Exhibit 10.1
    

CONVERTIBLE NOTE PURCHASE AGREEMENT
This Convertible Note Purchase Agreement (this “Agreement”) is dated as of June
2, 2015, between American Power Group Corporation, a Delaware corporation (the
“Company”), and each purchaser identified on the signature pages hereto (each, a
“Purchaser” and collectively the “Purchasers”).
WHEREAS, subject to the terms and conditions set forth in this Agreement and
pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506
of Regulation D promulgated thereunder, the Company desires to issue and sell to
each Purchaser, and each Purchaser desires to purchase from the Company, the
Company’s Subordinated Contingent Convertible Promissory Note, in the form of
Exhibit A attached hereto (each, a “Note” and, together, the “Notes”), as more
fully described in this Agreement; and
WHEREAS, each Purchaser is an “Accredited Investor”, as such term is defined in
Rule 501(a) of Regulation D;
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 Purchaser agree
as follows:
ARTICLE 1.
DEFINITIONS

1.1    Definitions. In addition to the terms defined elsewhere in this
Agreement, (a) capitalized terms that are not otherwise defined herein have the
meanings given to such terms in the Certificate of Designation (as defined
herein) (without regard to any changes or amendments thereto after the date
hereof) and (b) the following terms have the meanings set forth in this Section
1.1:

“Action” shall have the meaning ascribed to such term in Section 3.1(j).
“Affiliate” means any Person that, directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with a
Person as such terms are used in and construed under Rule 405 under the
Securities Act.
“Board of Directors” means the board of directors of the Company.
“Business Day” means any day except any Saturday, any 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.
“Certificate of Designation” means the Certificate of Designation of
Preferences, Rights and Limitations of Series C Convertible Preferred Stock, to
be filed by the Company with the Secretary of State of Delaware, in the form of
Exhibit B attached hereto.
“Certificate of Incorporation” means the Company’s Restated Certificate of
Incorporation, as in effect on the date hereof and as amended from time to time.

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“Closing” means the closing of the purchase and sale of the Notes in connection
with the Initial Closing, pursuant to Section 2.1, and in the case of each
closing that occurs subsequent to the Initial Closing, pursuant to the
provisions set forth in Section 2.2.
“Closing Date” means the Trading Day on which all of the Transaction Documents
(other than the Certificate of Designation and the Warrants) have been executed
and delivered by the applicable parties thereto, and all conditions precedent to
(i) the Purchasers’ obligations to pay the Subscription Amount at such Closing
and (ii) the Company’s obligations to deliver the Notes at such Closing, in each
case, have been satisfied or waived.
“Commission” means the United States Securities and Exchange Commission.
“Common Stock” means the common stock of the Company, par value $0.01 per share,
and any other class of securities into which such securities may hereafter be
reclassified or changed.
“Common Stock Equivalents” means any securities of the Company or the
Subsidiaries 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
exercisable or exchangeable for, or otherwise entitles the holder thereof to
receive, Common Stock.
“Conversion Shares” means the shares of Series C Convertible Preferred Stock
issuable upon conversion of the Notes.
“Equity Securities” means the Conversion Shares, the Warrants and the Underlying
Shares.
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.

“GAAP” shall have the meaning ascribed to such term in Section 3.1(h).
“Indebtedness” shall have the meaning ascribed to such term in Section 3.1(u).
“Initial Closing” means the first Closing pursuant to this Agreement.
“Initial Closing Date” means the date of the Initial Closing.
“Intellectual Property Rights” shall have the meaning ascribed to such term in
Section 3.1(o).
“Lien” means a lien, charge, security interest, encumbrance, right of first
refusal, preemptive right or other restriction.
“Material Adverse Effect” shall have the meaning assigned to such term in
Section 3.1(b).
“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.
“Prior Warrants” shall mean the Common Stock purchase warrants issued in
connection with the issuance of the Company’s 10% Convertible Preferred Stock.

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“Registration Rights Agreement” means the registration rights agreement to be
executed and delivered at the Initial Closing by the Company and the other
parties thereto, in the form of Exhibit C attached hereto.
“Required Approvals” shall have the meaning ascribed to such term 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” shall have the meaning ascribed to such term in Section 3.1(h).
“Securities” means the Notes and the Equity Securities.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
“Short Sales” means all “short sales” as defined in Rule 200 of Regulation SHO
under the Exchange Act (but shall not be deemed to include the location and/or
reservation of borrowable shares of Common Stock). 
“Subordination Agreement” means the subordination agreement to be executed and
delivered at the Initial Closing by the Purchasers and Iowa State Bank, in the
form of Exhibit D attached hereto.
“Subscription Amount” means, as to each Purchaser, the aggregate amount to be
paid for the Note purchased hereunder as specified below such Purchaser’s name
on the signature pages of this Agreement, in United States dollars and in
immediately available funds.
“Subsidiary” means any subsidiary of the Company as set forth on Exhibit 21.1 to
the Company’s Annual Report on Form 10-K for the fiscal year ended September 30,
2014 and shall, where applicable, also include any direct or indirect subsidiary
of the Company formed or acquired after the date thereof.
“Trading Day” means a day on which the principal Trading Market is open for
trading.
“Trading Market” means any of the following markets or exchanges on which the
Common Stock is listed or quoted for trading on the date in question: the NYSE
Alternext, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq
Global Select Market, the New York Stock Exchange or the OTC Bulletin Board (or
any successors to any of the foregoing).
“Transaction Documents” means this Agreement, the Notes, the Certificate of
Designation, the Warrants, all exhibits and schedules thereto and hereto and any
other documents or agreements executed in connection with the transactions
contemplated hereunder.
“Transfer Agent” means American Stock Transfer & Trust Company, LLC, the current
transfer agent of the Company, with a mailing address of 6201 15th Avenue
Brooklyn, New York 11219, and a facsimile number of (718) 765-8712, and any
successor transfer agent of the Company.
“Underlying Shares” means the shares of Common Stock issued and issuable upon
conversion of the Conversion Shares and upon exercise of the Warrants.

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“Warrant Amendment” means the amendment to all Common Stock purchase warrants
issued prior to the Closing and held or subsequently acquired by any of the
Purchasers, or their assignees, Affiliates, family members or related trusts,
issued by the Company in connection with its issuance of the Company’s 10%
Convertible Preferred Stock or Series B 10% Convertible Preferred Stock, in the
form of Exhibit E attached hereto.
“Warrants” means the Common Stock purchase warrants to be delivered to the
Purchasers upon the conversion of the Notes, in the form of Exhibit F attached
hereto.

ARTICLE 11
PURCHASE AND SALE

2.1    Initial Closing. On the Initial Closing Date, upon the terms and subject
to the conditions set forth herein, substantially concurrent with the execution
and delivery of this Agreement by the parties hereto, the Company agrees to
sell, and the Purchasers, severally and not jointly, agree to purchase, Notes in
the aggregate principal amount of not less than [$2,475,000]. At the Initial
Closing, each Purchaser shall deliver to the Company, via wire transfer or a
certified check of immediately available funds, an amount equal to such
Purchaser’s Subscription Amount and the Company shall deliver to each Purchaser
a Note in the principal amount of such Purchaser’s Subscription Amount; and the
Company and the Purchasers shall deliver the other items as set forth herein
that are deliverable at the Initial Closing. The Initial Closing shall occur on
the Closing Date at the offices of the Company’s counsel or such other location
as the Parties shall mutually agree. Notwithstanding that the Closing occurs in
a sequence in respect of the other transactions contemplated by the Transaction
Documents, the Parties acknowledge and agree that each Closing, including the
Initial Closing, is part of and not severable from the other transactions
contemplated by this Agreement or the other Transaction Documents.

2.2    Subsequent Closings. After the Initial Closing, the Company shall have
the right to sell additional Notes to one or more additional Purchasers at one
or more additional Closings, provided, however, that (i) the Company shall not
sell Notes with an aggregate principal amount of more than $2,750,000 pursuant
to this Agreement and (ii) the final Closing hereunder shall be held within 30
days after the Initial Closing. Each additional Purchaser shall become a party
to this Agreement, the Registration Rights Agreement and the Subordination
Agreement by executing and delivering a counterpart signature page to each of
the agreements.

2.3    Deliverables.

(a)On or prior to each Closing Date, the Company shall deliver or cause to be
delivered to each Purchaser purchasing a Note at such Closing the following:

(i)a copy of this Agreement duly executed by the Company;

(ii)a Note, in the principal amount of the respective Purchaser’s Subscription
Amount, registered in the name of such Purchaser;

(iii)a copy of the Warrant Amendment, duly executed by the Company;

(iv)a copy of the Registration Rights Agreement, duly executed by the Company;

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(v)a copy of the letter agreement between the Company and Matthew Van Steenwyk,
in the form of Exhibit G attached hereto (the “Letter Agreement”), duly executed
by the Company; and

(vi)a copy of the Subordination Agreement, duly executed by the Bank and
acknowledged by the Company.

(b)    On or prior to each Closing Date, each Purchaser purchasing a Note at
such Closing shall deliver or cause to be delivered to the Company the
following:

(i)a copy of this Agreement duly executed by such Purchaser;

(ii)such Purchaser’s Subscription Amount by wire transfer or a certified check
of immediately available funds;

(iii)a copy of the Warrant Amendment, duly executed by such Purchaser;

(iv)a copy of the Registration Rights Agreement, duly executed by such
Purchaser;

(v)a copy of the Subordination Agreement, duly executed by such Purchaser; and

(c)    On or prior to the Initial Closing Date, Arrow, LLC shall deliver or
cause to be delivered to the Company the Letter Agreement, duly executed by
Matthew Van Steenwyk.

2.4    Closing Conditions.

(a)    The obligations of the Company to each of the Purchasers, severally and
not jointly, hereunder in connection with each Closing are subject to the
following conditions being met:
(i)each of the representations and warranties made by such Purchaser in this
Agreement is true and correct in all material respects on and as of such
Closing, as though each such representation or warranty had been made on and as
of such Closing, except that those representations and warranties that address
matters only as of a particular date shall remain true and correct as of such
date;

(ii)all obligations, covenants and agreements of such Purchaser required to be
performed at or prior to the Closing shall have been performed in all material
respects; and

(iii)the delivery by such Purchaser of the items as set forth herein.

(b)    The respective obligations of each Purchaser hereunder are subject to the
following conditions being met:

(i)each of the representations and warranties of the Company in this Agreement
that is qualified by a reference to materiality or Material Adverse Effect shall
be true in all respects as so qualified on and as of each Closing, including the
Initial Closing, and each of the representations and warranties of the Company
in this Agreement that is not so qualified shall be true and correct in all
material respects on and as of such Closing and as of all previous Closings,
including the Initial Closing, as though each such representation or warranty
had

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been made on and as of each respective Closing, except that those
representations and warranties that address matters only as a particular date
shall remain true and correct as of such date;

(ii)all obligations, covenants and agreements of the Company required to be
performed at or prior to the Closing shall have been performed in all material
respects;

(iii)the delivery by the Company of the items as set forth herein;

(iv)there shall have been no Material Adverse Effect with respect to the Company
since the date hereof;

(v)the Securities Purchase Agreement dated as of April 30, 2012, pursuant to
which the Company issued shares of its 10% Convertible Preferred Stock and the
Prior Warrants, shall have been amended to include within the definition of
“Exempt Issuance” the issuance or deemed issuance of the Conversion Shares, the
Warrants and the Underlying Shares; and

(vi)from the date hereof to the Closing Date, trading in the Common Stock shall
not have been suspended by the Commission or the Company’s principal Trading
Market (except for any suspension of trading of limited duration agreed to by
the Company, which suspension shall be terminated prior to the Closing), and, at
any time prior to the Closing Date, trading in securities generally as reported
by Bloomberg L.P. shall not have been suspended or limited, or minimum prices
shall not have been established on securities whose trades are reported by such
service, or on any Trading Market, nor shall a banking moratorium have been
declared either by the United States or New York State authorities nor shall
there have occurred any material outbreak or escalation of hostilities or other
national or international calamity of such magnitude in its effect on, or any
material adverse change in, any financial market which, in each case, in the
reasonable judgment of each Purchaser, makes it impracticable or inadvisable to
purchase the Securities at the Closing.

ARTICLE 111.
REPRESENTATIONS AND WARRANTIES

3.1    Representations and Warranties of the Company. The Company hereby makes
the following representations and warranties to each Purchaser:

(a)Subsidiaries. Exhibit 21.1 to the Company’s Annual Report on Form 10-K for
the fiscal year ended September 30, 2014 sets forth a list of all of direct and
indirect Subsidiaries of the Company existing during such fiscal year. The
Company owns, directly or indirectly, all of the capital stock or other equity
interests of each Subsidiary, including any direct or indirect subsidiary of the
Company formed or acquired subsequent to the filing of the above-referenced
annual report, free and clear of any Liens, and all of the issued and
outstanding shares of capital stock 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 the Subsidiaries
is an entity duly incorporated or otherwise organized, validly existing and in
good standing under the laws of the

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jurisdiction of its formation, with the requisite power and authority to own 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, bylaws or other organizational or charter documents. Each of the
Company and the 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, could not reasonably be expected to result in: (i)
a material adverse effect on the legality, validity or enforceability of any
Transaction Document, (ii) a material adverse effect on the results of
operations, assets, business or condition (financial or otherwise) of the
Company and the Subsidiaries, taken as a whole, or (iii) a material adverse
effect on the Company’s ability to perform in any material respect on a timely
basis its obligations under any Transaction Document (any of (i), (ii) or (iii),
a “Material Adverse Effect”) and no action, claim, suit, investigation or
proceeding (including, without limitation, an informal investigation or partial
proceeding, such as a deposition) has been instituted in any such jurisdiction
revoking, limiting or curtailing or seeking to revoke, limit or curtail such
power and authority or qualification.
(c)    Authorization; Enforcement. The Company or any Subsidiary of the Company
that is a party to this Agreement or the other Transaction Documents 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
execution and delivery of each of the Transaction Documents and the consummation
by the Company and each Subsidiary of the transactions contemplated hereby and
thereby have been duly authorized by all required corporate or other action on
the part of the Company and each Subsidiary other than in connection with the
Required Approvals. Each Transaction Document to which the Company and each
Subsidiary is a party has been (or upon delivery will have been) duly executed
by the Company or such Subsidiary, as the case may be, and, when delivered in
accordance with the terms hereof and thereof, will constitute the valid and
binding obligation of, and will be enforceable against, the Company or the
Subsidiary, as the case may be, in accordance with its terms, except (i) as
limited by general equitable principles and applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors’ rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief or other equitable
remedies and (iii) insofar as the Company’s indemnification obligations under
the provisions of Section 4.9 may be limited by applicable law.

(d)    No Conflicts. The execution, delivery and performance by the Company and
each Subsidiary of the Transaction Documents, the issuance and sale of the
Securities, and the consummation of the transactions contemplated by the
Transaction Documents to which the applicable entity is a party (i) are not and
will not be subject to the Required Approvals, conflict with or violate any
provision of the Company’s or any Subsidiary’s certificate or articles of
incorporation, bylaws or other organizational or charter documents, or (ii) do
not and will not conflict with, or constitute a default (or an event that with
notice or lapse of time or both would constitute 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
agreement, credit facility, debt or other instrument (evidencing a Company or
Subsidiary debt or otherwise) or other understanding to which the Company or any
Subsidiary is a party or by which any property or asset of the Company or any
Subsidiary is bound or affected, or (iii) subject to the Required Approvals, do
not and will not conflict with or result in a violation of any law, rule,
regulation, order, judgment, injunction, decree or other restriction of any

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court or governmental authority to which the Company or a Subsidiary is subject
(including federal and state securities laws and regulations), or by which any
property or asset of the Company or a Subsidiary is bound or affected; except in
the case of each of clauses (ii) and (iii), such as could not reasonably be
expected to result in a Material Adverse Effect.

(e)    Filings, Consents and Approvals. The Company is not 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, other
than: (i) the filings required pursuant to Section 4.5 of this Agreement, (ii)
application(s) to each applicable Trading Market for the issuance and sale of
the Securities and the listing of the Underlying Shares for trading thereon in
the time and manner required thereby, (iii) such filings as are required to be
made under applicable state securities laws, and (iv) certain stockholder
approvals as contemplated by Section 4.18 of this Agreement (collectively, the
“Required Approvals”).

(f)    Issuance of the Securities. Subject to the effectiveness of the filing of
the Certificate of Designation with the Secretary of State of Delaware, the
Equity Securities are duly authorized and, when issued and paid for in
accordance with the applicable Transaction Documents, will be duly and validly
issued, fully paid and nonassessable, free and clear of all Liens imposed by the
Company other than restrictions on transfer provided in the Transaction
Documents. The Underlying Shares, when issued in accordance with the terms of
the Conversion Shares and the Warrants, will be validly issued, fully paid and
nonassessable, free and clear of all Liens imposed by the Company other than
restrictions on transfer provided for in the Transaction Documents. The Company
has reserved from its duly authorized capital stock the maximum number of shares
of Common Stock issuable upon the conversion of the Notes and the exercise of
the Warrants.

(g)    Capitalization. The Company has not issued any capital stock since its
most recently filed periodic report under the Exchange Act, other than pursuant
to the exercise of employee stock options under the Company’s stock option
plans, the issuance of shares of Common Stock to employees pursuant to the
Company’s employee stock purchase plans and pursuant to the conversion and/or
exercise of Common Stock Equivalents outstanding as of the date of the most
recently filed periodic report under the Exchange Act. 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.
The issuance and sale of the Securities 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 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. Except as contemplated by Section 4.18 of this
Agreement, no further approval or authorization of any stockholder, the Board of
Directors or others is required for the issuance and sale of the Securities.
Other than the Voting Agreement dated as of April 30, 2012 among the Company and
the parties thereto and as contemplated hereby, 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 knowledge of
the Company, between or among any of the Company’s stockholders.

(h)    SEC Reports; Financial Statements. The Company has filed all reports,
schedules, forms, statements and other documents required to be filed by the
Company under the Securities Act

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and the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for
the two years 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”)
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. As
disclosed in the Company’s Current Report on Form 8-K filed with the Commission
on May 21, 2015 (the “Corrective 8-K”), the Company intends to restate certain
financial information included in the Company’s Annual Report on Form 10-K for
the fiscal year ended September 30, 2014 and the Company’s Current Reports on
Form 10-Q for the three month periods ended December 31, 2013, March 31, 2014,
June 30, 2014 and December 31, 2014, to reflect the impact of the correction of
a recently discovered accounting error. Except as identified in the Corrective
8-K, as of their respective dates, the SEC Reports complied in all material
respects with the requirements of the Securities Act and the Exchange Act, as
applicable, except that the Company may not have furnished to the Commission and
posted on its corporate Web site every Interactive Data File required to be
submitted and posted within the timeframes required by Rule 405 of Regulation
S-T, 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 the 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. Except as
identified in the Corrective 8-K, the financial statements of the Company
included in the SEC Reports complied 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. Such financial statements
have been prepared in accordance with United States generally accepted
accounting principles applied on a consistent basis during the periods involved
(“GAAP”), except as disclosed in the Corrective 8-K and 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 as of and for the dates thereof and
the results of operations and cash flows for the periods indicated therein,
subject, in the case of unaudited statements, to normal, year-end audit
adjustments.

(i)    Material Changes; Undisclosed Events, Liabilities or Developments. Since
the date of the latest audited financial statements included within the SEC
Reports, except as otherwise disclosed in the SEC Reports (including the
Corrective 8-K) or as identified in Section 3.1(g), (i) there has been no event,
occurrence or development that has had or that could reasonably be expected to
result in a Material Adverse Effect, (ii) the Company has not incurred any
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 its method of accounting, (iv) the
Company has not declared or made any dividend or distribution of cash or other
property to its stockholders, other than dividends paid on outstanding shares of
the Company’s 10% Convertible Preferred Stock and/or Series B 10% Convertible
Preferred Stock, or purchased, redeemed or made any agreements to purchase or
redeem any shares of its capital stock and (v) the Company has not issued any
equity securities to any officer, director or Affiliate, except pursuant to
existing Company stock option plans. The Company does not have pending before
the Commission any request for confidential treatment of information. Except for
the issuance of the Securities contemplated by this Agreement, no event,
liability or development that could reasonably be expected to result in a
Material Adverse Effect has occurred or exists with respect to the Company or
its Subsidiaries or their respective business, properties, operations or
financial condition that would be required to be disclosed by the Company under
applicable securities

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laws at the time this representation is made or deemed made that has not been
publicly disclosed at least one Trading Day prior to the date that this
representation is made.

(j)    Litigation. There is no action, suit, inquiry, notice of violation,
proceeding or investigation pending or, to the knowledge of the Company,
threatened against or affecting the Company, any Subsidiary or any of their
respective properties before or by any court, arbitrator, governmental or
administrative agency or regulatory authority (federal, state, county, local or
foreign) (collectively, an “Action”) which (i) adversely affects or challenges
the legality, validity or enforceability of any of the Transaction Documents or
the Securities or (ii) could, if there were an unfavorable decision, reasonably
be expected to result in a Material Adverse Effect. Neither the Company nor any
Subsidiary, to the knowledge of the Company, nor 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 knowledge of the Company, there
is not pending or contemplated, any investigation by the Commission involving
the Company or any current or former officer or any current director 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
Subsidiary under the Exchange Act or the Securities Act.

(k)    Labor Relations. No material labor dispute exists or, to the knowledge of
the Company, is imminent with respect to any of the employees of the Company.
None of the Company’s or its Subsidiaries’ employees is a member of a union that
relates to such employee’s relationship with the Company or such Subsidiary, and
neither the Company nor any of its Subsidiaries is a party to a collective
bargaining agreement, and the Company and its Subsidiaries believe that their
relationships with their employees are good. No executive officer, to the
knowledge of the Company, is now or is 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 any third party,
and the continued employment of each such executive officer does not subject the
Company or any of its Subsidiaries to any liability with respect to any of the
foregoing matters. The Company and its Subsidiaries are in compliance in all
material respects with all U.S. federal, state, local laws and regulations
relating to employment and employment practices, terms and conditions of
employment and wages and hours.

(l)    Compliance. Neither the Company nor any Subsidiary: (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 Subsidiary under), nor has the Company or any Subsidiary received
notice of a claim that it is in default under or that it is in violation of, any
indenture, loan or credit agreement or any other agreement or instrument to
which it is a party or by which it or any of its properties is bound (whether or
not such default or violation has been waived), (ii) is in violation of any
judgment, decree or order of any court, arbitrator or governmental body or (iii)
except as disclosed in the Corrective 8-K, is or has been in violation of any
statute, rule, ordinance or regulation of any governmental authority, including
without limitation all foreign, federal, state and local laws applicable to its
business and all such laws that affect the environment, except in each case as
could not reasonably be expected to result in a Material Adverse Effect.

(m)    Regulatory Permits. The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Reports, except where the failure
to possess such permits could not reasonably be expected to result in a Material

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Adverse Effect (“Material Permits”), and neither the Company nor any Subsidiary
has received any notice of proceedings relating to the revocation or
modification of any Material Permit.

(n)    Title to Assets. The Company and the Subsidiaries have good and
marketable title in fee simple to all real property owned by them and good and
marketable title in all personal property owned by them that is material to the
business of the Company and the Subsidiaries, in each case free and clear of all
Liens, except for Liens in favor of Iowa State Bank, Liens reflected in the
Company’s financial statements and Liens for the payment of federal, state or
other taxes, the payment of which is neither delinquent nor subject to
penalties. Any real property and facilities held under lease by the Company and
the Subsidiaries are held by them under valid, subsisting and enforceable leases
with which the Company and the Subsidiaries are in compliance.

(o)    Patents and Trademarks. The Company and the Subsidiaries have, or have
rights to use, all patents, patent applications, trademarks, trademark
applications, service marks, trade names, trade secrets, inventions, copyrights,
licenses and other intellectual property rights and similar rights necessary or
material for use in connection with their respective businesses as described in
the SEC Reports and which the failure to so have could 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. To the
knowledge of the Company, all Intellectual Property Rights that the Company owns
or has rights to are enforceable and there is no existing infringement by
another Person of any of the Intellectual Property Rights. The Company and its
Subsidiaries have taken reasonable security measures to protect the secrecy,
confidentiality and value of their intellectual property that consist of trade
secrets.

(p)    Insurance. The Company and the Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are, to the knowledge of the Company, prudent and customary in the
businesses in which the Company and the Subsidiaries are engaged, including, but
not limited to, directors and officers insurance coverage at least equal to the
aggregate Subscription Amount. Neither the Company nor any Subsidiary has any
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business without a
significant increase in cost.

(q)    Transactions With Affiliates and Employees. Except as described in the
SEC Reports, none of the officers or directors of the Company and, to the
knowledge of the Company, 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, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or, to the
knowledge of the Company, any entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or
partner, in each case in excess of $120,000 other than for (i) payment of salary
or consulting fees for services rendered, (ii) reimbursement for expenses
incurred on behalf of the Company and (iii) other employee benefits, including
stock option agreements under any stock option plan of the Company.

(r)    Sarbanes-Oxley; Internal Accounting Controls. The Company is in all
material respects in compliance with all provisions of the Sarbanes-Oxley Act of
2002 which are applicable to it as of both the Initial Closing Date and the
Closing Date. The Company and the Subsidiaries

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

(s)    Certain Fees. No brokerage or finder’s fees or commissions are or will be
payable by the Company to any broker, financial advisor or consultant, finder,
placement agent, investment banker, bank or other Person with respect to the
transactions contemplated by the Transaction Documents. 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 Section
that may be due in connection with the transactions contemplated by the
Transaction Documents.

(t)    Investment Company. The Company is not, and is not an Affiliate of, and
immediately after receipt of payment for the Securities, 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 an “investment company” subject to
registration under the Investment Company Act of 1940, as amended.

(u)    Listing and Maintenance Requirements. The 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, or which to its knowledge is likely to have the
effect of, terminating the registration of the Common Stock under the Exchange
Act nor has the Company received any notification that the Commission is
contemplating terminating such registration. The Company has not, in the 12
months preceding the date hereof, received notice from any Trading Market on
which the Common Stock is or has been listed or quoted to the effect that the
Company is not in compliance with the listing or maintenance requirements of
such Trading Market. The Company is, and has no reason to believe that it will
not in the foreseeable future continue to be, in compliance with all such
listing and maintenance requirements.

(v)    Application of Takeover Protections. 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 Certificate of Incorporation (or
similar charter documents) or the laws of its state of incorporation that is or
could become applicable to the Purchasers

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as a result of the Purchasers and the Company fulfilling their obligations or
exercising their rights under the Transaction Documents, including without
limitation as a result of the Company’s issuance of the Securities and the
Purchasers’ ownership of the Equity Securities.

(w)    Disclosure. Except with respect to the material terms and conditions of
the transactions contemplated by the Transaction Documents, the Company confirms
that neither it nor any other Person acting on its behalf has provided any of
the Purchasers or their agents or counsel with any information that it believes
constitutes or might constitute material, non-public information. The Company
understands and confirms that the Purchasers will rely on the foregoing
representation in effecting transactions in securities of the Company. All of
the disclosure furnished, taken as a whole, by or on behalf of the Company to
the Purchasers regarding the Company, its business and the transactions
contemplated hereby, is true and correct in all material respects 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 hereof.

(x)    No Integrated Offering. Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.2, neither the Company,
nor any of its Affiliates, nor any Person acting on its or their behalf has,
directly or indirectly, made any offers or sales of any security or solicited
any offers to buy any security, under circumstances that would cause this
offering of the Securities to be integrated with prior offerings by the Company
for purposes of (i) the Securities Act which would require the registration of
any such securities under the Securities Act, or (ii) any applicable shareholder
approval provisions of any Trading Market on which any of the securities of the
Company are listed or designated.

(y)    Solvency. The Company has no knowledge of any facts or circumstances
which lead it to believe that it will file for reorganization or liquidation
under the bankruptcy or reorganization laws of any jurisdiction within one year
from the Closing Date. The SEC Reports describe all outstanding secured and
unsecured Indebtedness of the Company and all Subsidiaries, or for which the
Company or any Subsidiary has commitments. For the purposes of this Agreement,
“Indebtedness” means (x) any liabilities for borrowed money or amounts owed in
excess of $250,000 (other than trade accounts payable incurred in the ordinary
course of business), (y) all guaranties, endorsements and other contingent
obligations in respect of indebtedness of others, whether or not the same are or
should be reflected in the Company’s balance sheet (or the notes thereto),
except guaranties by endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business; and (z)
the present value of any lease payments in excess of $250,000 due under leases
required to be capitalized in accordance with GAAP. Neither the Company nor any
Subsidiary is in default with respect to any Indebtedness.

(z)    Tax Status. The Company and each Subsidiary has filed all necessary
federal, state and foreign income and franchise tax returns and has paid or
accrued all taxes shown as due thereon, and the Company has no knowledge of a
tax deficiency which has been asserted or threatened against the Company or any
Subsidiary.

(aa)    Foreign Corrupt Practices. Neither the Company, nor to the knowledge of
the Company, 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

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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.

(bb)    Accountants. The Company’s accounting firm is set forth in the SEC
Reports. To the knowledge and belief of the Company, such accounting firm (i) is
a registered public accounting firm as required by the Exchange Act and (ii)
shall express its opinion with respect to the financial statements to be
included in the Company’s Annual Report for the fiscal year ending September 30,
2015.    

(cc)    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 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 and thereby by the Company and its
representatives.

(dd)    Acknowledgment Regarding Purchasers’ Trading Activity. Anything in this
Agreement or elsewhere herein to the contrary notwithstanding (except for
Sections 3.2(e) and 4.12 hereof), it is understood and acknowledged by the
Company that: (i) none of the Purchasers have 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, presently may have a “short” position in the Common Stock, and (iv)
no Purchaser shall 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 (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.

(ee)    Regulation M Compliance. The Company has not, and to its knowledge no
one acting on its behalf has, (i) taken, directly or indirectly, any action
designed to cause or to result in the stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of any of the
Securities, (ii) sold, bid for, purchased, or, paid any compensation for
soliciting purchases

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of, any of the Securities, or (iii) paid or agreed to pay to any Person any
compensation for soliciting another to purchase any other securities of the
Company.

(ff)    Private Placement. Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.2, no registration under
the Securities Act is required for the offer and sale of the Securities by the
Company to the Purchasers as contemplated hereby. To the knowledge of the
Company, the issuance and sale of the Securities hereunder does not contravene
the rules and regulations of any Trading Market.

(gg)    No General Solicitation. Neither the Company nor 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.

(hh)    No Disagreements with Accountants and Lawyers. To the knowledge of the
Company, there are no disagreements of any kind presently existing, or
reasonably anticipated by the Company to arise, between the Company and the
accountants and lawyers formerly or presently employed by the Company and the
Company is current with respect to any fees owed to its accountants and lawyers
which could affect the Company’s ability to perform any of its obligations under
any of the Transaction Documents.

3.2    Representations and Warranties of the Purchasers. Each Purchaser, for
itself and for no other Purchaser, hereby represents and warrants as of the
Closing Date of such Purchaser’s purchase of a Note to the Company as follows
(unless as of a specific date therein):

(a)Organization; Authority. Such Purchaser is either an individual or an entity
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization with full right, corporate or partnership power
and authority to enter into and to consummate the transactions contemplated by
this Agreement and otherwise to carry out its obligations hereunder and
thereunder. The execution and delivery of this Agreement and performance by such
Purchaser of the transactions contemplated by this Agreement have been duly
authorized by all necessary corporate, partnership, limited liability company or
similar action, as applicable, on the part of such Purchaser. Each Transaction
Document to which such Purchaser 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 such Purchaser in accordance with its terms,
except: (i) as limited by general equitable principles and applicable
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors’ rights generally, and (ii) as
limited by laws relating to the availability of specific performance, injunctive
relief or other equitable remedies.

(b)Understandings or Arrangements. Such Purchaser understands that the
Securities are “restricted securities” and have not been registered under the
Securities Act or any applicable state securities law. Such Purchaser is
acquiring the Securities 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 law, has no
present intention of distributing any of such Securities in violation of the
Securities Act or any applicable state securities law and has no direct or
indirect arrangement or understandings with any other persons to distribute or
regarding the distribution of such Securities in violation of the Securities Act
or any applicable state securities law (this representation and warranty not
limiting such Purchaser’s right to sell the Securities in

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compliance with applicable federal and state securities laws). Such Purchaser is
acquiring the Securities hereunder in the ordinary course of its business.

(c)Purchaser Status. At the time such Purchaser was offered the Securities, it
was, and as of the date hereof it is, and on each date on which it exercises the
Warrant or converts any of the Notes, it will be either: (i) an “accredited
investor” as defined in Rule 501(a) under the Securities Act or (ii) a
“qualified institutional buyer” as defined in Rule 144A(a) under the Securities
Act. Such Purchaser is not required to be registered as a broker-dealer under
Section 15 of the Exchange Act.

(d)Experience of 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.

(e)    No General Solicitation. Such Purchaser is not purchasing the Securities
as a result of any press release, Form D or other filing made by the Company
under federal or state securities laws, 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 solicitation or general advertisement. Without limiting the
generality of the foregoing, each Purchaser purchasing a Note after the Initial
Closing represents and warrants that such Purchaser had a substantive,
pre-existing relationship with the Company prior to the filing by the Company of
the Current Report on Form 8-K referred to in Section 4.5, below, and that such
Purchaser did not independently contact the Company as a result of such filing.

(f)    Speculative Investment. Such Purchaser understands and recognizes that
the purchase of the Securities is highly speculative and involves a high degree
of risk and that only investors who can afford the loss of their entire
investment should consider investing in the Company. Such Purchaser has reviewed
the risk factors in the SEC Reports.

(g)    Principal Place of Business. The address of such Purchaser furnished by
such Purchaser on the signature page hereto is such Purchaser’s principal
business address.

(h)    U.S. Person. Such Purchaser is a United States Person.

(i)    No Reliance on Other Statements. No statements, promises, warranties or
representations have been made to such Purchaser concerning the Securities or
the Company, its business or prospects, or other matters, by the Company, by the
Company’s representatives, or by any other persons or entities, except as set
forth in the Transaction Documents and the SEC Reports. Such Purchaser has not
relied on any representation, written or oral, not contained in the Transaction
Documents or the SEC Reports in deciding to purchase the Securities.

The Company acknowledges and agrees that the representations contained in
Section 3.2 shall not modify, amend or affect such Purchaser’s right to rely on
the Company’s representations and warranties contained in this Agreement or any
representations and warranties made by the Company and any Subsidiaries
contained in any other Transaction Document or any other document or instrument
executed and/or delivered in connection with this Agreement or the consummation
of the transaction contemplated hereby.

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ARTICLE IV.
OTHER AGREEMENTS OF THE PARTIES

4.1    Transfer Restrictions.

(a)The Securities may only be disposed of in compliance with state and federal
securities laws. In connection with any transfer of Securities other than
pursuant to an effective registration statement or Rule 144, to the Company or
to an Affiliate of a Purchaser or in connection with a 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 any other Transaction Documents to
which the transferor is a party, and shall have the rights and obligations of a
Purchaser under this Agreement and the other Transaction Documents.

(b)The Purchasers agree to the imprinting, so long as is required by this
Section 4.1, of a legend on any of the Securities in the following form:

[NEITHER] THIS SECURITY [NOR THE SECURITIES INTO WHICH THIS SECURITY IS
[EXERCISABLE] [CONVERTIBLE]] HAS [NOT] BEEN REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON
AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS. SUCH SECURITIES MAY BE TRANSFERRED ONLY IN
ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED
HOLDER OF SUCH SECURITIES, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE
COMPANY. THIS SECURITY [AND THE SECURITIES ISSUABLE UPON [EXERCISE] [CONVERSION]
OF THIS SECURITY] MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT
WITH A REGISTERED BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL INSTITUTION THAT
IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT
OR OTHER LOAN SECURED BY SUCH SECURITIES.
(c)The Company acknowledges and agrees that Purchasers may from time to time
pledge pursuant to a bona fide margin agreement with a registered broker-dealer
or grant a security interest in some or all of the Equity Securities to a
financial institution that is an “accredited investor” as defined in Rule 501(a)
under the Securities Act and who agrees to be bound by the provisions of this
Agreement and, if required under the terms of such arrangement, such Purchaser
may transfer pledged or secured Equity Securities to the pledgees or secured
parties. Such a pledge or transfer would not be subject to approval of the
Company and no legal opinion of legal counsel of the pledgee, secured party or
pledgor shall be required in connection therewith. Further, no notice shall be
required of such pledge. 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 Equity Securities, including, if the Equity Securities are
subject to an

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effective registration statement under the Securities Act, the preparation and
filing of any required prospectus supplement under Rule 424(b)(3) promulgated by
the Commission under the Securities Act, as such Rule may be amended or
interpreted from time to time, or any similar rule or regulation hereafter
adopted by the Commission having substantially the same purpose and effect as
such Rule, or any other applicable provision of the Securities Act to
appropriately amend the list of selling stockholders thereunder.

(d)Certificates evidencing the Underlying Shares shall not contain any legend
(including the legend set forth in Section 4.1(b) hereof): (i) while a
registration statement covering the resale of such security is effective under
the Securities Act, (ii) following any sale of such Underlying Shares pursuant
to Rule 144, (iii) if such Underlying Shares 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 Underlying Shares
and without volume or manner-of-sale restrictions or (iv) if such legend is not
required under applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the Commission). The
Company shall cause its counsel to issue a legal opinion to the Transfer Agent
if required by the Transfer Agent to effect the removal of the legend hereunder.
If all or any of the Notes are converted or any portion of a Warrant is
exercised at a time when there is an effective registration statement to cover
the resale of the Underlying Shares, or if such Underlying Shares may be sold
under Rule 144 and the Company is then in compliance with the current public
information required under Rule 144, or if the Underlying Shares may 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 Underlying
Shares and without volume or manner-of-sale restrictions or if such legend is
not otherwise required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the staff of
the Commission) then such Underlying Shares shall be issued free of all legends.
The Company agrees that at such time as such legends are no longer required
under this Section 4.1(c), it will, no later than three Trading Days following
the delivery by a Purchaser to the Company or the Transfer Agent of a
certificate representing Underlying Shares, as applicable, issued with a
restrictive legend, deliver or cause to be delivered to such Purchaser a
certificate representing such shares 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. Certificates for Underlying Shares subject to legend
removal hereunder shall be transmitted by the Transfer Agent to the Purchaser by
crediting the account of the Purchaser’s prime broker with the Depository Trust
Company System as directed by such Purchaser.

(e)Each Purchaser, severally and not jointly with the other Purchasers, agrees
with the Company that such Purchaser will sell any Securities pursuant to either
the registration requirements of the Securities Act, including any applicable
prospectus delivery requirements, or an exemption therefrom, and that if Equity
Securities are sold pursuant to an effective registration statement, they will
be sold in compliance with the plan of distribution set forth therein, and
acknowledges that the removal of the restrictive legend from certificates
representing Securities as set forth in this Section 4.1 is predicated upon the
Company’s reliance upon this understanding.

4.2    Acknowledgment of Dilution. The Company acknowledges that the issuance of
the Securities may result in dilution of the outstanding shares of Common Stock,
which dilution may be substantial under certain market conditions. The Company
further acknowledges that its obligations under the Transaction Documents,
including, without limitation, its obligation to issue the Underlying Shares
pursuant to the Transaction Documents, are unconditional and absolute and not
subject to any right of set off, counterclaim, delay or reduction, regardless of
the effect of any such dilution or any claim the Company may have against

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any Purchaser and regardless of the dilutive effect that such issuance may have
on the ownership of the other stockholders of the Company.

4.3    Furnishing of Information; Public Information. Until the earliest of the
time that (i) no Purchaser owns Securities or (ii) the Warrants have expired,
the Company covenants to maintain the registration of the Common Stock under
Section 12(b) or 12(g) of the Exchange Act and 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 even if the Company is not then subject to the reporting
requirements of the Exchange Act.

4.4    Integration. The Company shall not 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 would 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 or that would be integrated with the offer or
sale of the Securities for purposes of the rules and regulations of any Trading
Market such that it would require shareholder approval prior to the closing of
such other transaction unless shareholder approval is obtained before the
closing of such subsequent transaction.

4.5    Securities Laws Disclosure; Publicity. The Company shall, by the close of
business (New York City time) on the second day after the Initial Closing, file
a Current Report on Form 8-K, disclosing the material terms of the transactions
contemplated hereby and including the Transaction Documents as exhibits thereto.
From and after the filing of such Form 8-K, the Company shall have publicly
disclosed all material, non-public information delivered to any of the
Purchasers by the Company or any of its Subsidiaries, or any of their respective
officers, directors, employees or agents in connection with the transactions
contemplated by the Transaction Documents. The Company and each Purchaser shall
consult with each other in issuing any press releases with respect to the
transactions contemplated hereby, and neither the Company nor any Purchaser
shall issue any press release nor otherwise make any such public statement
without the prior consent of the Company, with respect to any press release of
any Purchaser, or without the prior consent of such Purchaser, with respect to
any press release of the Company, which consent shall not unreasonably be
withheld or delayed, except if such disclosure is required by law, in which case
the disclosing party shall promptly provide the other party with prior notice of
such public statement or communication.

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, by virtue of receiving Securities under the Transaction
Documents or under any other agreement between the Company and any Purchaser.

4.7    Non-Public Information. Except with respect to the material terms and
conditions of the transactions contemplated by the Transaction Documents, 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
that the Company believes constitutes material non-public information, unless
prior thereto such Purchaser shall have executed a written agreement with the
Company 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 not less than $500,000 of the net
proceeds from the sale of the Securities hereunder to support its efforts to
obtain additional Environmental Protection Agency

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engine family approvals, to support its efforts to obtain California Air
Research Board engine family approvals, to increase the number of
Company-sponsored dual fuel demonstration units and to support its efforts to
expand the Company’s Fueled By Flare initiative. The Company shall use the
balance of such net proceeds for working capital purposes and shall not use such
proceeds for: (a) the satisfaction of any Company indebtedness to any of its
directors or officers or (b) the redemption of any Common Stock or Common Stock
Equivalents.

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 a Purchaser
Party 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.

4.10    Reservation of Common Stock. As of the date hereof, the Company has
reserved and the Company shall continue to reserve and keep available at all
times, free of preemptive rights, a sufficient number of shares of Common Stock
for the purpose of enabling the Company to issue all of the Underlying Shares.

4.11    Listing of Common Stock. The Company hereby agrees to use all
commercially reasonable efforts to maintain the listing or quotation of the
Common Stock on the Trading Market on which it is currently

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listed, and concurrently with the Initial Closing, the Company shall apply to
list or quote all of the Underlying Shares on such Trading Market and promptly
secure the listing of all of the Underlying Shares on such Trading Market. The
Company further agrees, if the Company applies to have the Common Stock traded
on any other Trading Market, it will then include in such application all of the
Underlying Shares, and will take such other action as is necessary to cause all
of the Underlying Shares to be listed or quoted on such other Trading Market as
promptly as possible. The Company will then take all action reasonably necessary
to continue the listing and trading of its Common Stock on a Trading Market and
will comply in all respects with the Company’s reporting, filing and other
obligations under the bylaws or rules of the Trading Market.

4.12    Certain Transactions and Confidentiality. Each Purchaser, severally and
not jointly with any other Purchaser, covenants that neither it nor any
Affiliate acting on behalf of or pursuant to any understanding with the Company
will execute any purchases or sales, including Short Sales of any of the
Company’s securities during the period commencing with the execution of this
Agreement and ending at such time that the transactions contemplated by this
Agreement are first publicly announced pursuant to the Form 8-K as described in
Section 4.5. Each Purchaser, severally and not jointly with any other Purchaser,
covenants that until such time as the transactions contemplated by this
Agreement are publicly disclosed by the Company pursuant to the Form 8-K 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. Notwithstanding the foregoing and notwithstanding
anything contained in this Agreement to the contrary, the Company expressly
acknowledges and agrees that (i) no Purchaser makes any representation, warranty
or covenant hereby that it will not engage in effecting transactions in any
securities of the Company after the time that the transactions contemplated by
this Agreement are first publicly announced pursuant to the Form 8-K as
described in Section 4.5, (ii) no Purchaser shall be restricted or prohibited
from effecting any transactions in any securities of the Company in accordance
with applicable securities laws from and after the time that the transactions
contemplated by this Agreement are first publicly announced pursuant to the Form
8-K as described in Section 4.5 and (iii) no Purchaser shall have any duty of
confidentiality to the Company or its Subsidiaries after the issuance of the
Form 8-K as described in Section 4.5.

4.13    Conversion and Exercise Procedures. Each of the form of Notice of
Exercise included in the Warrants and the form of Notice of Conversion included
in the Certificate of Designation set forth the totality of the procedures
required of the Purchasers in order to exercise the Warrants or convert the
Conversion Shares. No additional legal opinion, other information or
instructions shall be required of the Purchasers to exercise the Warrants or
convert the Notes or the Conversion Shares. The Company shall honor exercises of
the Warrants and conversions of the Conversion Shares and shall deliver
Underlying Shares in accordance with the terms, conditions and time periods set
forth in the Transaction Documents.

4.14    Form D; Blue Sky Filings. The Company agrees to timely file a Form D
with respect to the Securities as required under Regulation D and to provide to
Purchaser a copy thereof, promptly upon request of any Purchaser. The Company
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 at each Closing under applicable securities or “Blue Sky” laws of the
states of the United States, and shall provide evidence of such actions promptly
upon request of any Purchaser; provided, however, 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.

4.15    Application for Exchange Listing of Common Stock. The Company shall
apply to have the Common Stock listed on a Trading Market other than the OTC
Bulletin Board as soon as reasonably practicable after the Company qualifies for
listing pursuant to the minimal applicable listing standards of

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such Trading Market. The Company shall use its reasonable best efforts to
qualify for listing pursuant to the minimal applicable listing standards of such
Trading Market.

4.16    Issuance of Warrants. Upon the conversion of the Notes pursuant to their
terms, the Company shall issue to each Purchaser a Warrant entitling such
Purchaser to purchase, at an initial exercise price of $.20 per share, that
number of shares of Common Stock into which such Purchaser’s Conversion Shares
are convertible from time to time.

4.17    Conversion Conditions. The Company shall not file the Certificate of
Designation with the Secretary of State of Delaware unless and until it shall
have satisfied both of the following conditions (the “Conversion Conditions”):
(a) any and all antidilution adjustments otherwise applicable to (i) the
Company’s 10% Convertible Preferred Stock and (ii) the Company’s Series B 10%
Convertible Preferred Stock shall have been amended or waived so as to be
inapplicable to the issuance or deemed issuance of the Conversion Shares, the
Warrants and the Underlying Shares; and (b) notwithstanding the requirements of
Section 2.4(b)(v), the holders of not less than 75% of the Prior Warrants shall
have agreed to amend or waive the Prior Warrants so as to make inapplicable the
antidilution adjustments otherwise applicable to the issuance or deemed issuance
of the Conversion Shares, the Warrants and the Underlying Shares.

4.18    Stockholders Meeting. The Company shall take all action reasonably
necessary in accordance with applicable law to convene a meeting of its
stockholders to be held at the earliest practicable time after the date of this
Agreement for the purpose of amending the Certificate of Incorporation to
satisfy the Conversion Conditions. Without limiting the generality of the
foregoing, (i) within 30 days after the Initial Closing Date, the Company shall
file with the Commission a preliminary proxy statement with respect to such
meeting and (ii) the Company shall use its reasonable commercial efforts to file
a definitive proxy statement (the “Proxy Statement”) with respect to such
meeting, and to distribute the Proxy Statement to its stockholders, as soon as
practicable thereafter. The Proxy Statement shall satisfy all requirements of
applicable state and federal securities laws and the Delaware General
Corporation Law. The Company’s Board of Directors shall recommend to the
stockholders the adoption of the amendment to the Certificate of Incorporation
satisfying the Closing Conditions.

ARTICLE V.
MISCELLANEOUS

5.1    Fees and Expenses. Each party shall pay the fees and expenses of its
respective advisers, counsel, accountants and other experts, if any, and all
other expenses incurred by such party incident to 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 delivery of any Securities to the Purchasers.

5.2    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 and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules.

5.3    Governing Agreement. Should any provision of this Agreement conflict with
the provisions of any other Transaction Document, the terms of this Agreement
shall govern.

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5.4    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 facsimile at the facsimile number
set forth on the signature page attached hereto prior to 5:30 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 facsimile at the
facsimile number set forth on the signature pages attached hereto on a day that
is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading
Day, (c) the second (2nd) Trading Day following the date of mailing, if sent by
U.S. nationally recognized overnight courier service or (d) upon actual receipt
by the party to whom such notice is required to be given. The addresses for such
notices and communications shall be as set forth on the signature pages attached
hereto.

5.5    Amendments; Waivers. 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 holding 67% of the Notes
then outstanding (or, if no Notes are outstanding, 67% of the Underlying Shares
then outstanding or issuable) or, in the case of a waiver, by the party against
whom enforcement of any such waived provision is sought. 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 any party to exercise any
right hereunder in any manner impair the exercise of any such right.

5.6    Headings. 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.

5.7    Successors and Assigns. This Agreement shall be binding upon and inure to
the benefit of the parties and their successors and permitted assigns. The
Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of each Purchaser (other than by merger). Any
Purchaser may assign any or all of its rights under this Agreement to any Person
to whom such Purchaser assigns or transfers any Securities, provided that such
transferee agrees in writing to be bound, with respect to the transferred
Securities, by the provisions of the Transaction Documents that apply to the
“Purchaser.”

5.8    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 as otherwise set forth in Section 4.9.

5.9    Governing Law. With exception of the Subordination Agreement, which shall
be governed by the laws of the State of Iowa, and the Certificate of
Designation, which shall be governed by the laws of the State of Delaware, all
questions concerning the construction, validity, enforcement and interpretation
of the Transaction Documents 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 legal
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, directors,
officers, shareholders, employees or agents) shall be commenced exclusively in
the state and federal courts sitting in the City of New York. Each party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in the City of New York, borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein (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, that
such suit, action or proceeding

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is improper or is an inconvenient venue for such proceeding. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof 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 other manner permitted by law. If any
party shall commence an action or proceeding to enforce any provisions of the
Transaction Documents, then, in addition to the obligations of the Company under
Section 4.9, the prevailing party in such action or proceeding shall be
reimbursed by the other party for its reasonable attorneys’ fees and other costs
and expenses incurred with the investigation, preparation and prosecution of
such action or proceeding.

5.10    Survival. The representations and warranties contained herein shall
survive the Closings and the delivery of the Securities.

5.11    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 or “.pdf” signature page were an original thereof.

5.12    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 commercially 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.

5.13    Rescission and Withdrawal Right. Notwithstanding anything to the
contrary contained in (and without limiting any similar provisions of) any of
the other 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; provided,
however, that in the case of a rescission of a conversion of the Notes or an
exercise of a Warrant, the applicable Purchaser shall be required to return any
shares of Common Stock subject to any such rescinded conversion or exercise
notice concurrently with the return to such Purchaser of the aggregate exercise
price paid to the Company for such shares and the restoration of such
Purchaser’s right to acquire such shares pursuant to such Purchaser’s Warrant
(including issuance of a replacement warrant certificate evidencing such
restored right).

5.14    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 (in the case of mutilation), or in lieu of and substitution therefor, a
new certificate or instrument, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction. The applicant
for a new certificate or instrument under such circumstances shall

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also pay any reasonable third-party costs (including customary indemnity)
associated with the issuance of such replacement Securities.

5.15    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
contained in the Transaction Documents and hereby agree to waive and not to
assert in any action for specific performance of any such obligation the defense
that a remedy at law would be adequate.

5.16    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.

5.17    Liquidated Damages. The Company’s obligations to pay any partial
liquidated damages or other amounts owing under the Transaction Documents is a
continuing obligation of the Company and shall not terminate until all unpaid
partial liquidated damages and other amounts have been paid notwithstanding the
fact that the instrument or security pursuant to which such partial liquidated
damages or other amounts are due and payable shall have been canceled.

5.18    Saturdays, Sundays, Holidays, etc.    If the last or appointed day for
the taking of any action or the expiration of any right required or granted
herein shall not be a Business Day, then such action may be taken or such right
may be exercised on the next succeeding Business Day.

5.19    Construction. The parties agree that each of them and/or their
respective counsel has reviewed and had an opportunity to revise the Transaction
Documents and, therefore, the normal rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be employed
in the interpretation of the Transaction Documents or any amendments hereto. In
addition, each and every reference to share prices and shares of Common Stock in
any Transaction Document shall be subject to adjustment for reverse and forward
stock splits, stock dividends, stock combinations and other similar transactions
of the Common Stock that occur after the date of this Agreement.

5.20    WAIVER OF JURY TRIAL. IN ANY ACTION, SUIT, OR PROCEEDING IN ANY
JURISDICTION BROUGHT BY ANY PARTY AGAINST ANY OTHER PARTY, THE PARTIES EACH
KNOWINGLY AND INTENTIONALLY, TO THE GREATEST EXTENT PERMITTED BY APPLICABLE LAW,
HEREBY ABSOLUTELY, UNCONDITIONALLY, IRREVOCABLY AND EXPRESSLY WAIVES FOREVER
TRIAL BY JURY.

(Signature Pages Follow)

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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.

American Power Group Corporation
Address for Notice:
By: /s/ Charles E. Coppa
     Name: Charles E. Coppa
     Title: Chief Financial Officer

With a copy to (which shall not constitute notice):
American Power Group Corporation
7 Kimball Lane, Building A
Lynnfield, Massachusetts 01940
Attention: Charles E. Coppa
Fax: (781) 224-0114

Morse, Barnes-Brown & Pendleton, P.C.
CityPoint
230 Third Avenue
Waltham, Massachusetts 02451
Attention: Carl F. Barnes
Fax (781) 622-5933

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.
SIGNATURE PAGES FOR PURCHASERS FOLLOW.]

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[PURCHASER SIGNATURE PAGES TO AMERICAN POWER GROUP CORPORATION CONVERTIBLE NOTE
PURCHASE AGREEMENT ARE ON FILE WITH AMERICAN POWER GROUP CORPORATION AND ARE
INTTENTIONALLY OMITTED]

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