisfied and
complied in all material respects with all covenants, agreements and conditions
required by the Transaction Documents to be performed, satisfied or complied
with by such Purchaser at or prior to the Closing Date.

 

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

 

(d)          Consents. The Company shall have obtained in a timely fashion any
and all consents, permits, approvals, registrations and waivers necessary for
consummation of the purchase and sale of the Securities, all of which shall be
and remain so long as necessary in full force and effect.

 

(e)          Purchasers Deliverables. Such Purchaser shall have delivered its
Purchaser Deliverables in accordance with Section 2.2(b).

 

(f)           Listing. The NASDAQ Global Market shall have received the
application for the listing of additional shares for the Conversion Shares and
Interest Shares.

 

(g)          Termination. This Agreement shall not have been terminated as to
such Purchaser in accordance with Section 6.18 herein.

 

34

 

 

(h)          Waiver. The Company shall have obtained a consent or a waiver, as
necessary, from DAFNA Lifescience L.P. and/or entities affiliated therewith
necessary to consummate the transactions contemplated by the Transaction
Agreements.

 

ARTICLE VI.
MISCELLANEOUS

 

6.1         Fees and Expenses. At the Closing, the Company has agreed to
reimburse Sabby the non-accountable sum of $50,000 for its legal fees and
expenses, $15,000 of which has been paid prior to the Closing. Except as
otherwise expressly set forth in the Transaction Documents and in the Company’s
engagement letter with Summer Street, the Company and the Purchasers shall each
pay the fees and expenses of their respective advisers, counsel, accountants and
other experts, if any, and all other expenses incurred by such party in
connection with the negotiation, preparation, execution, delivery and
performance of this Agreement. The Company shall pay all Transfer Agent fees,
stamp taxes and other taxes and duties levied in connection with the sale and
issuance of the Securities to the Purchasers. Each Purchaser, severally and not
jointly with any other Purchaser, shall be responsible for all other tax
liability that may arise as a result of holding or transferring the Securities
by it.

 

6.2         Entire Agreement. The Transaction Documents, together with the
exhibits and schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements,
understandings, discussions and representations, oral or written, with respect
to such matters, which the parties acknowledge have been merged into such
documents, exhibits and schedules. At or after the Closing, and without further
consideration, the Company and the Purchasers will execute and deliver to the
other such further documents as may be reasonably requested in order to give
practical effect to the intention of the parties under the Transaction
Documents.

 

6.3         Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of transmission, if
such notice or communication is delivered via e-mail or facsimile (provided the
sender receives a machine-generated confirmation of successful transmission) at
the facsimile number specified in this Section 6.3 prior to 5:00 P.M., New York
City time, on a Trading Day, (b) the next Trading Day after the date of
transmission, if such notice or communication is delivered via e-mail or
facsimile at the facsimile number specified in this Section 6.3 on a day that is
not a Trading Day or later than 5:00 P.M., New York City time, on any Trading
Day, (c) the Trading Day following the date of mailing, if sent by U.S.
nationally recognized overnight courier service with next day delivery
specified, or (d) upon actual receipt by the party to whom such notice is
required to be given. The address for such notices and communications shall be
as follows:

 

If to the Company:Baxano Surgical, Inc.

110 Horizon Drive

Suite 230

Raleigh, North Carolina 27615

Telephone No.: (919) 800-0020

Facsimile No.: (919) 803-3775

Attention: Ken Reali

E-mail: ken.reali@baxsurg.com

 

With a copy to:Goodwin Procter LLP

53 State Street

Boston, Massachusetts 02109

Telephone No.: (617) 570-1000

Facsimile No.: (617) 523-1231

Attention: Edward A. King

E-mail: eking@goodwinprocter.com

 

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If to a Purchaser:To the address, facsimile number or e-mail address set forth
under such Purchaser’s name on the signature page hereof;

 

or such other address as may be designated in writing hereafter, in the same
manner, by such Person.

 

6.4         Amendments; Waivers; No Additional Consideration. No provision of
this Agreement may be waived, modified, supplemented or amended except in a
written instrument signed, in the case of an amendment, by the Company and the
Purchasers of at least 67% in interest of the Securities still held by
Purchasers or, in the case of a waiver, by the party against whom enforcement of
any such waiver is sought; provided, that any amendment, waiver modification or
supplement of this Agreement that adversely modifies the Subscription Amount of
any Purchaser, the Purchase Price or Section 2.1(a) of this Agreement or causes
any such Purchaser to assume any additional liability or material obligation,
may be effected only pursuant to a written instrument signed by the Company and
such Purchaser. No waiver of any default with respect to any provision,
condition or requirement of this Agreement shall be deemed to be a continuing
waiver in the future or a waiver of any subsequent default or a waiver of any
other provision, condition or requirement hereof, nor shall any delay or
omission of either party to exercise any right hereunder in any manner impair
the exercise of any such right. No consideration shall be offered or paid to any
Purchaser to amend or consent to a waiver or modification of any provision of
any Transaction Document unless the same consideration is also offered to all
Purchasers who then hold Securities.

 

6.5         Construction. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof. 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 construed as if drafted jointly by the parties, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any provisions of this Agreement or any of the Transaction
Documents.

 

6.6         Successors and Assigns. The provisions of this Agreement shall inure
to the benefit of and be binding upon the parties and their successors and
permitted assigns. This Agreement, or any rights or obligations hereunder, may
not be assigned by the Company without the prior written consent of at least a
majority in interest of the Securities still held by Purchasers. Any Purchaser
may assign its rights hereunder in whole or in part to any Person to whom such
Purchaser assigns or transfers any Securities in compliance with the Transaction
Documents and applicable law, provided such transferee shall agree in writing to
be bound, with respect to the transferred Securities, by the terms and
conditions of this Agreement that apply to the “Purchasers”.

 

6.7         No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except (i) the Placement Agent is an intended third party
beneficiary of Article III hereof and (ii) each Purchaser Party is an intended
third party beneficiary of Section 4.9.

 

36

 

 

6.8         Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law thereof. Each party
agrees that all Proceedings concerning the interpretations, enforcement and
defense of the transactions contemplated by this Agreement and any other
Transaction Documents (whether brought against a party hereto or its respective
Affiliates, employees or agents) shall be commenced exclusively in the New York
Courts. Each party hereto hereby irrevocably submits to the exclusive
jurisdiction of the New York Courts for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein (including with respect to the enforcement of any of the
Transaction Documents), and hereby irrevocably waives, and agrees not to assert
in any Proceeding, any claim that it is not personally subject to the
jurisdiction of any such New York Court, or that such Proceeding has been
commenced in an improper or inconvenient forum. Each party hereto hereby
irrevocably waives personal service of process and consents to process being
served in any such Proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to such party
at the address in effect for notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. EACH PARTY HERETO HEREBY
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND
ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

 

6.9         Survival. Subject to applicable statute of limitations, the
representations, warranties, agreements and covenants contained herein shall
survive the Closing and the delivery of the Securities.

 

6.10       Execution. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, or by e-mail delivery of a “.pdf” format
data file, such signature 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 facsimile signature page were an original thereof.

 

6.11       Severability. If any provision of this Agreement is held to be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.

 

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

 

6.13       Replacement of Securities. If any certificate or instrument
evidencing any Securities is mutilated, lost, stolen or destroyed, the Company
shall issue or cause to be issued in exchange and substitution for and upon
cancellation thereof, or in lieu of and substitution therefor, a new certificate
or instrument, but only upon receipt of evidence reasonably satisfactory to the
Company and, as applicable, the Transfer Agent of such loss, theft or
destruction and the execution by the holder thereof of a customary lost
certificate affidavit of that fact and an agreement to indemnify and hold
harmless the Company and, as applicable, the Transfer Agent for any losses in
connection therewith or, if required by the Transfer Agent, a bond in such form
and amount as is required by the Transfer Agent. The applicants for a new
certificate or instrument under such circumstances shall also pay any reasonable
third-party costs associated with the issuance of such replacement Securities.
If a replacement certificate or instrument evidencing any Securities is
requested due to a mutilation thereof, the Company may require delivery of such
mutilated certificate or instrument as a condition precedent to any issuance of
a replacement.

 

37

 

 

6.14       Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of the
Purchasers and the Company will be entitled to specific performance under the
Transaction Documents. The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations described in the foregoing sentence and hereby agree to waive in any
action for specific performance of any such obligation (other than in connection
with any action for a temporary restraining order) the defense that a remedy at
law would be adequate.

 

6.15       Payment Set Aside. To the extent that the Company makes a payment or
payments to any Purchaser pursuant to any Transaction Document or a Purchaser
enforces or exercises its rights thereunder, and such payment or payments or the
proceeds of such enforcement or exercise or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside, recovered
from, disgorged by or are required to be refunded, repaid or otherwise restored
to the Company, a trustee, receiver or any other person under any law
(including, without limitation, any bankruptcy law, state or federal law, common
law or equitable cause of action), then to the extent of any such restoration
the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
made or such enforcement or setoff had not occurred.

 

6.16       Adjustments in Share Numbers and Prices. In the event of any stock
split, subdivision, dividend or distribution payable in shares of Common Stock
(or other securities or rights convertible into, or entitling the holder thereof
to receive directly or indirectly shares of Common Stock), combination or other
similar recapitalization or event occurring after the date hereof and prior to
the Closing, each reference in any Transaction Document to a number of shares or
a price per share shall be deemed to be amended to appropriately account for
such event.

 

6.17       Independent Nature of Purchasers' Obligations and Rights. The
obligations of each Purchaser under any Transaction Document are several and not
joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser under any Transaction Document. The decision of each Purchaser to
purchase Securities pursuant to the Transaction Documents has been made by such
Purchaser independently of any other Purchaser and independently of any
information, materials, statements or opinions as to the business, affairs,
operations, assets, properties, liabilities, results of operations, condition
(financial or otherwise) or prospects of the Company or any Subsidiary which may
have been made or given by any other Purchaser or by any agent or employee of
any other Purchaser, and no Purchaser and any of its agents or employees shall
have any liability to any other Purchaser (or any other Person) relating to or
arising from any such information, materials, statement or opinions. Nothing
contained herein or in any Transaction Document, and no action taken by any
Purchaser pursuant thereto, shall be deemed to constitute the Purchasers as a
partnership, an association, a joint venture or any other kind of entity, or
create a presumption that the Purchasers are in any way acting in concert or as
a group with respect to such obligations or the transactions contemplated by the
Transaction Documents. Each Purchaser acknowledges that no other Purchaser has
acted as agent for such Purchaser in connection with making its investment
hereunder and that no Purchaser will be acting as agent of such Purchaser in
connection with monitoring its investment in the Securities or enforcing its
rights under the Transaction Documents. Each Purchaser shall be entitled to
independently protect and enforce its rights, including without limitation the
rights arising out of this Agreement or out of the other Transaction Documents,
and it shall not be necessary for any other Purchaser to be joined as an
additional party in any proceeding for such purpose. Each Purchaser has been
represented by its own separate legal counsel in its review and negotiation of
the Transaction Documents. For reasons of administrative convenience only, each
Purchaser and its respective counsel have chosen to communicate with the Company
through EGS. EGS does not represent all of the Purchasers and only represents
Sabby. The Company has elected to provide all Purchasers with the same terms and
Transaction Documents for the convenience of the Company and not because it was
required or requested to do so by any Purchaser.

 

38

 

 

6.18       Termination. This Agreement may be terminated and the sale and
purchase of the Debentures abandoned at any time prior to the Closing by either
the Company or any Purchaser (with respect to itself only) upon written notice
to the other, if the Closing has not been consummated on or prior to 5:00 P.M.,
New York City time, on the Outside Date; provided, however, that the right to
terminate this Agreement under this Section 6.18 shall not be available to any
Person whose failure to comply with its obligations under this Agreement has
been the cause of or resulted in the failure of the Closing to occur on or
before such time. Nothing in this Section 6.18 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. In the
event of a termination pursuant to this Section 6.18, the Company shall promptly
notify all non-terminating Purchasers. Upon a termination in accordance with
this Section 6.18, the Company and the terminating Purchaser(s) shall not have
any further obligation or liability (including arising from such termination) to
the other, and no Purchaser will have any liability to any other Purchaser under
the Transaction Documents as a result therefrom. The Company and any
Purchaser(s) may extend the term of this Agreement in accordance with the
amendment provisions of Section 6.4 hereof.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

39

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the date first indicated above.

 

  BAXANO SURGICAL, INC.       By: /s/Ken Reali     Name:  Ken Reali    
Title:  President and Chief Executive Officer

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

 

 

 

  NAME OF PURCHASER:    

 

  By:     Name:   Title:

 

  Aggregate Purchase Price   $           Aggregate Subscription Amount   $  
Aggregate Principal Amount of Debentures to be Acquired       Tax ID.    

 

  Address for Notice:                

 

  Telephone No.:           Facsimile No.:           E-mail Address:            
Attention:    

 

Delivery Instructions:

(if different than above)

 

c/o               Street:               City/State/Zip:           Attention:    
      Telephone No.:      

  

 

 

 

Exhibit A

 

Form of Subordinated Convertible Debenture

 

 

 

 

 

FORM OF SUBORDINATED CONVERTIBLE DEBENTURE

 

NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON CONVERSION OF, OR
PAYMENT OF INTEREST ON, THESE SECURITIES HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER THE SECURITIES ACT OR (B) AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS OR BLUE SKY LAWS AS
EVIDENCED BY A LEGAL OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY
AND ITS TRANSFER AGENT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES.

 

THE SECURITIES REPRESENTED BY THIS DEBENTURE ARE SUBJECT TO THAT CERTAIN
SUBORDINATION AGREEMENT, DATED AS OF September __, 2014, AMONG THE HOLDERS OF
THE DEBENTURES, THE COMPANY AND HERCULES TECHNOLOGY GROWTH CAPITAL, INC., A
MARYLAND CORPORATION (AS THE SAME MAY, FROM TIME TO TIME, BE AMENDED, MODIFIED,
SUPPLEMENTED, RESTATED OR REPLACED, THE “HERCULES SUBORDINATION AGREEMENT”) AND
THAT CERTAIN SUBORDINATION AGREEMENT, DATED AS OF SEPTEMBER [__], 2014, AMONG
THE HOLDERS OF THE DEBENTURES, THE COMPANY AND THE OTHER PARTIES THERETO (AS THE
SAME MAY, FROM TIME TO TIME, BE AMENDED, MODIFIED, SUPPLEMENTED, RESTATED OR
REPLACED, THE “MARCH 2014 SUBORDINATION AGREEMENT” AND, TOGETHER WITH THE
HERCULES SUBORDINATION AGREEMENT, THE “SUBORDINATION AGREEMENTS”).

 

Baxano Surgical, INC.

SUBORDINATED CONVERTIBLE DEBENTURE

 

Issuance Date: September __, 2014

 

Original Principal Amount: U.S. $[ ]

 

 

FOR VALUE RECEIVED, Baxano Surgical, Inc., a Delaware corporation (the
“Company”), hereby promises to pay to the order of [PURCHASER] or its registered
assigns (“Holder”) the amount set out above as the Original Principal Amount (as
reduced pursuant to the terms hereof pursuant to redemption, conversion or
otherwise, the “Principal”) when due, whether upon a Maturity Date, or upon
acceleration, redemption or otherwise (in each case in accordance with the terms
hereof) and to pay interest (“Interest”) on any outstanding Principal at the
applicable Interest Rate (as defined below) from the date set out above as the
Issuance Date (the “Issuance Date”) until the same becomes due and payable,
whether upon a Maturity Date or upon acceleration, conversion, redemption or
otherwise (in each case in accordance with the terms hereof). This Subordinated
Convertible Debenture (including all Subordinated Convertible Debentures issued
in exchange, transfer or replacement hereof, this “Debenture”) is one of an
issue of Subordinated Convertible Debentures issued pursuant to the Purchase
Agreement (as defined below) on the Closing Date (as defined below)
(collectively, the “Debentures”, and such other Subordinated Convertible
Debentures, the “Other Debentures”, and the holders of the Debentures, including
the Holder, the “Holders”)). Certain capitalized terms used herein are defined
in Section 31.

 

1.          PAYMENTS OF PRINCIPAL. On each Maturity Date, the Company shall pay
to the Holder an amount in cash representing 1/16th of the initial outstanding
Principal, accrued and unpaid Interest and accrued and unpaid Late Charges (as
defined in Section 24(c)) on such Principal and Interest. Other than as
specifically permitted by this Debenture, the Company may not prepay any portion
of the outstanding Principal, accrued and unpaid Interest or accrued and unpaid
Late Charges on Principal and Interest, if any.

 

1

 

 

2.           INTEREST; INTEREST RATE.

 

(a)          Interest on this Debenture shall commence accruing on the Issuance
Date, shall accrue daily at the Interest Rate on the outstanding Principal
amount from time to time, shall be computed on the basis of a 360-day year
comprised of twelve (12) thirty (30) day months, shall compound each calendar
month (if not timely paid) and shall be payable in arrears quarterly on the
first (1st) Business Day of each calendar quarter (each, an “Interest Date”)
with the first Interest Date being January 1, 2015. Interest shall be payable on
each Interest Date, to the record holder of this Debenture on the applicable
Interest Date, in shares of Common Stock (“Interest Shares”) so long as there
then exists no Equity Conditions Failure; provided however, that the Company
may, at its option following notice to the Holder, pay Interest on any Interest
Date in cash (“Cash Interest”) or in a combination of Cash Interest and Interest
Shares (and provided that such combination is applied according to each Holders
Pro Rata Amount). The Company shall deliver a written notice (each, an “Interest
Election Notice”) to each holder of the Debentures on or prior to twentieth
(20th) Trading Day prior to the applicable Interest Date (the “Interest Notice
Due Date”, and such date such notice is delivered to all of the holders, the
“Interest Notice Date”) which notice (i) either (A) confirms that Interest to be
paid on such Interest Date shall be paid entirely in Interest Shares or (B)
elects to pay Interest as Cash Interest or a combination of Cash Interest and
Interest Shares and specifies the amount of Interest that shall be paid as Cash
Interest and the amount of Interest, if any, that shall be paid in Interest
Shares and (ii) certifies that there has been no Equity Conditions Failure. If
an Equity Conditions Failure has occurred as of the Interest Notice Date, then
unless the Company has elected to pay such Interest as Cash Interest, the
Interest Notice shall indicate that unless the Holder waives the Equity
Conditions Failure, the Interest shall be paid as Cash Interest. Notwithstanding
anything herein to the contrary, if no Equity Conditions Failure has occurred as
of the Interest Notice Date but an Equity Conditions Failure occurs at any time
prior to the Interest Date, (x) the Company shall provide the Holder a
subsequent notice to that effect and (y) unless the Holder waives the Equity
Conditions Failure, the Interest shall be paid in cash. Interest to be paid on
an Interest Date in Interest Shares shall be paid in a number of fully paid and
nonassessable shares (rounded down to the nearest whole share, with the Company
to pay the fair market value (based on the Closing Sale Price) in Cash Interest)
of any fractional shares in cash, in accordance with Section 3(a)) of Common
Stock equal to the quotient of (1) the amount of Interest payable on such
Interest Date less any Cash Interest paid and (2) the Interest Conversion Price
in effect on the applicable Interest Date.

 

(b)          When any Interest Shares are to be paid on an Interest Date, the
Company shall (i) (A) provided that the Company's transfer agent (the “Transfer
Agent”) is participating in the Depository Trust Company (“DTC”) Fast Automated
Securities Transfer Program, credit such aggregate number of Interest Shares to
which the Holder shall be entitled to the Holder's or its designee's balance
account with DTC through its Deposit/Withdrawal at Custodian system no later
than the close of the second (2nd) Trading Day following the Interest Date, or
(B) if the Transfer Agent is not participating in the DTC Fast Automated
Securities Transfer Program, issue and deliver by the close of the second (2nd)
Trading Day following the applicable Interest Date, to the address set forth in
the register maintained by the Company for such purpose pursuant to the Purchase
Agreement or to such address as specified by the Holder in writing to the
Company on or before the applicable Interest Date, a certificate, registered in
the name of the Holder or its designee, for the number of Interest Shares to
which the Holder shall be entitled and (ii) with respect to each Interest Date,
pay to the Holder, in cash by wire transfer of immediately available funds, the
amount of any Cash Interest; provided that such Cash Interest may be paid by
check in the event that such Cash Interest is comprised solely of cash payments
in lieu of fractional shares.

 

2

 

 

(c)          Prior to the payment of Interest on an Interest Date, Interest on
this Debenture shall accrue at the Interest Rate and be payable by way of
inclusion of the Interest in the Conversion Amount on each Conversion Date in
accordance with Section 3(b)(i) or upon any redemption in accordance with
Section 12. From and after the occurrence and during the continuance of an Event
of Default, the Interest Rate shall be increased to fifteen percent (15.0%) per
annum. In the event that such Event of Default is subsequently cured, the
automatic increase to the Interest Rate referred to in the preceding sentence
shall cease to be effective as of the date of such cure; provided that the
Interest as calculated and unpaid at such increased rate during the continuance
of such Event of Default shall continue to apply to the extent relating to the
days after the occurrence of such Event of Default through and including the
date of such cure of such Event of Default.

 

3.           CONVERSION OF DEBENTURES. This Debenture shall be convertible into
validly issued, fully paid and non-assessable shares of Common Stock (as defined
below), on the terms and conditions set forth in this Section 3.

 

(a)          Conversion Right. Subject to the provisions of Section 3(d), the
Holder shall be entitled to convert any portion of the outstanding and unpaid
Conversion Amount (as defined below) into validly issued, fully paid and
non-assessable shares of Common Stock in accordance with Section 3(c), at the
Conversion Rate (as defined below). The Company shall not issue any fraction of
a share of Common Stock upon any conversion. If the issuance would result in the
issuance of a fraction of a share of Common Stock, the Company shall round such
fraction of a share of Common Stock down to the nearest whole share and the
Company shall pay the Holder in cash the fair market value (based on the Closing
Sale Price) for any such fractional shares. The Company shall pay any and all
transfer, stamp, issuance and similar taxes that may be payable with respect to
the issuance and delivery of Common Stock upon conversion of any Conversion
Amount.

 

(b)          Conversion Rate. The number of shares of Common Stock issuable upon
conversion of any Conversion Amount pursuant to Section 3(a) shall be determined
by dividing (x) such Conversion Amount by (y) the Conversion Price (the
“Conversion Rate”).

 

(i)          “Conversion Amount” means the portion of the Principal to be
converted, redeemed or otherwise with respect to which this determination is
being made, plus all accrued and unpaid Interest with respect to such portion of
the Principal amount and accrued and unpaid Late Charges with respect to such
portion of such Principal and such Interest.

 

(ii)         “Conversion Price” means, as of any Conversion Date or other date
of determination, $0______1, subject to adjustment as provided herein.

 

 

1   Closing Bid Price immediately prior to execution.

  

3

 

 

(c)          Mechanics of Conversion.

 

(i)          Optional Conversion. To convert any Conversion Amount into shares
of Common Stock on any date (a “Conversion Date”), the Holder shall deliver
(whether via facsimile, electronic mail or otherwise), for receipt on or prior
to 11:59 p.m., New York time, on such date, a copy of an executed notice of
conversion in the form attached hereto as Exhibit I (the “Conversion Notice”) to
the Company. No ink-original Conversion Notice shall be required, nor shall any
medallion guarantee (or other type of guarantee or notarization) of any form of
Conversion Notice be required. If required by Section 3(c)(iii), within three
(3) Trading Days following a conversion of this Debenture as aforesaid, the
Holder shall surrender this Debenture to a nationally recognized overnight
delivery service for delivery to the Company (or an indemnification undertaking
with respect to this Debenture in the case of its loss, theft or destruction as
contemplated by Section 19(b)). On or before the first (1st) Trading Day
following the date of receipt of a Conversion Notice, the Company shall transmit
by facsimile an acknowledgment of confirmation, in the form attached hereto as
Exhibit II, of receipt of such Conversion Notice to the Holder and the Transfer
Agent. On or before the second (2nd) Trading Day following the date of receipt
of a Conversion Notice, the Company shall (1) provided that the Transfer Agent
is participating in the DTC Fast Automated Securities Transfer Program and
further provided that the Registration Statement is then effective or such
shares are freely transferable without restriction under Rule 144 under the
Securities Act by a Holder who is not an affiliate of the Company, credit such
aggregate number of shares of Common Stock to which the Holder shall be entitled
to the Holder’s or its designee’s balance account with DTC through its
Deposit/Withdrawal at Custodian system or (2) if the conditions set forth in
clause (1) are not satisfied, issue and deliver (via reputable overnight
courier) to the address as specified in the Conversion Notice, a certificate,
registered in the name of the Holder or its designee (provided that, if the
Registration Statement is not effective and the Holder directs the Company to
deliver a certificate for such shares in a name other than that of the Holder or
an Affiliate of the Holder, it shall deliver to the Company on the Conversion
Date an opinion of counsel reasonably satisfactory to the Company to the effect
that the issuance of such shares in such other name may be made pursuant to an
available exemption from the registration requirements of the Securities Act and
all applicable state securities or blue sky laws), for the number of shares of
Common Stock to which the Holder shall be entitled. If this Debenture is
physically surrendered for conversion pursuant to Section 3(c)(iii) and the
outstanding Principal of this Debenture is greater than the Principal portion of
the Conversion Amount being converted, then the Company shall as soon as
practicable and in no event later than three (3) Business Days after receipt of
this Debenture and at its own expense, issue and deliver to the Holder (or its
designee) a new Debenture (in accordance with Section 19(d)) representing the
outstanding Principal not converted. The Person or Persons entitled to receive
the shares of Common Stock issuable upon a conversion of this Debenture shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on the Conversion Date.

 

(ii)         Company’s Failure to Timely Convert. If the Company shall fail, for
any reason or for no reason, to issue to the Holder within three (3) Trading
Days after the Company’s receipt of a Conversion Notice (whether via facsimile
or otherwise) (the “Share Delivery Deadline”), a certificate for the number of
shares of Common Stock to which the Holder is entitled and register such shares
of Common Stock on the Company’s share register or to credit the Holder’s or its
designee’s balance account with DTC for such number of shares of Common Stock to
which the Holder is entitled upon the Holder’s conversion of any Conversion
Amount (as the case may be) on or prior to the Share Delivery Deadline (a
“Conversion Failure”), and if on or after such Share Delivery Deadline the
Holder purchases (in an open market transaction or otherwise) shares of Common
Stock to deliver in satisfaction of a sale by the Holder of shares of Common
Stock issuable upon such conversion that the Holder anticipated receiving from
the Company, then, in addition to all other remedies available to the Holder,
the Company shall, within three (3) Business Days after the Holder’s request and
in the Holder’s discretion, either (i) pay cash to the Holder in an amount equal
to the Holder’s total purchase price (including brokerage commissions and other
out-of-pocket expenses, if any) for the shares of Common Stock so purchased
(including, without limitation, by any other Person in respect, or on behalf, of
the Holder) (the “Buy-In Price”), at which point the Company’s obligation to
deliver such certificate (and to issue such shares of Common Stock) shall
terminate, or (ii) promptly honor its obligation to deliver to the Holder a
certificate or certificates representing such shares of Common Stock or credit
the Holder’s balance account with DTC for the number of shares of Common Stock
to which the Holder is entitled upon the Holder’s conversion hereunder (as the
case may be) and pay cash to the Holder in an amount equal to the excess (if
any) of the Buy-In Price over the product of (A) such number of shares of Common
Stock multiplied by (B) the closing bid price of a share of Common Stock on
Conversion Date. Furthermore, if the Company fails for any reason to deliver to
the Holder such certificate or certificates pursuant to this Section by the
Share Delivery Deadline, the Company shall pay to the Holder, in cash, as
liquidated damages and not as a penalty, for each one thousand dollars ($1,000)
of principal amount being converted, ten dollars ($10) per Trading Day
(increasing to twenty dollars ($20) per Trading Day on the fifth (5th) Trading
Day after such liquidated damages begin to accrue) for each Trading Day after
such Share Delivery Deadline until such certificates are delivered or Holder
rescinds such conversion. Nothing herein shall limit a Holder’s right to pursue
actual damages or declare an Event of Default pursuant to Section 4 hereof for
the Company’s failure to deliver Conversion Shares within the period specified
herein and the Holder shall have the right to pursue all remedies available to
it hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief. The exercise of any such rights
shall not prohibit the Holder from seeking to enforce damages pursuant to any
other Section hereof or under applicable law.

 

4

 

 

(iii)        Registration; Book-Entry. The Company shall maintain a register
(the “Register”) for the recordation of the names and addresses of the Holders
of each Debenture and the principal amount of the Debentures held by such
Holders (the “Registered Debentures”). The entries in the Register shall be
conclusive and binding for all purposes absent manifest error. The Company and
the Holders of the Debentures shall treat each Person whose name is recorded in
the Register as the owner of a Debenture for all purposes, including, without
limitation, the right to receive payments of Principal and Interest hereunder,
notwithstanding notice to the contrary. A Registered Debenture may be assigned
or sold in whole or in part only by registration of such assignment or sale on
the Register. Upon its receipt of a request to assign or sell all or part of any
Registered Debenture by a Holder, the Company shall record the information
contained therein in the Register and issue one or more new Registered
Debentures in the same aggregate principal amount as the principal amount of the
surrendered Registered Debenture to the designated assignee or transferee
pursuant to Section 19. Notwithstanding anything to the contrary set forth in
this Section 3, upon conversion of any portion of this Debenture in accordance
with the terms hereof, the Holder shall not be required to physically surrender
this Debenture to the Company unless (A) the full Conversion Amount represented
by this Debenture is being converted (in which event this Debenture shall be
delivered to the Company as contemplated by Section 3(c)(i)) or (B) the Holder
has provided the Company with prior written notice (which notice may be included
in a Conversion Notice) requesting reissuance of this Debenture upon physical
surrender of this Debenture. The Company shall update the Register to reflect
the Principal, Interest and Late Charges converted and/or paid (as the case may
be) and the dates of such conversions and/or payments (as the case may be) or
shall use such other method, reasonably satisfactory to the Holder and the
Company, so as not to require physical surrender of this Debenture upon
conversion.

 

(iv)        Failure to Deliver Certificates. If, in the case of any Conversion
Notice, such certificate or certificates are not delivered to or as directed by
the applicable Holder by the Share Delivery Deadline, the Holder shall be
entitled to elect by written notice to the Company at any time on or before its
receipt of such certificate or certificates, to rescind such Conversion, in
which event the Company shall promptly return to the Holder any original
Debenture delivered to the Company and the Holder shall promptly return to the
Company the Common Stock certificates issued to such Holder pursuant to the
rescinded Conversion Notice.

 

(d)          Limitations on Conversions.

 

(i)          Beneficial Ownership. Notwithstanding anything to the contrary
contained in this Debenture, this Debenture shall not be convertible by the
Holder hereof, and the Company shall not effect any conversion of this Debenture
or otherwise issue any shares of Common Stock pursuant hereto, to the extent
(but only to the extent) that after giving effect to such conversion or other
share issuance hereunder the Holder (together with its affiliates) would
beneficially own in excess of 9.99% (the “Maximum Percentage”) of the Common
Stock. To the extent the above limitation applies, the determination of whether
this Debenture shall be convertible (vis-à-vis other convertible, exercisable or
exchangeable securities owned by the Holder or any of its affiliates) shall,
subject to such Maximum Percentage limitation, be determined on the basis of the
first submission to the Company for conversion, exercise or exchange (as the
case may be). No prior inability to convert this Debenture, or to issue shares
of Common Stock, pursuant to this paragraph shall have any effect on the
applicability of the provisions of this paragraph with respect to any subsequent
determination of convertibility. For purposes of this paragraph, beneficial
ownership and all determinations and calculations (including, without
limitation, with respect to calculations of percentage ownership) shall be
determined in accordance with Section 13(d) of the 1934 Act (as defined in the
Purchase Agreement) and the rules and regulations promulgated thereunder. The
provisions of this paragraph shall be implemented in a manner otherwise than in
strict conformity with the terms of this paragraph to correct this paragraph (or
any portion hereof) which may be defective or inconsistent with the intended
Maximum Percentage beneficial ownership limitation herein contained or to make
changes or supplements necessary or desirable to properly give effect to such
Maximum Percentage limitation. The limitations contained in this paragraph shall
apply to a successor Holder of this Debenture. The holders of Common Stock shall
be third party beneficiaries of this paragraph and the Company may not waive
this paragraph without the consent of holders of a majority of its Common Stock.
For any reason at any time, upon the written or oral request of the Holder, the
Company shall within one (1) Business Day confirm orally and in writing to the
Holder the number of shares of Common Stock then outstanding, including by
virtue of any prior conversion or exercise of convertible or exercisable
securities into Common Stock, including, without limitation, pursuant to this
Debenture or securities issued pursuant to the Purchase Agreement. For the
avoidance of doubt, solely with respect to the calculations in this Section
3(d)(i), shares of Common Stock that may not be issued to the Holder pursuant to
Sections 3(d)(ii)or 10(b) hereof shall be disregarded for purposes of
determining the number of shares of Common Stock issuable upon a conversion or
other issuance hereunder until such time, if any, as such applicable
restrictions or prohibitions no longer apply.

 

5

 

 

4.           RIGHTS UPON EVENT OF DEFAULT.

 

(a)          Event of Default. Each of the following events shall constitute an
“Event of Default”:   

 

(i)          the failure of the applicable Registration Statement (as defined in
the Registration Rights Agreement) to be filed with the SEC on or prior to the
date that is thirty (30) days after the closing of the $25 Million Offering (as
defined in the Purchase Agreement), or if such offering is abandoned, the date
that is thirty days from the filing of the Company’s report on Form 8-K relating
to the transactions contemplated by the Purchase Agreement.;

 

(ii)         while the applicable Registration Statement is required to be
maintained effective pursuant to the terms of the Registration Rights Agreement,
the effectiveness of the applicable Registration Statement lapses for any reason
(including, without limitation, the issuance of a stop order) or such
Registration Statement (or the prospectus contained therein) is unavailable to
any holder of Registrable Securities (as defined in the Registration Rights
Agreement) for sale of all of such holder’s Registrable Securities in accordance
with the terms of the Registration Rights Agreement, and (I) such lapse or
unavailability continues for a period of twenty (20) consecutive days or for
more than an aggregate of thirty (30) days in any 365-day period (excluding days
during an Allowable Grace Period (as defined in the Registration Rights
Agreement)) and (II) any such holder does not then have the right to sell all of
such holder’s Registrable Securities without restriction pursuant to Rule 144
(including, without limitation, volume limitations);

 

(iii)        the suspension from trading or the failure of the Common Stock to
be trading or listed (as applicable) on an Eligible Market for a period of
twenty (20) consecutive days or for more than an aggregate of thirty (30) days
in any 365-day period;

 

(iv)        the Company’s failure to cure a Conversion Failure by delivery of
the required number of shares of Common Stock within five (5) Trading Days after
the applicable Conversion Date or exercise date (as the case may be) (it being
understood that a Conversion Failure or Delivery Failure shall not be deemed to
have occurred for purposes of this Section 4(a)(iv) to the extent the Company
has complied with the terms and conditions of Sections 3(d) or 10(b) of this
Debenture, and paid such applicable cash consideration to the Holder in lieu of
such applicable delivery of shares of Common Stock);

 

(v)         at any time following the tenth (10th) consecutive day after March
1, 2015, the Holder’s Authorized Share Allocation is less than the number of
shares of Common Stock that the Holder would then be entitled to receive upon a
conversion of the full Conversion Amount of this Debenture (without regard to
any limitations on conversion set forth in Section 3(d) or otherwise);

 

6

 

 

(vi)        the Company’s or any Subsidiary’s (as defined in the Purchase
Agreement) failure to pay to the Holder any amount of Principal, Interest, Late
Charges or other amounts when and as due under this Debenture (including,
without limitation, the Company’s or any Subsidiary’s failure to pay any
redemption payments or amounts hereunder) or any other Transaction Document (as
defined in the Purchase Agreement) or any other agreement, document, certificate
or other instrument delivered in connection with the transactions contemplated
hereby and thereby, except, in the case of a failure to pay Interest, Late
Charges or such other amounts when and as due, in which case only if such
failure remains uncured for a period of at least five (5) days;

 

(vii)       the Company fails to remove any restrictive legend on any
certificate or any shares of Common Stock issued to the Holder upon conversion
or exercise (as the case may be) of any Securities acquired by the Holder under
the Purchase Agreement (including this Debenture) as and when required by such
Securities or the Purchase Agreement, unless otherwise then prohibited by
applicable federal securities laws, and any such failure remains uncured for at
least five (5) days;

 

(viii)      [Reserved];

 

(ix)         bankruptcy, insolvency, reorganization or liquidation proceedings
or other proceedings for the relief of debtors shall be instituted by or against
the Company or any Subsidiary and, if instituted against the Company or any
Subsidiary by a third party, shall not be dismissed within forty-five (45) days
of their initiation;

 

(x)          the commencement by the Company or any Subsidiary of a voluntary
case or proceeding under any applicable federal, state or foreign bankruptcy,
insolvency, reorganization or other similar law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to
the entry of a decree, order, judgment or other similar document in respect of
the Company or any Subsidiary in an involuntary case or proceeding under any
applicable federal, state or foreign bankruptcy, insolvency, reorganization or
other similar law or to the commencement of any bankruptcy or insolvency case or
proceeding against it, or the filing by it of a petition or answer or consent
seeking reorganization or relief under any applicable federal, state or foreign
law, or the consent by it to the filing of such petition or to the appointment
of or taking possession by a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Subsidiary or of
any substantial part of its property, or the making by it of an assignment for
the benefit of creditors, or the execution of a composition of debts, or the
occurrence of any other similar federal, state or foreign proceeding, or the
admission by it in writing of its inability to pay its debts generally as they
become due, the taking of corporate action by the Company or any Subsidiary in
furtherance of any such action or the taking of any action by any secured
creditor of the Company or any Subsidiary to commence a Uniform Commercial Code
(“UCC”) foreclosure sale or any other similar action under federal, state or
foreign law;

 

(xi)         the entry by a court of (i) a decree, order, judgment or other
similar document in respect of the Company or any Subsidiary of a voluntary or
involuntary case or proceeding under any applicable federal, state or foreign
bankruptcy, insolvency, reorganization or other similar law or (ii) a decree,
order, judgment or other similar document adjudging the Company or any
Subsidiary as bankrupt or insolvent, or approving as properly filed a petition
seeking liquidation, reorganization, arrangement, adjustment or composition of
or in respect of the Company or any Subsidiary under any applicable federal,
state or foreign law or (iii) a decree, order, judgment or other similar
document appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Subsidiary or of
any substantial part of its property, or ordering the winding up or liquidation
of its affairs, and the continuance of any such decree, order, judgment or other
similar document or any such other decree, order, judgment or other similar
document unstayed and in effect for a period of forty-five (45) consecutive
days;

 

7

 

 

(xii)        a final judgment or judgments for the payment of money aggregating
in excess of $1,000,000 are rendered against the Company and/or any of its
Subsidiaries and which judgments are not, within thirty (30) days after the
entry thereof, bonded, discharged or stayed pending appeal, or are not
discharged within thirty (30) days after the expiration of such stay; provided,
however, any judgment which is covered by insurance or an indemnity from a
credit worthy party shall not be included in calculating the $1,000,000 amount
set forth above so long as liability has been accepted by the insurance carrier
or the Company provides the Holder a written statement from such indemnity
provider (which written statement shall be reasonably satisfactory to the
Holder) to the effect that such judgment is covered by an indemnity and the
Company or such Subsidiary (as the case may be) will receive the proceeds of
such indemnity within thirty (30) days of the issuance of such judgment;

 

(xiii)       either (i) the Company and/or any Subsidiary, individually or in
the aggregate, fails to pay, when due, or within any applicable grace period,
any payment with respect to any Indebtedness in excess of $500,000 due to any
third party (other than, with respect to unsecured Indebtedness only, payments
contested by the Company and/or such Subsidiary (as the case may be) 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 $500,000, which breach or violation permits the other party thereto to
declare a default or otherwise accelerate amounts due thereunder, or (ii) the
occurrence of a default or event of default under any agreement binding the
Company or any Subsidiary, 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 and its Subsidiaries, in the aggregate;

 

(xiv)      other than as specifically set forth in another clause of this
Section 4(a), the Company or any Subsidiary breaches in any material respect any
representation, warranty, covenant or other term or condition of any Transaction
Document, except, in the case of a breach of a covenant or other term or
condition that is curable, only if such breach remains uncured for a period of
five (5) consecutive Trading Days;

 

(xv)       a false or inaccurate certification (including a false or inaccurate
deemed certification) by the Company that the Equity Conditions are satisfied,
that there has been no Equity Conditions Failure or as to whether any Event of
Default has occurred;

 

(xvi)      any breach or failure in any respect by the Company or any Subsidiary
to comply with any provision of Section 13 of this Debenture;

 

(xvii)     any material adverse change in the results of operations, assets,
prospects, business or financial condition of the Company and the Subsidiaries,
taken as a whole (a “Material Adverse Change”), except that any of the
following, either alone or in combination, shall not be deemed a Material
Adverse Change: (i) effects caused by changes or circumstances affecting general
market conditions in the U.S. economy or which are generally applicable to the
industry in which the Company operates, provided that such effects are not borne
disproportionately by the Company, (ii) effects resulting from or relating to
the announcement or disclosure of the sale of this Debenture or other
transaction contemplated by the Transaction Documents, (iii) effects caused by
any event, occurrence or condition resulting from or relating to the taking of
any action in accordance with this Debenture, (iv) effects arising in connection
with earthquakes, hostilities, acts of war, sabotage or terrorism or military
actions or any escalation or material worsening of any such hostilities, acts of
war, sabotage or terrorism or military actions existing as of the date hereof,
(v) effects resulting from decreases in the Company’s stock price as a result of
the transactions contemplated by the Transaction Documents or the Debentures
issued thereunder, or as a result of sales of the Securities (as defined in the
Purchase Agreement) or securities issuable upon conversion or exercise, as
applicable, of the Existing Debentures or the Existing Warrants (as each such
term is defined in the Purchase Agreement) into the open market;

 

(xviii)    a proceeding shall be commenced by the Company or any Subsidiary or
any governmental authority having jurisdiction over any of them, seeking to
establish the invalidity or unenforceability of any Transaction Document;

 

8

 

 

(xix)       the electronic transfer by the Company of shares of Common Stock
through the Depository Trust Company or another established clearing corporation
is no longer available or is subject to a “chill” due to an act or failure to
act by the Company; or

 

(xx)        any Event of Default (as defined in the Other Debentures) occurs
with respect to any Other Debentures.

 

(b)          Notice of an Event of Default; Redemption Right. Upon the
occurrence of an Event of Default with respect to this Debenture or any Other
Debenture, the Company shall within one (1) Business Day deliver written notice
thereof via facsimile and overnight courier (with next day delivery specified)
(an “Event of Default Notice”) to the Holder. At any time during the period
commencing on the earlier of the Holder’s receipt of an Event of Default Notice
and the Holder becoming aware of an Event of Default and, solely to the extent
the Company has delivered an Event of Default Notice with respect to each such
Event of Default then outstanding, and ending on the later of (x) the date all
such Events of Default have been cured and (y) the fifth (5th) calendar day
following the date of the last Event of Default Notice delivered to the Holder,
the Holder may require the Company to redeem all or any portion of this
Debenture by delivering written notice thereof (the “Event of Default Redemption
Notice”) to the Company, which Event of Default Redemption Notice shall indicate
the portion of this Debenture the Holder is electing to redeem. Each portion of
this Debenture subject to redemption by the Company pursuant to this Section
4(b) shall be redeemed by the Company at a price equal to the greater of (i) the
product of (A) the Conversion Amount to be redeemed multiplied by (B) the
Redemption Premium and (ii) the product of (X) the Conversion Rate with respect
to the Conversion Amount in effect at such time as the Holder delivers an Event
of Default Redemption Notice multiplied by (Y) the product of (1) the Redemption
Premium multiplied by (2) the greatest Closing Sale Price of the Common Stock on
any Trading Day during the period commencing on the fifth (5th) Trading Day
prior to the date of the Event of Default Redemption Notice and ending on the
Trading Day immediately prior to the date the Company makes the entire payment
required to be made under this Section 4(b) (the “Event of Default Redemption
Price”). Redemptions required by this Section 4(b) shall be made in accordance
with the provisions of Section 12. To the extent redemptions required by this
Section 4(b) are deemed or determined by a court of competent jurisdiction to be
prepayments of this Debenture by the Company, such redemptions shall be deemed
to be voluntary prepayments. Notwithstanding anything to the contrary in this
Section 4, but subject to Section 3(d), until the Event of Default Redemption
Price (together with any Late Charges thereon) is paid in full, the Conversion
Amount submitted for redemption under this Section 4(b) (together with any Late
Charges thereon) may be converted, in whole or in part, by the Holder into
Common Stock pursuant to the terms of this Debenture. In the event of the
Company’s redemption of any portion of this Debenture under this Section 4(b),
the Holder’s damages would be uncertain and difficult to estimate because of the
parties’ inability to predict future interest rates and the uncertainty of the
availability of a suitable substitute investment opportunity for the Holder.
Accordingly, any redemption premium due under this Section 4(b) is intended by
the parties to be, and shall be deemed, a reasonable estimate of the Holder’s
actual loss of its investment opportunity and not as a penalty.

 

9

 

 

5.           RIGHTS UPON FUNDAMENTAL TRANSACTION.

 

(a)          Assumption. If, at any time while this Debenture is outstanding (i)
the Company effects any merger or consolidation of the Company with or into
another Person, in which the Company is not the survivor or the stockholders of
the Company immediately prior to such merger or consolidation do not own,
directly or indirectly, at least 50% of the voting securities of the surviving
entity, (ii) the Company effects any sale of all or substantially all of its
assets or a majority of its Common Stock is acquired by a third party, in each
case, in one or a series of related transactions, (iii) any tender offer or
exchange offer (whether by the Company or another Person) is completed pursuant
to which all or substantially all of the holders of Common Stock are permitted
to tender or exchange their shares for other securities, cash or property, or
(iv) the Company effects 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 (other than
as a result of a subdivision or combination of shares of Common Stock covered by
Section 7(a) below) (in any such case, a “Fundamental Transaction”), then the
Holder shall have the right thereafter to receive, upon conversion of this
Debenture, the same amount and kind of securities, cash or property as it would
have been entitled to receive upon the occurrence of such Fundamental
Transaction if it had been, immediately prior to such Fundamental Transaction,
the holder of the number of shares of Common Stock then issuable upon conversion
in full of this Debenture without regard to any limitations on exercise
contained herein (the “Alternate Consideration”), and the Holder shall no longer
have the right to receive any shares of Common Stock upon conversion of this
Debenture. If holders of Common Stock are given any choice as to the securities,
cash or property to be received in a Fundamental Transaction, then the Holder
shall be given the same choice as to the Alternate Consideration it receives
upon any conversion of this Debenture following such Fundamental Transaction.
The Company shall not effect any such Fundamental Transaction unless prior to or
simultaneously with the consummation thereof, any successor to the Company,
surviving entity or the corporation purchasing or otherwise acquiring such
assets or other appropriate corporation or Person shall assume the obligation to
deliver to the Holder, such Alternate Consideration as, in accordance with the
foregoing provisions, the Holder may be entitled to receive, and the other
obligations under this Debenture. The provisions of this paragraph (c) shall
similarly apply to subsequent transactions of an analogous type to any
Fundamental Transaction. The Company shall cause any Successor Entity to assume
in writing all of the obligations of the Company under this Debenture and the
other Transaction Documents (as defined in the Purchase Agreement) in accordance
with the provisions of this Section 5(a) pursuant to written agreements in form
and substance reasonably satisfactory to the Holder and approved by the Holder
(without unreasonable delay) prior to such Fundamental Transaction and shall, at
the option of the holder of this Debenture, deliver to the Holder in exchange
for this Debenture a security of the Successor Entity evidenced by a written
instrument substantially similar in form and substance to this Debenture that is
convertible for a corresponding number of shares of capital stock of such
Successor Entity (or its parent entity) equivalent to the shares of Common Stock
acquirable and receivable upon conversion of this Debenture (without regard to
any limitations on the conversion of this Debenture) prior to such Fundamental
Transaction, and with a conversion price that applies the conversion price
hereunder to such shares of capital stock (but taking into account the relative
value of the shares of Common Stock pursuant to such Fundamental Transaction and
the value of such shares of capital stock, such number of shares of capital
stock and such conversion price being for the purpose of protecting the economic
value of this Debenture immediately prior to the consummation of such
Fundamental Transaction), and that is reasonably satisfactory in form and
substance to the Holder. Upon the occurrence of any such 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 Debenture 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 Debenture and the other Transaction Documents with the same effect as
if such Successor Entity had been named as the Company herein.

 

(b)          Other Corporate Events. In addition to and not in substitution for
any other rights hereunder, prior to the consummation of any Fundamental
Transaction pursuant to which holders of shares of Common Stock are entitled to
receive securities or other assets with respect to or in exchange for shares of
Common Stock (a “Corporate Event”), the Company shall make appropriate provision
to insure that the Holder will thereafter have the right to receive upon a
conversion of this Debenture (i) in addition to the shares of Common Stock
receivable upon such conversion, such securities or other assets to which the
Holder would have been entitled with respect to such shares of Common Stock had
such shares of Common Stock been held by the Holder upon the consummation of
such Corporate Event (without taking into account any limitations or
restrictions on the convertibility of this Debenture) or (ii) in lieu of the
shares of Common Stock otherwise receivable upon such conversion, such
securities or other assets received by the holders of shares of Common Stock in
connection with the consummation of such Corporate Event in such amounts as the
Holder would have been entitled to receive had this Debenture initially been
issued with conversion rights for the form of such consideration (as opposed to
shares of Common Stock) at a conversion rate for such consideration commensurate
with the Conversion Rate. Provision made pursuant to the preceding sentence
shall be in a form and substance reasonably satisfactory to the Holder. The
provisions of this Section 6 shall apply similarly and equally to successive
Corporate Events and shall be applied without regard to any limitations on the
conversion or redemption of this Debenture.

 

10

 

 

6.          RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.
In addition to any adjustments pursuant to Section 7 below, if at any time the
Company grants, issues or sells any Options, Convertible Securities or rights to
purchase stock, warrants, securities or other property pro rata to the record
holders of any class of Common Stock (the “Purchase Rights”), then the Holder
will be entitled to acquire, upon the terms applicable to such Purchase Rights,
the aggregate Purchase Rights which the Holder could have acquired if the Holder
had held the number of shares of Common Stock acquirable upon complete
conversion of this Debenture (without taking into account any limitations or
restrictions on the convertibility of this Debenture) immediately before the
date on which a record is taken for the grant, issuance or sale of such Purchase
Rights, or, if no such record is taken, the date as of which the record holders
of Common Stock are to be determined for the grant, issue or sale of such
Purchase Rights (provided, however, to the extent that the Holder’s right to
participate in any such Purchase Right would result in the Holder exceeding the
Maximum Percentage, then the Holder shall not be entitled to participate in such
Purchase Right to such extent (or beneficial ownership of such shares of Common
Stock as a result of such Purchase Right to such extent) and such Purchase Right
to such extent shall be held in abeyance for the Holder until such time, if
ever, as its right thereto would not result in the Holder exceeding the Maximum
Percentage).

 

7.           RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

 

(a)          Stock Dividends and Splits. If the Company, at any time while this
Debenture is outstanding, (i) pays a stock dividend on its Common Stock or
otherwise makes a distribution pro rata to the holders of any class of capital
stock that is payable in shares of Common Stock, (ii) subdivides its outstanding
shares of Common Stock into a larger number of shares, (iii) combines its
outstanding shares of Common Stock into a smaller number of shares or (iv)
issues by reclassification of shares of Common Stock any shares of capital stock
of the Company, then in each such case the Conversion Price shall be adjusted to
a price determined by multiplying the Conversion Price in effect immediately
prior to the effective date of such event by a fraction, the numerator of which
shall be the number of shares of Common Stock outstanding on such effective date
immediately before giving effect to such event and the denominator of which
shall be the number of shares of Common Stock outstanding immediately after
giving effect to such event. Any adjustment made pursuant to clause (i) of this
paragraph shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution,
and any adjustment pursuant to clause (ii), (iii) or (iv) of this paragraph
shall become effective immediately after the effective date of such subdivision,
combination or reclassification.

 

(b)          Pro Rata Distributions. If the Company, at any time while this
Debenture is outstanding, distributes to all holders of Common Stock for no
consideration (i) evidences of its indebtedness, (ii) any security (other than a
distribution of Common Stock covered by the preceding paragraph) or (iii) rights
or warrants to subscribe for or purchase any security, or (iv) any other asset,
including cash (in each case, “Distributed Property”), then, upon any conversion
of this Debenture that occurs after the record date fixed for determination of
stockholders entitled to receive such distribution, the Holder shall be entitled
to receive, in addition to the Conversion Shares otherwise issuable upon such
exercise (if applicable), the Distributed Property that such Holder would have
been entitled to receive in respect of such number of Conversion Shares had the
Holder been the record holder of such Conversion Shares immediately prior to
such record date.

 

8.          EXCHANGE RIGHT. In the event that the Company shall issue or sell
any shares of Common Stock, Convertible Securities, Options or any combination
thereof while this Debenture remains outstanding, the Holder shall have the
right to exchange this Debenture for such Common Stock, Convertible Securities,
Options or such combination thereof issued or sold by the Company. By way of
example, if the Company undertakes an offering of convertible securities along
with warrants, the Holder shall have the right to surrender this Debenture to
the Company in the exchange for the purchase of the units of convertible
securities and warrants (on a $1 for $1 basis).

 

9.          NONCIRCUMVENTION. The Company hereby covenants and agrees that the
Company will not, by amendment of its Certificate of Incorporation (as defined
in the Purchase Agreement), Bylaws (as defined in the Purchase Agreement) or
through any reorganization, transfer of assets, consolidation, merger, scheme of
arrangement, dissolution, issue or sale of securities, or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of this Debenture, and will at all times in good faith carry out all of the
provisions of this Debenture and take all action as may be required to protect
the rights of the Holder of this Debenture. Without limiting the generality of
the foregoing, the Company (i) shall not increase the par value of any shares of
Common Stock receivable upon conversion of this Debenture above the Conversion
Price then in effect, (ii) shall take all such actions as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and nonassessable shares of Common Stock upon the conversion of this Debenture,
and (iii) shall, so long as any of the Debentures are outstanding, take all
action necessary to reserve and keep available out of its authorized and
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the Debentures, the maximum number of shares of Common Stock as
shall from time to time be necessary to effect the conversion of the Debentures
then outstanding (without regard to any limitations on conversion).

 

11

 

 

10.         RESERVATION OF AUTHORIZED SHARES.

 

(a)          Reservation. The Company shall reserve a number of shares of Common
Stock for each of the Debentures equal to 100% of the entire Conversion Rate
with respect to the entire Conversion Amount of each such Debenture as of the
Issuance Date. So long as any of the Debentures are outstanding, the Company
shall take all action necessary to reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of effecting the
conversion of the Debentures, 100% of the number of shares of Common Stock as
shall from time to time be necessary to effect the conversion of all of the
Debentures then outstanding, provided that at no time shall the number of shares
of Common Stock so reserved be less than the number of shares required to be
reserved by the previous sentence (without regard to any limitations on
conversions) (the “Required Reserve Amount”). The initial number of shares of
Common Stock reserved for conversions of the Debentures and each increase in the
number of shares so reserved shall be allocated pro rata among the holders of
the Debentures based on the original principal amount of the Debentures held by
each holder on the Closing Date or increase in the number of reserved shares (as
the case may be) (the “Authorized Share Allocation”). In the event that a holder
shall sell or otherwise transfer any of such holder’s Debentures, each
transferee shall be allocated a pro rata portion of such holder’s Authorization
Share Allocation. Any shares of Common Stock reserved and allocated to any
Person which ceases to hold any Debentures shall be allocated to the remaining
holders of Debentures, pro rata based on the principal amount of the Debentures
then held by such holders.

 

(b)          Insufficient Authorized Shares. If, notwithstanding Section 10(a),
and not in limitation thereof, at any time while any of the Debentures remain
outstanding the Company does not have a sufficient number of authorized and
unreserved shares of Common Stock to satisfy its obligation to reserve for
issuance upon conversion of the Debentures at least a number of shares of Common
Stock equal to the Required Reserve Amount (an “Authorized Share Failure”), then
the Company shall immediately take all action necessary to increase the
Company’s authorized shares of Common Stock to an amount sufficient to allow the
Company to reserve the Required Reserve Amount for the Debentures then
outstanding. Without limiting the generality of the foregoing sentence, as soon
as practicable after the date of the occurrence of an Authorized Share Failure,
but in no event later than ninety (90) days after the occurrence of such
Authorized Share Failure, the Company shall hold a meeting of its stockholders
for the approval of an increase in the number of authorized shares of Common
Stock. In connection with such meeting, the Company shall provide each
stockholder with a proxy statement and shall use its best efforts to solicit its
stockholders’ approval of such increase in authorized shares of Common Stock and
to cause its board of directors to recommend to the stockholders that they
approve such proposal. In the event that the Company is prohibited from issuing
shares of Common Stock upon any conversion due to the failure by the Company to
have sufficient shares of Common Stock available out of the authorized but
unissued shares of Common Stock (such unavailable number of shares of Common
Stock, the “Authorization Failure Shares”), in lieu of delivering such
Authorization Failure Shares to the Holder, the Company shall pay cash in
exchange for the redemption of such portion of the Conversion Amount convertible
into such Authorization Failure Shares at a price equal to the sum of (i) the
product of (x) such number of Authorization Failure Shares and (y) the Closing
Sale Price on the Trading Day immediately preceding the date the Holder delivers
the applicable Conversion Notice with respect to such Authorization Failure
Shares to the Company and (ii) to the extent the Holder purchases (in an open
market transaction or otherwise) shares of Common Stock to deliver in
satisfaction of a sale by the Holder of Authorization Failure Shares, any
brokerage commissions and other out-of-pocket expenses, if any, of the Holder
incurred in connection therewith.

 

12

 

 

11.          REDEMPTIONS.

 

(a)          Event of Default. If the Company receives an Event of Default
Redemption Notice, the Company shall deliver the applicable Event of Default
Redemption Price to the Holder in cash within five (5) Business Days after the
Company’s receipt of the Holder’s Event of Default Redemption Notice. In the
event of a redemption of less than all of the Conversion Amount of this Note, if
requested by Holder, the Company shall promptly cause to be issued and delivered
to the Holder a new Debenture (in accordance with Section 18(d)) representing
the outstanding Principal which has not been redeemed. In the event that the
Company does not pay the applicable Redemption Price to the Holder within the
time period required, at any time thereafter and until the Company pays such
unpaid Redemption Price in full, the Holder shall have the option, in lieu of
redemption, to require the Company to promptly return to the Holder all or any
portion of this Debenture representing the Conversion Amount that was submitted
for redemption and for which the applicable Redemption Price (together with any
Late Charges thereon) has not been paid. Upon the Company’s receipt of such
notice, (x) the applicable Redemption Notice shall be null and void with respect
to such Conversion Amount, (y) the Company shall immediately return this
Debenture, or issue a new Debenture (in accordance with Section 18(d)), to the
Holder, and in each case the principal amount of this Debenture or such new
Debenture (as the case may be) shall be increased by an amount equal to any
accrued and unpaid Late Charges with respect thereto and (z) the Conversion
Price of this Debenture or such new Debentures (as the case may be) shall be
automatically adjusted with respect to each conversion effected thereafter by
the Holder to the applicable Event of Default Conversion Price. The Holder’s
delivery of a notice voiding a Redemption Notice and exercise of its rights
following such notice shall not affect the Company’s obligations to make any
payments of Late Charges which have accrued prior to the date of such notice
with respect to the Conversion Amount subject to such notice.

 

(b)          Redemption by Other Holders. Upon the Company’s receipt of notice
from any of the holders of the Other Debentures for redemption or repayment as a
result of an event or occurrence substantially similar to the events or
occurrences described in Section 4(b), Section 5(b) or Section 8 (each, an
“Other Redemption Notice”), the Company shall immediately, but no later than one
(1) Business Day of its receipt thereof, forward to the Holder by facsimile a
copy of such notice. If the Company receives a Redemption Notice and one or more
Other Redemption Notices, during the seven (7) Business Day period beginning on
and including the date which is three (3) Business Days prior to the Company’s
receipt of the Holder’s applicable Redemption Notice and ending on and including
the date which is three (3) Business Days after the Company’s receipt of the
Holder’s applicable Redemption Notice and the Company is unable to redeem all
principal, interest and other amounts designated in such Redemption Notice and
such Other Redemption Notices received during such seven (7) Business Day
period, then the Company shall redeem a pro rata amount from each holder of the
Debentures (including the Holder) based on the principal amount of the
Debentures submitted for redemption pursuant to such Redemption Notice and such
Other Redemption Notices received by the Company during such seven (7) Business
Day period.

 

(c)          Optional Redemption at Election of Company. Subject to the
provisions of this Section 11(c), at any time after the 36-month anniversary of
the Issuance Date if the Closing Bid Price on at least 15 out of 20 consecutive
Trading Days exceeds 200% of the then Conversion Price (the last such date, the
“Trigger Date”), so long as there then exists no Equity Conditions Failure, the
Company may, on one occasion only within one Trading Day of a Trigger Date,
deliver a notice to the Holder (an “Optional Redemption Notice” and the date
such notice is deemed delivered hereunder, the “Optional Redemption Notice
Date”) of its irrevocable election to redeem some or all of this Debenture for
cash by wire transfer of immediately available funds in an amount equal to all
outstanding Principal, accrued and unpaid Interest and accrued and unpaid Late
Charges on such Principal and Interest on the 20th Trading Day following the
Optional Redemption Notice Date (such date, the “Optional Redemption Date”, such
20 Trading Day period, the “Optional Redemption Period” and such redemption, the
“Optional Redemption”). The Optional Redemption Amount is payable in full on the
Optional Redemption Date. The Company may only effect an Optional Redemption if
each of the Equity Conditions shall have been met (unless waived in writing by
the Holder) on each Trading Day during the period commencing on the Optional
Redemption Notice Date through to the Optional Redemption Date and through and
including the date payment of the Optional Redemption Amount is actually made in
full. If there is an Equity Conditions Failure at any time during the Optional
Redemption Period, then the Holder may elect to nullify the Optional Redemption
Notice by notice to the Company within 3 Trading Days after the first day on
which any such Equity Condition has not been met (provided that if, by a
provision of the Transaction Documents, the Company is obligated to notify the
Holder of the non-existence of an Equity Condition, such notice period shall be
extended to the third Trading Day after proper notice from the Company) in which
case the Optional Redemption Notice shall be null and void, ab initio. The
Company covenants and agrees that it will honor all Notices of Conversion
tendered from the time of delivery of the Optional Redemption Notice through the
date all amounts owing thereon are due and paid in full. The Company’s
determination to pay an Optional Redemption in cash shall be applied according
to each Holder’s Holder Pro Rata Amount.

 

13

 

 

(d)          Holder Redemption Upon Issuance of Securities. In the event that
the Company shall, directly or indirectly, offer, sale, grant any option to
purchase, or other disposition of (or announcement of any offer, sale, grant or
any option to purchase or other disposition of) any of its or its Subsidiaries'
equity or equity equivalent securities, including without limitation any debt,
preferred stock or other instrument or security that is, at any time during its
life and under any circumstances, convertible into or exchangeable or
exercisable for Common Stock or Common Stock Equivalents (“Subsequent Offering”)
while this Debenture remains outstanding, the Company shall offer to the Holder
the right to cause the Company to use up to 20% of the gross proceeds of such
Subsequent Offering (“Subsequent Offering Redemption Amount”) to be used to
redeem (“Subsequent Offering Redemption”) this Debenture (if other Debenture
holders exercise their right to redeem hereunder, the Holder shall be entitled
to their Holder Pro Rata Amount (but based on participating Holders) of the
Subsequent Offering Redemption Amount) in an amount equal to all outstanding
Principal, accrued and unpaid Interest and accrued and unpaid Late Charges on
such Principal and Interest (“Base Redemption Amount”); provided, however, if a
Subsequent Offering occurs (x) prior to the 9 month anniversary of the Issuance
Date or (y) at the time of such Subsequent Offering there is an Equity
Conditions Failure, then the redemption price hereunder shall be equal to the
greater of (1) the Base Redemption Amount and (2) an amount equal to the number
of Conversion Shares underlying the portion of this Debenture (and interest and
Late Charges, if any) subject to a Subsequent Offering Redemption Amount times
the public offering price of the Common Stock issued or issuable upon conversion
(as to Convertible Securities)(if no public offering price can be determined,
the closing bid price immediately prior to the announcement of the Subsequent
Offering). The Company shall provide the Holder with written notice of a
Subsequent Offering Redemption on the earlier of the 3rd Trading Day prior to
the closing of the Subsequent Offering, which notice shall include the closing
date and Subsequent Offering Amount, and the date that such Subsequent Offering
is publicly disclosed and the Holder shall make its election on or before the
Trading Day immediately prior to such Closing Date. Payment of the Subsequent
Offering Redemption Amount shall be made directly out of the closing proceeds of
the Subsequent Offering in cash by wire transfer of immediately available funds.
The Company covenants and agrees that it will honor all Notices of Conversion
tendered from the time of delivery of the notice of Subsequent Offering
Redemption through the date all amounts owing thereon are due and paid in full.

 

12.         VOTING RIGHTS. The Holder shall have no voting rights as the holder
of this Debenture, except as required by law (including, without limitation, the
Delaware General Corporation Law) and as expressly provided in this Debenture.

 

13.         COVENANTS. Until this Debenture has been converted, redeemed or
otherwise satisfied in accordance with their terms:

 

(a)          Rank. All payments due under this Debenture (a) shall rank pari
passu with all Other Debentures and (b) shall be senior to all other
Indebtedness of the Company and its Subsidiaries other than Permitted Senior
Indebtedness.

 

(b)          Incurrence of Indebtedness. Other than Permitted Indebtedness, the
Company shall not, and the Company shall cause each of its Subsidiaries to not,
directly or indirectly, enter into, incur or guarantee, assume or suffer to
exist any Indebtedness for borrowed money of any kind, including, but not
limited to, a guarantee.

 

(c)          Existence of Liens. Other than Permitted Liens, the Company shall
not, directly or indirectly, enter into, allow or suffer to exist any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by the Company
or hereafter acquired or any interest therein or any income or profits therefrom
(collectively, “Liens”).

 

14

 

 

(d)          Restriction on Redemption and Cash Dividends. The Company shall
not, and the Company shall cause each of its Subsidiaries to not, directly or
indirectly, redeem, repurchase or declare or pay any cash dividend or cash
distribution on any of its capital stock, other than (i) repurchases of stock
from former employees, directors, or consultants of the Company under the terms
of applicable repurchase agreements at the original issuance price of such
securities in an aggregate amount not to exceed $250,000 in any fiscal year,
provided that no Event of Default has occurred, is continuing or would exist
after giving effect to the repurchases, (ii) in connection with a reverse stock
split, (iii) pursuant to employee, director or consultant repurchase plans or
other similar agreements or plans, (iv) dividends paid or distributions made by
a Subsidiary to the Company, and (v) payments by the Company in cash, in lieu of
the issuance of fractional shares, upon the exercise of warrants or upon the
conversion or exchange of equity interests of the Company; provided, however, in
the case of clauses (i) and (iii) above the repurchase or redemption price does
not exceed the original consideration paid for such stock or equity interest.

 

(e)          Restriction on Transfer of Assets. The Company shall not, directly
or indirectly, sell, lease, license, assign, transfer, spin-off, split-off,
close, convey or otherwise dispose of any material portion of the 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 $500,000 in any twelve (12) month period, (ii) sales
of inventory in the ordinary course of business, (iii) licenses of intellectual
property rights of the Company for fair value in an arm’s length transaction in
the ordinary course of its business, (iv) sales of non-inventory equipment not
needed for the Company’s business to one or more third parties for fair value in
an arm’s length transaction, (v) sales of non-inventory equipment to one or more
third parties for fair value in an arm’s length transaction, the proceeds of
which are used to purchase replacement or other assets useful in the Company’s
business within twelve months of such sale, and (vi) without duplication,
Permitted Transfers under (and as defined in) the Loan and Security Agreement
referred to in the definition of “Permitted Senior Indebtedness.”

 

(f)          Maturity of Indebtedness. The Company shall not, and the Company
shall cause each of its Subsidiaries to not, directly or indirectly, permit any
Indebtedness of the Company or any of the Subsidiaries to mature or accelerate
prior to the final Maturity Date.

 

(g)          Change in Nature of Business. The Company shall not, and the
Company shall cause each of its Subsidiaries to not, directly or indirectly,
engage in any material line of business substantially different from those lines
of business conducted by the Company and each of its Subsidiaries on the
Issuance Date or any business substantially related or incidental thereto.

 

(h)          Preservation of Existence, Etc. The Company shall maintain and
preserve, and cause each of its Subsidiaries (other than TranS1 GmbH) to
maintain and preserve, its existence, rights and privileges, and become or
remain, and cause each of such Subsidiaries to 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, except where the failure to be so qualified
or in good standing, as the case may be, would not have or reasonably be
expected to result in a material adverse effect on the business, assets,
operations (including results thereof), liabilities, properties, condition
(including financial condition) or prospects of the Company and such
Subsidiaries, taken as a whole.

 

(i)          Maintenance of Properties, Etc. The Company shall maintain and
preserve, and cause each of its Subsidiaries (other than TranS1 GmbH) to
maintain and preserve, all of its material properties which are necessary or
useful in the proper conduct of its business in good working order and
condition, ordinary wear and tear excepted, and comply, and cause each of such
Subsidiaries to comply, at all times with the material provisions of all leases
to which it is a party as lessee or under which it occupies property, so as to
prevent any loss or forfeiture thereof or thereunder.

 

15

 

 

(j)          Maintenance of Intellectual Property. The Company will, and will
cause each of its Subsidiaries (other than TranS1 GmbH) to, take all action
reasonably necessary or advisable to maintain all of the Intellectual Property
Rights (as defined in the Purchase Agreement) of the Company and/or any of such
Subsidiaries that are necessary or material to the conduct of its business in
full force and effect.

 

(k)          Maintenance of Insurance. The Company shall maintain, and cause
each of its Subsidiaries (other than TranS1 GmbH) to maintain, insurance with
responsible and reputable insurance companies or associations (including,
without limitation, comprehensive general liability, hazard, rent and business
interruption insurance) with respect to its properties (including all real
properties leased or owned by it) and business, in such amounts and covering
such risks as is required by any governmental authority having jurisdiction with
respect thereto or as is carried generally in accordance with sound business
practice by companies in similar businesses similarly situated.

 

(l)          Transactions with Affiliates. The Company shall not, nor shall it
permit any of its Subsidiaries to, enter into, renew, extend or be a party to,
any transaction or series of related transactions (including, without
limitation, the purchase, sale, lease, transfer or exchange of property or
assets of any kind or the rendering of services of any kind) with any Affiliate,
except (i) in the ordinary course of business in a manner and to an extent
consistent with past practice and necessary or desirable for the prudent
operation of its business, for fair consideration and on terms no less favorable
to it or its Subsidiaries than would be obtainable in a comparable arm's length
transaction with a Person that is not an Affiliate thereof or (ii) if
pre-approved by the Audit Committee of the Company’s Board of Directors in
accordance with its Charter.

 

(m)         Restricted Issuances. The Company shall not, directly or indirectly,
without the prior written consent of the holders of a majority in aggregate
principal amount of the Debentures then outstanding, (i) issue any Debentures
(other than as contemplated by the Purchase Agreement and the Debentures) or
(ii) issue any other securities that would cause a breach or default under the
Debentures.

 

14.         [Intentionally Omitted]

 

15.         [Intentionally Omitted]

 

16.         AMENDING THE TERMS OF THIS DEBENTURE. The Debentures may be amended
or supplemented with the consent of the Holders of at least sixty-seven percent
(67%) in principal amount of the Debentures then outstanding (excluding any
Debentures held by the Company or any of its Subsidiaries); provided, however,
that without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Debentures held by a non-consenting Holder): (a) reduce the
principal amount of Debentures whose Holders must consent to an amendment,
supplement or waiver; (b) reduce the principal of or change the fixed maturity
of any Debenture or alter the provisions, or waive any payment, with respect to
the redemption of the Debentures; (c) reduce the rate of or change the time for
payment of interest on any Debenture; (d) change the Conversion Price, Share
Delivery Deadlines or other material term relating to payments or deliveries
made in connection with the exercise of the rights herein; or (e) make any
change in the preceding amendment and waiver provisions. No consideration shall
be offered or paid to the Holder to adversely amend or consent to an adverse
waiver or modification of any provision of this Debenture unless the same
consideration is also offered to all of the holders of the Other Debentures.

 

17.         TRANSFER. This Debenture and any shares of Common Stock issued upon
conversion of this Debenture may be offered, sold, assigned or transferred by
the Holder without the consent of the Company, subject only to the provisions of
Section 4.1 of the Purchase Agreement.

 

18.         REISSUANCE OF THIS DEBENTURE.

 

(a)          Transfer. Subject to the provisions of Section 4.1 of the Purchase
Agreement, if this Debenture is to be transferred, the Holder shall surrender
this Debenture to the Company, whereupon the Company will forthwith issue and
deliver upon the order of the Holder a new Debenture (in accordance with Section
19(d)), registered as the Holder may request, representing the outstanding
Principal being transferred by the Holder and, if less than the entire
outstanding Principal is being transferred, a new Debenture (in accordance with
Section 19(d)) to the Holder representing the outstanding Principal not being
transferred. The Holder and any assignee, by acceptance of this Debenture,
acknowledge and agree that, by reason of the provisions of Section 3(c)(iii)
following conversion or redemption of any portion of this Debenture, the
outstanding Principal represented by this Debenture may be less than the
Principal stated on the face of this Debenture.

 

16

 

 

(b)          Lost, Stolen or Mutilated Debenture. Upon receipt by the Company of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of this Debenture (as to which a written certification and the
indemnification contemplated below shall suffice as such evidence), and, in the
case of loss, theft or destruction, of any indemnification undertaking by the
Holder to the Company in customary and reasonable form and, in the case of
mutilation, upon surrender and cancellation of this Debenture, the Company shall
execute and deliver to the Holder a new Debenture (in accordance with Section
19(d)) representing the outstanding Principal.

 

(c)          Debenture Exchangeable for Different Denominations. This Debenture
is exchangeable, upon the surrender hereof by the Holder at the principal office
of the Company, for a new Debenture or Debentures (in accordance with Section
19(d) and in principal amounts of at least $1,000) representing in the aggregate
the outstanding Principal of this Debenture, and each such new Debenture will
represent such portion of such outstanding Principal as is designated by the
Holder at the time of such surrender.

 

(d)          Issuance of New Debentures. Whenever the Company is required to
issue a new Debenture pursuant to the terms of this Debenture, such new
Debenture (i) shall be of like tenor with this Debenture, (ii) shall represent,
as indicated on the face of such new Debenture, the Principal remaining
outstanding (or in the case of a new Debenture being issued pursuant to Section
19(a) or Section 19(c), the Principal designated by the Holder which, when added
to the principal represented by the other new Debentures issued in connection
with such issuance, does not exceed the Principal remaining outstanding under
this Debenture immediately prior to such issuance of new Debentures), (iii)
shall have an issuance date, as indicated on the face of such new Debenture,
which is the same as the Issuance Date of this Debenture, (iv) shall have the
same rights and conditions as this Debenture, and (v) shall represent accrued
and unpaid Interest and Late Charges on the Principal and Interest of this
Debenture, from the Issuance Date.

 

19.         REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND
INJUNCTIVE RELIEF. The remedies provided in this Debenture shall be cumulative
and in addition to all other remedies available under this Debenture and any of
the other Transaction Documents at law or in equity (including a decree of
specific performance and/or other injunctive relief), and nothing herein shall
limit the Holder’s right to pursue actual and consequential damages for any
failure by the Company to comply with the terms of this Debenture. The Company
covenants to the Holder that there shall be no characterization concerning this
instrument other than as expressly provided herein. Amounts set forth or
provided for herein with respect to payments, conversion and the like (and the
computation thereof) shall be the amounts to be received by the Holder and shall
not, except as expressly provided herein, be subject to any other obligation of
the Company (or the performance thereof). The Company acknowledges that a breach
by it of its obligations hereunder will cause irreparable harm to the Holder and
that the remedy at law for any such breach may be inadequate. The Company
therefore agrees that, in the event of any such breach or threatened breach, the
Holder shall be entitled, in addition to all other available remedies, to an
injunction restraining any such breach or any such threatened breach, without
the necessity of showing economic loss and without any bond or other security
being required. The Company shall provide all information and documentation to
the Holder that is requested by the Holder to enable the Holder to confirm the
Company’s compliance with the terms and conditions of this Debenture (including,
without limitation, compliance with Section 7).

 

20.         PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this
Debenture is placed in the hands of an attorney for collection or enforcement or
is collected or enforced through any legal proceeding or the Holder otherwise
takes action to collect amounts due under this Debenture or to enforce the
provisions of this Debenture or (b) there occurs any bankruptcy, reorganization,
receivership of the Company or other proceedings affecting Company creditors’
rights and involving a claim under this Debenture, then the Company shall pay
the costs incurred by the Holder for such collection, enforcement or action or
in connection with such bankruptcy, reorganization, receivership or other
proceeding, including, without limitation, attorneys’ fees, financial advisors
and disbursements. The Company expressly acknowledges and agrees that no amounts
due under this Debenture shall be affected, or limited, by the fact that the
purchase price paid for this Debenture was less than the original Principal
amount hereof.

 

17

 

 

21.         CONSTRUCTION; HEADINGS. This Debenture shall be deemed to be jointly
drafted by the Company and the Holder and shall not be construed against any
Person as the drafter hereof. The headings of this Debenture are for convenience
of reference and shall not form part of, or affect the interpretation of, this
Debenture. Terms used in this Debenture but defined in the other Transaction
Documents shall have the meanings ascribed to such terms on the Closing Date in
such other Transaction Documents unless otherwise consented to in writing by the
Holder.

 

22.         FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of
the Holder in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privilege. No waiver shall be effective unless it is
in writing and signed by an authorized representative of the waiving party.

 

23.         DISPUTE RESOLUTION. In the case of a dispute as to the determination
of the Conversion Price, the Interest Conversion Price, the Closing Sale Price
or fair market value (as the case may be) or the arithmetic calculation of the
Conversion Rate or the applicable Redemption Price (as the case may be), the
Company or the Holder (as the case may be) shall submit the disputed
determinations or arithmetic calculations (as the case may be) to the other
party via facsimile (i) within two (2) Business Days after receipt of the
applicable notice giving rise to such dispute to the Company or the Holder (as
the case may be) or (ii) if no notice gave rise to such dispute, at any time
after the Holder learned of the circumstances giving rise to such dispute. If
the Holder and the Company are unable to agree upon such determination or
calculation within two (2) Business Days of such disputed determination or
arithmetic calculation (as the case may be) being submitted to the Company or
the Holder (as the case may be), then the Company shall, within two (2) Business
Days, submit via facsimile (a) the disputed determination of the Conversion
Price, the Interest Conversion Price, the Closing Sale Price or fair market
value (as the case may be) to an independent, reputable investment bank selected
by the Company and approved by the Holder or (b) the disputed arithmetic
calculation of the Conversion Rate or any Redemption Price (as the case may be)
to the Company’s independent, outside accountant. The Company shall cause at its
expense the investment bank or the accountant (as the case may be) to perform
the determinations or calculations (as the case may be) and notify the Company
and the Holder of the results no later than ten (10) Business Days from the time
it receives such disputed determinations or calculations (as the case may be).
Such investment bank’s or accountant’s determination or calculation (as the case
may be) shall be binding upon all parties absent demonstrable error.

 

24.         NOTICES; CURRENCY; PAYMENTS.

 

(a)          Notices. Whenever notice is required to be given under this
Debenture, unless otherwise provided herein, such notice shall be given in
accordance with Section 6.3 of the Purchase Agreement. The Company shall provide
the Holder with prompt written notice of all actions taken pursuant to this
Debenture, including in reasonable detail a description of such action and the
reason therefore. Without limiting the generality of the foregoing, the Company
will give written notice to the Holder (i) immediately upon any adjustment of
the Conversion Price, setting forth in reasonable detail, and certifying, the
calculation of such adjustment and (ii) at least fifteen (15) days prior to the
date on which the Company closes its books or takes a record (A) with respect to
any dividend or distribution upon the Common Stock, (B) with respect to any
grant, issuances, or sales of any Options, Convertible Securities or rights to
purchase stock, warrants, securities or other property to holders of shares of
Common Stock or (C) for determining rights to vote with respect to any
Fundamental Transaction, dissolution or liquidation, provided in each case that
such information shall be made known to the public prior to or in conjunction
with such notice being provided to the Holder.

 

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(b)          Currency. All dollar amounts referred to in this Debenture are in
United States Dollars (“U.S. Dollars”), and all amounts owing under this
Debenture shall be paid in U.S. Dollars. All amounts denominated in other
currencies (if any) shall be converted into the U.S. Dollar equivalent amount in
accordance with the Exchange Rate on the date of calculation. “Exchange Rate”
means, in relation to any amount of currency to be converted into U.S. Dollars
pursuant to this Debenture, the U.S. Dollar exchange rate as published in the
Wall Street Journal on the relevant date of calculation (it being understood and
agreed that where an amount is calculated with reference to, or over, a period
of time, the date of calculation shall be the final date of such period of
time).

 

(c)          Payments. Whenever any payment of cash is to be made by the Company
to any Person pursuant to this Debenture, unless otherwise expressly set forth
herein, such payment shall be made in lawful money of the United States of
America by a certified check drawn on the account of the Company and sent via
overnight courier service to such Person at such address as previously provided
to the Company in writing (which address, in the case of each of the initial
purchasers of Debentures, shall initially be as set forth on the applicable
signature pages to the Purchase Agreement), provided that the Holder may elect
to receive a payment of cash via wire transfer of immediately available funds by
providing the Company with prior written notice setting out such request and the
Holder’s wire transfer instructions. Whenever any amount expressed to be due by
the terms of this Debenture is due on any day which is not a Business Day, the
same shall instead be due on the next succeeding day which is a Business Day.
Any amount of Principal or other amounts due under the Transaction Documents
which is not paid when due shall result in a late charge being incurred and
payable by the Company in an amount equal to interest on such amount at the rate
of eighteen percent (18%) per annum from the date such amount was due until the
same is paid in full (“Late Charge”).

 

25.         CANCELLATION. After all Principal, accrued Interest, Late Charges
and other amounts at any time owed on this Debenture have been paid in full,
this Debenture shall automatically be deemed canceled, shall be surrendered to
the Company for cancellation and shall not be reissued.

 

26.         WAIVER OF NOTICE. To the extent permitted by law, the Company hereby
irrevocably waives demand, notice, presentment, protest and all other demands
and notices in connection with the delivery, acceptance, performance, default or
enforcement of this Debenture and the Purchase Agreement.

 

27.         GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY,
ENFORCEMENT AND INTERPRETATION OF THIS DEBENTURE SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF. EACH OF THE
COMPANY AND THE HOLDER HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION
OF THE STATE AND FEDERAL COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF
MANHATTAN, FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION
HEREWITH OR WITH ANY TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN
(INCLUDING WITH RESPECT TO THE ENFORCEMENT OF ANY OF THE TRANSACTION DOCUMENTS),
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. EACH OF THE COMPANY AND THE HOLDER HEREBY IRREVOCABLY WAIVES
PERSONAL SERVICE OF PROCESS AND CONSENTS TO PROCESS BEING SERVED IN ANY SUCH
SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF VIA REGISTERED OR CERTIFIED
MAIL OR OVERNIGHT DELIVERY (WITH EVIDENCE OF DELIVERY) TO SUCH PERSON AT THE
ADDRESS IN EFFECT FOR NOTICES TO IT UNDER THE PURCHASE AGREEMENT AND AGREES THAT
SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE
THEREOF. NOTHING CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT
TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. EACH OF THE COMPANY AND THE
HOLDER HEREBY WAIVES ALL RIGHTS TO A TRIAL BY JURY.

 

19

 

 

28.         JUDGEMENT CURRENCY.

 

(a)          If for the purpose of obtaining or enforcing judgment against the
Company in any court in any jurisdiction it becomes necessary to convert into
any other currency (such other currency being hereinafter in this Section 28
referred to as the “Judgment Currency”) an amount due in U.S. dollars under this
Debenture, the conversion shall be made at the Exchange Rate prevailing on the
Trading Day immediately preceding:

 

(i)          the date actual payment of the amount due, in the case of any
proceeding in the courts of New York or in the courts of any other jurisdiction
that will give effect to such conversion being made on such date: or

 

(ii)         the date on which the foreign court determines, in the case of any
proceeding in the courts of any other jurisdiction (the date as of which such
conversion is made pursuant to this Section 28(a)(ii) being hereinafter referred
to as the “Judgment Conversion Date”).

 

(b)          If in the case of any proceeding in the court of any jurisdiction
referred to in Section 28(a)(ii) above, there is a change in the Exchange Rate
prevailing between the Judgment Conversion Date and the date of actual payment
of the amount due, the applicable party shall pay such adjusted amount as may be
necessary to ensure that the amount paid in the Judgment Currency, when
converted at the Exchange Rate prevailing on the date of payment, will produce
the amount of US dollars which could have been purchased with the amount of
Judgment Currency stipulated in the judgment or judicial order at the Exchange
Rate prevailing on the Judgment Conversion Date.

 

(c)          Any amount due from the Company under this provision shall be due
as a separate debt and shall not be affected by judgment being obtained for any
other amounts due under or in respect of this Debenture.

 

29.         MAXIMUM PAYMENTS. Without limiting Section 6.11 of the Purchase
Agreement, nothing contained herein shall be deemed to establish or require the
payment of a rate of interest or other charges in excess of the maximum
permitted by applicable law. In the event that the rate of interest required to
be paid or other charges hereunder exceed the maximum permitted by such law, any
payments in excess of such maximum shall be credited against amounts owed by the
Company to the Holder and thus refunded to the Company.

 

30.         CERTAIN DEFINITIONS. For purposes of this Debenture, the following
terms shall have the following meanings:

 

(a)          “Bloomberg” means Bloomberg, L.P.

 

(b)          “Business Day” means any day other than Saturday, Sunday or other
day on which commercial banks in The City of New York are authorized or required
by law to remain closed.

 

(c)          “Closing Bid Price” and “Closing Sale Price” means, for any
security as of any date, the last closing bid price and last closing trade
price, respectively, 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 bid price or the closing trade price
(as the case may be) then the last bid price or last trade price, respectively,
of such security prior to 4:00:00 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 closing bid price or last trade price,
respectively, 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 closing bid price or last trade price,
respectively, of such security in the over-the-counter market on the electronic
bulletin board for such security as reported by Bloomberg, or, if no closing bid
price or 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. (formerly Pink Sheets LLC). If the Closing Bid Price or the
Closing Sale Price cannot be calculated for a security on a particular date on
any of the foregoing bases, the Closing Bid Price or the Closing Sale Price (as
the case may be) of such security on such date shall be the fair market value as
mutually determined by the Company and the Holder. If the Company and the Holder
are unable to agree upon the fair market value of such security, then such
dispute shall be resolved in accordance with the procedures in Section 24. All
such determinations shall be appropriately adjusted for any stock dividend,
stock split, stock combination or other similar transaction during such period.

 

20

 

 

(f)          “Closing Date” shall have the meaning set forth in the Purchase
Agreement, which date is the date the Company initially issued Debentures
pursuant to the terms of the Purchase Agreement.

 

(g)          “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.

 

(h)          “Contingent Obligation” means, as to any Person, any direct or
indirect liability, contingent or otherwise, of that Person with respect to any
indebtedness, lease, dividend or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the primary
effect thereof, is to provide assurance to the obligee of such liability that
such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be
protected (in whole or in part) against loss with respect thereto.

 

(i)          “Convertible Securities” means any stock or other security (other
than Options) that is at any time and under any circumstances, directly or
indirectly, convertible into, exercisable or exchangeable for, or which
otherwise entitles the holder thereof to acquire, any shares of Common Stock.

 

(j)          “Current Subsidiary” means any Person in which the Company on the
Issuance Date, directly or indirectly, (i) owns any of the outstanding capital
stock or holds any equity or similar interest of such Person or (ii) controls or
operates all or any part of the business, operations or administration of such
Person, and all of the foregoing, collectively, “Current Subsidiaries.”

 

(k)          “Dollar Failure” means, with respect to a particular date of
determination, that the aggregate dollar trading volume (as reported on
Bloomberg) of the Common Stock on the Eligible Market on which the Common Stock
is listed or designated for quotation as of such date of determination over the
ten (10) consecutive Trading Day period ending on the Trading Day immediately
preceding such date of determination is less than $10,000 per Trading Day.

 

(l)          “Eligible Market” means The New York Stock Exchange, the NYSE MKT
LLC, the Nasdaq Global Select Market, the Nasdaq Capital Market or the Principal
Market.

 

21

 

 

(m)          “Equity Conditions” means: (i) on each day during the period
beginning on the later of one month prior to the applicable date of
determination and the Effectiveness Deadline, and ending on and including the
applicable date of determination either (x) one or more Registration Statements
filed pursuant to the Registration Rights Agreement shall be effective and the
prospectus contained therein shall be available for the resale by the Holder of
all of the Registrable Securities (which, solely for clarification purposes,
includes all shares of Common Stock issuable upon conversion of this Debenture
or otherwise pursuant to the terms of this Debenture) in accordance with the
terms of the Registration Rights Agreement and there shall not have been during
such period any Grace Periods (as defined in the Registration Rights Agreement)
or (y) all Registrable Securities shall be eligible for sale pursuant to Rule
144 without the need for registration under any applicable federal or state
securities laws (in each case, disregarding any limitation on conversion of the
Debentures, other issuance of securities with respect to the Debentures) and no
Current Information Failure (as defined in the Registration Rights Agreement)
exists or is continuing; (ii) on each day during the period beginning one month
prior to the applicable date of determination and ending on and including the
applicable date of determination (the “Equity Conditions Measuring Period”), the
Common Stock (including all Registrable Securities) is listed or designated for
quotation (as applicable) on an Eligible Market and shall not have been
suspended from trading on an Eligible Market (other than suspensions of not more
than two (2) days and occurring prior to the applicable date of determination
due to business announcements by the Company) nor shall delisting or suspension
by an Eligible Market have been threatened (with a reasonable prospect of
delisting occurring) or pending either (A) in writing by such Eligible Market or
(B) by falling below the minimum listing maintenance requirements of the
Eligible Market on which the Common Stock is then listed or designated for
quotation (as applicable); (iii) on each day during the Equity Conditions
Measuring Period, the Company shall have delivered all shares of Common Stock
issuable upon conversion of this Debenture on a timely basis as set forth in
Section 3 hereof and all other shares of capital stock required to be delivered
by the Company on a timely basis as set forth in the other Transaction
Documents; (iv) any shares of Common Stock to be issued in connection with the
event requiring determination may be issued in full without violating Section
3(d) hereof; (v) any shares of Common Stock to be issued in connection with the
event requiring determination may be issued in full without violating the rules
or regulations of the Eligible Market on which the Common Stock is then listed
or designated for quotation (as applicable); (vi) on each day during the Equity
Conditions Measuring Period, no public announcement of a pending, proposed or
intended Fundamental Transaction shall have occurred which has not been
abandoned, terminated or consummated; (vii) the Company shall have no knowledge
of any fact that would reasonably be expected to cause (1) any Registration
Statement required to be filed pursuant to the Registration Rights Agreement to
not be effective or the prospectus contained therein to not be available for the
resale of all of the Registrable Securities in accordance with the terms of the
Registration Rights Agreement or (2) any Registrable Securities to not be
eligible for sale pursuant to Rule 144 without the need for registration under
any applicable federal or state securities laws (in each case, disregarding any
limitation on conversion of the Debentures, other issuance of securities with
respect to the Debentures) and no Current Information Failure exists or is
continuing; (viii) the Holder shall not be in possession of any material,
non-public information provided to it by the Company, any of its affiliates or
any of their respective employees, officers, representatives, agents or the
like; (ix) on each day during the Equity Conditions Measuring Period, the
Company otherwise shall have been in compliance with each, and shall not have
materially breached any provision, covenant, representation or warranty of any
Transaction Document; (x) no Volume Failure, Dollar Failure or Price Failure
exists; and (xi) on each day during the Equity Conditions Measuring Period,
there shall not have occurred an Event of Default or an event that with the
passage of time or giving of notice would constitute an Event of Default.

 

(n)          “Equity Conditions Failure” means that on any day during the period
commencing ten (10) Trading Days prior to the applicable Interest Notice Date or
Option Redemption Date (as the case may be) through the later of the applicable
Interest Date or Optional Redemption Date (as the case may be) and the date on
which the applicable shares of Common Stock are actually delivered to the
Holder, the Equity Conditions have not been satisfied (or waived in writing by
the Holder).

 

(o)          “Fundamental Transaction” has the meaning set forth in Section
5(a).

 

(p)          “GAAP” means United States generally accepted accounting
principles, consistently applied.

 

(q)          “Holder Pro Rata Amount” means a fraction (i) the numerator of
which is the initial Principal amount of this Debenture on the Closing Date and
(ii) the denominator of which is the aggregate principal amount of all
Debentures issued to the initial purchasers of Debentures (or their successors
and assigns) pursuant to the Purchase Agreement on the Closing Date.

 

(r)          “Indebtedness” of any Person means, without duplication (i) all
indebtedness for borrowed money, (ii) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services, including
(without limitation) “capital leases” in accordance with generally accepted
accounting principles (other than trade payables entered into in the ordinary
course of business), (iii) all reimbursement or payment obligations with respect
to letters of credit, surety bonds and other similar instruments, (iv) all
obligations evidenced by notes, bonds, debentures or similar instruments, and
(v) all Contingent Obligations in respect of indebtedness or obligations of
others of the kinds referred to in clauses (i) through (iv) above.

 

(s)          “Interest Conversion Price” means, with respect to any Interest
Date that price which shall be the lower of (i) the applicable Conversion Price
and (ii) the price computed as 90% of the quotient of (I) the sum of the VWAP of
the Common Stock for each of the Trading Days during the ten (10) consecutive
Trading Day period ending and including the Trading Day immediately prior to
such Interest Date, divided by (II) ten (10) (such period, the “Interest
Measuring Period”). All such determinations to be appropriately adjusted for any
stock dividend, stock split, stock combination, reclassification or similar
transaction that proportionately decreases or increases the Common Stock during
such Interest Measuring Period.

 

22

 

 

(t)          “Interest Rate” means the greater of (1) 10% plus LIBOR and (2)
11.0%, as may be adjusted from time to time in accordance with Section 2.

 

(u)          “LIBOR” means the London Interbank Offered Rate.

 

(v)         “Maturity Date” shall be comprised of sixteen (16) Trading Days
which shall be the first Trading Day of each calendar quarter commencing on
March 31, 2015; provided, however, the Maturity Date may be extended at the
option of the Holder in the event that, and for so long as, an Event of Default
shall have occurred and be continuing or any event shall have occurred and be
continuing that with the passage of time and the failure to cure would result in
an Event of Default.

 

(w)          “New Subsidiary” means, as of any date of determination, any Person
in which the Company after the Subscription Date, directly or indirectly, (i)
owns or acquires any of the outstanding capital stock or holds any equity or
similar interest of such Person or (ii) controls or operates all or any part of
the business, operations or administration of such Person, and all of the
foregoing, collectively, “New Subsidiaries.”

 

(x)          “Options” means any rights, warrants or options to subscribe for or
purchase shares of Common Stock or Convertible Securities.

 

(y)          “Parent Entity” of a Person means an entity that, directly or
indirectly, controls the applicable Person and whose common stock or equivalent
equity security is quoted or listed on an Eligible Market, or, if there is more
than one such Person or Parent Entity, the Person or Parent Entity with the
largest public market capitalization as of the date of consummation of the
Fundamental Transaction.

 

(z)          “Permitted Indebtedness” means (i) Indebtedness evidenced by this
Debenture and the Other Debentures, (ii) Permitted Senior Indebtedness, (iii)
Indebtedness consisting of trade payables incurred in the ordinary course of
business, (v) Permitted Subordinated Indebtedness, and (vi) without duplication,
other Permitted Indebtedness under (and as defined in) the Loan and Security
Agreement referred to in the definition of “Permitted Senior Indebtedness.”

 

(aa)         “Permitted Liens” means (i) 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, (ii) 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, (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) Liens (A) upon or in any equipment
acquired or held by the Company or any of its Subsidiaries to secure the
purchase price of such equipment or indebtedness incurred solely for the purpose
of financing the acquisition or lease of such equipment, or (B) existing on such
equipment at the time of its acquisition, provided that the Lien is confined
solely to the property so acquired and improvements thereon, and the proceeds of
such equipment, in either case, with respect to indebtedness in an aggregate
amount not to exceed $50,000, (v) Liens incurred in connection with the
extension, renewal or refinancing of the indebtedness secured by Liens of the
type described in clause (iv) above, provided that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the Indebtedness being extended, renewed or
refinanced does not increase, (vi) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payments of custom duties in
connection with the importation of goods, (vii) Liens arising from judgments,
decrees or attachments in circumstances not constituting an Event of Default
under Section 4(a), (viii) any Lien securing Permitted Senior Indebtedness, (ix)
any Lien securing Permitted Subordinated Indebtedness, and (x) without
duplication, any other Permitted Lien under (and as defined in) the Loan and
Security Agreement referred to in the definition of “Permitted Senior
Indebtedness.”

 

23

 

 

(bb)         “Permitted Senior Indebtedness” means the principal of (and
premium, if any), interest on, and all fees and other amounts (including,
without limitation, any reasonable out-of-pocket costs, enforcement expenses
(including reasonable out-of-pocket legal fees and disbursements), collateral
protection expenses and other reimbursement or indemnity obligations relating
thereto) payable by Company and/or its Subsidiaries under or in connection with
the Loan and Security Agreement dated as of December 3, 2013, between the
Company and Hercules Technology Growth Capital, Inc., and with the Securities
Purchase Agreement, dated as of March 11, 2014, among the Company and the other
parties thereto, in each case as amended, modified, supplemented, restated,
replaced, or refinanced from time to time; provided, that the principal amount
of such Permitted Senior Indebtedness does not exceed $15,000,000 and the terms
of such Permitted Senior Indebtedness are not modified except as permitted
pursuant to the Hercules Subordination Agreement.

 

(cc)         “Permitted Subordinated Indebtedness” means Indebtedness incurred
by the Company that is made expressly subordinate in right of payment to the
Indebtedness evidenced by this Debenture, and the other Debentures as reflected
in a written agreement acceptable to the Required Holders, and which
Indebtedness does not provide at any time for (1) the payment, prepayment,
repayment, repurchase or defeasance, directly or indirectly, of any principal or
premium, if any, thereon until ninety-one (91) days after final Maturity Date or
later and (2) total interest and fees at a rate in excess of twelve percent
(12.0%) per annum.

 

(dd)         “Person” means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization, any other entity or a government or any department or agency
thereof.

 

(ee)         “Price Failure” means, with respect to a particular date of
determination, that the quotient of (I) the sum of the VWAP of the Common Stock
for each Trading Day in the thirty (30) consecutive Trading Day period ending
and including the Trading Day immediately preceding such date of determination,
divided by (II) thirty (30) is less than $0.02 (as adjusted for stock splits,
stock dividends, stock combinations or other similar transactions).

 

(ff)          “Principal Market” means the trading market on which the Common
Stock is primarily listed on and quoted for trading, which, as of the date of
this Agreement and the Closing Date, shall be the NASDAQ Global Market.

 

(gg)         “Redemption Notices” means, collectively, the Event of Default
Redemption Notices and the Change of Control Redemption Notices, and each of the
foregoing, individually, a “Redemption Notice.”

 

(hh)         “Redemption Premium” means in the case of the Events of Default
described in Section 4(a), 110%.

 

(ii)          “Redemption Prices” means, collectively, Event of Default
Redemption Prices, and each of the foregoing, individually, a “Redemption
Price.”

 

(jj)         “Registration Rights Agreement” means that certain registration
rights agreement, dated as of the Closing Date, by and among the Company and the
initial Holders of the Debentures relating to, among other things, the
registration of the resale of the Common Stock issuable upon conversion of the
Debentures or otherwise pursuant to the terms of the Debentures, as may be
amended from time to time.

 

(kk)         “SEC” means the United States Securities and Exchange Commission or
the successor thereto.

 

24

 

 

(ll)          “Purchase Agreement” means that certain securities purchase
agreement, dated as of the Subscription Date, by and among the Company and the
initial Holders of the Debentures pursuant to which the Company issued the
Debentures, as may be amended from time to time.

 

(mm)        “Subscription Date” means September __ 2014.

 

(nn)         “Subsidiaries” means, as of any date of determination,
collectively, all Current Subsidiaries and all New Subsidiaries, and each of the
foregoing, individually, a “Subsidiary.”

 

(oo)         “Successor Entity” means the Person (or, if so elected by the
Holder, the Parent Entity) formed by, resulting from or surviving any
Fundamental Transaction or the Person (or, if so elected by the Holder, the
Parent Entity) with which such Fundamental Transaction shall have been entered
into.

 

(pp)         “Trading Day” means any day on which the Common Stock is traded on
the Principal Market, or, if the Principal Market is not the principal trading
market for the Common Stock, then on the principal securities exchange or
securities 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 exchange or 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
exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or 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.

 

(qq)         “Volume Failure” means, with respect to a particular date of
determination, the average daily volume (as reported on Bloomberg) of the Common
Stock on the Eligible Market on which the Common Stock is listed or designated
for quotation as of such date of determination on any Trading Day during the
thirty (30) consecutive Trading Day period ending on the Trading Day immediately
preceding such date of determination is less than $100,000 Trading Day, as to
Section 2(a) and Section 11(c).

 

(rr)         “VWAP” means, for any security as of any date, the dollar
volume-weighted average price for such security on the Principal Market (or, if
the Principal Market is not the principal trading market for such security, then
on the principal securities exchange or securities market on which such security
is then traded) during the period beginning at 9:30:01 a.m., New York time, and
ending at 4:00:00 p.m., New York time, as reported by Bloomberg through its
“Volume at Price” function or, if the foregoing does not apply, the dollar
volume-weighted average price of such security in the over-the-counter market on
the electronic bulletin board for such security during the period beginning at
9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York time, as
reported by Bloomberg, or, if no dollar volume-weighted average price is
reported for such security by Bloomberg for such hours, the average of the
highest closing bid price and the lowest closing ask price of any of the market
makers for such security as reported in the “pink sheets” by OTC Markets Group
Inc. (formerly Pink Sheets LLC). If the VWAP cannot be calculated for such
security on such date on any of the foregoing bases, the VWAP of such security
on such date shall be the fair market value as mutually determined by the
Company and the Holder. If the Company and the Holder are unable to agree upon
the fair market value of such security, then such dispute shall be resolved in
accordance with the procedures in Section 24. All such determinations shall be
appropriately adjusted for any stock dividend, stock split, stock combination or
other similar transaction during such period.

 

31.         DISCLOSURE. Upon receipt or delivery by the Company of any notice in
accordance with the terms of this Debenture, unless the Company has in good
faith determined that the matters relating to such notice do not constitute
material, non-public information relating to the Company or any of its
Subsidiaries, the Company shall within one (1) Business Day after any such
receipt or delivery publicly disclose such material, non-public information on a
Current Report on Form 8-K or otherwise. In the event that the Company believes
that a notice contains material, non-public information relating to the Company
or any of its Subsidiaries, the Company so shall indicate to such Holder
contemporaneously with delivery of such notice, and in the absence of any such
indication, the Holder shall be allowed to presume that all matters relating to
such notice do not constitute material, non-public information relating to the
Company or its Subsidiaries. Nothing contained in this Section 31 shall limit
any obligations of the Company, or any rights of the Holder, under Section 4.5
of the Purchase Agreement.

 

25

 

 

32.         SUBORDINATION. Notwithstanding anything herein to the contrary, to
the extent that any provision of the Subordination Agreements conflicts with any
provision of this Debenture, including, but not limited to, any provision of
this Debenture otherwise requiring the Company to pay any amount in cash to the
Holder while the Permitted Senior Indebtedness is outstanding, such provision of
the Subordination Agreements shall control.

 

[signature page follows]

 

26

 

 

IN WITNESS WHEREOF, the Company has caused this Debenture to be duly executed as
of the Issuance Date set out above.

 

  BAXANO SURGICAL, INC.         By:       Name:     Title:

 

27

 

 

EXHIBIT I

 

BAXANO SURGICAL, INC.
CONVERSION NOTICE

 

[To be executed by the Holder to exercise the right to convert the Debenture
into shares of Common Stock]

 

To: Baxano Surgical, Inc.

 

(1)         The undersigned is the Holder of a Debenture in aggregate principal
amount of $               (the “Debenture”) issued by Baxano Surgical, Inc., a
Delaware corporation (the “Company”). Capitalized terms used herein and not
otherwise defined herein have the respective meanings set forth in the
Debenture.

 

(2)         In accordance with and pursuant to the Debenture, the undersigned
hereby elects to convert the Conversion Amount (as defined in the Debenture) of
the Debenture indicated below into shares of common stock, par value $0.0001 per
share, of the Company, as of the date specified below.

 

Date of Conversion       Aggregate Principal to be converted       Aggregate
accrued and unpaid Interest and accrued and unpaid Late Charges with respect to
such portion of Aggregate Principal and such Aggregate Interest to be converted
      AGGREGATE CONVERSION AMOUNT TO BE CONVERTED  

 

Please confirm the following information:

 

Conversion Price       Number of shares of Common Stock to be issued  

 

Please issue the Common Stock into which the Debenture is being converted in the
following name and to the following addressee:

 

Issued to: _________________________________

 

Facsimile Number: __________________________

 

Account Number: ___________________________

(if electronic book entry transfer)

 

Transfer Code Number: ______________________

 

 

 

 

The undersigned hereby executes and delivery this Conversion Notice as of the
date set forth below:

  

Holder:    By:    Its:   

(Signature must conform in all respects to name of Holder as specified on the
face of the Warrant)

 

Dated:

 

ACKNOWLEDGEMENT

 

The Company hereby acknowledges this Conversion Notice and hereby directs
American Stock Transfer & Trust Company, LLC to issue the above indicated number
of shares of Common Stock in accordance with the Irrevocable Transfer Agent
Instructions dated [ ˜ ], 2014, from the Company and acknowledged and agreed to
by American Stock Transfer & Trust Company, LLC.

 

  BAXANO SURGICAL, INC.         By:     Name:     Title:  

 

 

 

  

Exhibit B

 

Form of Registration Rights Agreement

 

 

 

 

 

REGISTRATION RIGHTS AGREEMENT

 

This Registration Rights Agreement (this “Agreement”) is made and entered into
as of September 24, 2014, by and among Baxano Surgical, Inc., a Delaware
corporation (the “Company”), and the several purchasers signatory hereto (each a
“Purchaser” and collectively, the “Purchasers”).

 

This Agreement is made pursuant to the Securities Purchase Agreement, dated as
of the date hereof between the Company and each Purchaser (the “Purchase
Agreement”).

 

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Agreement, and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the Company and each of the
Purchasers agree as follows:

 

1.           Definitions. Capitalized terms used and not otherwise defined
herein that are defined in the Purchase Agreement shall have the meanings given
such terms in the Purchase Agreement. As used in this Agreement, the following
terms shall have the following meanings:

 

“Advice” has the meaning set forth in Section 6(d).

 

“Affiliate” means, with respect to any person, any other person which directly
or indirectly controls, is controlled by, or is under common control with, such
person.

 

“Agreement” has the meaning set forth in the Preamble.

 

“Business Day” means a day, other than a Saturday or Sunday, on which banks in
New York City are open for the general transaction of business.

 

“Closing Date” has the meaning set forth in the Purchase Agreement.

 

“Commission” means the Securities and Exchange Commission.

 

“Common Stock” means the common stock of the Company, par value $0.0001 per
share, and any securities into which such common stock may hereinafter be
reclassified.

 

“Company” has the meaning set forth in the Preamble.

 

“Conversion Shares” means the shares of Common Stock issued or issuable upon
conversion of the Debentures.

 

“Debentures” means the subordinated convertible debentures issued by the Company
pursuant to the Purchase Agreement.

 

“Effective Date” means the date that the Registration Statement filed pursuant
to Section 2(a) is first declared effective by the Commission.

 

 

 

 

“Effectiveness Deadline” means, with respect to the Initial Registration
Statement or the New Registration Statement, the sixtieth (60th) calendar day
following the Closing Date (or, in the event the Commission reviews and has
written comments to the Initial Registration Statement or the New Registration
Statement, the ninetieth (90th) calendar day following the Closing Date);
provided, however, that if the Company is notified by the Commission that the
Initial Registration Statement or the New Registration Statement will not be
reviewed or is no longer subject to further review and comments, the
Effectiveness Deadline as to such Registration Statement shall be the fifth
(5th) Trading Day following the date on which the Company is so notified if such
date precedes the dates otherwise required above; provided, further, that if the
Effectiveness Deadline falls on a Saturday, Sunday or other day that the
Commission is closed for business, the Effectiveness Deadline shall be extended
to the next Business Day on which the Commission is open for business.

 

“Effectiveness Period” has the meaning set forth in Section 2(b).

 

“Event” has the meaning set forth in Section 2(c).

 

“Event Date” has the meaning set forth in Section 2(c).

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.

 

“Filing Deadline” means, with respect to the Initial Registration Statement
required hereunder, the 30th calendar day following the date hereof and, with
respect to any additional Registration Statements which may be required pursuant
to Section 2(a) or Section 3(c), the earliest practical date on which the
Company is permitted by SEC Guidance to file such additional Registration
Statement related to the Registrable Securities, provided, however, that if the
Filing Deadline falls on a Saturday, Sunday or other day that the Commission is
closed for business, the Filing Deadline shall be extended to the next Business
Day on which the Commission is open for business.

 

“Holder” or “Holders” means the holder or holders, as the case may be, from time
to time of Registrable Securities.

 

“Indemnified Party” has the meaning set forth in Section 5(c).

 

“Indemnifying Party” has the meaning set forth in Section 5(c).

 

“Initial Registration Statement” means the initial Registration Statement filed
pursuant to Section 2(a) of this Agreement.

 

“Interest Shares” means those shares of Common Stock issuable to a Holder as
payment for interest pursuant to a Debenture.

 

“Liquidated Damages” has the meaning set forth in Section 2(c).

 

“Losses” has the meaning set forth in Section 5(a).

 

“New Registration Statement” has the meaning set forth in Section 2(a).

 

2

 

 

“Person” means an individual or corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability company, joint
stock company, government (or an agency or subdivision thereof) or other entity
of any kind.

 

“Principal Market” means the Trading Market on which the Common Stock is
primarily listed on and quoted for trading, which, as of the Closing Date, shall
be the NASDAQ Global Market.

 

“Proceeding” means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition).

 

“Prospectus” means the prospectus included in a Registration Statement
(including, without limitation, a prospectus that includes any information
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A promulgated under the Securities Act), as
amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of the Registrable Securities covered by a
Registration Statement, and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference or deemed to be incorporated by reference in such Prospectus.

 

“Purchase Agreement” has the meaning set forth in the Recitals.

 

“Purchaser” or “Purchasers” has the meaning set forth in the Preamble.

 

“Registrable Securities” means all of (i) the Conversion Shares, (ii) the
Interest Shares, and (iii) any securities issued or issuable upon any stock
split, dividend or other distribution, recapitalization or similar event with
respect to the foregoing, provided, that with respect to a particular Holder,
such Holder’s Conversion Shares and Interest Shares shall cease to be
Registrable Securities upon the earliest to occur of the following: (A) a sale
pursuant to a Registration Statement or Rule 144 under the Securities Act (in
which case, only such security sold by the Holder shall cease to be a
Registrable Security); or (B) becoming eligible for resale by the Holder under
Rule 144 without the requirement for the Company to be in compliance with the
current public information required thereunder and without volume or
manner-of-sale restrictions, pursuant to a written opinion letter to such
effect, addressed, delivered and acceptable to the Transfer Agent.

 

“Registration Statements” means any one or more registration statements of the
Company filed under the Securities Act that covers the resale of any of the
Registrable Securities pursuant to the provisions of this Agreement (including
without limitation the Initial Registration Statement, the New Registration
Statement and any Remainder Registration Statements), including (in each case)
the amendments and supplements to such Registration Statements, including pre-
and post-effective amendments thereto, all exhibits and all material
incorporated by reference or deemed to be incorporated by reference in such
Registration Statements.

 

“Remainder Registration Statements” has the meaning set forth in Section 2(a).

 

3

 

 

“Rule 144” means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.

 

“Rule 415” means Rule 415 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.

 

“Rule 424” means Rule 424 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.

 

“SEC Guidance” means (i) any publicly-available written or oral guidance,
comments, requirements or requests of the Commission staff, provided that any
such oral guidance, comments, requirements, or requests are reduced to writing
by the Commission, and (ii) the Securities Act.

 

“Securities Act” means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.

 

“Selling Stockholder Questionnaire” means a questionnaire in the form attached
as Annex B hereto.

 

“Trading Day” means (i) a day on which the Common Stock is listed or quoted and
traded on its Principal Market (other than the OTC Bulletin Board), or (ii) if
the Common Stock is not listed on a Trading Market (other than the OTC Bulletin
Board), a day on which the Common Stock is traded in the over-the-counter
market, as reported by the OTC Bulletin Board, or (iii) if the Common Stock is
not quoted on any Trading Market, a day on which the Common Stock is quoted in
the over-the-counter market as reported in the “pink sheets” by Pink Sheets LLC
(or any similar organization or agency succeeding to its functions of reporting
prices); provided, that in the event that the Common Stock is not listed or
quoted as set forth in (i), (ii) and (iii) hereof, then Trading Day shall mean a
Business Day.

 

“Trading Market” means whichever of the New York Stock Exchange, the NYSE Amex
Equities (formerly the American Stock Exchange), the NASDAQ Global Select
Market, the NASDAQ Global Market, the NASDAQ Capital Market or OTC Bulletin
Board on which the Common Stock is listed or quoted for trading on the date in
question.

 

“Transfer Agent” has the meaning set forth in the Purchase Agreement.

 

4

 

 

2.           Registration.

 

(a)          On or prior to the initial Filing Deadline, the Company shall
prepare and file with the Commission a Registration Statement covering the
resale of all of the Registrable Securities not already covered by an existing
and effective Registration Statement for an offering to be made on a continuous
basis pursuant to Rule 415 or, if Rule 415 is not available for offers and sales
of the Registrable Securities, by such other means of distribution of
Registrable Securities as the Holders may reasonably specify (the “Initial
Registration Statement”). The Initial Registration Statement shall be on Form
S-3 (except if the Company is then ineligible to register for resale the
Registrable Securities on Form S-3, in which case such registration shall be on
such other form available to register for resale the Registrable Securities as a
secondary offering) subject to the provisions of Section 2(e) and shall contain
(except if otherwise required pursuant to written comments received from the
Commission upon a review of such Registration Statement) a “Plan of
Distribution” section substantially in the form attached hereto as Annex A
(which may be modified to respond to comments, if any, provided by the
Commission). Notwithstanding the registration obligations set forth in this
Section 2, in the event the Commission informs the Company that all of the
Registrable Securities cannot, as a result of the application of Rule 415, be
registered for resale as a secondary offering on a single registration
statement, the Company agrees to promptly (i) inform each of the holders thereof
and use its commercially reasonable efforts to file amendments to the Initial
Registration Statement as required by the Commission and/or (ii) withdraw the
Initial Registration Statement and file a new registration statement (a “New
Registration Statement”), in either case covering the maximum number of
Registrable Securities permitted to be registered by the Commission, on Form S-3
or such other form available to register for resale the Registrable Securities
as a secondary offering; provided, however, that prior to filing such amendment
or New Registration Statement, the Company shall be obligated to use its
commercially reasonable efforts to advocate with the Commission for the
registration of all of the Registrable Securities in accordance with the SEC
Guidance, including without limitation, Interpretive Response 612.09 of the
Commission’s Securities Act Rules Compliance and Disclosure Interpretations.
Notwithstanding any other provision of this Agreement and subject to the payment
of liquidated damages in Section 2(c), if any SEC Guidance sets forth a
limitation of the number of Registrable Securities permitted to be registered on
a particular Registration Statement as a secondary offering (and notwithstanding
that the Company used diligent efforts to advocate with the Commission for the
registration of all or a greater number of Registrable Securities), unless
otherwise directed in writing by a Holder as to its Registrable Securities, the
number of Registrable Securities to be registered on such Registration Statement
will first be reduced by Registrable Securities not acquired pursuant to the
Purchase Agreement (whether pursuant to registration rights or otherwise),
second by Registrable Securities represented by Interest Shares (applied, in the
case that some Interest Shares may be registered, to the Holders on a pro rata
basis based on the total number of unregistered Interest Shares held by such
Holders), and third by Registrable Securities represented by Conversion Shares
(applied, in the case that some Conversion Shares may be registered, to the
Holders on a pro rata basis based on the total number of unregistered Conversion
Shares held by such Holders, subject to a determination by the Commission that
certain Holders must be reduced first based on the number of Conversion Shares
held by such Holders). In the event the Company amends the Initial Registration
Statement or files a New Registration Statement, as the case may be, under
clauses (i) or (ii) above, the Company will use its commercially reasonable
efforts to file with the Commission, as promptly as allowed by Commission or SEC
Guidance provided to the Company or to registrants of securities in general, one
or more registration statements on Form S-3 or such other form available to
register for resale those Registrable Securities that were not registered for
resale on the Initial Registration Statement, as amended, or the New
Registration Statement (the “Remainder Registration Statements”).

 

5

 

 

(b)          The Company shall use its best efforts to cause each Registration
Statement to be declared effective by the Commission as soon as practicable and,
with respect to the Initial Registration Statement or the New Registration
Statement, as applicable, no later than the Effectiveness Deadline (including
filing with the Commission a request for acceleration of effectiveness in
accordance with Rule 461 promulgated under the Securities Act), and shall use
its commercially reasonable efforts to keep each Registration Statement
continuously effective under the Securities Act until the earlier of (i) such
time as all of the Registrable Securities covered by such Registration Statement
have been publicly sold by the Holders or (ii) such time that all of the
Registrable Securities may be sold without volume or manner-of-sale restrictions
pursuant to Rule 144 and without the requirement for the Company to be in
compliance with the current public information requirement under Rule 144, as
determined by the counsel to the Company pursuant to a written opinion letter to
such effect, addressed and acceptable to the Transfer Agent and the affected
Holders (the “Effectiveness Period”). The Company shall telephonically request
effectiveness of a Registration Statement as of 5:00 P.M. New York City time on
a Trading Day. The Company shall promptly notify the Holders via facsimile or
electronic mail of a “.pdf” format data file of the effectiveness of a
Registration Statement on the same Trading Day that the Company telephonically
confirms effectiveness with the Commission, which date of confirmation shall
initially be the date requested for effectiveness of such Registration
Statement. The Company shall, by 9:30 A.M. New York City time on the first
Trading Day after the Effective Date, file a final Prospectus with the
Commission, as required by Rule 424(b).

 

(c)          If: (i) the Initial Registration Statement is not filed with the
Commission on or prior to the Filing Deadline, (ii) a Registration Statement
registering for resale all of the Registrable Securities is not declared
effective by the Commission by the Effectiveness Deadline of the Initial
Registration Statement or (iii) after its Effective Date, (A) such Registration
Statement ceases for any reason (including without limitation by reason of a
stop order, or the Company’s failure to update the Registration Statement) to
remain continuously effective as to all Registrable Securities included in such
Registration Statement or (B) the Holders are not permitted to utilize the
Prospectus therein to resell such Registrable Securities for any reason (other
than due to a change in the “Plan of Distribution” or the inaccuracy of any
information regarding the Holders), in each case, for more than an aggregate of
twenty (20) consecutive calendar days or twenty-five (25) calendar days (which
need not be consecutive days) during any twelve (12) month period, (iv) if none
of the Initial Registration Statement, the New Registration Statement or a
Remainder Registration Statement is effective and the Company fails to satisfy
the current public information requirement pursuant to Rule 144(c)(1) as a
result of which the Holders who are not affiliates are unable to sell
Registrable Securities without restriction under Rule 144 (or any successor
thereto) or (v) prior to the effective date of a Registration Statement, the
Company fails to file a pre-effective amendment and otherwise respond in writing
to comments made by the Commission in respect of such Registration Statement
within ten (10) Trading Days after the receipt of comments by or notice from the
Commission that such amendment is required in order for such Registration
Statement to be declared effective or (vi) the Company fails to file with the
Commission a request for acceleration of a Registration Statement in accordance
with Rule 461 promulgated by the Commission pursuant to the Securities Act,
within five (5) Trading Days of the date that the Company is notified (orally or
in writing, whichever is earlier) by the Commission that such Registration
Statement will not be “reviewed” or will not be subject to further review, (any
such failure or breach in clauses (i) through (vi) above being referred to as an
“Event,” and, for purposes of clauses (i), (ii) or (iv), the date on which such
Event occurs, and for purposes of clause (iii), the date on which such twenty
(20) or twenty-five (25) calendar day period is exceeded, and for purposes of
clause (v) the date on which such ten (10) Trading Day period is exceeded, and
for purposes of clause (vi), the date on which such five Trading Day period is
exceeded, being referred to as an “Event Date”), then, in addition to any other
rights the Holders may have hereunder or under applicable law, on each such
Event Date and on each monthly anniversary of each such Event Date (if the
applicable Event shall not have been cured by such date) until the applicable
Event is cured, the Company shall pay to each Holder an amount in cash, as
partial liquidated damages (“Liquidated Damages”) and not as a penalty, equal to
the product of 1.0% of the aggregate Subscription Amount paid by such Holder
pursuant to the Purchase Agreement. If the Company fails to pay any Liquidated
Damages pursuant to this Section 2(c) in full within five (5) Business Days
after the date payable, the Company will pay interest thereon at a rate of one
and one-half percent (1.5%) per month (or such lesser maximum amount that is
permitted to be paid by applicable law) to the Holder, accruing daily from the
date such Liquidated Damages are due until such amounts, plus all such interest
thereon, are paid in full. Unless otherwise specified in this Section 2(c), the
Liquidated Damages pursuant to the terms hereof shall apply on a daily pro-rata
basis for any portion of a month prior to the cure of an Event, except in the
case of the first Event Date. Notwithstanding the foregoing, nothing shall
preclude any Holder from pursuing or obtaining any available remedies at law,
specific performance or other equitable relief with respect to this Section 2(c)
in accordance with applicable law.

 

6

 

 

(d)          Each Holder agrees to furnish to the Company a completed Selling
Stockholder Questionnaire not more than five (5) Trading Days following the date
of this Agreement. If a Holder of Registrable Securities returns a Selling
Stockholder Questionnaire or a request for further information, in either case,
after its respective deadline, the Company shall use its commercially reasonable
efforts to take such actions as are required to name such Holder as a selling
security holder in the Registration Statement or any pre-effective or
post-effective amendment thereto and to include (to the extent not theretofore
included) in the Registration Statement the Registrable Securities identified in
such late Selling Stockholder Questionnaire or request for further information.
Each Holder acknowledges and agrees that the information in the Selling
Stockholder Questionnaire or request for further information as described in
this Section 2(d) will be used by the Company in the preparation of the
Registration Statement and hereby consents to the inclusion of such information
in the Registration Statement.

 

(e)          In the event that Form S-3 is not  available for the registration
of the resale of Registrable Securities hereunder, the Company shall (i)
register the resale of the Registrable Securities on another appropriate form
reasonably acceptable to the Holders and (ii) undertake to register the
Registrable Securities on Form S-3 promptly after such form is available,
provided that the Company shall maintain the effectiveness of the Registration
Statement then in effect until such time as a Registration Statement on Form S-3
covering the Registrable Securities has been declared effective by the
Commission.

 

3.           Registration Procedures

 

In connection with the Company's registration obligations hereunder, the Company
shall:

 

7

 

 

(a)          Not less than five (5) Trading Days prior to the filing of each
Registration Statement and not less than one (1) Trading Day prior to the filing
of any related Prospectus or any amendment or supplement thereto (except for
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports
on Form 8-K and any similar or successor reports), (i) furnish to the Holder
copies of such Registration Statement, Prospectus or amendment or supplement
thereto, as proposed to be filed, which documents will be subject to the review
of such Holder (it being acknowledged and agreed that if a Holder does not
object to or comment on the aforementioned documents within such five (5)
Trading Day or one (1) Trading Day period, as the case may be, then the Holder
shall be deemed to have consented to and approved the use of such documents) and
(ii) use commercially reasonable efforts to cause its officers and directors,
counsel and independent registered public accountants to respond to such
inquiries as shall be necessary, in the reasonable opinion of respective counsel
to each Holder, to conduct a reasonable investigation within the meaning of the
Securities Act. The Company shall not file any Registration Statement or
Prospectus or any amendment or supplement thereto in a form to which a Holder
reasonably objects in good faith, provided that, the Company is notified of such
objection in writing within the five (5) Trading Day or one (1) Trading Day
period described above, as applicable.

 

(b)          (i) Prepare and file with the Commission such amendments (including
post-effective amendments) and supplements, to each Registration Statement and
the Prospectus used in connection therewith as may be necessary to keep such
Registration Statement continuously effective as to the applicable Registrable
Securities for its Effectiveness Period; (ii) cause the related Prospectus to be
amended or supplemented by any required Prospectus supplement (subject to the
terms of this Agreement), and, as so supplemented or amended, to be filed
pursuant to Rule 424; (iii) respond as promptly as reasonably practicable to any
comments received from the Commission with respect to each Registration
Statement or any amendment thereto and, as promptly as reasonably possible,
provide the Holders true and complete copies of all correspondence from and to
the Commission relating to such Registration Statement that pertains to the
Holders as “Selling Stockholders” but not any comments that would result in the
disclosure to the Holders of material and non-public information concerning the
Company; and (iv) comply with the provisions of the Securities Act and the
Exchange Act with respect to the disposition of all Registrable Securities
covered by a Registration Statement until such time as all of such Registrable
Securities cease to be Registrable Securities or shall have been disposed of
(subject to the terms of this Agreement) in accordance with the intended methods
of disposition by the Holders thereof as set forth in such Registration
Statement as so amended or in such Prospectus as so supplemented. In the case of
amendments and supplements to a Registration Statement which are required to be
filed pursuant to this Agreement (including pursuant to this Section 3(b)) by
reason of the Company filing a report on Form 10-K, Form 10-Q or Form 8-K or any
analogous report under the Exchange Act, the Company shall have incorporated
such report by reference into such Registration Statement, if applicable, or
shall file such amendments or supplements with the Commission on the same day on
which the Exchange Act report which created the requirement for the Company to
amend or supplement such Registration Statement was filed.

 

8

 

 

(c)          Notify the Holders (which notice shall, pursuant to clauses (iii)
through (v) hereof, be accompanied by an instruction to suspend the use of the
Prospectus until the requisite changes have been made) as promptly as reasonably
practicable (and, in the case of (i)(A) below, not less than one (1) Trading Day
prior to such filing) and (if requested by any such Person) confirm such notice
in writing no later than one (1) Trading Day following the day: (i)(A) when a
Prospectus or any Prospectus supplement or post-effective amendment to a
Registration Statement is proposed to be filed; (B) when the Commission notifies
the Company whether there will be a “review” of such Registration Statement and
whenever the Commission comments in writing on any Registration Statement (in
which case the Company shall provide to each of the Holders true and complete
copies of all comments that pertain to the Holders as a “Selling Stockholder” or
to the “Plan of Distribution” and all written responses thereto, but not
information that the Company believes would constitute material and non-public
information); and (C) with respect to each Registration Statement or any
post-effective amendment, when the same has become effective; (ii) of any
request by the Commission or any other federal or state governmental authority
for amendments or supplements to a Registration Statement or Prospectus or for
additional information that pertains to the Holders as “Selling Stockholders” or
the “Plan of Distribution”; (iii) of the issuance by the Commission or any other
federal or state governmental authority of any stop order suspending the
effectiveness of a Registration Statement covering any or all of the Registrable
Securities or the initiation of any Proceedings for that purpose; (iv) of the
receipt by the Company of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Registrable
Securities for sale in any jurisdiction, or the initiation or threatening of any
Proceeding for such purpose; and (v) of the occurrence of any event or passage
of time that makes the financial statements included in a Registration Statement
ineligible for inclusion therein or any statement made in such Registration
Statement or Prospectus or any document incorporated or deemed to be
incorporated therein by reference untrue in any material respect or that
requires any revisions to such Registration Statement, Prospectus or other
documents so that, in the case of such Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein (in the case of any Prospectus, form of prospectus
or supplement thereto, in light of the circumstances under which they were
made), not misleading.

 

(d)          Use best efforts to avoid the issuance of, or, if issued, obtain
the withdrawal of (i) any order suspending the effectiveness of a Registration
Statement, or (ii) any suspension of the qualification (or exemption from
qualification) of any of the Registrable Securities for sale in any
jurisdiction, as soon as practicable.

 

(e)          If requested by a Holder, furnish to such Holder, without charge,
at least one conformed copy of each Registration Statement and each amendment
thereto and all exhibits to the extent requested by such Person (including those
previously furnished or incorporated by reference) promptly after the filing of
such documents with the Commission; provided, that the Company shall have no
obligation to provide any document pursuant to this clause that is available on
the Commission’s EDGAR system.

 

(f)          Prior to any resale of Registrable Securities by a Holder, use its
best efforts to register or qualify or cooperate with the selling Holders in
connection with the registration or qualification (or exemption from the
registration or qualification) of such Registrable Securities for the resale by
the Holder under the securities or Blue Sky laws of such jurisdictions within
the United States as any Holder reasonably requests in writing, to keep each
registration or qualification (or exemption therefrom) effective during the
Effectiveness Period and to do any and all other acts or things reasonably
necessary to enable the disposition in such jurisdictions of the Registrable
Securities covered by each Registration Statement; provided, that the Company
shall not be required to qualify generally to do business in any jurisdiction
where it is not then so qualified, subject the Company to any material tax in
any such jurisdiction where it is not then so subject or file a general consent
to service of process in any such jurisdiction.

 

9

 

 

(g)          If requested by a Holder, cooperate with such Holder to facilitate
the timely preparation and delivery of certificates representing Registrable
Securities to be delivered to a transferee pursuant to the Registration
Statement, which certificates shall be free, to the extent permitted by the
Purchase Agreement and under law, of all restrictive legends, and to enable such
Registrable Securities to be in such denominations and registered in such names
as any such Holders may request.

 

(h)          Following the occurrence of any event contemplated by Section 3(c),
as promptly as reasonably practicable (taking into account the Company’s good
faith assessment of any adverse consequences to the Company and its stockholders
of the premature disclosure of such event), prepare a supplement or amendment,
including a post-effective amendment, to the affected Registration Statements or
a supplement to the related Prospectus or any document incorporated or deemed to
be incorporated therein by reference, and file any other required document so
that, as thereafter delivered, no Registration Statement nor any Prospectus will
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein (in
the case of any Prospectus, form of prospectus or supplement thereto, in light
of the circumstances under which they were made), not misleading. If the Company
notifies the Holders in accordance with clauses (iii) through (v) of Section
3(c) above to suspend the use of any Prospectus until the requisite changes to
such Prospectus have been made, then the Holders shall suspend use of such
Prospectus. The Company will use its commercially reasonable efforts to ensure
that the use of the Prospectus may be resumed as promptly as is practicable. The
Company shall be entitled to exercise its right under this Section 3(h) to
suspend the availability of a Registration Statement and Prospectus, subject to
the payment of partial Liquidated Damages otherwise required pursuant to Section
2(c), for a period not to exceed twenty-five (25) calendar days (which need not
be consecutive days) in any 12-month period.

 

(i)          The Company may require each selling Holder to furnish to the
Company a certified statement as to (i) the number of shares of Common Stock
beneficially owned by such Holder and any Affiliate thereof, (ii) any Financial
Industry Regulatory Authority (“FINRA”) affiliations, (iii) any natural persons
who have the power to vote or dispose of the common stock and (iv) any other
information as may be required by the Commission, FINRA or any state securities
commission. During any periods that the Company is unable to meet its
obligations hereunder with respect to the registration of Registrable Securities
because any Holder fails to furnish such information within three (3) Trading
Days of the Company’s request, any Liquidated Damages that are accruing at such
time as to such Holder only shall be tolled and any Event that may otherwise
occur solely because of such delay shall be suspended as to such Holder only,
until such information is delivered to the Company.

 

(j)          The Company shall cooperate with any registered broker through
which a Holder proposes to resell its Registrable Securities in effecting a
filing with FINRA pursuant to FINRA Rule 5110 as requested by any such Holder
and the Company shall pay the filing fee required for the first such filing
within five (5) Business Days of the request therefor.

 

10

 

 

(k)          Subject to the terms of this Agreement, the Company hereby consents
to the use of such Prospectus and each amendment or supplement thereto by each
of the selling Holders in connection with the offering and sale of the
Registrable Securities covered by such Prospectus and any amendment or
supplement thereto, except after the giving of any notice pursuant to the
parenthetical in the first sentence of Section 3(c).

 

(l)          Comply with all applicable rules and regulations of the Commission.

 

4.           Registration Expenses. All fees and expenses incident to the
Company’s performance of or compliance with its obligations under this Agreement
(excluding any underwriting discounts and selling commissions for any Holder)
shall be borne by the Company whether or not any Registrable Securities are sold
pursuant to a Registration Statement. The fees and expenses referred to in the
foregoing sentence shall include, without limitation, (i) all registration and
filing fees (including, without limitation, fees and expenses (A) with respect
to filings required to be made with any Trading Market on which the Common Stock
is then listed for trading, (B) with respect to compliance with applicable state
securities or Blue Sky laws (including, without limitation, fees and
disbursements of counsel for the Company in connection with Blue Sky
qualifications or exemptions of the Registrable Securities and determination of
the eligibility of the Registrable Securities for investment under the laws of
such jurisdictions as requested by the Holders) and (C) if not previously paid
by the Company in connection with Section 3(j) hereof, with respect to any
filing that may be required to be made by any broker through which a Holder
intends to make sales of Registrable Securities with FINRA pursuant to FINRA
Rule 5110, so long as the broker is receiving no more than a customary brokerage
commission in connection with such sale), (ii) printing expenses (including,
without limitation, expenses of printing certificates for Registrable Securities
and of printing prospectuses if the printing of prospectuses is reasonably
requested by the Holders of a majority of the Registrable Securities included in
the Registration Statement), (iii) messenger, telephone and delivery expenses,
(iv) fees and disbursements of counsel for the Company, (v) Securities Act
liability insurance, if the Company so desires such insurance, and (vi) fees and
expenses of all other Persons retained by the Company in connection with the
consummation of the transactions contemplated by this Agreement. In addition,
the Company shall be responsible for all of its internal expenses incurred in
connection with the consummation of the transactions contemplated by this
Agreement (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expense of
any annual audit and the fees and expenses incurred in connection with the
listing of the Registrable Securities on any securities exchange as required
hereunder. In no event shall the Company be responsible for any underwriting,
broker or similar fees or commissions of any Holder or, except to the extent
provided for in the Transaction Documents, any legal fees or other costs of the
Holders.

 

11

 

 

5.           Indemnification.

 

(a)          Indemnification by the Company. The Company shall, notwithstanding
any termination of this Agreement, indemnify, defend and hold harmless each
Holder, the officers, directors, agents, partners, members, managers,
stockholders, Affiliates, brokers and employees of each of them (and any other
Persons with a functionally equivalent role of a Person holding such titles,
notwithstanding a lack of such title or any other title), each Person who
controls any such Holder (within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act) and the officers, directors, partners,
members, managers, stockholders, agents, brokers and employees of each such
controlling Person (and any other Persons with a functionally equivalent role of
a Person holding such titles, notwithstanding a lack of such title or any other
title), to the fullest extent permitted by applicable law, from and against any
and all losses, claims, damages, liabilities, costs (including, without
limitation, reasonable costs of preparation and investigation and reasonable
attorneys' fees) and expenses (collectively, “Losses”), as incurred, that arise
out of or are based upon (i) any untrue or alleged untrue statement of a
material fact contained in any Registration Statement, any Prospectus or any
form of prospectus or in any amendment or supplement thereto or in any
preliminary prospectus, or arising out of or relating to any omission or alleged
omission to state a material fact required to be stated therein or necessary to
make the statements therein (in the case of any Prospectus or form of prospectus
or supplement thereto, in light of the circumstances under which they were made)
not misleading, or (ii) any violation or alleged violation by the Company of the
Securities Act, the Exchange Act or any state securities law or any rule or
regulation thereunder, in connection with the performance of its obligations
under this Agreement, except to the extent that (A) such untrue statements,
alleged untrue statements, omissions or alleged omissions are based solely upon
information regarding such Holder furnished in writing to the Company by such
Holder expressly for use therein, or to the extent that such information relates
to such Holder or such Holder's proposed method of distribution of Registrable
Securities and was reviewed and approved in writing by such Holder expressly for
use in the Registration Statement, such Prospectus or such form of Prospectus or
in any amendment or supplement thereto (it being understood that each Holder has
approved Annex A hereto for this purpose), (B) in the case of an occurrence of
an event of the type specified in Section 3(c)(iii)-(v), related to the use by a
Holder of an outdated or defective Prospectus after the Company has notified
such Holder that the Prospectus is outdated or defective in accordance with
Section 3(c) and prior to the receipt by such Holder of the Advice contemplated
and defined in Section 6(d) below, but if and only to the extent that following
the receipt of the Advice the misstatement or omission giving rise to such Loss
would have been corrected or (C) any such Losses arise solely out of the
Purchaser’s (or any other indemnified Person’s) failure to send or give a copy
of the Prospectus or supplement (as then amended or supplemented), if required,
pursuant to Rule 172 under the Securities Act (or any successor rule) to the
Persons asserting an untrue statement or alleged untrue statement or omission or
alleged omission at or prior to the written confirmation of the sale of
Registrable Securities to such Person if such statement or omission was
corrected in such Prospectus or supplement. The Company shall notify the Holders
promptly of the institution, threat or assertion of any Proceeding arising from
or in connection with the transactions contemplated by this Agreement of which
the Company is aware. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of an Indemnified Party (as
defined in Section 5(c)) and shall survive the transfer of the Registrable
Securities by the Holders.

 

12

 

 

(b)          Indemnification by Holders. Each Holder shall, severally and not
jointly, indemnify and hold harmless the Company, its directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling Persons, to the
fullest extent permitted by applicable law, from and against all Losses, as
incurred, arising out of or based solely upon any untrue or alleged untrue
statement of a material fact contained in any Registration Statement, any
Prospectus, or in any amendment or supplement thereto or in any preliminary
prospectus, or arising out of or relating to any omission or alleged omission of
a material fact required to be stated therein or necessary to make the
statements therein (in the case of any Prospectus or supplement thereto, in
light of the circumstances under which they were made) not misleading (i) to the
extent that such untrue statements or omissions are based upon information
regarding such Holder furnished in writing to the Company by such Holder
expressly for use therein or (ii) to the extent that such information relates to
such Holder or such Holder’s proposed method of distribution of Registrable
Securities and was reviewed and approved in writing by such Holder expressly for
use in a Registration Statement (it being understood that the Holder has
approved Annex A hereto for this purpose), such Prospectus or in any amendment
or supplement thereto or (iii) in the case of an occurrence of an event of the
type specified in Section 3(c)(iii)-(v), to the extent related to the use by
such Holder of an outdated or defective Prospectus after the Company has
notified such Holder that the Prospectus is outdated or defective in accordance
with Section 3(c) and prior to the receipt by such Holder of the Advice
contemplated in Section 6(d). In no event shall the liability of any selling
Holder hereunder be greater in amount than the dollar amount of the net proceeds
received by such Holder upon the sale of the Registrable Securities giving rise
to such indemnification obligation.

 

(c)          Conduct of Indemnification Proceedings. If any Proceeding shall be
brought or asserted against any Person entitled to indemnity hereunder (an
“Indemnified Party”), such Indemnified Party shall promptly notify the Person
from whom indemnity is sought (the “Indemnifying Party”) in writing, and the
Indemnifying Party shall have the right to assume the defense thereof, including
the employment of counsel reasonably satisfactory to the Indemnified Party and
the payment of all reasonable fees and expenses incurred in connection with
defense thereof; provided, that the failure of any Indemnified Party to give
such notice shall not relieve the Indemnifying Party of its obligations or
liabilities pursuant to this Agreement, except (and only) to the extent that it
shall be finally determined by a court of competent jurisdiction (which
determination is not subject to appeal or further review) that such failure
shall have materially and adversely prejudiced the Indemnifying Party.

 

An Indemnified Party shall have the right to employ separate counsel in any such
Proceeding and to participate in the defense thereof, but the fees and expenses
of such counsel shall be at the expense of such Indemnified Party or Parties
unless: (1) the Indemnifying Party has agreed in writing to pay such fees and
expenses; (2) the Indemnifying Party shall have failed promptly to assume the
defense of such Proceeding and to employ counsel reasonably satisfactory to such
Indemnified Party in any such Proceeding; or (3) the named parties to any such
Proceeding (including any impleaded parties) include both such Indemnified Party
and the Indemnifying Party, and such Indemnified Party shall have been advised
by counsel that a conflict of interest exists if the same counsel were to
represent such Indemnified Party and the Indemnifying Party (in which case, if
such Indemnified Party notifies the Indemnifying Party in writing that it elects
to employ separate counsel at the expense of the Indemnifying Party, the
Indemnifying Party shall not have the right to assume the defense thereof and
such counsel shall be at the expense of the Indemnifying Party). The
Indemnifying Party shall not be liable for any settlement of any such Proceeding
effected without its prior written consent, which consent shall not be
unreasonably withheld, delayed or conditioned. No Indemnifying Party shall,
without the prior written consent of the Indemnified Party, effect any
settlement of any pending Proceeding in respect of which any Indemnified Party
is a party, unless such settlement includes an unconditional release of such
Indemnified Party from all liability on claims that are the subject matter of
such Proceeding and such settlement does not include any non-monetary limitation
on the actions of any Indemnified Party or any of its affiliates or any
admission of fault or liability on behalf of any such Indemnified Party.

 

13

 

 

Subject to the terms of this Agreement, all fees and expenses of the Indemnified
Party (including reasonable fees and expenses to the extent incurred in
connection with investigating or preparing to defend such Proceeding in a manner
not inconsistent with this Section 5) shall be paid to the Indemnified Party, as
incurred, within twenty (20) Trading Days of written notice thereof to the
Indemnifying Party; provided, that the Indemnified Party shall promptly
reimburse the Indemnifying Party for that portion of such fees and expenses
applicable to such actions for which such Indemnified Party is finally
judicially determined to not be entitled to indemnification hereunder). The
failure to deliver written notice to the Indemnifying Party within a reasonable
time of the commencement of any such action shall not relieve such Indemnifying
Party of any liability to the Indemnified Party under this Section 5, except to
the extent that the Indemnifying Party is materially and adversely prejudiced in
its ability to defend such action.

 

(d)          Contribution. If a claim for indemnification under Section 5(a) or
5(b) is unavailable to an Indemnified Party or insufficient to hold an
Indemnified Party harmless for any Losses, then each Indemnifying Party, in lieu
of indemnifying such Indemnified Party, shall contribute to the amount paid or
payable by such Indemnified Party as a result of such Losses, in such proportion
as is appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in this Agreement, any reasonable attorneys' or
other reasonable fees or expenses incurred by such party in connection with any
Proceeding to the extent such party would have been indemnified for such fees or
expenses if the indemnification provided for in this Section 5 was available to
such party in accordance with its terms.

 

The parties hereto agree that it would not be just and equitable if contribution
pursuant to this Section 5(d) were determined by pro rata allocation or by any
other method of allocation that does not take into account the equitable
considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 5(d), (A) no Holder shall be
required to contribute, in the aggregate, any amount in excess of the amount by
which the net proceeds actually received by such Holder from the sale of the
Registrable Securities subject to the Proceeding exceeds the amount of any
damages that such Holder has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission and (B) no
contribution will be made under circumstances where the maker of such
contribution would not have been required to indemnify the Indemnified Party
under the fault standards set forth in this Section 5. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation.

 

14

 

 

The indemnity and contribution agreements contained in this Section 5 are in
addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties and are not in diminution or limitation of the
indemnification provisions under the Purchase Agreement.

 

6.           Miscellaneous.

 

(a)          Remedies. Subject to the limitations set forth elsewhere in this
Agreement, in the event of a breach by the Company or by a Holder of any of
their obligations under this Agreement, each Holder or the Company, as the case
may be, in addition to being entitled to exercise all rights granted by law and
under this Agreement, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement. The Company and each
Holder agree that monetary damages would not provide adequate compensation for
any losses incurred by reason of a breach by it of any of the provisions of this
Agreement and hereby further agrees that, in the event of any action for
specific performance in respect of such breach, it shall waive the defense that
a remedy at law would be adequate.

 

(b)          No Piggyback on Registrations; Prohibition on Filing Other
Registration Statements. Neither the Company nor any of its security holders
(other than the Holders in such capacity pursuant hereto) may include securities
of the Company in a Registration Statement other than the Registrable Securities
and the Company shall not prior to the initial Effective Date of the Initial
Registration Statement enter into any agreement providing any such right to any
of its security holders. The Company shall not file with the Commission any
other registration statement until the earlier of the date that is ninety (90)
days after the date all Registrable Securities are registered pursuant to a
Registration Statement that is declared effective by the Commission or (ii) the
date that all Registrable Securities are eligible for resale by non-affiliates
without volume or manner of sale restrictions under Rule 144 and without the
requirement for the company to be in compliance with the current public
information requirements under Rule 144. For the avoidance of doubt, the Company
shall not be prohibited from filing amendments to registration statements in
connection with the evergreen requirements filed prior to the date of this
Agreement.

 

(c)          Compliance. Each Holder covenants and agrees that it will comply
with the prospectus delivery requirements of the Securities Act as applicable to
it (unless an exemption therefrom is available) in connection with sales of
Registrable Securities pursuant to the Registration Statement and shall sell the
Registrable Securities only in accordance with a method of distribution
described in the Registration Statement.

 

15

 

 

(d)          Discontinued Disposition. By its acquisition of Registrable
Securities, each Holder agrees that, upon receipt of a notice from the Company
of the occurrence of any event of the kind described in Section 3(c)(iii)-(v),
such Holder will forthwith discontinue disposition of such Registrable
Securities under a Registration Statement until it is advised in writing (the
“Advice”) by the Company that the use of the applicable Prospectus (as it may
have been supplemented or amended) may be resumed. The Company will use its
commercially reasonable efforts to ensure that the use of the Prospectus may be
resumed as promptly as is practicable. The Company agrees and acknowledges that
any periods during which the Holder is required to discontinue the disposition
of the Registrable Securities hereunder shall be subject to the provisions of
Section 2(c).

 

(e)          No Inconsistent Agreements. Neither the Company nor any of its
Subsidiaries has entered, as of the date hereof, nor shall the Company or any of
its Subsidiaries, on or after the date hereof, enter into any agreement with
respect to its securities that would have the effect of impairing the rights
granted to the Holders in this Agreement or otherwise conflicts with the
provisions hereof.

 

(f)          Amendments and Waivers. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
or waived unless the same shall be in writing and signed by the Company and
Holders holding no less than 67% of the then outstanding Registrable Securities,
provided that any party may give a waiver as to itself. Notwithstanding the
foregoing, a waiver or consent to depart from the provisions hereof with respect
to a matter that relates exclusively to the rights of Holders and that does not
directly or indirectly affect the rights of other Holders may be given by
Holders of all of the Registrable Securities to which such waiver or consent
relates; provided, however, that the provisions of this sentence may not be
amended, modified, or supplemented except in accordance with the provisions of
the immediately preceding sentence.

 

(g)          Notices. Except as otherwise provided in this Agreement, any
notices or other communications or deliveries required or permitted to be
provided hereunder shall be delivered as set forth in the Purchase Agreement.

 

(h)          Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the successors and permitted assigns of each of the
parties and shall inure to the benefit of each Holder. Nothing in this
Agreement, express or implied, is intended to confer upon any party other than
the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement. The Company may not assign its
rights (except by merger or in connection with another entity acquiring all or
substantially all of the Company’s assets) or obligations hereunder without the
prior written consent of all the Holders of the then outstanding Registrable
Securities. Each Holder may assign its respective rights with respect to any or
all of its Conversion Shares and/or Interest Shares hereunder in the manner and
to the Persons as permitted under the Purchase Agreement; provided in each case
that (i) the Holder agrees in writing with the transferee or assignee to assign
such rights and related obligations under this Agreement, and for the transferee
or assignee to assume such obligations, and a copy of such agreement is
furnished to the Company within a reasonable time after such assignment,
(ii) the Company is, within a reasonable time after such transfer or assignment,
furnished with written notice of the name and address of such transferee or
assignee and the securities with respect to which such registration rights are
being transferred or assigned, (iii) at or before the time the Company receives
the written notice contemplated by clause (ii) of this sentence, the transferee
or assignee agrees in writing with the Company to be bound by all of the
provisions contained herein and (iv) the transferee is an “accredited investor,”
as that term is defined in Rule 501 of Regulation D.

 

16

 

 

(i)          Execution and Counterparts. This Agreement may be executed in two
or more 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
Agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party, it being understood that both parties
need not sign the same counterpart. In the event that any signature is delivered
by facsimile transmission or by e-mail delivery of a “.pdf” format data file,
such signature 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 facsimile or “.pdf” signature were the original thereof.

 

(j)          Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be determined in
accordance with the provisions of the Purchase Agreement.

 

(k)          Cumulative Remedies. Except as provided herein, the remedies
provided herein are cumulative and not exclusive of any other remedies provided
by law.

 

(l)          Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their good faith reasonable efforts to find and employ an
alternative means to achieve the same or substantially the same result as that
contemplated by such term, provision, covenant or restriction. It is hereby
stipulated and declared to be the intention of the parties that they would have
executed the remaining terms, provisions, covenants and restrictions without
including any of such that may be hereafter declared invalid, illegal, void or
unenforceable.

 

(m)         Headings. The headings in this Agreement are for convenience only
and shall not limit or otherwise affect the meaning hereof.

 

17

 

 

(n)          Independent Nature of Purchasers’ Obligations and Rights. The
obligations of each Purchaser under this Agreement are several and not joint
with the obligations of any other Purchaser hereunder, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser hereunder. The decision of each Purchaser to purchase the Securities
pursuant to the Transaction Documents has been made independently of any other
Purchaser. Nothing contained herein or in any other agreement or document
delivered at any closing, and no action taken by any Purchaser pursuant hereto
or thereto, shall be deemed to constitute the Purchasers as a partnership, an
association, a joint venture or any other kind of entity, or create a
presumption that the Purchasers are in any way acting in concert with respect to
such obligations or the transactions contemplated by this Agreement. Each
Purchaser acknowledges that no other Purchaser has acted as agent for such
Purchaser in connection with making its investment hereunder and that no
Purchaser will be acting as agent of such Purchaser in connection with
monitoring its investment in the Securities or enforcing its rights under the
Transaction Documents. Each Purchaser shall be entitled to protect and enforce
its rights, including, without limitation, the rights arising out of this
Agreement, and it shall not be necessary for any other Purchaser to be joined as
an additional party in any Proceeding for such purpose. The Company acknowledges
that each of the Purchasers has been provided with the same Registration Rights
Agreement for the purpose of closing a transaction with multiple Purchasers and
not because it was required or requested to do so by any Purchaser.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

18

 

 

IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement
as of the date first written above.

 

  BAXANO SURGICAL, INC.         By:       Name:   Ken Reali     Title: President
and Chief Executive Officer

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

 

 

 

IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement
as of the date first written above.

 

  [NAME OF INVESTING ENTITY]                     AUTHORIZED SIGNATORY        
By:     Name:     Title:           ADDRESS FOR NOTICE         c/o:          
Street:  

        City/State/Zip:   

      Attention:            Tel:           Fax:           Email:  

 

 

 

  

Annex A

 

Plan of Distribution

 

Each Selling Stockholder (the “Selling Stockholders”) of the securities and any
of their pledgees, assignees and successors-in-interest may, from time to time,
sell any or all of their securities covered hereby on the any stock exchange,
market or trading facility on which the securities are traded or in private
transactions. These sales may be at fixed or negotiated prices. A Selling
Stockholder may use any one or more of the following methods when selling
securities:

 

·ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;

 

·block trades in which the broker-dealer will attempt to sell the securities as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;

 

·purchases by a broker-dealer as principal and resale by the broker-dealer for
its account;

 

·an exchange distribution in accordance with the rules of the applicable
exchange;

 

·privately negotiated transactions;

 

·settlement of short sales;

 

·in transactions through broker-dealers that agree with the Selling Stockholders
to sell a specified number of such securities at a stipulated price per
security;

 

·through the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;

 

·a combination of any such methods of sale; or

 

·any other method permitted pursuant to applicable law.

 

The Selling Stockholders may also sell securities under Rule 144 under the
Securities Act of 1933, as amended (the “Securities Act”), if available, rather
than under this prospectus.

 

Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of securities, from the purchaser) in amounts to be
negotiated, but, except as set forth in a supplement to this Prospectus, in the
case of an agency transaction not in excess of a customary brokerage commission
in compliance with FINRA Rule 2440; and in the case of a principal transaction a
markup or markdown in compliance with FINRA IM-2440.

 

 

 

 

In connection with the sale of the securities or interests therein, the Selling
Stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the
securities in the course of hedging the positions they assume. The Selling
Stockholders may also sell securities short and deliver these securities to
close out their short positions, or loan or pledge the securities to
broker-dealers that in turn may sell these securities. The Selling Stockholders
may also enter into option or other transactions with broker-dealers or other
financial institutions or create one or more derivative securities which require
the delivery to such broker-dealer or other financial institution of securities
offered by this prospectus, which securities such broker-dealer or other
financial institution may resell pursuant to this prospectus (as supplemented or
amended to reflect such transaction).

 

The Selling Stockholders and any broker-dealers or agents that are involved in
selling the securities may be deemed to be “underwriters” within the meaning of
the Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
securities purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each Selling Stockholder has informed the
Company that it does not have any written or oral agreement or understanding,
directly or indirectly, with any person to distribute the securities.

 

The Company is required to pay certain fees and expenses incurred by the Company
incident to the registration of the securities. The Company has agreed to
indemnify the Selling Stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.

 

Because Selling Stockholders may be deemed to be “underwriters” within the
meaning of the Securities Act, they will be subject to the prospectus delivery
requirements of the Securities Act including Rule 172 thereunder. In addition,
any securities covered by this prospectus which qualify for sale pursuant to
Rule 144 under the Securities Act may be sold under Rule 144 rather than under
this prospectus. The Selling Stockholders have advised us that there is no
underwriter or coordinating broker acting in connection with the proposed sale
of the resale securities by the Selling Stockholders.

 

We agreed to keep this prospectus effective until the earlier of (i) the date on
which the securities may be resold by the Selling Stockholders without
registration and without regard to any volume or manner-of-sale limitations by
reason of Rule 144, without the requirement for the Company to be in compliance
with the current public information under Rule 144 under the Securities Act or
any other rule of similar effect or (ii) all of the securities have been sold
pursuant to this prospectus or Rule 144 under the Securities Act or any other
rule of similar effect. The resale securities will be sold only through
registered or licensed brokers or dealers if required under applicable state
securities laws. In addition, in certain states, the resale securities covered
hereby may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.

 

2

 

 

Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale securities may not simultaneously
engage in market making activities with respect to the common stock for the
applicable restricted period, as defined in Regulation M, prior to the
commencement of the distribution. In addition, the Selling Stockholders will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including Regulation M, which may limit the timing of
purchases and sales of the common stock by the Selling Stockholders or any other
person. We will make copies of this prospectus available to the Selling
Stockholders and have informed them of the need to deliver a copy of this
prospectus to each purchaser at or prior to the time of the sale (including by
compliance with Rule 172 under the Securities Act).

 

3

 

 

Annex B

 

BAXANO SURGICAL, Inc.

 

Selling Stockholder Notice and Questionnaire

 

The undersigned beneficial owner of common stock (the “Registrable Securities”)
of Baxano Surgical, Inc., a Delaware corporation (the “Company”), understands
that the Company has filed or intends to file with the Securities and Exchange
Commission (the “Commission”) a registration statement (the “Registration
Statement”) for the registration and resale under Rule 415 of the Securities Act
of 1933, as amended (the “Securities Act”), of the Registrable Securities, in
accordance with the terms of the Registration Rights Agreement (the
“Registration Rights Agreement”) to which this document is annexed. A copy of
the Registration Rights Agreement is available from the Company upon request at
the address set forth below. All capitalized terms not otherwise defined herein
shall have the meanings ascribed thereto in the Registration Rights Agreement.

 

Certain legal consequences arise from being named as a selling stockholder in
the Registration Statement and the related prospectus. Accordingly, holders and
beneficial owners of Registrable Securities are advised to consult their own
securities law counsel regarding the consequences of being named or not being
named as a selling stockholder in the Registration Statement and the related
prospectus.

 

NOTICE

 

The undersigned beneficial owner (the “Selling Stockholder”) of Registrable
Securities hereby elects to include the Registrable Securities owned by it in
the Registration Statement.

 

 

 

 

The undersigned hereby provides the following information to the Company and
represents and warrants that such information is accurate:

 

QUESTIONNAIRE

 

1.Name.

 

(a)Full Legal Name of Selling Stockholder

 

   

 

(b)Full Legal Name of Registered Holder (if not the same as (a) above) through
which Registrable Securities are held:

 

   

 

(c)Full Legal Name of Natural Control Person (which means a natural person who
directly or indirectly alone or with others has power to vote or dispose of the
securities covered by this Questionnaire):

 

   

 

2.Address for Notices to Selling Stockholder:

 

     

Telephone:   

Fax:   

Contact Person:    

 

3.Broker-Dealer Status:

 

(a)Are you a broker-dealer?

 

Yes   ¨              No   ¨

 

(b)If “yes” to Section 3(a), did you receive your Registrable Securities as
compensation for investment banking services to the Company?

 

Yes   ¨              No   ¨

 

Note:If “no” to Section 3(b), the Commission’s staff has indicated that you
should be identified as an underwriter in the Registration Statement.

 

 

 

  

(c)Are you an affiliate of a broker-dealer?

 

Yes   ¨              No   ¨

 

(d)If you are an affiliate of a broker-dealer, do you certify that you purchased
the Registrable Securities in the ordinary course of business, and at the time
of the purchase of the Registrable Securities to be resold, you had no
agreements or understandings, directly or indirectly, with any person to
distribute the Registrable Securities?

 

Yes   ¨              No   ¨

 

Note:If “no” to Section 3(d), the Commission’s staff has indicated that you
should be identified as an underwriter in the Registration Statement.

 

4.Beneficial Ownership of Securities of the Company Owned by the Selling
Stockholder.

 

Except as set forth below in this Item 4, the undersigned is not the beneficial
or registered owner of any securities of the Company other than the securities
issuable pursuant to the Purchase Agreement.

 

(a)Type and Amount of other securities beneficially owned by the Selling
Stockholder:

 

     

 

 

 

 

5.Relationships with the Company:

 

Except as set forth below, neither the undersigned nor any of its affiliates,
officers, directors or principal equity holders (owners of 5% of more of the
equity securities of the undersigned) has held any position or office or has had
any other material relationship with the Company (or its predecessors or
affiliates) during the past three years.

 

State any exceptions here:

 

     

 

The undersigned agrees to promptly notify the Company of any inaccuracies or
changes in the information provided herein that may occur subsequent to the date
hereof at any time while the Registration Statement remains effective.

 

By signing below, the undersigned consents to the disclosure of the information
contained herein in its answers to Items 1 through 5 and the inclusion of such
information in the Registration Statement and the related prospectus and any
amendments or supplements thereto. The undersigned understands that such
information will be relied upon by the Company in connection with the
preparation or amendment of the Registration Statement and the related
prospectus and any amendments or supplements thereto.

 

IN WITNESS WHEREOF the undersigned, by authority duly given, has caused this
Notice and Questionnaire to be executed and delivered either in person or by its
duly authorized agent.

 

Date:     Beneficial Owner:                       By:             Name:        
  Title:  

 

PLEASE FAX A COPY (OR EMAIL A .PDF COPY) OF THE COMPLETED AND EXECUTED NOTICE
AND QUESTIONNAIRE, AND RETURN THE ORIGINAL BY OVERNIGHT MAIL, TO:

 

 

 

 

Exhibit C

 

Form of Subsidiary Guarantee

 

 

 

 

 

SUBSIDIARY GUARANTEE

 

SUBSIDIARY GUARANTEE, dated as of September 24, 2014 (this “Guarantee”), made by
each of the signatories hereto (together with any other entity that may become a
party hereto as provided herein, the “Guarantors”), in favor of the purchasers
signatory (together with their permitted assigns, the “Purchasers”) to that
certain Securities Purchase Agreement, dated as of the date hereof, between
Baxano Surgical, Inc., a Delaware corporation (the “Company”) and the
Purchasers.

 

WITNESSETH:

 

WHEREAS, pursuant to that certain Securities Purchase Agreement, dated as of the
date hereof, by and between the Company and the Purchasers (the “Purchase
Agreement”), the Company has agreed to sell and issue to the Purchasers, and the
Purchasers have agreed to purchase from the Company the Debentures, subject to
the terms and conditions set forth therein; and

 

WHEREAS, each Guarantor will directly benefit from the extension of credit to
the Company represented by the issuance of the Debentures; and

 

NOW, THEREFORE, in consideration of the premises and to induce the Purchasers to
enter into the Purchase Agreement and to carry out the transactions contemplated
thereby, each Guarantor hereby agrees with the Purchasers as follows:

 

1.           Definitions. Unless otherwise defined herein, terms defined in the
Purchase Agreement and used herein shall have the meanings given to them in the
Purchase Agreement. The words “hereof,” “herein,” “hereto” and “hereunder” and
words of similar import when used in this Guarantee shall refer to this
Guarantee as a whole and not to any particular provision of this Guarantee, and
Section and Schedule references are to this Guarantee unless otherwise
specified. The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms. The following
terms shall have the following meanings:

 

“Guarantee” means this Subsidiary Guarantee, as the same may be amended,
supplemented or otherwise modified from time to time.

 

1

 

 

“Obligations” means, in addition to all other costs and expenses of collection
incurred by Purchasers in enforcing any of such Obligations and/or this
Guarantee, all of the liabilities and obligations (primary, secondary, direct,
contingent, sole, joint or several) due or to become due, or that are now or may
be hereafter contracted or acquired, or owing to, of the Company or any
Guarantor to the Purchasers, including, without limitation, all obligations
under this Guarantee, the Debentures and any other instruments, agreements or
other documents executed and/or delivered in connection herewith or therewith,
in each case, whether now or hereafter existing, voluntary or involuntary,
direct or indirect, absolute or contingent, liquidated or unliquidated, whether
or not jointly owed with others, and whether or not from time to time decreased
or extinguished and later increased, created or incurred, and all or any portion
of such obligations or liabilities that are paid, to the extent all or any part
of such payment is avoided or recovered directly or indirectly from any of the
Purchasers as a preference, fraudulent transfer or otherwise as such obligations
may be amended, supplemented, converted, extended or modified from time to time.
Without limiting the generality of the foregoing, the term “Obligations” shall
include, without limitation: (i) principal of, and interest on the Debentures
and the loans extended pursuant thereto; (ii) any and all other fees,
indemnities, costs, obligations and liabilities of the Company or any Guarantor
from time to time under or in connection with this Guarantee, the Debentures and
any other instruments, agreements or other documents executed and/or delivered
in connection herewith or therewith; and (iii) all amounts (including but not
limited to post-petition interest) in respect of the foregoing that would be
payable but for the fact that the obligations to pay such amounts are
unenforceable or not allowable due to the existence of a bankruptcy,
reorganization or similar proceeding involving the Company or any Guarantor.

 

2.           Guarantee.

 

(a)          Guarantee.

 

(i)          The Guarantors hereby, jointly and severally, unconditionally and
irrevocably, guarantee to the Purchasers and their respective successors,
indorsees, transferees and assigns, the prompt and complete payment and
performance when due (whether at the stated maturity, by acceleration or
otherwise) of the Obligations.

 

(ii)         Anything herein or in any other Transaction Document to the
contrary notwithstanding, the maximum liability of each Guarantor hereunder and
under the other Transaction Documents shall in no event exceed the amount which
can be guaranteed by such Guarantor under applicable federal and state laws,
including laws relating to the insolvency of debtors, fraudulent conveyance or
transfer or laws affecting the rights of creditors generally (after giving
effect to the right of contribution established in Section 2(b)).

 

(iii)        Each Guarantor agrees that the Obligations may at any time and from
time to time exceed the amount of the liability of such Guarantor hereunder
without impairing the guarantee contained in this Section 2 or affecting the
rights and remedies of the Purchasers hereunder.

 

(iv)        The guarantee contained in this Section 2 shall remain in full force
and effect until all the Obligations and the obligations of each Guarantor under
the guarantee contained in this Section 2 shall have been satisfied by
indefeasible payment in full.

 

2

 

 

(v)         No payment made by the Company, any of the Guarantors, any other
guarantor or any other Person or received or collected by the Purchasers from
the Company, any of the Guarantors, any other guarantor or any other Person by
virtue of any action or proceeding or any set-off or appropriation or
application at any time or from time to time in reduction of or in payment of
the Obligations shall be deemed to modify, reduce, release or otherwise affect
the liability of any Guarantor hereunder which shall, notwithstanding any such
payment (other than any payment made by such Guarantor in respect of the
Obligations or any payment received or collected from such Guarantor in respect
of the Obligations), remain liable for the Obligations up to the maximum
liability of such Guarantor hereunder until the Obligations are indefeasibly
paid in full.

 

(vi)        Notwithstanding anything to the contrary in this Guarantee, with
respect to any defaulted non-monetary Obligations the specific performance of
which by the Guarantors is not reasonably possible (e.g. the issuance of the
Company's Common Stock), the Guarantors shall only be liable for making the
Purchasers whole on a monetary basis for the Company's failure to perform such
Obligations in accordance with the Transaction Documents.

 

(b)          Right of Contribution. Subject to Section 2(c), each Guarantor
hereby agrees that to the extent that a Guarantor shall have paid more than its
proportionate share of any payment made hereunder, such Guarantor shall be
entitled to seek and receive contribution from and against any other Guarantor
hereunder which has not paid its proportionate share of such payment. Each
Guarantor's right of contribution shall be subject to the terms and conditions
of Section 2(c). The provisions of this Section 2(b) shall in no respect limit
the obligations and liabilities of any Guarantor to the Purchasers and each
Guarantor shall remain liable to the Purchasers for the full amount guaranteed
by such Guarantor hereunder.

 

(c)          No Subrogation. Notwithstanding any payment made by any Guarantor
hereunder or any set-off or application of funds of any Guarantor by the
Purchasers, no Guarantor shall be entitled to be subrogated to any of the rights
of the Purchasers against the Company or any other Guarantor or any collateral
security or guarantee or right of offset held by the Purchasers for the payment
of the Obligations, nor shall any Guarantor seek or be entitled to seek any
contribution or reimbursement from the Company or any other Guarantor in respect
of payments made by such Guarantor hereunder, until all amounts owing to the
Purchasers by the Company on account of the Obligations are indefeasibly paid in
full. If any amount shall be paid to any Guarantor on account of such
subrogation rights at any time when all of the Obligations shall not have been
paid in full, such amount shall be held by such Guarantor in trust for the
Purchasers, segregated from other funds of such Guarantor, and shall, forthwith
upon receipt by such Guarantor, be turned over to the Purchasers in the exact
form received by such Guarantor (duly indorsed by such Guarantor to the
Purchasers, if required), to be applied against the Obligations, whether matured
or unmatured, in such order as the Purchasers may determine.

 

3

 

 

(d)          Amendments, Etc. With Respect to the Obligations. Each Guarantor
shall remain obligated hereunder notwithstanding that, without any reservation
of rights against any Guarantor and without notice to or further assent by any
Guarantor, any demand for payment of any of the Obligations made by the
Purchasers may be rescinded by the Purchasers and any of the Obligations
continued, and the Obligations, or the liability of any other Person upon or for
any part thereof, or any collateral security or guarantee therefor or right of
offset with respect thereto, may, from time to time, in whole or in part, be
renewed, extended, amended, modified, accelerated, compromised, waived,
surrendered or released by the Purchasers, and the Purchase Agreement and the
other Transaction Documents and any other documents executed and delivered in
connection therewith may be amended, modified, supplemented or terminated, in
whole or in part, as the Purchasers may deem advisable from time to time, and
any collateral security, guarantee or right of offset at any time held by the
Purchasers for the payment of the Obligations may be sold, exchanged, waived,
surrendered or released. The Purchasers shall have no obligation to protect,
secure, perfect or insure any Lien at any time held by them as security for the
Obligations or for the guarantee contained in this Section 2 or any property
subject thereto.

 

(e)          Guarantee Absolute and Unconditional. Each Guarantor waives any and
all notice of the creation, renewal, extension or accrual of any of the
Obligations and notice of or proof of reliance by the Purchasers upon the
guarantee contained in this Section 2 or acceptance of the guarantee contained
in this Section 2; the Obligations, and any of them, shall conclusively be
deemed to have been created, contracted or incurred, or renewed, extended,
amended or waived, in reliance upon the guarantee contained in this Section 2;
and all dealings between the Company and any of the Guarantors, on the one hand,
and the Purchasers, on the other hand, likewise shall be conclusively presumed
to have been had or consummated in reliance upon the guarantee contained in this
Section 2. Each Guarantor waives to the extent permitted by law diligence,
presentment, protest, demand for payment and notice of default or nonpayment to
or upon the Company or any of the Guarantors with respect to the Obligations.
Each Guarantor understands and agrees that the guarantee contained in this
Section 2 shall be construed as a continuing, absolute and unconditional
guarantee of payment and performance without regard to (a) the validity or
enforceability of the Purchase Agreement or any other Transaction Document, any
of the Obligations or any other collateral security therefor or guarantee or
right of offset with respect thereto at any time or from time to time held by
the Purchasers, (b) any defense, set-off or counterclaim (other than a defense
of payment or performance or fraud by Purchasers) which may at any time be
available to or be asserted by the Company or any other Person against the
Purchasers, or (c) any other circumstance whatsoever (with or without notice to
or knowledge of the Company or such Guarantor) which constitutes, or might be
construed to constitute, an equitable or legal discharge of the Company for the
Obligations, or of such Guarantor under the guarantee contained in this Section
2, in bankruptcy or in any other instance. When making any demand hereunder or
otherwise pursuing its rights and remedies hereunder against any Guarantor, the
Purchasers may, but shall be under no obligation to, make a similar demand on or
otherwise pursue such rights and remedies as they may have against the Company,
any other Guarantor or any other Person or against any collateral security or
guarantee for the Obligations or any right of offset with respect thereto, and
any failure by the Purchasers to make any such demand, to pursue such other
rights or remedies or to collect any payments from the Company, any other
Guarantor or any other Person or to realize upon any such collateral security or
guarantee or to exercise any such right of offset, or any release of the
Company, any other Guarantor or any other Person or any such collateral
security, guarantee or right of offset, shall not relieve any Guarantor of any
obligation or liability hereunder, and shall not impair or affect the rights and
remedies, whether express, implied or available as a matter of law, of the
Purchasers against any Guarantor. For the purposes hereof, “demand” shall
include the commencement and continuance of any legal proceedings.

 

4

 

 

(f)          Reinstatement. The guarantee contained in this Section 2 shall
continue to be effective, or be reinstated, as the case may be, if at any time
payment, or any part thereof, of any of the Obligations is rescinded or must
otherwise be restored or returned by the Purchasers upon the insolvency,
bankruptcy, dissolution, liquidation or reorganization of the Company or any
Guarantor, or upon or as a result of the appointment of a receiver, intervenor
or conservator of, or trustee or similar officer for, the Company or any
Guarantor or any substantial part of its property, or otherwise, all as though
such payments had not been made.

 

(g)          Payments. Each Guarantor hereby guarantees that payments hereunder
will be paid to the Purchasers without set-off or counterclaim in U.S. dollars
at the address set forth or referred to in the Signature Pages to the Purchase
Agreement.

 

3.           Representations and Warranties. Each Guarantor hereby makes the
following representations and warranties to Purchasers as of the date hereof:

 

(a)          Organization and Qualification. The Guarantor is a corporation,
duly incorporated, validly existing and in good standing under the laws of the
applicable jurisdiction set forth on Schedule 1, with the requisite corporate
power and authority to own and use its properties and assets and to carry on its
business as currently conducted. The Guarantor has no subsidiaries other than
those identified as such on the Disclosure Schedules to the Purchase Agreement.
The Guarantor is duly qualified to do business and is in good standing as a
foreign corporation in each jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary, except
where the failure to be so qualified or in good standing, as the case may be,
could not, individually or in the aggregate, (x) adversely affect the legality,
validity or enforceability of any of this Guaranty in any material respect, (y)
have a material adverse effect on the results of operations, assets, prospects,
or financial condition of the Guarantor or (z) adversely impair in any material
respect the Guarantor's ability to perform fully on a timely basis its
obligations under this Guaranty (a “Material Adverse Effect”).

 

5

 

 

(b)          Authorization; Enforcement. The Guarantor has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by this Guaranty, and otherwise to carry out its obligations
hereunder. The execution and delivery of this Guaranty by the Guarantor and the
consummation by it of the transactions contemplated hereby have been duly
authorized by all requisite corporate action on the part of the Guarantor. This
Guaranty has been duly executed and delivered by the Guarantor and constitutes
the valid and binding obligation of the Guarantor enforceable against the
Guarantor in accordance with its terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to, or affecting generally the enforcement
of, creditors' rights and remedies or by other equitable principles of general
application.

 

(c)          No Conflicts. The execution, delivery and performance of this
Guaranty by the Guarantor and the consummation by the Guarantor of the
transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of its Certificate of Incorporation or By-laws or (ii)
conflict with, constitute a default (or an event which with notice or lapse of
time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which the Guarantor is a party, or (iii) result in a
violation of any law, rule, regulation, order, judgment, injunction, decree or
other restriction of any court or governmental authority to which the Guarantor
is subject (including Federal and State securities laws and regulations), or by
which any material property or asset of the Guarantor is bound or affected,
except in the case of each of clauses (ii) and (iii), such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as could
not, individually or in the aggregate, have or result in a Material Adverse
Effect. The business of the Guarantor is not being conducted in violation of any
law, ordinance or regulation of any governmental authority, except for
violations which, individually or in the aggregate, do not have a Material
Adverse Effect.

 

6

 

 

(d)          Consents and Approvals. The Guarantor is not required to obtain any
consent, waiver, authorization or order of, or make any filing or registration
with, any court or other federal, state, local, foreign or other governmental
authority or other person in connection with the execution, delivery and
performance by the Guarantor of this Guaranty.

 

(e)          Purchase Agreement. The representations and warranties of the
Company set forth in the Purchase Agreement as they relate to such Guarantor,
each of which is hereby incorporated herein by reference, are true and correct
as of each time such representations are deemed to be made pursuant to such
Purchase Agreement, and the Purchasers shall be entitled to rely on each of them
as if they were fully set forth herein, provided that each reference in each
such representation and warranty to the Company's knowledge shall, for the
purposes of this Section 3, be deemed to be a reference to such Guarantor's
knowledge.

 

(f)          Foreign Law. Each Guarantor has consulted with appropriate foreign
legal counsel with respect to any of the above representations for which
non-U.S. law is applicable. Such foreign counsel have advised each applicable
Guarantor that such counsel knows of no reason why any of the above
representations would not be true and accurate. Such foreign counsel were
provided with copies of this Subsidiary Guarantee and the Transaction Documents
prior to rendering their advice.

 

4.           Covenants.

 

(a)          Each Guarantor covenants and agrees with the Purchasers that, from
and after the date of this Guarantee until the Obligations shall have been
indefeasibly paid in full, such Guarantor shall take, and/or shall refrain from
taking, as the case may be, each commercially reasonable action that is
necessary to be taken or not taken, as the case may be, so that no Event of
Default (as defined in the Debentures) is caused by the failure to take such
action or to refrain from taking such action by such Guarantor.

 

(b)          So long as any of the Obligations are outstanding, unless
Purchasers holding at least 67% of the aggregate principal amount of the then
outstanding Debentures shall otherwise consent in writing, each Guarantor will
not directly or indirectly on or after the date of this Guarantee:

 

i.            enter into, create, incur, assume or suffer to exist any
indebtedness for borrowed money of any kind, including but not limited to, a
guarantee, on or with respect to any of its property or assets now owned or
hereafter acquired or any interest therein or any income or profits therefrom;

 

ii.         enter into, create, incur, assume or suffer to exist any liens of
any kind, on or with respect to any of its property or assets now owned or
hereafter acquired or any interest therein or any income or profits therefrom;

 

7

 

 

iii.         amend its certificate of incorporation, bylaws or other charter
documents so as to adversely affect any rights of any Purchaser;

 

iv.         repay, repurchase or offer to repay, repurchase or otherwise acquire
more than a de minimis number of shares of its securities or debt obligations;

 

v.           pay cash dividends on any equity securities of the Company;

 

vi.         enter into any transaction with any Affiliate of the Guarantor which
would be required to be disclosed in any public filing of the Company with the
Commission, unless such transaction is made on an arm’s-length basis and
expressly approved by a majority of the disinterested directors of the Company
(even if less than a quorum otherwise required for board approval); or

 

vii.         enter into any agreement with respect to any of the foregoing.

 

5.           Miscellaneous.

 

(a)          Amendments in Writing. None of the terms or provisions of this
Guarantee may be waived, amended, supplemented or otherwise modified except in
writing by the Purchasers.

 

(b)          Notices. All notices, requests and demands to or upon the
Purchasers or any Guarantor hereunder shall be effected in the manner provided
for in the Purchase Agreement, provided that any such notice, request or demand
to or upon any Guarantor shall be addressed to such Guarantor at its notice
address set forth on Schedule 5(b).

 

(c)          No Waiver By Course Of Conduct; Cumulative Remedies. The Purchasers
shall not by any act (except by a written instrument pursuant to Section 5(a)),
delay, indulgence, omission or otherwise be deemed to have waived any right or
remedy hereunder or to have acquiesced in any default under the Transaction
Documents or Event of Default. No failure to exercise, nor any delay in
exercising, on the part of the Purchasers, any right, power or privilege
hereunder shall operate as a waiver thereof. No single or partial exercise of
any right, power or privilege hereunder shall preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. A
waiver by the Purchasers of any right or remedy hereunder on any one occasion
shall not be construed as a bar to any right or remedy which the Purchasers
would otherwise have on any future occasion. The rights and remedies herein
provided are cumulative, may be exercised singly or concurrently and are not
exclusive of any other rights or remedies provided by law.

 

8

 

 

(d)          Enforcement Expenses; Indemnification.

 

(i)          Each Guarantor agrees to pay, or reimburse the Purchasers for, all
its costs and expenses incurred in collecting against such Guarantor under the
guarantee contained in Section 2 or otherwise enforcing or preserving any rights
under this Guarantee and the other Transaction Documents to which such Guarantor
is a party, including, without limitation, the reasonable fees and disbursements
of counsel to the Purchasers.

 

(ii)         Each Guarantor agrees to pay, and to save the Purchasers harmless
from, any and all liabilities with respect to, or resulting from any delay in
paying, any and all stamp, excise, sales or other taxes which may be payable or
determined to be payable in connection with any of the transactions contemplated
by this Guarantee.

 

(iii)        Each Guarantor agrees to pay, and to save the Purchasers harmless
from, any and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind or nature
whatsoever with respect to the execution, delivery, enforcement, performance and
administration of this Guarantee to the extent the Company would be required to
do so pursuant to the Purchase Agreement.

 

(iv)        The agreements in this Section shall survive repayment of the
Obligations and all other amounts payable under the Purchase Agreement and the
other Transaction Documents.

 

(e)          Successor and Assigns. This Guarantee shall be binding upon the
successors and assigns of each Guarantor and shall inure to the benefit of the
Purchasers and their respective successors and assigns; provided that no
Guarantor may assign, transfer or delegate any of its rights or obligations
under this Guarantee without the prior written consent of the Purchasers.

 

9

 

 

(f)          Set-Off. Each Guarantor hereby irrevocably authorizes the
Purchasers at any time and from time to time while an Event of Default under any
of the Transaction Documents shall have occurred and be continuing, without
notice to such Guarantor or any other Guarantor, any such notice being expressly
waived by each Guarantor, to set-off and appropriate and apply any and all
deposits, credits, indebtedness or claims, in any currency, in each case whether
direct or indirect, absolute or contingent, matured or unmatured, at any time
held or owing by the Purchasers to or for the credit or the account of such
Guarantor, or any part thereof in such amounts as the Purchasers may elect,
against and on account of the obligations and liabilities of such Guarantor to
the Purchasers hereunder and claims of every nature and description of the
Purchasers against such Guarantor, in any currency, whether arising hereunder,
under the Purchase Agreement, any other Transaction Document or otherwise, as
the Purchasers may elect, whether or not the Purchasers have made any demand for
payment and although such obligations, liabilities and claims may be contingent
or unmatured. The Purchasers shall notify such Guarantor promptly of any such
set-off and the application made by the Purchasers of the proceeds thereof,
provided that the failure to give such notice shall not affect the validity of
such set-off and application. The rights of the Purchasers under this Section
are in addition to other rights and remedies (including, without limitation,
other rights of set-off) which the Purchasers may have.

 

(g)          Counterparts. This Guarantee may be executed by one or more of the
parties to this Guarantee on any number of separate counterparts (including by
telecopy), and all of said counterparts taken together shall be deemed to
constitute one and the same instrument.

 

(h)          Severability. Any provision of this Guarantee which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.

 

(i)           Section Headings. The Section headings used in this Guarantee are
for convenience of reference only and are not to affect the construction hereof
or be taken into consideration in the interpretation hereof.

 

(j)           Integration. This Guarantee and the other Transaction Documents
represent the agreement of the Guarantors and the Purchasers with respect to the
subject matter hereof and thereof, and there are no promises, undertakings,
representations or warranties by the Purchasers relative to subject matter
hereof and thereof not expressly set forth or referred to herein or in the other
Transaction Documents.

 

10

 

 

(k)          Governing Laws. All questions concerning the construction,
validity, enforcement and interpretation of this Guarantee shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflicts of law thereof. Each of
the Company and the Guarantors agree that all proceedings concerning the
interpretations, enforcement and defense of the transactions contemplated by
this Guarantee (whether brought against a party hereto or its respective
affiliates, directors, officers, shareholders, partners, members, employees or
agents) shall be commenced exclusively in the state and federal courts sitting
in the City of New York, Borough of Manhattan. Each of the Company and the
Guarantors hereby irrevocably submits to the exclusive jurisdiction of the state
and federal courts sitting in the City of New York, Borough of Manhattan for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any proceeding, any claim that it is not
personally subject to the jurisdiction of any such court, that such proceeding
is improper. Each party hereto hereby irrevocably waives personal service of
process and consents to process being served in any such proceeding by mailing a
copy thereof via registered or certified mail or overnight delivery (with
evidence of delivery) to such party at the address in effect for notices to it
under this Guarantee and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing contained herein shall
be deemed to limit in any way any right to serve process in any manner permitted
by law. Each party hereto hereby irrevocably waives, to the fullest extent
permitted by applicable law, any and all right to trial by jury in any legal
proceeding arising out of or relating to this Guarantee or the transactions
contemplated hereby.

 

(l)          Acknowledgements. Each Guarantor hereby acknowledges that:

 

(i)          it has been advised by counsel in the negotiation, execution and
delivery of this Guarantee and the other Transaction Documents to which it is a
party;

 

(ii)         the Purchasers have no fiduciary relationship with or duty to any
Guarantor arising out of or in connection with this Guarantee or any of the
other Transaction Documents, and the relationship between the Guarantors, on the
one hand, and the Purchasers, on the other hand, in connection herewith or
therewith is solely that of debtor and creditor; and

 

(iii)        no joint venture is created hereby or by the other Transaction
Documents or otherwise exists by virtue of the transactions contemplated hereby
among the Guarantors and the Purchasers.

 

(m)          Additional Guarantors. The Company shall cause each of its
subsidiaries formed or acquired on or subsequent to the date hereof to become a
Guarantor for all purposes of this Guarantee by executing and delivering an
Assumption Agreement in the form of Annex 1 hereto.

 

(n)          Release of Guarantors. Each Guarantor will be released from all
liability hereunder concurrently with the indefeasible repayment in full of all
amounts owed under the Purchase Agreement, the Debentures and the other
Transaction Documents.

 

11

 

 

(o)          Seniority. The Obligations of each of the Guarantors hereunder rank
senior in priority to any other Indebtedness (as defined in the Purchase
Agreement) of such Guarantor.

 

(p)          WAIVER OF JURY TRIAL. EACH GUARANTOR AND, BY ACCEPTANCE OF THE
BENEFITS HEREOF, THE PURCHASERS, HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE
TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS GUARANTEE AND
FOR ANY COUNTERCLAIM THEREIN.

 

*********************

 

(Signature Pages Follow)

 

12

 

 

IN WITNESS WHEREOF, each of the undersigned has caused this Guarantee to be duly
executed and delivered as of the date first above written.

 

  [SUBSIDIARY         By:       Name:     Title:

 

13

 

SCHEDULE 1

 

GUARANTORS

 

The following are the names, notice addresses and jurisdiction of organization
of each Guarantor.

 

      COMPANY   JURISDICTION OF   OWNED BY   INCORPORATION   PERCENTAGE        

 

14

 

 

Annex 1 to

SUBSIDIARY GUARANTEE

 

ASSUMPTION AGREEMENT, dated as of ____ __, ______ made by
______________________________, a ______________ corporation (the “Additional
Guarantor”), in favor of the Purchasers pursuant to the Purchase Agreement
referred to below. All capitalized terms not defined herein shall have the
meaning ascribed to them in such Purchase Agreement.

 

WITNESSETH:

 

WHEREAS, Baxano Surgical, Inc., a Delaware corporation (the “Company”) and the
Purchasers have entered into a Securities Purchase Agreement, dated as of
September ___, 2014 (as amended, supplemented or otherwise modified from time to
time, the “Purchase Agreement”);

 

WHEREAS, in connection with the Purchase Agreement, the Subsidiaries of the
Company (other than the Additional Guarantor) have entered into the Subsidiary
Guarantee, dated as of September ___, 2014 (as amended, supplemented or
otherwise modified from time to time, the “Guarantee”) in favor of the
Purchasers;

 

WHEREAS, the Purchase Agreement requires the Additional Guarantor to become a
party to the Guarantee; and

 

WHEREAS, the Additional Guarantor has agreed to execute and deliver this
Assumption Agreement in order to become a party to the Guarantee;

 

NOW, THEREFORE, IT IS AGREED:

 

1.          Guarantee. By executing and delivering this Assumption Agreement,
the Additional Guarantor, as provided in Section 5(m) of the Guarantee, hereby
becomes a party to the Guarantee as a Guarantor thereunder with the same force
and effect as if originally named therein as a Guarantor and, without limiting
the generality of the foregoing, hereby expressly assumes all obligations and
liabilities of a Guarantor thereunder. The information set forth in Annex 1
hereto is hereby added to the information set forth in Schedule 1 to the
Guarantee. The Additional Guarantor hereby represents and warrants that each of
the representations and warranties contained in Section 3 of the Guarantee is
true and correct on and as the date hereof as to such Additional Guarantor
(after giving effect to this Assumption Agreement) as if made on and as of such
date.

 

2.          Governing Law. THIS ASSUMPTION AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.

 

15

 

 

IN WITNESS WHEREOF, the undersigned has caused this Assumption Agreement to be
duly executed and delivered as of the date first above written.

 

  [ADDITIONALGUARANTOR]       By:     Name:   Title:

 

16

 

 

Exhibit D

 

Securities Questionnaire

 

 

 

 

 

EXHIBIT D-1

 

Accredited Investor Questionnaire

 

(ALL INFORMATION WILL BE TREATED CONFIDENTIALLY)

 

To:Baxano Surgical, Inc.

 

This Investor Questionnaire (“Questionnaire”) must be completed by each
potential investor in connection with the offer and sale of the shares of the
subordinated convertible debentures, shares of common stock, par value $0.0001
per share (the “common stock”), that may be issued upon conversion of such
debentures, shares of common stock that may be issued as payment of interest
under the debentures, certain warrants and shares of common stock that may be
issued upon exercise of such warrants (collectively, the “Securities”), of
Baxano Surgical, Inc., a Delaware corporation (the “Corporation”). The
Securities are being offered and sold by the Corporation without registration
under the Securities Act of 1933, as amended (the “Act”), and the securities
laws of certain states, in reliance on the exemptions contained in Section 4(2)
of the Act and on Regulation D promulgated thereunder and in reliance on similar
exemptions under applicable state laws. The Corporation must determine that a
potential investor meets certain suitability requirements before offering or
selling Securities to such investor. The purpose of this Questionnaire is to
assure the Corporation that each investor will meet the applicable suitability
requirements. The information supplied by you will be used in determining
whether you meet such criteria, and reliance upon the private offering
exemptions from registration is based in part on the information herein
supplied.

 

This Questionnaire does not constitute an offer to sell or a solicitation of an
offer to buy any security. Your answers will be kept strictly confidential.
However, by signing this Questionnaire, you will be authorizing the Corporation
to provide a completed copy of this Questionnaire to such parties as the
Corporation deems appropriate in order to ensure that the offer and sale of the
Securities will not result in a violation of the Act or the securities laws of
any state and that you otherwise satisfy the suitability standards applicable to
purchasers of the Securities. All potential investors must answer all applicable
questions and complete, date and sign this Questionnaire. Please print or type
your responses and attach additional sheets of paper if necessary to complete
your answers to any item.

 

PART A.           BACKGROUND INFORMATION

 

Name of Beneficial Owner of the
Securities:_____________________________________________

 

Business
Address:________________________________________________________________

(Number and Street)

______________________________________________________________________________

(City)                                      (State)                                                                         (Zip
Code)

 

Telephone Number:
(___)__________________________________________________________

 

If a corporation, partnership, limited liability company, trust or other entity:

Type of
entity:___________________________________________________________________

State of formation:______________________ Approximate Date of formation:
____________________

 

Were you formed for the purpose of investing in the securities being offered?

 

Yes ¨               No ¨

 

 

 

 

If an individual:

 

Residence
Address:_______________________________________________________________

(Number and Street)

______________________________________________________________________________

(City)                                      (State)                                                                         (Zip
Code)

 

Telephone Number: (___)
__________________________________________________________

 

Age: __________ Citizenship: ____________ Where registered to vote:
_______________

 

Set forth in the space provided below the state(s), if any, in the United States
in which you maintained your residence during the past two years and the dates
during which you resided in each state:

 

Are you a director or executive officer of the Corporation?

 

Yes ¨              No ¨

 

Social Security or Taxpayer Identification
No.  ___________________________________________________         

 

PART B.           ACCREDITED INVESTOR QUESTIONNAIRE

 

In order for the Corporation to offer and sell the Securities in conformance
with state and federal securities laws, the following information must be
obtained regarding your investor status. Please initial each category applicable
to you as a Purchaser of Securities of the Company.

 

  __(1) A bank as defined in Section 3(a)(2) of the Securities Act, or any
savings and loan association or other institution as defined in Section
3(a)(5)(A) of the Securities Act whether acting in its individual or fiduciary
capacity;

 

  __(2) A broker or dealer registered pursuant to Section 15 of the Securities
Exchange Act of 1934;

 

  __(3) An insurance company as defined in Section 2(13) of the Securities Act;

 

  __(4) An investment company registered under the Investment Company Act of
1940 or a business development company as defined in Section 2(a)(48) of that
Act;

 

  __(5) A Small Business Investment Company licensed by the U.S. Small Business
Administration under Section 301(c) or (d) of the Small Business Investment Act
of 1958;

 

  __(6) A plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its political
subdivisions, for the benefit of its employees, if such plan has total assets in
excess of $5,000,000;

 

 

 

 

  __(7) An employee benefit plan within the meaning of the Employee Retirement
Income Security Act of 1974, if the investment decision is made by a plan
fiduciary, as defined in Section 3(21) of such act, which is either a bank,
savings and loan association, insurance company, or registered investment
adviser, or if the employee benefit plan has total assets in excess of
$5,000,000 or, if a self-directed plan, with investment decisions made solely by
persons that are accredited investors;

 

  __(8) A private business development company as defined in Section 202(a)(22)
of the Investment Advisers Act of 1940;

 

  __(9) An organization described in Section 501(c)(3) of the Internal Revenue
Code, a corporation, Massachusetts or similar business trust, or partnership,
not formed for the specific purpose of acquiring the Securities, with total
assets in excess of $5,000,000;

 

  __(10) A trust, with total assets in excess of $5,000,000, not formed for the
specific purpose of acquiring the Securities, whose purchase is directed by a
sophisticated person who has such knowledge and experience in financial and
business matters that such person is capable of evaluating the merits and risks
of investing in the Corporation;

  

  ___(11) A natural person whose individual net worth, or joint net worth with
that person’s spouse, at the time of his purchase exceeds $1,000,000;

 

  ___(12) A natural person who had an individual income in excess of $200,000 in
each of the two most recent years, or joint income with that person’s spouse in
excess of $300,000, in each of those years, and has a reasonable expectation of
reaching the same income level in the current year;         ___(13) An executive
officer or director of the Corporation;

  

  ___(14) An entity in which all of the equity owners qualify under any of the
above subparagraphs. If the undersigned belongs to this investor category only,
list the equity owners of the undersigned, and the investor category which each
such equity owner satisfies.

 

A.           FOR EXECUTION BY AN INDIVIDUAL: 

 

    By   Date           Print Name:  

 

 

 

 

B.           FOR EXECUTION BY AN ENTITY:

 

  Entity Name:  

 

    By   Date           Print Name:       Title:  

 

C.           ADDITIONAL SIGNATURES (if required by partnership, corporation or
trust document):

 

  Entity Name:  

 

    By   Date           Print Name:       Title:  

 

  Entity Name:  

 

    By   Date           Print Name:       Title:  

 

 

 

 

Exhibit D-2

 

Securities Questionnaire

 

Pursuant to Section 2.2(b) of the Agreement, please provide us with the
following information:

 

1. The exact name that the Securities are to be registered in (this is the name
that will appear on the stock certificate(s)).  You may use a nominee name if
appropriate:         2. The relationship between the Purchaser of the Securities
and the Registered Holder listed in response to Item 1 above:         3. The
mailing address, telephone number and e-mail address of the Registered Holder
listed in response to Item 1 above:                                            
            4. The Tax Identification Number (or, if an individual, the Social
Security Number) of the Registered Holder listed in response to Item 1 above:  

 

 

 

 

Exhibit F

 

Irrevocable Transfer Agent Instructions

 

 

 

 

 

Form of Irrevocable Transfer Agent Instructions

 

As of [ ˜ ], 2014

 

American Stock Transfer & Trust Company, LLC
10150 Mallard Creek Road
Suite 307
Charlotte, North Carolina 28262

Attn: Joan K. Greenfield

 

Ladies and Gentlemen:

 

Reference is made to that certain Securities Purchase Agreement, dated as of
[ ˜ ], 2014 (the “Agreement”), by and among Baxano Surgical, Inc., a Delaware
corporation (the “Company”), and the purchasers named on the signature pages
thereto (collectively, and including permitted transferees, the “Holders”),
pursuant to which the Company is issuing to the Holders subordinated convertible
debentures (the “Debentures”), which are convertible into shares of Common Stock
of the Company, par value $0.0001 per share (the “Common Stock”) (such shares,
the “Conversion Shares”) and on which the Company may pay interest in shares of
Common Stock (the “Interest Shares”).

 

This letter shall serve as our irrevocable authorization and direction to you
(provided that you are the transfer agent of the Company at such time and the
conditions set forth in this letter are satisfied), subject to any stop transfer
instructions that we may issue to you from time to time, if any:

 

(i)          to issue certificates or book entries representing shares of Common
Stock upon transfer or resale of the Conversion Shares or Interest Shares; and

 

(ii)         to issue Conversion Shares upon the conversion of the Debentures to
a Holder from time to time upon delivery to you by the Company of a properly
completed and duly executed Conversion Notice, in the form attached hereto as
Annex I, which has been acknowledged by the Company as indicated by the
signature of a duly authorized officer of the Company thereon together with
indication of receipt of the exercise price therefor and direction to you to
issue the number of Conversion Shares indicated on the Conversion Notice; and

 

You acknowledge and agree that so long as you have received (a) written
confirmation from the Company’s legal counsel that either (1) a registration
statement covering resales of the Conversion Shares and the Interest Shares has
been declared effective by the Securities and Exchange Commission (the
“Commission”) under the Securities Act of 1933, as amended (the “Securities
Act”), or (2) the Conversion Shares and the Interest Shares have been sold in
conformity with Rule 144 under the Securities Act (“Rule 144”) or are eligible
for sale under Rule 144, without the requirement for the Company to be in
compliance with the current public information required under Rule 144 as to
such securities and without volume or manner-of-sale restrictions and (b) if
applicable, a copy of such registration statement, then, unless otherwise
required by law, within three (3) Trading Days of your receipt of a notice of
transfer, Conversion Shares, Interest Shares or Conversion Notice (such
Conversion Notice to be delivered by the Company together with its
acknowledgment), you shall issue the certificates representing the Conversion
Shares and/or the Interest Shares, as the case may be, registered in the names
of such Holders or transferees, as the case may be, and such certificates shall
not bear any legend restricting transfer of the Conversion Shares or the
Interest Shares thereby and should not be subject to any stop-transfer
restriction; provided, however, that if such Conversion Shares and Interest
Shares are not registered for resale under the Securities Act or able to be sold
under Rule 144 without the requirement for the Company to be in compliance with
the current public information required under Rule 144 as to such securities and
without volume or manner-of-sale restrictions, then the certificates for such
Conversion Shares and/or Interest Shares shall bear the following legend:

 

 

 

  

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE “SECURITIES ACT”), OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE
ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OR (B) AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT
SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN
ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS OR BLUE SKY LAWS AS EVIDENCED
BY A LEGAL OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY AND ITS
TRANSFER AGENT. 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.

 

A form of written confirmation from the Company’s outside legal counsel that a
registration statement covering resales of the Conversion Shares and Interest
Shares has been declared effective by the Commission under the Securities Act is
attached hereto as Annex II.

 

Please be advised that the Holders are relying upon this letter as an inducement
to enter into the Agreement and, accordingly, each Holder is a third party
beneficiary to these instructions.

 

Please execute this letter in the space indicated to acknowledge your agreement
to act in accordance with these instructions.

 

  Very truly yours,       BAXANO SURGICAL, INC.         By:     Name:     Title:
 

 

Acknowledged and Agreed:

 

AMERICAN STOCK TRANSFER & TRUST COMPANY, LLC

 

By:   Name:   Title:  

 

Date: _________________, 2014

 

 

 

 

Annex I

FORM OF CONVERSION NOTICE

 

[To be executed by the Holder to exercise the right to convert the Debenture
into shares of Common Stock]

 

To: Baxano Surgical, Inc.

 

(1)         The undersigned is the Holder of a Debenture in aggregate principal
amount of $               (the “Debenture”) issued by Baxano Surgical, Inc., a
Delaware corporation (the “Company”). Capitalized terms used herein and not
otherwise defined herein have the respective meanings set forth in the
Debenture.

 

(2)         In accordance with and pursuant to the Debenture, the undersigned
hereby elects to convert the Conversion Amount (as defined in the Debenture) of
the Debenture indicated below into shares of common stock, par value $0.0001 per
share, of the Company, as of the date specified below.

 

Date of Conversion       Aggregate Principal to be converted       Aggregate
accrued and unpaid Interest and accrued and unpaid Late Charges with respect to
such portion of Aggregate Principal and such Aggregate Interest to be converted
      AGGREGATE CONVERSION AMOUNT TO BE CONVERTED  

 

Please confirm the following information:

 

Conversion Price       Number of shares of Common Stock to be issued  

 

Please issue the Common Stock into which the Debenture is being converted in the
following name and to the following addressee:

 

Issued to: _________________________________

 

Facsimile Number: __________________________

 

Account Number: ___________________________

(if electronic book entry transfer)

 

Transfer Code Number: ______________________

 

 

 

 

The undersigned hereby executes and delivery this Conversion Notice as of the
date set forth below:

 

Holder:    By:    Its:   

(Signature must conform in all respects to name of Holder as specified on the
face of the Warrant)

 

Dated:

 

ACKNOWLEDGEMENT

 

The Company hereby acknowledges this Conversion Notice and hereby directs
American Stock Transfer & Trust Company, LLC to issue the above indicated number
of shares of Common Stock in accordance with the Irrevocable Transfer Agent
Instructions dated [ ˜ ], 2014, from the Company and acknowledged and agreed to
by American Stock Transfer & Trust Company, LLC.

 

  BAXANO SURGICAL, INC.         By:     Name:     Title:  

 

 

 

  

Annex II

 

FORM OF NOTICE OF EFFECTIVENESS OF REGISTRATION STATEMENT

     

American Stock Transfer & Trust Company, LLC
10150 Mallard Creek Road
Suite 307
Charlotte, North Carolina 28262

Attn: Joan K. Greenfield 

          Re: Baxano Surgical, Inc.

 

Ladies and Gentlemen:

 

We are counsel to Baxano Surgical, Inc., a Delaware corporation (the “Company”),
and have represented the Company in connection with that certain Securities
Purchase Agreement, dated as of [ ˜ ], 2014, entered into by and among the
Company and the purchasers named therein (collectively, the “Purchasers”)
pursuant to which the Company issued to the Purchasers subordinated convertible
debentures (the “Debentures”), which are convertible into shares of Common Stock
of the Company, par value $0.0001 per share (the “Common Stock”) (such shares,
the “Conversion Shares”) and pursuant to which the Company may pay interest in
shares of Common Stock (the “Interest Shares”). Pursuant to that certain
Registration Rights Agreement of even date, the Company agreed to register the
resale of the Conversion Shares and Interest Shares (collectively, the
“Registrable Securities”), under the Securities Act of 1933, as amended (the
“Securities Act”). In connection with the Company’s obligations under the
Registration Rights Agreement, on                     , 2014, the Company filed
a Registration Statement on Form S-3 (File No. 333-                    ) (the
“Registration Statement”) with the Securities and Exchange Commission (the
“Commission”) relating to the Registrable Securities which names each of the
Purchasers as a selling stockholder thereunder.

 

In connection with the foregoing, we advise you that a member of the
Commission’s staff has advised us by telephone that the Commission has entered
an order declaring the Registration Statement effective under the Securities Act
at ____ [a.m.][p.m.] on __________, 2014, and we have no knowledge, after a
review of the Commission’s “Stop Orders” web page, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the Commission and the Registrable
Securities are available for resale under the Securities Act pursuant to the
Registration Statement.

 

This letter shall serve as our standing notice to you that the Common Stock may
be freely transferred by the Purchasers pursuant to the Registration Statement.
You need not require further letters from us to effect any future legend-free
issuance or reissuance of shares of Common Stock to the Purchasers or the
transferees of the Purchasers, as the case may be, as contemplated by the
Company’s Irrevocable Transfer Agent Instructions dated __________, 2014,
provided at the time of such reissuance, the Company has not otherwise notified
you that the Registration Statement is unavailable for the resale of the
Registrable Securities. This letter shall serve as our standing instructions
with regard to this matter.

              Very truly yours,               GOODWIN PROCTER LLP              
By:    

 

 

 

  

Exhibit G

 

Secretary’s Certificate

 

 

 

  

BAXANO SURGICAL, INC.

 

Secretary’s Certificate

 

The undersigned hereby certifies that he is the duly elected, qualified and
acting Secretary of Baxano Surgical, Inc., a Delaware corporation (the
“Company”), and that as such he is authorized to execute and deliver this
certificate in the name and on behalf of the Company and in connection with the
Securities Purchase Agreement, dated as of September [_], 2014, by and among the
Company and the investors party thereto (the “Securities Purchase Agreement”),
and further certifies in his official capacity, in the name and on behalf of the
Company, the items set forth below. Capitalized terms used but not otherwise
defined herein shall have the meaning set forth in the Securities Purchase
Agreement.

 

1.Attached hereto as Exhibit A is a true, correct and complete copy of the
resolutions duly adopted by the Board of Directors of the Company at a meeting
of the Board of Directors held on ___________, 2014. Such resolutions have not
in any way been amended, modified, revoked or rescinded, have been in full force
and effect since their adoption to and including the date hereof and are now in
full force and effect.

 

2.Attached hereto as Exhibit B is a true, correct and complete copy of the
Certificate of Incorporation of the Company, together with any and all
amendments thereto currently in effect, and no action has been taken to further
amend, modify or repeal such Certificate of Incorporation, the same being in
full force and effect in the attached form as of the date hereof.

 

3.Attached hereto as Exhibit C is a true, correct and complete copy of the
Bylaws of the Company and any and all amendments thereto currently in effect,
and no action has been taken to further amend, modify or repeal such Bylaws, the
same being in full force and effect in the attached form as of the date hereof.

 

4.Each person listed below has been duly elected or appointed to the position(s)
indicated opposite his name and is duly authorized to sign the Securities
Purchase Agreement and each of the Transaction Documents on behalf of the
Company, and the signature appearing opposite such person’s name below is such
person’s genuine signature.

 

Name   Position   Signature           Ken Reali   Chief Executive Officer      
        Timothy M. Shannon   Chief Financial Officer    

 

[Remainder of Page Intentionally Left Blank]

 

 

 

 

IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of this ____
day of September, 2014.

 

      Timothy M. Shannon   Chief Financial Officer, Treasurer and Secretary

 

I, Ken Reali, President and Chief Executive Officer, hereby certify that Timothy
M. Shannon is the duly elected, qualified and acting Secretary of the Company
and that the signature set forth above is his true signature.

 

      Ken Reali   President and Chief Executive Officer

 

[Signature Page to Secretary’s Certificate]

 

 

 

 

Exhibit H

 

Officer’s Certificate

 

 

 

  

BAXANO SURGICAL, INC.

 

Officer’s Certificate

 

The undersigned, the President and Chief Executive Officer of Baxano Surgical,
Inc., a Delaware corporation (the “Company”), pursuant to Section 5.1(i) of the
Securities Purchase Agreement, dated as of September [__], 2014, by and among
the Company and the investors signatory thereto (the “Securities Purchase
Agreement”), hereby represents, warrants and certifies as follows (capitalized
terms used but not otherwise defined herein shall have the meaning set forth in
the Securities Purchase Agreement):

 

1.The representations and warranties of the Company contained in the Securities
Purchase Agreement are true and correct in all material respects (except for
those representations and warranties which are qualified as to materiality, in
which case, such representations and warranties shall be true and correct in all
respects) as of the date when made and as of the date hereof, as though made on
and as of such date, except for such representations and warranties that speak
as of a specific date.

 

2.The Company has performed, satisfied and complied in all material respects
with all covenants, agreements and conditions required by the Transaction
Documents to be performed, satisfied or complied with by it at or prior to the
date hereof.

 

[Remainder of Page Intentionally Left Blank]

 

 

 

 

IN WITNESS WHEREOF, the undersigned has executed this certificate this ___ day
of September, 2014.

 

      Ken Reali   President and Chief Executive Officer

 

[Signature Page to Officer’s Certificate]

 

 

 

 

Exhibit I

 

Russell Hirsch, M.D., Ph.D.

Jeffrey Fischgrund, M.D.

Paul LaViolette

Roderick A. Young

Mark Stautberg

James Shapiro

David Simpson

Ken Reali

Timothy M. Shannon

Stephanie Fitts

Greg Welsh

Stephen D. Ainsworth

Matthew Pickens

 

 

 

 

Exhibit J

 

Form of Lock-Up

 

 

 

 

EXHIBIT __

 

FORM OF LOCK-UP AGREEMENT

 

September __, 2014

 

Each Purchaser referenced below:

 

Re:Securities Purchase Agreement, dated as of September __, 2014 (the “Purchase
Agreement”), between Baxano Surgical, Inc., a Delaware corporation (the
“Company”) and the purchasers signatory thereto (each, a “Purchaser” and,
collectively, the “Purchasers”)

 

Ladies and Gentlemen:

 

Defined terms not otherwise defined in this letter agreement (the “Letter
Agreement”) shall have the meanings set forth in the Purchase Agreement.
Pursuant to Section 4.23 of the Purchase Agreement and in satisfaction of a
condition of the Company’s obligations under the Purchase Agreement, the
undersigned irrevocably agrees with the Company that, from the date hereof until
the 90th day following the Effective Date (such period, the “Restriction
Period”), the undersigned will not offer, sell, contract to sell, hypothecate,
pledge or otherwise dispose of (or enter into any transaction which is designed
to, or might reasonably be expected to, result in the disposition (whether by
actual disposition or effective economic disposition due to cash settlement or
otherwise) by the undersigned or any Affiliate of the undersigned or any person
in privity with the undersigned or any Affiliate of the undersigned), directly
or indirectly, including the filing (or participation in the filing) of a
registration statement with the Commission in respect of, or establish or
increase a put equivalent position or liquidate or decrease a call equivalent
position within the meaning of Section 16 of the Exchange Act with respect to,
any shares of Common Stock or Common Stock Equivalents beneficially owned, held
or hereafter acquired by the undersigned (the “Securities”). Beneficial
ownership shall be calculated in accordance with Section 13(d) of the Exchange
Act. In order to enforce this covenant, the Company shall impose irrevocable
stop-transfer instructions preventing the Transfer Agent from effecting any
actions in violation of this Letter Agreement.

 

The undersigned acknowledges that the execution, delivery and performance of
this Letter Agreement is a material inducement to each Purchaser to complete the
transactions contemplated by the Purchase Agreement and that each Purchaser
(which shall be a third party beneficiary of this Letter Agreement) and the
Company shall be entitled to specific performance of the undersigned’s
obligations hereunder. The undersigned hereby represents that the undersigned
has the power and authority to execute, deliver and perform this Letter
Agreement, that the undersigned has received adequate consideration therefor and
that the undersigned will indirectly benefit from the closing of the
transactions contemplated by the Purchase Agreement.

 

 

 

 

This Letter Agreement may not be amended or otherwise modified in any respect
without the written consent of each of the Company, each Purchaser and the
undersigned. This Letter Agreement shall be construed and enforced in accordance
with the laws of the State of New York without regard to the principles of
conflict of laws. The undersigned hereby irrevocably submits to the exclusive
jurisdiction of the United States District Court sitting in the Southern
District of New York and the courts of the State of New York located in
Manhattan, for the purposes of any suit, action or proceeding arising out of or
relating to this Letter Agreement, and hereby waives, and agrees not to assert
in any such suit, action or proceeding, any claim that (i) it is not personally
subject to the jurisdiction of such court, (ii) the suit, action or proceeding
is brought in an inconvenient forum, or (iii) the venue of the suit, action or
proceeding is improper. The undersigned hereby irrevocably waives personal
service of process and consents to process being served in any such suit, action
or proceeding by receiving a copy thereof sent to the Company at the address in
effect for notices to it under the Purchase Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. The undersigned hereby waives any right to a trial by jury. Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law. The undersigned agrees and understands that this
Letter Agreement does not intend to create any relationship between the
undersigned and each Purchaser and that each Purchaser is not entitled to cast
any votes on the matters herein contemplated and that no issuance or sale of the
Securities is created or intended by virtue of this Letter Agreement.

 

By its signature below, the Transfer Agent hereby acknowledges and agrees that,
reflecting this Letter Agreement, it has placed an irrevocable stop transfer
instruction on all Securities beneficially owned by the undersigned until the
end of the Restriction Period. This Letter Agreement shall be binding on
successors and assigns of the undersigned with respect to the Securities and any
such successor or assign shall enter into a similar agreement for the benefit of
the Purchasers.

 

*** SIGNATURE PAGE FOLLOWS***

 

2

 

 

This Letter Agreement may be executed in two or more counterparts, all of which
when taken together may be considered one and the same agreement.

  

    Signature           Print Name           Position in Company       Address
for Notice:                          

Number of shares of Common Stock

 

 

 

Number of shares of Common Stock underlying subject to warrants, options,
debentures or other convertible securities

 

By signing below, the Company agrees to enforce the restrictions on transfer set
forth in this Letter Agreement.

 

        By:   Name: Title:

 

Acknowledged and agreed to

as of the date set forth above:

 

[insert name of Transfer Agent]     By:   Name: Title:

 

3

 

 

Schedules

 

 

 

 

 

SCHEDULES:

 

3.1(a) Subsidiaries

3.1(g) Capitalization

3.1(j) Material Changes/Compliance

3.1(m) Compliance

3.1(o) Title to Assets

3.1(u) Certain Fees

3.1(x) Registration Rights

3.1(y) Listing and Maintenance Requirements

3.1(cc) Solvency

3.1(uu) Ranking of Debentures

 

 

 

 

Schedule 3.1(a)

 

Subsidiaries

 

TranS1 GmbH

 

TranS1 GmbH has been in the process of dissolution since 2011. The only
remaining asset is an approximate Euro 30,000 cash balance maintained in escrow
subject to the settlement of a claim by the former General Manager of TranS1
GmbH.

 

 

 

 

Schedule 3.1(g)

 

Capitalization

 

Authorized Shares

 

150, 000,000 shares of Common Stock, $0.0001 par value per share

5,000,000 shares of Preferred Stock, $0.0001 par value per share (zero shares
issued and outstanding)

 

Capitalization

 

Total Outstanding Common Stock as of 9/15/14   49,725,415         Shares
underlying convertible debentures and related warrants and interest held by two
institutional investors for April, 22, 2014   22,187,229  Shares reserved for
issuance to Lincoln Park Capital Fund, LLC   9,595,356  Shares underlying
warrant held by Hercules Technology Growth Capital, Inc. (“Hercules”) 
 1,176,471  Shares underlying outstanding RSUs granted pursuant to Amended and
Restated 2007 Stock Incentive Plan   1,844,671  Shares underlying outstanding
options granted pursuant to Amended and Restated 2000 Stock Incentive Plan 
 229,608  Shares underlying outstanding options granted pursuant to Amended and
Restated 2007 Stock Incentive Plan   3,686,849  Shares reserved for issuance
pursuant to Amended and Restated 2007 Stock Incentive Plan   2,086,480  Shares
reserved for issuance pursuant to Amended and Restated Employee Stock Purchase
Plan   221,402  Total Reserves   41,010,066 

 

Shares of Common Stock Issued since June 30, 2014

 

During the third quarter of 2014, the Company issued approximately 1.1 million
shares of Common Stock to Lincoln Park Capital Fund, LLC (“Lincoln Park”). As of
September 16, 2014, the Company had issued approximately 4.3 million shares of
Common Stock to Lincoln Park, leaving approximately $4.5 million for future
issuance of stock.

 

Stock Options Issued to Employees

 

The stock options included in the table above include stock options awarded to
employees through August 5, 2014.

 

Rights to Acquire Shares of Common Stock

 

In addition to the shares issuable pursuant to the Company’s equity compensation
plans and the Hercules warrant listed above, Hercules has the right to
participate on the same terms as other participants in certain types of broadly
marketed equity financings of the Company in an aggregate amount of up to
$1,000,000 pursuant to the Loan and Security Agreement, dated December 3, 2013,
between the Company and Hercules.

 

On August 1, 2014 the Company entered into an independent sales representative
agreement with Innotek Medical Products, Inc. which includes provisions
regarding potential future issuances of common stock.

 

 

 

 

Schedule 3.1(j)

 

Material Changes

 

Liquidity

 

The Company has incurred trade payables that have aged beyond normal terms and
are currently being serviced on a limited basis. Cumulative trade payables
considered past due as of 9/17/14 total approximately $2.9 million.

 

Certain vendors have indicated they will not continue doing business with the
Company until their account is current.

 

U.S. Government Settlement Agreement

 

On July 1, 2014, the Company agreed with the U.S. Government to defer the
scheduled payment of $0.7 million and is working with them to establish revised
quarterly payments to conclude over the original term ending July 1, 2015. The
revised quarterly payment signed by the Company but not yet signed by the U.S.
Government calls for a $0.7 million payment on October 1, 2014 and payments of
$0.9 million during 2015 on January, 2, April 1 and July 1. The Company expects
to request deferral of the October 1, 2014 payment to the U.S. Government.

 

U.S. Government Corporate Integrity Agreement

 

The Company entered into a Settlement Agreement and Corporate Integrity
Agreement (“CIA”) with certain U.S. government entities, which required the
Company to hire an Independent Review Organization (“IRO”) to assist the Company
in evaluating its systems and processes related to healthcare compliance. In a
draft report, the IRO noted several non-conformities during the IRO Year 1
Transactional Review in the overall processes, systems and in testing of
specific transactions, and identified one area to contain a "material error"
which is defined as missing or incomplete control documents which has led the
IRO to be unable to assess compliance to policies and procedures.

 

 

 

 

Schedule 3.1(m)

 

Compliance

 

The disclosures set forth on Schedule 3.1(j) are incorporated into this schedule
by reference.

 

 

 

 

Schedule 3.1(o)

 

Title to Assets

 

The Company has three capital leases for C-Arms machines and Surgical lights for
Labs in Raleigh, NC and San Jose, CA.

 

 

 

 

Schedule 3.1(u)

 

Certain Fees

 

The Company engaged Summer Street to act as placement agent for the transactions
contemplated by the Purchase Agreement at a 6% commission.

 

 

 

 

Schedule 3.1(x)

 

Registration Rights

 

Pursuant to the Warrant Agreement, dated December 3, 2013, between the Company
and Hercules, Hercules holds piggyback registration rights for the shares
issuable upon exercise of its warrant with respect to any resale registration
statement filed by the Company on behalf of any person other than the Company,
Lincoln Park and its affiliates prior to the date Hercules may sell all shares
underlying its warrant without restriction pursuant to Rule 144.

 

 

 

  

Schedule 3.1(y)

 

Listing and Maintenance Requirements

 

NASDAQ Notification Letter

 

On June 3, 2014, the Company received a notification letter from The NASDAQ OMX
Group (“NASDAQ”) indicating that the bid price of the Company’s Common Stock for
the last 30 consecutive business days had closed below the minimum $1.00 per
share required for continued listing under NASDAQ Listing Rule 5450(a)(1). If
the Company fails to regain compliance with applicable NASDAQ rules, the
Company’s Common Stock may be subject to delisting by NASDAQ.

 

NASDAQ Compliance

 

The Company is required to maintain minimum net stockholders’ equity of $10
million. At June 30, 2014, the Company’s reported net equity was $17,651,000.
The Company’s net stockholders’ equity may fall below the $10 million minimum
during or before the fourth quarter of 2014.

 

 

 

 

Schedule 3.1(cc)

 

Solvency

 

The Company maintains the following Indebtedness as of September 19, 2014:

 

·$7,500,000 senior secured term loan with Hercules Technology Growth Company

 

·$9,993,680 senior subordinated Convertible Debentures

 

·$17,871 capital lease obligations for Lab equipment (Stryker Finance)

 

·Three outstanding cash collaterized letters of credit with Silicon Valley Bank
for $250,000 (SVBSF005937), $150,000 (SVBSF008366), and $120,000 (SVBSF007136)

 

 

 

 

Schedule 3.1(uu)

 

Ranking of Debentures

 

1.Indebtedness incurred pursuant to that certain Loan and Security Agreement,
dated as of December 3, 2013, by and between the Company and Hercules Technology
Growth Capital, Inc., as amended.

 

2.Indebtedness incurred pursuant to that certain Securities Purchase Agreement,
dated as of March 11, 2014, among the Company and the other parties thereto.

 

3.Debentures (each being pari passu with the other Debentures)

 

4.Reimbursement obligations in respect of three (3) letters of credit issued by
Silicon Valley Bank.

 

5.Capital leases and purchase money indebtedness in respect of equipment.