EXHIBIT 10.1

 

 

Agreement No.

 

FORM OF CONFIDENTIAL SUBSCRIPTION AGREEMENT

XENONICS HOLDINGS, INC.

Private Sale of up to $1,000,000 of Convertible

Senior Secured Notes

 

 

THIS SUBSCRIPTION AGREEMENT CONTAINS MATERIAL NONPUBLIC INFORMATION CONCERNING
XENONICS HOLDINGS, INC. AND IS PREPARED SOLELY FOR THE USE OF THE OFFEREE NAMED
ABOVE. ANY USE OF THIS INFORMATION FOR ANY PURPOSE OTHER THAN IN CONNECTION WITH
THE CONSIDERATION OF AN INVESTMENT IN THE SECURITIES OFFERED HEREBY MAY SUBJECT
THE USER TO CRIMINAL AND CIVIL LIABILITY.

THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH DEGREE
OF RISK AND IMMEDIATE DILUTION AND MAY BE PURCHASED ONLY BY PERSONS WHO QUALIFY
AS “ACCREDITED SUBSCRIBERS” UNDER RULE 501 (a) OF REGULATION D UNDER THE
SECURITIES ACT.

THIS DOCUMENT HAS NOT BEEN FILED WITH OR REVIEWED BY THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER COMMISSION OR REGULATORY
AUTHORITY, AND HAS NOT BEEN FILED WITH OR REVIEWED BY THE ATTORNEY GENERAL OF
ANY STATES NOR HAS ANY SUCH COMMISSION, AUTHORITY OR ATTORNEY GENERAL DETERMINED
WHETHER IT IS ACCURATE OR COMPLETE OR PASSED UPON OR ENDORSED THE MERITS OF THIS
OFFERING. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

XENONICS HOLDINGS, INC.

3186 Lionshead Avenue

Carlsbad, CA 92010

June 23, 2014

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CONFIDENTIAL SUBSCRIPTION AGREEMENT

INSTRUCTIONS:

Items to be delivered by all Subscribers:

 

  a. One (1) completed and executed Subscription Agreement, including the
Investor Questionnaire.

 

  b. One completed and executed Security Agreement.

 

  c. Payment in the amount of subscription, by wire transfer of funds only.

Wired funds should be directed as follows:

California Bank & Trust

2501 Palomar Airport Rd.

Carlsbad, CA 92011

Routing#: 122232109

For credit to: Xenonics, Inc.

Account #:

THE SUBSCRIBER IS RESPONSIBLE FOR ALL WIRE TRANSFER FEES IMPOSED BY THE
SUBSCRIBER’S BANK.

ALL DOCUMENTS SHOULD BE RETURNED TO:

Sandlapper Securities LLC

Sandlapper Financial Center

29800 Agoura Rd Suite 205

Agoura Hills, CA 91301

Attn.: Scott Ozer

Fax 818 707 7201

In the event investor decides not to participate in this offering please return
this Confidential Subscription Agreement to the address set forth above.

THE FOLLOWING EXHIBITS AND SCHEDULES ARE ANNEXED TO

AND FORM PART OF THIS SUBSCRIPTION AGREEMENT:

DISCLOSURE SCHEDULE

EXHIBIT A:    INVESTOR QUESTIONNAIRE EXHIBIT B:    FORM OF CONVERTIBLE SENIOR
SECURED NOTE EXHIBIT C:    FORM OF SECURITY AGREEMENT EXHIBIT D:    FORM OF
INTERCREDITOR AGREEMENT

 

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SUBSCRIPTION AGREEMENT

The undersigned (the “Subscriber” or the “Purchaser”) hereby subscribes to
purchase from Xenonics Holdings, Inc., a Nevada corporation (the “Company”),
Senior Secured Notes, on the terms as described herein. The Company is offering
hereby (the “Offering”) up to a total aggregate principal amount of $1,000,000
of Senior Secured Convertibles Notes on a “best efforts” basis in the principal
amount of $25,000 (the “Convertible Note”).

Article I

SALE OF CONVERTIBLE NOTES

1.1 Sale of Securities; Offering Period

(a) Subject to the terms and conditions hereof and on the basis of the
representations and warranties hereinafter set forth, the Company hereby agrees
to issue and sell to the Subscriber and the Subscriber agrees to purchase from
the Company, upon Closing, the principal amount of Convertible Notes as
described herein for the purchase price as set forth on the signature page of
this Subscription Agreement executed by the Subscriber. The Convertible Notes
are convertible into shares of the Company’s common stock, par value $0.001 per
share (the “Common Stock”) or the “Conversion Securities”, as defined below. The
principal amount of Convertible Notes purchased hereunder by a Subscriber shall
be as specified on the signature page of this Subscription Agreement executed by
the Subscriber. The Company may reject any subscription in whole or in part. The
Company is offering the Convertible Notes on a “best efforts” basis as the total
Offering amount. This Offering is only being made to “accredited Subscribers”
(as defined in Rule 501 under the Securities Act of 1933, as amended (the
“Securities Act”)) in reliance upon an exemption from registration under
Section 4(2) of the Securities Act and/or Regulation D promulgated thereunder,
and on similar exemptions under applicable state laws. The Convertible Notes may
be purchased, in part or their entirety, by officers and directors of the
Company or representatives of the Selling Agent (as defined below).

(b) The Securities are being offered during the offering period commencing on
the date set forth on the cover page of this Subscription Agreement and
terminating on the earlier of (a) 5:00 p.m. (Los Angeles, California time) on
July 31, 2014 or (b) the date on which all the Securities authorized for sale
have been sold (the “Offering Period”). The Company reserves the right to
terminate or close the offering at any time.

(c) The Convertible Notes are convertible at the option of the holder shares of
the Company’s Common Stock (the “Conversion Shares”) at the initial conversion
rate of $0.07 per share. The conversion rate is subject to adjustment as
described in the Convertible Notes, including in the event that the Company
issued additional shares of Common Stock or other equity securities at a
purchase price (or exercise price or conversion price for Convertible
Securities) below the initial conversion rate. The principal amount of the
Convertible Notes shall bear interest at the rate of 13% per annum and shall
have maturity date of there 3 years from the original issue date. The
Convertible Notes are secured obligations of the Company and will be secured by
a first priority lien and security interest on the Company’s assets, which lien
will be evidenced by the Security Agreement annexed hereto (the “Security
Agreement. A summary of the material terms and conditions of the Convertible
Notes is set forth below under the caption “Summary of Offering.”

1.2 High Risk Investment. This investment is speculative and should only be made
by Subscribers who can afford the risk of loss of their entire investment. The
proceeds from the sale of the Convertible Notes will be used to fund short term
capital needs to enable the Company to maintain operations (including certain
limited payments to officers for accrued salaries) until additional funding is
received. The Company has significant outstanding debt represented by promissory
notes which is due and payable prior to the maturity date of the Convertible
Notes and although a substantial potion of the creditors holding these
outstanding obligations will be required to agree to forgo collection efforts,
for a period of time, it is possible that the Company’s revenue and income will
be unable to generate sufficient funds to repay all of the outstanding debt,
including the Convertible Notes. The Company may be required to sell additional
securities (whether debt or equity or equity linked) after the completion of
this transaction to further fund its operations. Unless the Company is
successful in completing these additional funding transactions, or is able to
generate sufficient revenue from operations, the Company may be forced to
significantly curtail its operations, the Convertible Notes may remain unpaid
and Subscribers will lose their entire investment.

 

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1.3 Selling Agents; Certain Expenses. The Company has engaged Sandlapper
Securities LLC as its exclusive selling agent (the “Selling Agent”), for the
sale of the Convertible Notes and will pay commissions and other compensation to
the Selling Agent based on the subscriptions procured by it in this Offering.
The Company will pay commissions to the Selling Agent of 9.0% of the gross
proceeds from the sale of the Securities in this Offering to subscribers
procured by Sandlapper Securities LLC and reimburse Sandlapper Securities LLC
for their reasonable expenses up to $15,000. The Company will also issue to the
Selling Agent warrants (the “Agent Warrants”) to purchase such number of shares
of Common Stock of the Company as equals 25% of the number of shares of Common
Stock based upon the principal amount of Convertible Notes and the conversion
price of the Convertible Notes sold in the Offering to Subscribers procured by
the Selling Agents. The Agent Warrants will be exercisable for a period of five
(5) years at an exercise price of $0.12 per share. Officers, directors and
affiliates of the Selling Agent and the Company may purchase Convertible Notes
in the Offering. The Company will also indemnify the Selling Agent against
certain liabilities, including liabilities under the Securities Act of 1933, and
liabilities arising from breaches of representations and warranties contained in
the agreement, or to contribute to payments that it may be required to make in
respect of such liabilities.

Summary of Offering

 

Securities Offered:    The Company is offering a total of $1,000,000 of its
Convertible Notes on a “best efforts” basis as to the entire Offering. As used
herein the Convertible Notes and Conversion Shares may be collectively referred
to as the “Securities.” Purchase Price:    The Company is selling the
Convertible Notes in this Offering at a Purchase Price of $25,000 principal
amount. The Company may accept subscriptions for partial Convertible Notes in
its sole discretion. Offering Period:    The Securities are being offered during
the Offering Period commencing on the date set forth on the cover page of this
Subscription Agreement and terminating on the earlier of (a) 5:00 p.m. (Los
Angeles, California time) on July 31, 2014 or (b) the date on which maximum
principal amount of Convertible Notes authorized for sale have been sold. The
Company reserves the right to terminate or close the offering at any time.
Summary of Convertible Notes:         Principal Amount:    Up to an aggregate
principal amount of $1,000,000.         Interest:    The Convertible Notes shall
accrue simple interest at the rate of 13% per annum, payable semi-annually and
at maturity. Interest shall be payable on September 30th and March 30th of each
year.         Maturity:    The Convertible Notes shall have a maturity date of
three (3) years from the date of issuance.

 

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Prepayment/

Redemption:

   The Convertible Notes may be prepaid in whole or in part at any time at the
option of the Company between the first anniversary and second anniversary
thereafter at 110% of the principal amount plus accrued and unpaid interest.
Holders of the Convertible Notes shall have the option to convert principal and
unpaid interest into Common Stock at their option upon receipt of any prepayment
notice received from the Company. After the second anniversary the Convertible
Notes can be prepaid without any prepayment penalty under the same terms.

Conversion Price:

   At the holder’s option the Convertible Notes will be convertible into shares
of Common Stock at an initial conversion rate of $0.07 per share.

Anti-dilution protection:

   The conversion rate of the Convertible Notes will be adjusted on a “full
ratchet” basis in the event that the Company issues additional shares of Common
Stock or common stock equivalents (other than for stock option grants and other
customary exclusions) at a purchase price less than the initial conversion rate
of the Convertible Notes. In addition, the Convertible Notes will be adjusted
proportionally in the event of stock splits, stock dividends, combinations,
recapitalizations, and similar events.

Security Interest:

   The outstanding principal and interest outstanding under the Convertible
Notes, and all other amounts due thereunder, shall be secured by a first
priority lien on the assets of the Company as set forth in the Security
Agreement which lien is intended to be pari passu with all other secured
Indebtedness. Holders of the Convertible Notes shall enter into an intercreditor
agreement (“Intercreditor Agreement”) with other secured indebtedness. The
Company has approximately $2,375,000 (“Prior Debt”) amount of indebtedness
secured by a lien on the Company’s assets which is intended to be pari passu
which the lien granted in connection with the Convertible Notes. Registration
Rights:    Subscribers shall not be entitled to registration rights and will be
required to rely upon Rule 144 with respect to the resale of any shares of
Common Stock upon conversion of the Convertible Notes. The Company, shall at its
cost and expense, provide on behalf of investor, any legal opinions with respect
to sales, pursuant to Rule 144, of Conversion Shares as may be required by the
Company’s stock transfer agent. Use of Proceeds:    The proceeds will be used to
fund working capital and for general corporate purposes. No more than an
aggregate of $50,000 of the proceeds will be used to repay accrued salaries or
expenses of officers or directors or affiliates thereof. After the final
Closing, any such remaining accrued, but unpaid salaries and expenses shall be
paid solely from positive cash flow from operations of the Company and not from
any proceeds of the offering. Escrow; No Offering Minimum:    The Company and
the Selling Agent have established a non-interest bearing escrow account for the
deposit of funds in this Offering. However, each Subscriber acknowledges and
understands that there is no minimum Offering amount necessary to conduct a
closing for the funds to be released to the Company. The escrow account will be
established between the Company and the Selling Agent at California Bank &
Trust. Funds may be released to the Company and closings held, from time to
time, as determined by the Company and the Selling Agent at any time during the
Offering Period.

 

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Subscription Procedure:    In order to subscribe for the Securities, each
prospective subscriber must complete, execute and deliver to the Company a
signature page evidencing such prospective subscriber’s execution of this
Subscription Agreement along with a completed confidential Purchaser
Questionnaire and a copy of the Security Agreement. The Agent appointed
(Sandlapper Securities LLC on behalf of the subscribers) under the Security
Agreement will execute the Intercreditor Agreement on behalf of Subscribers.

Restrictions on

Transferability:

   There is no public market for the Convertible Notes and it is not anticipated
that a market will develop after this Offering. Further, the Conversion Shares
have not been registered under the Securities Act or under the securities laws
of the United States or of any state or other jurisdiction. As a result, the
Convertible Notes and Conversion Shares (collectively, sometimes referred to as
the “Securities”) are restricted securities under the Securities Act and they
may not be transferred without registration under the Securities Act, or, if
applicable, the securities laws of any state or other jurisdiction, unless in
the opinion of counsel to the Company, such registration is not then required
because of the availability of an exemption from registration. Investment:    An
investment in the Company is highly speculative, and each investor bears the
risk of losing his, her or its entire investment. All Purchasers must complete
and execute a Subscription Agreement, the Security Agreement, and a confidential
Purchaser Questionnaire. Purchasers must set forth representations in such
documents that he, she or it is purchasing the Securities for investment
purposes only and without a view toward distribution. The Securities are
suitable investments only for sophisticated Subscribers for whom an investment
in the Securities does not constitute a complete investment program and who
fully understand, are willing to assume, and who have the financial resources
necessary to withstand, the risks involved in investing in the Securities and
who can bear the potential loss of their entire investment. The Securities are
being offered and sold only to persons who qualify as “accredited Subscribers,”
as defined under Regulation D of the Securities Act. Risk Factors:    An
investment in the Securities involves a high degree of risk. Purchasers of the
Securities should carefully review the factors under the heading “Risk Factors”
herein and in the Company’s reports filed under the Securities Exchange Act of
1934, as amended which are incorporated by reference.

1.4 Escrow and No Minimum Offering Amount; Multiple Closings.

Each Subscriber acknowledges and agrees that all subscription amounts will be
deposited in a non-interest bearing account established by the Company and the
Selling Agent at California Bank & Trust, but that there is no minimum Offering
amount (or other conditions other than normal closing conditions) necessary to
conduct a closing for the funds to be released to the Company. Accordingly,
funds may be released to the Company and closings held, from time to time, as
determined by the Company at any time during the Offering Period. During the
Offering Period, subscription funds will be placed into the escrow account and
closings will be held from time to time up to the sale of the maximum amount of
Securities described in this Subscription Agreement or the expiration of the
Offering Period. In the event a subscription is not accepted in whole or in part
by the Company, the full or ratable amount, as the case may be, of any
subscription payment received will be promptly refunded to the Subscriber
without deduction therefrom and without interest thereon. In the event a
subscription is accepted by the Company, in whole or in part, and subject to the
conditions set forth in this Subscription Agreement, a closing may be held from
time to time by the Company and the Company shall issue and deliver to
subscriber, the Convertible Note dated the date of closing on such funds, and a
fully executed copy of this Subscription Agreement and the Security Agreement.

 

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At each closing of the transactions contemplated herein (the “Closing”), the
Subscribers shall purchase, severally and not jointly, and the Company shall
issue and sell, to the Subscribers the amount of Securities as indicated on the
signature page of each Subscriber’s subscription agreement, up to the total
Offering amount. The Securities may be purchased, in part or their entirety, by
officers and directors of the Company or representatives of the Selling Agent.
Each Closing shall occur on the date determined by the Company and the Selling
Agent at such times and/or locations as the Company may set. A final Closing
shall be held either on the date of which this Offering is fully subscribed or
the last date during the Offering Period on which the Company accepts a
subscription, whichever is latest. This Offering shall terminate on the earlier
of (a) 5:00 p.m. (New York time) on July 31, 2014 or (b) the date on which all
the Securities authorized for sale have been sold, unless sooner terminated by
the Company, in its sole discretion. Each Closing of the transactions
contemplated hereunder shall be deemed to occur at the offices of Becker &
Poliakoff, LLP, 45 Broadway, 8th Floor, New York, New York 10006, or at such
other place as shall be mutually agreeable to the parties, at 12 noon, New York
time, on such date or dates as may be mutually agreeable to the parties.

1.5 Closing Matters. At each Closing the following actions shall be taken:

(a) each Subscriber shall deliver its Purchase Price in immediately available
United States funds to the escrow account established for the Offering;

(b) the Company shall deliver the Convertible Notes subscribed for to each
Subscriber; and

(c) each of the Company and the Subscriber shall deliver to the other signed
copies of this Agreement and the Security Agreement and the Subscriber shall
deliver to the Selling Agent a completed and executed Purchaser Questionnaire.

1.6 Use of Proceeds. The Company intends to use the proceeds derived from this
Offering to satisfy its working capital requirements and general corporate
purposes. No more than an aggregate of $50,000 of the proceeds will be used to
repay accrued salaries or expenses of officers or directors or affiliates
thereof. After the Closing, any such remaining accrued, but unpaid salaries and
expenses shall be paid solely from positive cash flow from operations of the
Company and not from any proceeds of the offering. Management reserves the right
to utilize the net proceeds of the Offering in a manner in the best interests of
the Company. Accordingly, management will have broad discretion in the
application of the proceeds of the Offering. The amount of the net proceeds that
will be invested in particular areas of the Company’s business will depend upon
future economic conditions and business opportunities. To the extent that the
Company continues to incur losses from operations, such losses will be funded
from its general funds, including the net proceeds of this Offering. As reported
in its Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, filed
on May 15, 2014, the Company had total liabilities of approximately $3,499,000,
including accounts payable of approximately $591,000. Holders of not less than
$2,375,000 of outstanding notes (“Prior Debt”) are entitled, under the existing
terms of such debt, to be repaid in October and December of 2014, which is prior
to the maturity date of the Convertible Notes. The holders of such Prior Debt
have entered into the Intercreditor Agreement with Subscribers in this Offering
(the security agent shall execute the Intercreditor Agreement on behalf of
Subscribers) whereby the holders of the Prior Debt shall agree to postpone any
collection efforts with respect to such Prior Debt except upon consent of at
least 75% of the principal amount of all the Prior Debt and the Convertible
Notes, considered as a single class. Further, under the Interecreditor
Agreement, the holders of the Prior Debt and the Convertible Notes shall share
ratably as secured creditors in the assets of the Company upon any default.
Additionally under the Intercreditor Agreement, (i) no interest payments may be
made on the Prior Debt or the convertible Notes unless both receive interest
payments, (ii) so long as the Company generates (a) at least $1,000,000 of
revenue during any fiscal quarter of the Company, and (b) positive EBITDA during
such quarter, the Company may, in its discretion, pay down the principal balance
under the Prior Debt within 45 days after the end of any such quarter in an
amount not to exceed 25% of such positive EBITDA on a cumulative basis;
provided, however, that no principal payments may be made unless the Company has
free cash of at least $200,000. For purposes of this Agreement, (a) “EBITDA”
means, for any period in question, Company’s consolidated net income for such
period plus, to the extent deducted in determining consolidated net income for
such period, interest expense, income tax expense, and depreciation and
amortization, and (b) “free cash” means cash of the Company net of any principal
payments that are contemplated to be made by the Company.

 

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1.7 Certain Reports Filed Under the Securities Exchange Act of 1934.

(a) Annual Report on Form 10-K for the year ended September 30, 2013. On
December 19, 2013, the Company filed its Annual Report on Form 10-K for the year
ended September 30, 2013 (the “2013 Annual Report”) with the United States
Securities and Exchange Commission (the “SEC”).

(b) Quarterly Reports on Form 10-Q. On May 15, 2014, the Company filed with the
SEC its Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 (the
“2013 Quarterly Reports”).

(c) Current Reports on Form 8-K. The Company has filed Current Reports on Form
8-K with the SEC on the following dates during the current fiscal year:
February 14, 2013 and May 19, 2014 (the “Current Reports”).

(d) Acknowledgement and Confirmation. The undersigned hereby agrees and
acknowledges that it has been advised that the Company has filed with the SEC
the 2013 Annual Report, the 2014 Quarterly Reports and the Current Reports
(collectively, the “SEC Reports”) and that it has either obtained or has access
to (through the public website of the SEC or otherwise) the SEC Reports. The SEC
Reports comprise an integral part of this Agreement and each Subscriber is urged
to read each such report in its entirety including the “Risk Factors” stated
therein. The undersigned further agrees that the SEC Reports are incorporated
herein by reference, that it has taken the opportunity to review such reports in
their entirety, including the risk factors described therein, and that it has
considered all factors that it deems material in deciding on the advisability of
investing in the Company’s Convertible Notes.

1.8 Subscriber Information

 

(a)   

Name(s) of

SUBSCRIBER(s):                                                                 

                                         
                                                          
                                                                                
             

(b)    Principal Amount of Convertible

  

         Notes Subscribed for:

   $                        

(c)    Accredited Investor Status

  

The Subscriber acknowledges and agrees that the offering and sale of the
Securities are intended to be exempt from registration under the Securities Act,
by virtue of Section 4(2) thereof and/or Regulation D promulgated thereunder. In
accordance therewith and in furtherance thereof, the Subscriber represents and
warrants to and agrees with the Company as follows [Please check statements
applicable to the Subscriber]:

The Subscriber is an Accredited Investor because the Subscriber is (check
appropriate item):

 

  ¨ a bank as defined in Section 3(a)(2) of the Securities Act;

 

  ¨ a savings and loan association or other institution as defined in
Section 3(a)(5)(A) of the Securities Act;

 

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  ¨ a broker or dealer registered pursuant to Section 15 of the Securities
Exchange Act of 1934 as amended (the “Exchange Act”);

 

  ¨ an insurance company as defined in Section 2(13) of the Securities Act;

 

  ¨ an investment company registered under the Investment Company Act of 1940,
as amended or a business development company as defined in Section 2(a)(48) of
such act;

 

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

 

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

 

  ¨ a private business development company as defined in Section 202(a)(22) of
the Investment Advisers Act of 1940, as amended;

 

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

 

  ¨ a natural person whose individual net worth or joint net worth with that
person’s spouse, at the time of his purchase exceeds $l,000,000 (excluding the
value of such person’s primary residence);

 

  ¨ a natural person who had an individual income in excess of $200,000 in each
of the two most recent years or joint income with that person’s spouse in excess
of $300,000 in each of those years and has a reasonable expectation of reaching
the same income level in the current year;

 

  ¨ a trust, with total assets in excess of $5,000,000, not formed for the
specific purpose of acquiring the securities offered, whose purchase is directed
by a sophisticated person as described in Rule 506(b)(2)(ii) of the Exchange
Act;

 

  ¨ an entity in which all of the equity owners are accredited Subscribers. (If
this alternative is checked, the Subscriber must identify each equity owner and
provide statements signed by each demonstrating how each qualifies as an
accredited investor);

 

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

 

  ¨ a director or officer of the Company.

 

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(d) Additional Information.

The Subscriber has completed the signature page to this Subscription Agreement
and the Questionnaire annexed at Exhibit A to this Subscription Agreement and
the signature page to the Security Agreement annexed as Exhibit C.

 

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1.9 Risk Factors

Investing in the Company’s Convertible Notes involves risks and the Company’s
operating results and financial condition have varied in the past and may in the
future vary significantly depending on a number of factors. Investors should
consider the following risk factors in evaluating whether to invest in the
Securities. However, the risks described below are not the only risks facing the
Company. In addition to these risk factors and other risks described elsewhere
in this Agreement, including the Disclosure Schedule to this Agreement,
investors should carefully consider the risk factors described in the Company’s
SEC Reports, each of which has been filed with the Securities and Exchange
Commission and which are all incorporated by reference in this Agreement. These
risks could have a material adverse effect on the Company’s business, results of
operations, financial condition or liquidity and cause the Company’s actual
operating results to materially differ from those contained in forward-looking
statements made in this Agreement, in the Company’s SEC Reports and elsewhere by
management. Before making an investment decision, investor should carefully
consider these risks as well as other information contained or incorporated by
reference in this Agreement. Additional risks and uncertainties not currently
known to the Company or that the Company currently deems to be immaterial also
may materially adversely affect the Company’s business, financial condition
and/or operating results.

General Risks Related to the Company’s Business

The Company has only Limited Revenue and has a history of Losses.

Revenues for the quarter ended March 31, 2014 were $16,000 compared to revenues
of $961,000 for the quarter ended March 31, 2013. In the quarter ended March 31,
2014, 100% of revenues were from sales of the Company’s NightHunter products to
the military (U.S. Army, U.S. Marines and military distributors). In the quarter
ended March 31, 2013, 98% of revenues were from sales of the NightHunter
products to the military. The Company had, in the quarter ended March 31, 2014
net losses of $576,000 compared to a net loss of $293,000 for the quarter ended
March 31, 2013. Unless the amount of revenue and net profit increase, we will be
unable to repay the Convertible Notes and Subscribers may lose their investment.

The Company’s financial statements include a “Going Concern” qualification.

The Company’s financial statements for the three and six months ended March 31,
2014 and for the fiscal year ended September 30, 2013, include an explanatory
paragraph relating to the Company’s ability to continue as a going concern.
Based on the amount of working capital that on hand on March 31, 2014 and the
amount of unfilled and potential orders that are pending, management is
optimistic about its ability to obtain sales orders and/or additional equity or
debt financing to continue to support planned operations and satisfy
obligations. However, due to the nature of the Company’s business, and its
dependence upon US and Foreign military spending, business, there is no
assurance that the Company will receive new orders if ever or when anticipated.

Risks Related to this Offering

This Offering may result in dilution to common shareholders.

Dilution of the per share value of the Company’s Common Stock could result from
the issuance of the Securities in this Offering. If this Offering is fully
subscribed and excluding the Agent Warrants, the Company will issue an aggregate
of $1,000,000 of Convertible Notes, which are initially convertible into a total
of 14,285,714 Conversion Shares. In addition, the Company may be required to
issue additional Conversion Shares pursuant to the anti-dilution provision of
the Convertible Notes. The issuance of a substantial number of shares of the
Company’s Common Stock will dilute the equity interests of the Company’s current
stockholders.

 

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The Company does not currently have necessary Revenue or Income to Repay its
Outstanding Debt; Certain Proceeds will be used to repay Officers Salaries;
Subscribers of Convertible Notes will be limited in rights to collect upon
collateral in the event of default or non payment.

The Company has secured debt and other liabilities in excess of its ability to
pay currently. The Company’s primary goal is to use the funds from this Offering
to help it obtain additional contracts and revenue although the Company may use
up to $50,000 for officers’ salaries. Holders of the Convertible Notes will be
required, under the terms of the Intercreditor Agreement, to forego certain
rights as secured creditors or share in assets of the Company with other secured
creditors, and this may result in less proceeds being available, if the Company
defaults under the Convertible Notes, to repay the holders of the Convertible
Notes in full.

The Company will require additional financing.

The Company anticipates that it will need to raise additional financing
following the completion of this Offering. The net proceeds from the sale of the
Convertible Notes will not satisfy all of our working capital needs. Further,
the Company outstanding debt of approximately $[2,385,000] as of June 1, 2014,
all of which has due date for payment prior to the maturity date of the
Convertible Notes. The Company would be unable to repay such Prior Debt with the
proceeds of this Offering and may be unable to generate income in an amount
necessary to repay the Prior Debt of the Convertible Notes. If the Company is
unable to generate sufficient income or cancel the due dates or terms of the
Prior Debt, it may also be required to raise additional funds. Accordingly, the
purchasers of the Securities should expect to experience substantial dilution in
their percentage of ownership of the Company and, possibly, the value of their
investment. Any future offerings will dilute the percentage ownership of the
Company for purchasers of Securities in this Offering. The Company currently has
no commitments or arrangement with respect to any additional financings, and
cannot provide any assurances as to whether such additional financing will be
available or as to the terms upon which it may be available. If the Company
raises additional funds by selling common stock or convertible securities, the
ownership of the Company’s existing shareholders will be diluted

The Securities offered hereby are “restricted securities” and may not be
transferred or resold absent registration or an exemption therefrom.

The Securities offered hereby will be issued pursuant to an exemption from
registration under the Securities Act and therefore have not been and will not
be registered under that act or any applicable state securities laws.
Consequently, the Securities may be sold, transferred, or otherwise disposed of
by the Purchasers hereunder only if, among other things, the Securities are
registered or, in the opinion of counsel acceptable to us, registration is not
required under the Securities Act or any applicable state securities laws.
Accordingly, Subscribers will need to rely on exemptions to the registration
requirements under the Securities Act and the “blue sky” laws in order to be
able to resell the Securities offered hereby.

Purchasers of the Company’s Securities must be aware of the long-term nature of
their investment and be able to bear the economic risks of their investment for
an indefinite period of time. The Securities have not been registered under the
Securities Act or the securities or “blue sky” laws of any state. The right of
any Subscriber to sell, transfer, pledge or otherwise dispose of the Securities
offered herein will be limited by the Securities Act and state securities laws
and the regulations promulgated thereunder. Accordingly, under the Securities
Act, the Securities offered herein may not be resold unless a registration
statement is filed and becomes effective or an exemption from registration is
available. The Company is not under any affirmative obligation to file a
registration statement covering the Securities and even if the Company did file
a registration statement covering the Securities, there can be no assurance that
any such registration statement would be declared effective. Further, there can
be no assurance that a liquid market for the Company’s Common Stock will be
sustained. Rule 144 promulgated under the Securities Act requires, among other
conditions, a holding period prior to the resale of securities acquired in a
non-public offering without having to satisfy the registration requirements of
the Securities Act. There can be no assurance that the Company will fulfill in
the future any reporting requirements under the Exchange Act, or disseminate to
the public any current financial or other information concerning the Company, as
required by Rule 144 as one of the conditions of its availability.

 

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No assurances that enough Securities will be sold to pursue business strategies
or to repay the Convertible Notes.

No person or entity is committed to purchase any of the Securities offered
pursuant to this Offering, and no assurance is or can be given that all or any
of the Securities offered hereunder will be sold. Further, although the Company
has established an escrow account for the subscription amounts from Subscribers,
no minimum amounts of Securities are required to be sold. Proceeds received from
the Offering will be available to the Company upon receipt, which the Company
intends to promptly utilize in accordance with the terms of the “Use of
Proceeds” section of this Subscription Agreement, including the payment of
outstanding obligations. The application of the proceeds of the Offering to the
payment of current obligations would reduce the ability of the Company to
utilize such proceeds for other business purposes. In the event that the Company
is unable to sell all or a significant portion of the Securities pursuant to the
Offering, the Company may have insufficient capital after making the aforesaid
payments to proceed with the Company’s business strategies and thus may be
forced to seek additional capital sooner than would have been the case had the
Offering been fully subscribed. The Company also may need additional funds from
loans and/or the sale of securities to repay the Convertible Notes at their
maturity date. There can be no assurance that such additional funds will be
available to the Company when required on terms acceptable to the Company. The
Company’s inability to obtain financing on favorable terms could restrict its
operations and could materially harm an investment in the Company. The Company
has not entered into any agreement or letter of intent for the Next Financing or
any other subsequent financing. In the event the Next Financing is not
consummated or other financing obtained, the Company may not have adequate funds
available to repay the Convertible Notes.

This Offering is being made on a best efforts basis and there is no minimum
amount of funds required to hold a closing.

This Offering is being made on a “best efforts” rather than a firm commitment
basis. No commitment exists by anyone, including the Selling Agent, to purchase
all or any part of the Securities being offered pursuant to this Offering. There
can be no assurance that any Securities offered hereby will be sold. Although
the Company has established an escrow account for this Offering, there is no
“minimum offering” amount required in this Offering and closings may be held and
funds released to the Company at such times and in such amounts, up to the
maximum Offering amount, as determined by the Company and Selling Agent in their
discretion once the holders of Prior Debt have executed the Intercreditor
Agreement.

No independent counsel for Purchasers.

Each of the Company and the Selling Agent has employed its own legal counsel in
connection with this Offering. The Purchasers have not been represented by
independent counsel in connection with the preparation of this Subscription
Agreement or the terms of this Offering and no investigation of the merits or
fairness of this Offering has been conducted on behalf of the Purchasers.
Company Counsel has not conducted due diligence on behalf of the Purchasers.
Prospective Subscribers should consult with their own legal, tax and financial
advisors with respect to the Offering made hereby.

The Company’s management will have broad discretion with respect to the use of
the proceeds of this Offering.

The Company has highlighted the intended use of proceeds for this Offering,
including repayment of outstanding accounts payable. No proceeds shall be used
to repay indebtedness or accrued expenses of officers or directors or affiliates
thereof; provided however, the Company may utilize up to $50,000 to pay officers
and directors accrued salaries and expenses. The Company’s management will have
broad discretion as to the application of these net proceeds and could use them
for purposes other than those contemplated at the time of this Offering. The
Company’s note holders may not agree with the manner in which the Company’s
management chooses to allocate and spend the net proceeds.

 

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Availability of Securities Act exemption.

The Securities are being offered pursuant to various available exemptions from
registration from U.S. federal and state securities law registration
requirements. It is intended that the offering of the Convertible Notes will be
conducted in a manner so as to comply with Section 4(2) of the Securities Act of
1933, as amended and Rule 506 (b) of Regulation D promulgated by the SEC.
Compliance with such laws, which must be met in order for such exemptions to be
available to us, is highly technical and to some extent involves elements beyond
the Company’s control. If the proper exemptions do not ultimately prove to be
available, we could be subject to the claims of all or only some of the
Company’s shareholders for violations of federal or state securities laws, which
could materially adversely affect the Company’s profitability or operations or
make an investment in the Securities worthless.

Risks Related to the Company’s Securities

Exercise or conversion of outstanding options, warrants and shares of
convertible preferred stock will dilute stockholders and could decrease the
market price of the Company’s common stock.

As of May 1, 2014, there were issued and outstanding options to purchase
2,305,000 shares of Common Stock and warrants to purchase an aggregate of
7,187,000 additional shares of Common Stock. To the extent that these securities
are exercised or converted, dilution to the Company’s shareholders will occur.
Further, there are no outstanding shares of Common Stock pursuant to unvested
restricted stock awards or any additional shares of Common Stock or warrants to
certain third parties pursuant to consulting or other business arrangements that
are not described in the Company’s SEC filings. The exercise and conversion of
these securities by the holders and issuance of these additional shares of
Common Stock may adversely affect the market price of the Company’s Common Stock
and the terms under which we could obtain additional equity capital.

We do not anticipate paying dividends in the foreseeable future, and the lack of
dividends may have a negative effect on the price of the Company’s Common Stock.

The Company currently intends to retain our future earnings, if any, to support
operations and to finance expansion and therefore, the Company does not
anticipate paying any cash dividends on its Company’s Common Stock in the
foreseeable future.

The Company’s Common Stock is traded on the OTC Bulletin Board, which may be
detrimental to Subscribers.

The Company’s Common Stock is currently traded on the OTC Bulletin Board under
the symbol XNNH. Stocks traded on the OTC Bulletin Board generally have limited
trading volume and are therefore susceptible to exhibiting a wide spread between
the bid/ask quotations. The Company cannot predict whether a more active market
for the Company’s Common Stock will develop in the future. In the absence of an
active trading market, Subscribers may have difficulty buying and selling the
Company’s Common Stock or obtaining market quotations; market visibility for the
Company’s Common Stock may be limited; and a lack of visibility for the
Company’s Common Stock may have a depressive effect on the market price for the
Company’s Common Stock.

 

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Shares of the Company’s Common Stock are subject to restrictions on sales by
broker-dealers and penny stock rules, which may be detrimental to Subscribers;
Penny Stock Disclosure

The Company’s Common Stock is subject to Rules 15g-1 through 15g-9 under the
Exchange Act, which imposes certain sales practice requirements on
broker-dealers who sell the Company’s Common Stock to persons other than
established customers and “accredited Subscribers” (as defined in Rule 501(c) of
the Securities Act). For transactions covered by this rule, a broker-dealer must
make a special suitability determination for the purchaser and have received the
purchaser’s written consent to the transaction prior to the sale. This rule
adversely affects the ability of broker-dealers to sell the Company’s Common
Stock and purchasers of the Company’s Common Stock to sell their shares.

Additionally, the Company’s Common Stock is subject to SEC regulations
applicable to “penny stocks.” Penny stocks include any non-Nasdaq equity
security that has a market price of less than $5.00 per share, subject to
certain exceptions. Penny stocks are low-priced shares of small companies. Penny
stocks may trade infrequently – which means that it may be difficult to sell
penny stock shares once a Subscriber owns them. Because it may also be difficult
to find quotations for penny stocks, they may be impossible to accurately price.
Investors in penny stock should be prepared for the possibility that they may
lose their whole investment. For the 52 weeks ending June 20, 2014, the
Company’s had a high of $0.20 and a low of $0.05 per share and on June 20, 2014,
the Company’s Common Stock had a closing price of $0.09 per share. The
regulations require that prior to any non-exempt buy/sell transaction in a penny
stock, a disclosure schedule proscribed by the SEC relating to the penny stock
market must be delivered by a broker-dealer to the purchaser of such penny
stock. This disclosure must include the amount of commissions payable to both
the broker-dealer and the registered representative and current price quotations
for the Company’s Common Stock. The regulations also require that monthly
statements be sent to holders of a penny stock that disclose recent price
information for the penny stock and information of the limited market for penny
stocks. These requirements adversely affect the market liquidity of the
Company’s Common Stock. Under U.S. Securities and Exchange Commission rules, the
Selling Agent is required to provide purchasers of penny stocks the following
disclosure statement available at: http://www.sec.gov/investor/schedule15g.htm.
The link explains some of the risks of investing in penny stocks. The Company
and the Selling Agent advise each Subscriber to read it carefully before
agreeing to purchase or sell a penny stock.

There are outstanding a significant number of shares available for future sales
under Rule 144.

As of May 1, 2014, of the 24,975,929 issued and outstanding shares of the
Company’s Common Stock, approximately 1,061,935 shares may be deemed “restricted
shares” and, in the future, may be sold in compliance with Rule 144 under the
securities Act of 1933, as amended. In general, under Rule 144 under the
Securities Act, a person (or persons whose shares are aggregated) who is not
deemed to have been an affiliate of ours at any time during the three months
preceding a sale, and who has beneficially owned restricted securities within
the meaning of Rule 144 for at least six months (including any period of
consecutive ownership of preceding non-affiliated holders) would be entitled to
sell those shares, subject only to the availability of current public
information about us. A non-affiliated person who has beneficially owned
restricted securities within the meaning of Rule 144 for at least one year would
be entitled to sell those shares without regard to the provisions of Rule 144. A
person (or persons whose shares are aggregated) who is deemed to be an affiliate
of ours and who has beneficially owned restricted securities within the meaning
of Rule 144 for at least six months would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of one
percent of the then outstanding shares of the Company’s common stock or the
average weekly trading volume of the Company’s common stock during the Company’s
calendar weeks preceding such sale. Such sales are also subject to certain
manner of sale provisions, notice requirements and the availability of current
public information about us. Possible or actual sales of the Company’s Common
Stock by certain of the Company’s present shareholders under Rule 144 may, in
the future, have a depressive effect on the price of the Company’s Common Stock
in any market which may develop for such shares. Such sales at that time may
have a depressive effect on the price of the Company’s Common Stock in the open
market.

 

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A substantial number of shares may be sold in the market following this
offering, which will further dilute the Company’s common shareholders and may
depress the market price for the Company’s common stock.

Sales of a substantial number of shares of the Company’s Common Stock in the
public market following this offering could cause the market price of the
Company’s common stock to decline. If the total Offering is completed, the
Company will issue to Subscribers (a) an aggregate of $1,000,000 principal
amount of Convertible Notes, which are initially convertible into 14,285,714
Conversion Shares. The Company will also issue to the Selling Agent a maximum of
3,571,429 Agent Warrants. Based on a total of 24,975,929 shares of Common Stock
outstanding, if the total Offering is completed and the Convertible Notes
converted into Conversion Shares at a conversion rate of $0.07 per share, the
total number of outstanding shares of Common Stock would be 39,261,643 shares,
assuming no interest on the principal amount of the Convertible Notes or
exercise of outstanding options or warrants or of Agent Warrants. The issuance
of a substantial number of the Company’s Common Stock will dilute the equity
interests of the Company’s current stockholders. Further, as a substantial
majority of the outstanding shares of the Company’s Common Stock are, tradable
without restriction or further registration under the Securities Act of 1933
unless these shares are purchased by affiliates, the issuance of the Common
Stock offered hereby may further depress the market price of the Company’s
Common Stock.

Preferred Stock as an anti-takeover device.

The Company is authorized to issue 5,000,000 shares of preferred stock, $0.001
par value. Presently, the Company does not have any shares of preferred stock
outstanding. The preferred stock may be issued in series from time to time with
such designation, voting and other rights, preferences and limitations as the
Company’s Board of Directors may determine by resolution. Unless the nature of a
particular transaction and applicable statutes require such approval, the Board
of Directors has the authority to issue these shares without stockholder
approval subject to approval of the holders of the Company’s preferred stock.
The issuance of preferred stock may have the effect of delaying or preventing a
change in control of the Company without any further action by the Company’s
stockholders.

Forward Looking Statements

This Subscription Agreement and the exhibits and schedules annexed hereto
contain certain forward looking information within the meaning of the Securities
Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended.
These statements relate to future events or future predictions, including events
or predictions relating to the Company’s future financial performance, and are
generally identifiable by use of the use of forward-looking terminology such as
“believes”, “expects”, “may”, “will”, “should”, “plan”, “intend”, or
“anticipates” or the negative thereof or other variations thereon or comparable
terminology, or by discussion of strategy that involve risks an uncertainties.
Management wishes to caution each Subscriber that these forward-looking
statements and other statements contained herein regarding matters that are not
historical facts, are only predictions and estimates regarding future events and
circumstances and involve known and unknown risks, uncertainties and other
factors, including the risks described under “Risk Factors” that may cause the
Company’s or its industry’s actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by such
forward-looking statements. This information is based on various assumptions by
the management which may not prove to be correct.

In addition to the risks described in Risk Factors, important factors to
consider and evaluate in such forward-looking statements include: (i) changes in
the external competitive market factors which might impact the Company’s results
of operations; (ii) unanticipated working capital or other cash requirements
including those created by the failure of the Company to adequately anticipate
the costs associated with clinical trials, manufacturing and other critical
activities; (iii) changes in the Company’s business strategy or an inability to
execute its strategy due to the occurrence of unanticipated events; (iv) the
inability or failure of the Company’s management to devote sufficient time and
energy to the Company’s business; and (v) the failure of the Company to complete
any or all of the transactions described herein on the terms currently
contemplated. In light of these risks and uncertainties, there can be no
assurance that the forward-looking statements contained or incorporated by
reference in this Agreement will in fact transpire.

 

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All of these assumptions are inherently subject to significant uncertainties and
contingencies, many of which are beyond the control of the Company. Although the
Company believes that the expectations reflected in the forward-looking
statements are reasonable, the Company cannot guarantee future results, levels
of activity, performance or achievements. Accordingly, there can be no assurance
that actual results will meet expectations or will not be materially lower than
the results contemplated in this Agreement. Subscribers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date of this document or, in the case of documents referred to or
incorporated by reference, the dates of those documents. The Company does not
undertake any obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date of
this document or to reflect the occurrence of unanticipated events, except as
may be required under applicable U.S. securities law.

Article II

REPRESENTATIONS AND WARRANTIES OF COMPANY

Except as set forth under the corresponding section of the Disclosure Schedule,
which Disclosure Schedule shall be deemed a part hereof and to qualify any
representation or warranty otherwise made herein to the extent of such
disclosure, the Company hereby represents and warrants to the Purchasers as of
the date of this Subscription Agreement as follows:

(A) Organization. The Company is duly organized, validly existing and in good
standing under the laws of its state of incorporation, with all requisite power
and authority to own, lease, license, and use its properties and assets and to
carry out the business in which it is engaged, except where the failure to have
or be any of the foregoing may not be expected to have a material adverse effect
on the Company’s presently conducted businesses. The Company is not in violation
of any of the provisions of its articles of incorporation, bylaws or other
organizational or charter documents. The Company is duly qualified to transact
the business in which it is engaged and is in good standing as a foreign
corporation in every jurisdiction in which its ownership, leasing, licensing or
use of property or assets or the conduct of its business make such qualification
necessary, except where the failure to be so qualified or in good standing, as
the case may be, could not, individually or in the aggregate, have or reasonably
be expected to result in (i) a material and adverse effect on the legality,
validity or enforceability of this Agreement, (ii) a material and adverse effect
on the results of operations, assets, prospects, business or condition
(financial or otherwise) of the Company, taken as a whole, or (iii) an adverse
impairment to the Company’s ability to perform on a timely basis its obligations
hereunder (any of (i), (ii) or (iii), a “Material Adverse Effect”).

(B) Capitalization. The Company is currently authorized to issue 50,000,000
shares of Common Stock, $0.001 par value per share and 5,000,000 shares of
Preferred Stock, $0.001 par value per share. Except as may be described in this
Agreement, no securities of the Company are entitled to preemptive or similar
rights, and no entity or person has any right of first refusal, preemptive
right, right of participation, or any similar right to participate in the
transactions contemplated by this Agreement unless any such rights have been
waived. The issue and sale of the Securities will not (except pursuant to their
terms thereunder), immediately or with the passage of time, obligate the Company
to issue shares of Common Stock or other securities to any entity or person and
will not result in a right of any holder of Company securities to adjust the
exercise, conversion, exchange or reset price under such securities. As of
May 1, 2014, there are outstanding 24,975,929 shares of Common Stock. Further,
as of such date there are (i) outstanding an aggregate of 2,305,000 options to
purchase shares of Common Stock under the Company’s stock option plans,
(ii) outstanding an aggregate of 7,187,000 common stock purchase warrants,
(iii) reserved for issuance an aggregate of zero shares of Common Stock pursuant
to restricted stock awards granted to certain of the Company’s employees under
the Company’s stock option plans; and (iv) no other shares of Common Stock which
are issuable pursuant to arrangements we have agreed to with consultants or
vendors.

 

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(C) Authorization; Enforceability. The Company has the requisite corporate power
and authority to enter into, deliver and consummate the transactions
contemplated by this Subscription Agreement, to issue, sell and deliver the
Securities, and otherwise to carry out its obligations hereunder. The execution
and delivery of this Subscription Agreement and the consummation by it of the
transactions contemplated thereby have been duly authorized by the Company and
no further action is required by the Company in connection therewith. When
executed and delivered by the Company, this Subscription Agreement, the
Convertible Notes will constitute the legal, valid and binding obligations of
the Company, enforceable as to the Company in accordance with their respective
terms, except as enforcement may be limited by bankruptcy, insolvency,
reorganization, arrangement, fraudulent conveyance or transfer, moratorium or
other laws or court decisions, now or hereinafter in effect, relating to or
affecting the rights of creditors generally and as may be limited by general
principles of equity and the discretion of the court having jurisdiction in an
enforcement action (regardless of whether such enforceability is considered in a
proceeding in equity or at law).

(D) Consents. The Company is not required to obtain any consent, waiver,
authorization, approval 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 or entity in connection with the
execution, delivery and performance by the Company of this Agreement or the
issuance, sale or delivery of the Securities other than (i) any filings required
by state securities laws, (ii) the filing of a Notice of a Sale of Securities on
Form D with the Commission under Regulation D of the Securities Act, (iii) those
that have been made or obtained prior to or contemporaneously with the initial
Closing, (iv) filings pursuant to the Exchange Act upon closing of the offering
and (v) UCC filings to evidence the security interest granted under the Security
Agreement.

(E) No Conflicts. The execution, delivery and performance of this Subscription
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby in accordance with the terms and conditions described herein
do not and will not: (i) conflict with or violate any provision of the Company’s
certificate or articles of incorporation, bylaws or other organizational or
charter documents, or (ii) violate, conflict with, or constitute a default or
breach (or an event that with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation (with or without notice, lapse of time or both) of,
any agreement, credit facility, debt or other instrument (evidencing a Company
debt or otherwise) or other understanding to which the Company is a party or by
which any property or asset of the Company is bound or affected, or (iii) result
in a violation of any law, rule, regulation, order, judgment, injunction, decree
or other restriction of any court or governmental authority to which the Company
is subject (including federal and state securities laws and regulations), or by
which any property or asset of the Company is bound or affected; except in the
case of each of clauses (ii) and (iii), such as could not, individually or in
the aggregate, have or reasonably be expected to result in a Material Adverse
Effect.

(F) Issuance of Securities. The Securities have been duly authorized and, when
issued and paid for in accordance with this Subscription Agreement, the
Securities, and the securities comprising the Securities, will be duly and
validly issued, fully paid and nonassessable and will be issued free and clear
of all liens and encumbrances, other than restrictions on transfer under
applicable securities laws. The Company has properly reserved for issuance all
the securities underlying the Convertible and, upon payment for and issuance of
such securities in accordance with the terms of the Convertible Notes, they will
be duly authorized, fully paid and nonassessable securities of the Company, and
will be issued free and clear of all liens and encumbrances, other than
restrictions on transfer under applicable securities laws.

 

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(G) SEC Reports; Financial Statements. As of their respective dates, the SEC
Reports (as defined in Section 1.7 above) complied in all material respects with
the requirements of the Exchange Act 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. Except as may be stated in the SEC Reports, the financial statements
of the Company included in the SEC Reports comply in all material respects with
applicable accounting requirements and the rules and regulations of the
Commission with respect thereto as in effect at the time of filing. Such
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America applied on a consistent basis
during the periods involved (“GAAP”), except as may be otherwise specified in
such financial statements or the notes thereto and except that unaudited
financial statements may not contain all footnotes required by GAAP, and fairly
present in all material respects the financial position of the Company as of and
for the dates thereof and the results of operations and cash flows for the
periods then ended, subject, in the case of unaudited statements, to normal,
immaterial, year-end audit adjustments. The Company is current is satisfying its
obligations to file periodic reports with the SEC in accordance with the SEC
rules and regulations. The SEC Reports accurately report that the Company is not
a “shell” company within the meaning of SEC rules and regulations.

(H) Litigation. Except as disclosed in the SEC Reports or in Schedule II(H) to
this Subscription Agreement, there is no pending or, to the best knowledge of
the Company, threatened action, suit, proceeding or investigation before any
court, governmental agency or body, or arbitrator having jurisdiction over the
Company, or any of its affiliates that would affect the execution by the Company
or the performance by the Company of its obligations under this Agreement, and
all other agreements entered into by the Company relating hereto. Except as
disclosed in the SEC Reports, there is no pending or, to the best knowledge of
the Company, threatened action, suit, proceeding or investigation before any
court, governmental agency or body, or arbitrator having jurisdiction over the
Company, or any of its affiliates which litigation if adversely determined could
result in a Material Adverse Effect.

(I) Liabilities. The Company has no liabilities or obligations which are
material, individually or in the aggregate, which are not disclosed in the SEC
Reports, other than those incurred in the ordinary course of the Company’s
businesses and which, individually or in the aggregate, would not reasonably be
expected to have a material adverse effect on the Company’s financial condition.
Since the date of the latest audited financial statements included within the
SEC Reports, except as specifically disclosed in a subsequent SEC Report filed
prior to the date hereof or otherwise disclosed herein, there has been no event,
occurrence or development that has had or that could reasonably be expected to
result in a Material Adverse Effect. Section 2(I) of the Disclosure Schedule
sets forth a schedule, as of June 1, 2014 of all trade and accounts payable,
setting forth the amount and the intended payee.

(J) Compliance. Except as disclosed in the SEC Reports, the Company is not to
its knowledge: (i) 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) in violation of any judgment, decree or order of any court,
arbitrator or governmental body or (iii) in violation of any statute, rule,
ordinance or regulation of any governmental authority, including without
limitation all foreign, federal, state and local laws relating to taxes,
environmental protection, occupational health and safety, product quality and
safety and employment and labor matters, except in each case as could not have
or reasonably be expected to result in a Material Adverse Effect.

 

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(K) Intellectual Property. To the Company’s knowledge, the Company owns,
possesses, licenses or has other rights to use, on reasonable terms, all
patents, patent applications, trade and service marks, trade and service mark
registrations, trade names, copyrights, licenses, inventions, trade secrets,
technology, know-how and other intellectual property (collectively, the
“Intellectual Property”) necessary for the conduct of the Company’s business as
now conducted. Except as set forth in the SEC Reports or for such matters which
would not be expected to have a Material Adverse Effect, (a) to the Company’s
knowledge, there is no material infringement by third parties of any such
Intellectual Property owned by or exclusively licensed to the Company; (b) there
is no pending or, to the Company’s knowledge, threatened action, suit,
proceeding or claim by others challenging the Company’s or any subsidiary’s
rights in or to any material Intellectual Property, and the Company is unaware
of any facts which would form a reasonable basis for any such claim; (c) there
is no pending or, to the Company’s knowledge, threatened action, suit,
proceeding or claim by others challenging the validity or scope of any such
Intellectual Property, and the Company is unaware of any facts which would form
a reasonable basis for any such claim; and (d) there is no pending or, to the
Company’s knowledge, threatened action, suit, proceeding or claim by others that
the Company’s business as now conducted infringes or otherwise violates any
patent, trademark, copyright, trade secret or other proprietary rights of
others, and the Company is unaware of any other fact which would form a
reasonable basis for any such claim.

(L) Tax Matters. Except for matters that would not, individually or in the
aggregate, have or reasonably be expected to result in a Material Adverse
Effect, the Company (i) has made or filed all United States federal and state
income and all foreign income and franchise tax returns, reports and
declarations required by any jurisdiction to which it is subject, (ii) has paid
all taxes and other governmental assessments and charges that are material in
amount, shown or determined to be due on such returns, reports and declarations
and (iii) has set aside on its books provision reasonably adequate for the
payment of all material taxes for periods subsequent to the periods to which
such returns, reports or declarations apply except for any such amounts that is
currently being contested in good faith. There are no tax audits or
investigations pending, which if adversely determined would have a Material
Adverse Effect; nor are there any material proposed additional tax assessments
against the Company.

(M) Accountants. To the knowledge and belief of the Company, the Company’s
independent registered public accounting firm (i) is a registered public
accounting firm as required by the Exchange Act and (ii) is an independent
public or certified public accountants as required by the Securities Act and the
Exchange Act.

(N) Bad Actors. Neither the Company nor any officer, director or member of
executive management of the Company, any sponsor, general partner, manager,
advisor or any of the issuer’s affiliates, any beneficial owner of 20% or more
of any class of the Company’s equity securities or any promoter (for purposes of
this clause ((N) a “Covered Person”), has been the subject of SEC, Financial
Industry Regulatory Authority or state disciplinary actions or proceedings or
criminal complaints within the last 10 years. No Covered Person:

(a) Has been convicted, within ten years before the date of this Subscription
Agreement of any felony or misdemeanor: (i) in connection with the purchase or
sale of any security; (ii) involving the making of any false filing with the
SEC; or (iii) arising out of the conduct of the business of an underwriter,
broker, dealer, municipal securities dealer, investment advisor or paid
solicitor of purchasers of securities;

(b) Has been subject to any order, judgment or decree of any court of competent
jurisdiction, entered within five years within the date of this Subscription
Agreement, that restrains or enjoins the Covered Person from engaging or
continuing to engage in any conduct or practice: (i) in connection with the
purchase or sale of any security; (ii) involving the making of any false filing
with the SEC; or (iii) arising out of the conduct of the business of an
underwriter, broker, dealer, municipal securities dealer, investment adviser or
paid solicitor of purchasers of securities;

(c) Has been subject to a final order of a state securities commission (or an
agency or officer of a state performing like functions), a state authority that
supervises or examines banks, savings associations, or credit unions, a state
insurance commission (or an agency or officer of a state performing like
functions), an appropriate federal banking agency, the Commodity Futures Trading
Commission, or the National Credit Union Administration that: (i) at the time of
the sale of the securities, bars investor from: (a) association with an entity
regulated by such commission, authority, agency or officer, (b) engaging in the
business of securities, insurance or banking, or (c) engaging in savings
association or credit union activities; or (ii) constitutes a final order based
on a violation of any law or regulation that prohibits fraudulent, manipulative,
or deceptive conduct entered within ten years before the date of this
Subscription Agreement;

 

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(d) Has been subject to an order of the SEC entered pursuant to section 15(b) or
15B(c) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)
or section 203(e) or 203(f) of the Investment Advisers Act of 1940, as amended
(the “Advisers Act”) that, at the time of the sale of the securities:
(i) suspends or revokes the Covered Person’s registration as a broker, dealer,
municipal securities dealer or investment adviser; (ii) places limitations on
the activities, functions or operations of, or imposes civil money penalties on,
such person; or (iii) bars the Covered Person from being associated with any
entity or from participating in the offering of any penny stock;

(e) Has been subject to any order of the SEC, entered within five years before
the date of this Subscription Agreement, orders the Covered Person to cease and
desist from committing or causing a future violation of: (i) any scienter-based
anti-fraud provision of the federal securities laws, including, but not limited
to, Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act
and Rule 10b-5 thereunder, and Section 206(1) of the Advisers Act or any other
rule or regulation thereunder; or (ii) Section 5 of the Securities Act;

(f) Has been suspended or expelled from membership in, or suspended or barred
from association with a member of, a securities self-regulatory organization
(e.g., a registered national securities exchange or a registered national or
affiliated securities association) for any act or omission to act constituting
conduct inconsistent with just and equitable principles of trade;

(g) Has been subject to a United States Postal Service false representation
order entered within five years of the date of this Subscription Agreement,
subject to a temporary restraining order or preliminary injunction with respect
to conduct alleged by the United States Postal Service to constitute a scheme or
device for obtaining money or property through the mail by means of false
representations; and

(h) Has filed (as a registrant or issuer), or were named as an underwriter in
any registration statement or Regulation A offering statement filed with the SEC
that, within five years before the sale of the securities, was the subject of a
refusal order, stop order, or order suspending the Regulation A exemption, or
is, at the time of the sale of the securities, the subject of an investigation
or proceeding to determine whether a stop order or suspension order should be
issued.

Article III

REPRESENTATIONS AND WARRANTIES OF PURCHASERS

By signing this Agreement, each undersigned Purchaser hereby represents and
warrants to the Company as follows as an inducement to the Company to accept the
subscription of the Purchaser:

(A) The Purchaser acknowledges and agrees that (i) the offering and sale of the
Securities are intended to be exempt from registration under the Securities Act
by virtue of Section 4(2) of the Securities Act and/or Regulation D promulgated
thereunder, (ii) the Securities have not been registered under the Securities
Act and (iii) that the Company has represented to the Purchaser (assuming the
veracity of the representations of the Purchaser made herein and in the
Questionnaire annexed hereto at Exhibit A) that the Securities have been offered
and sold by the Company in reliance upon an exemption from registration provided
in Section 4(2) of the Securities Act and Regulation D thereunder. In accordance
therewith and in furtherance thereof, the Purchaser represents and warrants to
and agrees with the Company that it is an accredited investor (as defined in
Rule 501 promulgated under the Securities Act) for the reason indicated in
Article I of this Subscription Agreement.

(B) The Purchaser hereby represents and warrants that the Purchaser is acquiring
the Securities hereunder for its own account for investment and not with a view
to distribution, and with no present intention of distributing the Securities or
selling the Securities for distribution. The Purchaser understands that the
Securities are being sold to the Purchaser in a transaction which is exempt from
the registration requirements of the Securities Act. Accordingly, the Purchaser
acknowledges that it has been advised that the Securities have not been
registered under the Securities Act and are being sold by the Company in
reliance upon the veracity of the Purchaser’s representations contained herein
and upon the exemption from the registration requirements provided by the
Securities Act and the securities laws of all applicable states. The Purchaser’s
acquisition of the Securities shall constitute a confirmation of the foregoing
representation and warranty and understanding thereof.

 

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(C) The Purchaser (or its “Purchaser Representative”, if any) has such knowledge
and experience in financial and business matters as is required for evaluating
the merits and risks of making this investment, and the Purchaser or its
Purchaser Representative(s) has received such information requested by the
Purchaser concerning the business, management and financial affairs of the
Company in order to evaluate the merits and risks of making this investment.
Further, the Purchaser acknowledges that the Purchaser has had the opportunity
to ask questions of, and receive answers from, the officers of the Company
concerning the terms and conditions of this investment and to obtain information
relating to the organization, operation and business of the Company and of the
Company’s contracts, agreements and obligations or needed to verify the accuracy
of any information contained herein or any other information about the Company.
Except as set forth in this Subscription Agreement, no representation or
warranty is made by the Company to induce the Purchaser to make this investment,
and any representation or warranty not made herein or therein is specifically
disclaimed and no information furnished to the Purchaser or the Purchaser’s
advisor(s) in connection with the sale were in any way inconsistent with the
information stated herein. The Purchaser further understands and acknowledges
that no person has been authorized by the Company to make any representations or
warranties concerning the Company, including as to the accuracy or completeness
of the information contained in this Subscription Agreement.

(D) The Purchaser is making the foregoing representations and warranties with
the intent that they may be relied upon by the Company in determining the
suitability of the sale of the Securities to the Purchaser for purposes of
federal and state securities laws. Accordingly, each Purchaser represents and
warrants that the information stated herein is true, accurate and complete, and
agrees to notify and supply corrective information promptly to the Company as
provided above if any of such information becomes inaccurate or incomplete. The
Purchaser has completed this Agreement and Questionnaire, has delivered it
herewith and represents and warrants that it is accurate and true in all
respects and that it accurately and completely sets forth the financial
condition of the Purchaser on the date hereof. The Purchaser has no reason to
expect there will be any material adverse change in its financial condition and
will advise the Company of any such changes occurring prior to the closing or
termination of the Offering.

(E) The Purchaser is not subscribing for any of the Securities as a result of or
subsequent to any advertisement, article, notice or other communication
published in any newspaper, magazine or similar media or broadcast over
television or radio, any seminar or meeting, or any solicitation of a
subscription by a person not previously known to the Purchaser in connection
with investments in Securities generally.

(F) The Purchaser has received or obtained access to certain information
regarding the Company, including this Subscription Agreement, the SEC Reports
and other accompanying documents of the Company receipt of which is hereby
acknowledged. The Purchaser has carefully reviewed all information provided to
it and has carefully evaluated and understands the risks described therein
related to the Company and an investment in the Company, and understands and has
relied only on the information provided to it in writing by the Company relating
to this investment. No agent prepared any of the information to be delivered to
prospective Subscribers in connection with this transaction. Prospective
Subscribers are advised to conduct their own review of the business, properties
and affairs of the Company before subscribing to purchase the Securities.

(G) The Purchaser acknowledges and agrees that investing in the Company’s
Securities involves risks and that the Company’s operating results and financial
condition have varied in the past and may in the future vary significantly
depending on a number of factors. The Purchaser acknowledges and agrees that it
has evaluated and understands the risks regarding investing in the Company’s
securities, including the risks identified in this Subscription Agreement and
the Risk Factors described in the Company’s SEC Reports. The Purchaser agrees
that the risks described herein and in such SEC Reports are not the only risks
facing the Company. The Purchaser agrees that these risks could have a material
adverse effect on the Company’s business, results of operations, financial
condition or liquidity and cause its actual operating results to materially
differ from those contained in any forward-looking statements made in this
Subscription Agreement, in the Company’s SEC Reports and elsewhere by
management. Before making an investment decision, each Purchaser acknowledges
that it has been advised that it should carefully consider these risks as well
as other information contained or incorporated by reference in this Subscription
Agreement. Additional risks and uncertainties not currently known to the Company
or that it currently deems to be immaterial also may materially adversely affect
the Company’s business, financial condition and/or operating results.

 

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(H) The Purchaser also understands and agrees that, although the Company will
use its best efforts to keep the information provided in this Subscription
Agreement strictly confidential, the Company or its counsel may present this
Subscription Agreement and the information provided in answer to it to such
parties as they may deem advisable if called upon to establish the availability
under any federal or state securities laws of an exemption from registration of
the private placement or if the contents thereof are relevant to any issue in
any action, suit or proceeding to which the Company or its affiliates is a
party, or by which they are or may be bound or as otherwise required by law or
regulatory authority. Notwithstanding the foregoing, the Company shall not
publicly disclose the name of any Purchaser, or include the name of any
Purchaser in any filing with the Commission without the prior written consent of
such Purchaser, except as required by federal securities law in connection with
the disclosure of the transactions contemplated by this Subscription Agreement
and otherwise to the extent such disclosure is required by law or regulation, in
which case the Company shall provide the Purchasers with prior notice of such
disclosure permitted under this clause.

(I) The individual signing below on behalf of any entity hereby warrants and
represents that he/she is authorized to execute this Subscription Agreement on
behalf of such entity. If an individual, the Purchaser has reached the age of
majority in the state in which the Purchaser resides. The execution and delivery
of this Subscription Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all requisite action, if any,
in respect thereof on the part of Purchasers and no other proceedings on the
part of Purchasers are necessary to consummate the transactions contemplated
hereby. This Subscription Agreement has been duly and validly executed and
delivered by Purchasers and constitutes a valid and binding obligation of
Purchasers, enforceable against Purchasers in accordance with its terms (subject
to applicable bankruptcy, insolvency and similar laws affecting creditors’
rights generally and subject, as to enforceability, to general principles of
equity (whether applied in a proceeding in equity or at law)).

(J) The Purchaser is aware that the offering of the Securities involves
securities for which only a limited trading market exists, thereby requiring any
investment to be maintained for an indefinite period of time. The purchase of
the Securities involves risks which the Purchaser has evaluated, and the
Purchaser is able to bear the economic risk of the purchase of such Securities
and the loss of its entire investment. The undersigned is able to bear the
substantial economic risk of the investment for an indefinite period of time,
has no need for liquidity in such investment and can afford a complete loss of
such investment. The Purchaser’s overall commitment to investments that are not
readily marketable is not, and his acquisition of the Securities will not cause
such overall commitment to become, disproportionate to his net worth and the
Purchaser has adequate means of providing for its current needs and
contingencies.

(K) In entering into this Subscription Agreement and in purchasing the
Securities, the Purchaser further acknowledges that:

(i) The Company has informed the Purchaser that the Securities have not been
offered for sale by means of general advertising or solicitation and the
Purchaser acknowledges that it has either a pre-existing personal or business
relationship with either the Company or any of its officers, directors or
controlling person, of a nature and duration such as would enable a reasonable
prudent investor to be aware of the character, business acumen, and general
business and financial circumstances of the Company and an investment in the
Securities.

 

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(ii) Neither the Securities nor any interest therein may be resold by the
Purchaser in the absence of a registration under the Securities Act or an
exemption from registration. In particular, the Purchaser is aware that all of
the foregoing described Securities will be “restricted securities”, as such term
is defined in Rule 144 promulgated under the Securities Act (“Rule 144”), and
they may not be sold pursuant to Rule 144, unless the conditions thereof are
met. Other than set forth in this Agreement, the Company has no obligation to
register any securities purchased or issuable hereunder.

(iii) The following legend (or substantially similar language) shall be placed
on the certificate(s) or other instruments evidencing the Securities:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE “ACT”), OR ANY STATE SECURITIES LAWS AND NEITHER
SUCH NOTES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR
OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO
IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE
COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF SUCH NOTES, WHICH
COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH NOTES
MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER
CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR
APPLICABLE STATE SECURITIES LAWS.

(iv) The Company may at any time place a stop transfer order on its transfer
books against the Securities. Such stop order will be removed, and further
transfer of the Securities will be permitted, upon an effective registration of
the respective Securities, or the receipt by the Company of an opinion of
counsel satisfactory to the Company that such further transfer may be effected
pursuant to an applicable exemption from registration.

(L) The Company has employed its own legal counsel in connection with the
Offering. The Purchasers have not been represented by independent counsel in
connection with the preparation of this Subscription Agreement or the terms of
this Offering and no investigation of the merits or fairness of the Offering has
been conducted on behalf of the Purchasers. Each Purchaser has had the
opportunity to consult with its own legal, tax and financial advisors with
respect to the Offering made pursuant to this Subscription Agreement.

(M)                      (insert name of Purchaser Representative: if none leave
blank) has acted as the Purchaser’s Purchaser Representative for purposes of the
private placement exemption under the Act. If the Purchaser has appointed a
Purchaser Representative (which term is used herein with the same meaning as
given in Rule 501(h) of Regulation D), the Purchaser has been advised by his
Purchaser Representative as to the merits and risks of an investment in the
Company in general and the suitability of an investment in the Securities for
the Purchaser in particular.

(N) The undersigned hereby acknowledges that officers, affiliates, employees and
directors of the Company and/or the Selling Agent may purchase Securities in the
Offering on the same terms and conditions as the Purchasers.

(O) It never has been represented, guaranteed or warranted by the Company, any
of the officers, directors, stockholders, partners, employees or agents of the
Company, or any other persons, whether expressly or by implication, that:
(i) the Company or the Purchasers will realize any given percentage of profits
and/or amount or type of consideration, profit or loss as a result of the
Company’s activities or the Purchaser’s investment in the Company; or (ii) the
past performance or experience of the management of the Company, or of any other
person, will in any way indicate the predictable results of the ownership of the
Securities or of the Company’s activities.

 

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(P) The Purchaser acknowledges that any delivery to it of this Subscription
Agreement relating to the Securities prior to the determination by the Company
of its suitability as a Purchaser shall not constitute an offer of the
Securities until such determination of suitability shall be made, and the
Purchaser hereby agrees that it shall promptly return this Subscription
Agreement and the other Offering documents to the Company upon request. The
Purchaser understands that the Company shall have the right to accept or reject
this subscription in whole or in part. Unless this subscription is accepted in
whole or in part by the Company this subscription shall be deemed rejected in
whole.

(Q) Each Purchaser acknowledges that it is aware (and that its representatives
who are apprised of this matter have been or will be advised) that the United
States securities laws restrict persons with material non-public information
about a company obtained directly or indirectly from that company from
purchasing or selling securities of such company, or from communicating such
information to any other person under circumstances in which it is reasonably
foreseeable that such person is likely to purchase or sell such securities. Each
Purchaser hereby confirm and acknowledges that it is in receipt of material,
non-public information regarding this Offering and the Company and each
Purchaser further agrees and acknowledges that it will hold such information in
confidence, is restricted in its ability to use such information and may not use
any such information in contravention of applicable securities laws or
otherwise, including trading in the Company’s securities, except for the purpose
of evaluating an investment in the Company’s securities. Each Purchaser agrees
to comply with such restrictions for so long as it (or its representatives)
posses any material, non-public information concerning the Company or the
transactions contemplated herein.

(R) Each Purchaser acknowledges and agrees that there is no “minimum” offering
amount for the Securities and that funds may be immediately released to the
Company.

(S) Each Purchaser understands that nothing in this Subscription Agreement or
any other materials presented to the Purchaser in connection with the purchase
and sale of the Securities constitutes legal, tax or investment advice. The
Purchaser has consulted such legal, tax and investment advisors as it, in its
sole discretion, has deemed necessary or appropriate in connection with its
purchase of Securities.

Article IV

COVENANTS AND AGREEMENTS

4.1 Maintain SEC Reporting Requirements; Rule 144 Availability. The Company
shall, in a timely manner, make all necessary filings with the SEC under the
Securities and Exchange Act of 1934 for the longer of (i) so long as any
principal or interest under the Convertible Notes remain unpaid or (ii) a date
which is the last trading day of the ninth calendar month after the date of
conversion into Conversion Shares of the last outstanding Convertible Note by
the holder thereof. The Company shall, at its cost and expenses, (i) maintain a
stock transfer agent with respect to its Common Stock; (ii) at the Company’s
cost and expense, cause to be provided to the Subscribers in connection with the
sale of Conversion Shares any and all opinions of counsel to allow for the sale
of the Conversion Shares pursuant to SEC Rule 144; and (iii) cause its transfer
agent to issue Conversion Shares upon conversion of the Convertible Notes (or
remove any restrictive legends on the Conversion Shares) as may be allowed in
conformity with SEC rules and regulations.

 

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Article V

INDEMNIFICATION

5.1 Indemnification by the Company. The Company agrees to defend, indemnify and
hold harmless the Purchasers and shall reimburse Purchasers for, from and
against each claim, loss, liability, cost and expense (including without
limitation, interest, penalties, costs of preparation and investigation, and the
reasonable fees, disbursements and expenses of attorneys, accountants and other
professional advisors) (collectively, “Losses”) directly or indirectly relating
to, resulting from or arising out of any untrue representation,
misrepresentation, breach of warranty or non-fulfillment of any covenant,
agreement or other obligation by or of the Company contained herein or in any
certificate, document, or instrument delivered to Purchasers pursuant hereto.

5.2 Indemnification by Purchasers. Purchasers agrees to defend, indemnify and
hold harmless the Company and shall reimburse the Company for, from and against
all Losses directly or indirectly relating to, resulting from or arising out of
any untrue representation, misrepresentation, breach of warranty or
non-fulfillment of any covenant, agreement or other obligation of the Purchasers
contained herein or in any certificate, document or instrument delivered to the
Company pursuant hereto.

5.3 Procedure. The party to be indemnified hereunder (the “Indemnified Party”)
shall promptly notify the party providing indemnification hereunder (the
“Indemnifying Party”) of any claim, demand, action or proceeding for which
indemnification may be sought under Sections 5.1 or 5.2 of this Subscription
Agreement, and, if such claim, demand, action or proceeding is a third party
claim, demand, action or proceeding (collectively, an “Action”), the
Indemnifying Party will have the right at its expense to assume the defense
thereof using counsel reasonably acceptable to the Indemnified Party; provided,
however any failure or delay to so notify the Indemnifying Party will not
relieve it from its obligation to indemnify any Indemnified Party, unless and
only to the extent that such failure or delay results in the forfeiture by the
Indemnifying Party of substantial rights and defenses or the Indemnifying Party
is otherwise materially prejudiced by such failure or delay. Any Indemnified
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 Indemnified Party except to the extent that
(i) the employment thereof has been specifically authorized by the Indemnifying
Party in writing, (ii) the Indemnifying Party 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 Indemnifying Party and the
position of such Indemnified Party, in which case the Indemnifying Party shall
be responsible for the reasonable fees and expenses of no more than one such
separate counsel for the Indemnified Party. In connection with any such third
party Action, Purchasers and the Company shall cooperate with each other and
provide each other with access to relevant books and records in their
possession. No Indemnifying Party shall, without the prior written consent of
the Indemnified Party, which shall not be unreasonably withheld, effect any
settlement, compromise or consent to the entry of judgment in any pending or
threatened Action in respect of which any Indemnified Party is or could have
been a party and indemnity was or could have been sought hereunder by such
Indemnified Party, unless such settlement, compromise or consent includes an
unconditional release of such Indemnified Party from all liability on claims
that are the subject matter of such Action. Further, no Indemnified Party
seeking indemnification hereunder will, without the prior written consent of the
Indemnifying Party, which shall not be unreasonably withheld, settle,
compromise, consent to the entry of any judgment in or otherwise seek to
terminate any Action. The Indemnifying Party shall not be liable for settlement
of any Action effected without its written consent.

 

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ARTICLE VI

MISCELLANEOUS

6.1 Representations and Warranties and Covenants. No investigation made by or on
behalf of either party shall affect the representations and warranties made
pursuant to this Subscription Agreement. No party makes any additional or
implied representations other than those set forth herein. The representations,
warranties and covenants made by the Company herein shall survive final Closing
of the Offering for a period of one (1) year. Section 4.1 f this Agreement shall
remain in effect for a period of the longer of (i) so long as any principal or
interest under the Convertible Notes remain unpaid or (ii) a date which is the
last trading day of the ninth calendar month after the date of conversion into
Conversion Shares of the last outstanding Convertible Note by the holder
thereof.

6.2 Expenses. Each party hereto shall bear and pay all costs and expenses
incurred by it in connection with the transactions contemplated hereby,
including fees and expenses of its own brokers, finders, financial consultants,
accountants and counsel.

6.3 Entire Agreement. This Subscription Agreement, including the Exhibits,
contains the entire agreement and understanding of the parties with respect to
its subject matter. This Subscription Agreement supersedes all prior
arrangements and understandings between the parties, either written or oral,
with respect to its subject matter.

6.4 Binding Effect of Subscription. The Purchaser hereby acknowledges and
agrees, subject to any applicable state securities laws that the subscription
and application hereunder are irrevocable, that the Purchaser is not entitled to
cancel, terminate or revoke this Subscription Agreement and that this
Subscription Agreement shall survive the death or disability of the Purchaser
and shall be binding upon and inure to the benefit of the Purchaser and his
heirs, executors, administrators, successors, legal representatives, and
assigns. If the Purchaser is more than one person, the obligations of the
Purchaser hereunder shall be joint and several, and the agreements,
representations, warranties, and acknowledgments herein contained shall be
deemed to be made by and be binding upon each such person and his heirs,
executors, administrators, successors, legal representatives, and assigns.

6.5 Captions. The table of contents and captions contained in this Subscription
Agreement are for reference purposes only and are not part of this Subscription
Agreement.

6.6 Amendments; Waivers. No provision of this Subscription Agreement may be
waived or amended except in a written instrument signed by the Company and the
Purchasers holding a majority of the Convertible Notes. No waiver of any default
with respect to any provision, condition or requirement of this Subscription
Agreement shall be deemed to be a continuing waiver in the future or a waiver of
any subsequent default or a waiver of any other provision, condition or
requirement hereof, nor shall any delay or omission of either party to exercise
any right hereunder in any manner impair the exercise of any such right.

6.7 Notices. All notices, requests, consents and other communications hereunder
will be in writing, will be mailed by first-class registered or certified
airmail, or nationally recognized overnight express courier, postage prepaid, or
by facsimile, and will be deemed given (i) if delivered by first-class
registered or certified mail domestic, three business days after so mailed,
(ii) if delivered by nationally recognized overnight carrier, one business day
after so mailed, and (iii) if delivered by facsimile, upon electric confirmation
of receipt and will be delivered and addressed as follows: (A) if to the
Company, to the Company’s executive office as set forth on the cover of this
Subscription Agreement and (b) if to a Subscriber, to the address given by the
Subscriber on the signature page to this Subscription Agreement, or such other
address as may be given in writing by the Subscriber to the Company.

6.8 Execution. This Subscription Agreement may be executed through the use of
separate signature pages or in any number of counterparts, and each of such
counterparts shall, or all purposes, constitute one agreement binding on all
parties, notwithstanding that all parties are not signatories to the same
counterpart.

 

27

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6.9 Severability; Assignment. Each provision of this Subscription Agreement is
intended to be severable from every other provisions, and the invalidity or
illegality of any portion hereof, shall not affect the validity or legality of
the remainder hereof. This Subscription Agreement is not transferable or
assignable by the Purchaser except as may be provided herein. This Subscription
Agreement shall be binding upon and inure to the benefit of the Company, the
Purchasers and their respective successors and permitted assigns.

6.10 Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Subscription Agreement shall be governed
by and construed and enforced in accordance with the internal laws of the State
of California, without regard to the principles of conflicts of law thereof.
Each party agrees that all proceedings concerning the interpretations,
enforcement and defense of the transactions contemplated by this Agreement
(whether brought against a party hereto or its respective Affiliates, employees
or agents) shall be commenced exclusively in the state and federal courts
sitting in the Courts of Los Angeles, State of California (the “California
Courts”). Each party hereto hereby irrevocably submits to the exclusive
jurisdiction of the California Courts for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any proceeding, any claim that it is not personally subject to the jurisdiction
of any California Court, or that such proceeding has been commenced in an
improper or inconvenient forum. Each party hereto hereby irrevocably waives
personal service of process and consents to process being served in any such
proceeding by mailing a copy thereof via registered or certified mail or
overnight delivery (with evidence of delivery) to such party at the address in
effect for notices to it under this Agreement and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law. Each party hereto hereby irrevocably waives, to
the fullest extent permitted by applicable law, any and all right to trial by
jury in any proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby. If either party shall commence a proceeding to
enforce any provisions of this Agreement, then the prevailing party in such
proceeding shall be reimbursed by the other party for its reasonable attorney’s
fees and other reasonable costs and expenses incurred with the investigation,
preparation and prosecution of such Proceeding.

Signature pages to Subscription Agreement Follows

 

28

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SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT

IN WITNESS WHEREOF, the parties hereto have executed or caused this Subscription
Agreement to be executed by their signature as natural persons or by individuals
by their duly authorized officers as of the              day of
                    , 2014.

 

THE COMPANY:

XENONICS HOLDINGS, INC.:

 

Name:

Title:

 

29

--------------------------------------------------------------------------------

XENONICS HOLDINGS, INC.

EXECUTION BY AN INDIVIDUAL

(Not applicable to entities)

IF SUBSCRIBERS ARE PURCHASING SECURITIES WITH THE COMPANY’S SPOUSE, INVESTOR
MUST BOTH SIGN THIS SIGNATURE PAGE.

PLEASE INDICATE DESIRED TYPE OF OWNERSHIP OF SECURITIES:

 

  ¨ Individual

 

  ¨ Joint Tenants (rights of survivorship)

 

  ¨ Tenants in Common (no rights of survivorship)

I represent that the foregoing information is true and correct.

IN WITNESS WHEREOF, the undersigned has duly executed this Subscription
Agreement and agrees to the terms hereof.

Dated:                              , 2014

Subscription Amount (Principal Amount of Convertible Notes purchased):
$                    

 

 

(Name of Subscriber - Please Print)

 

(Signature)

 

(Name of co- Subscriber - Please Print)

 

(Signature of Co- Subscriber)

 

Exact name Securities are to be issued under:

 

 

Address for Delivery of Certificates

(if not the same as in Questionnaire):

 

 

 

 

 

 

 

30

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XENONICS HOLDINGS, INC.

PARTNERSHIP SIGNATURE PAGE

The undersigned PARTNERSHIP hereby represents and warrants that the person
signing this Subscription Agreement on behalf of the PARTNERSHIP is a general
partner of the PARTNERSHIP, has been duly authorized by the PARTNERSHIP to
acquire the Securities and sign this Subscription Agreement on behalf of the
PARTNERSHIP and, further, that the undersigned PARTNERSHIP has all requisite
authority to purchase such Securities and enter into the Subscription Agreement.

IN WITNESS WHEREOF, the undersigned has duly executed this Subscription
Agreement and agrees to the terms hereof.

Dated:                              , 2014

Subscription Amount (Principal Amount of Convertible Notes purchased):
$                    

 

 

 

Name of Partnership

 

(Please Type or Print)

By:

 

 

 

(Signature)

Name:

 

 

 

(Please Type or Print)

Title:

 

 

 

(Please Type or Print)

 

Exact name Securities are to be issued under:

  

 

Address for Delivery of Certificates

(if not the same as in Questionnaire):

  

 

  

 

  

 

 

31

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XENONICS HOLDINGS, INC.

CORPORATION/LIMITED LIABILITY COMPANY SIGNATURE PAGE

The undersigned CORPORATION or LIMITED LIABILITY COMPANY hereby represents and
warrants that the person signing this Subscription Agreement on behalf of the
CORPORATION or LIMITED LIABILITY COMPANY has been duly authorized by all
requisite action on the part of the CORPORATION or LIMITED LIABILITY COMPANY to
acquire the Securities and sign this Subscription Agreement on behalf of the
CORPORATION or LIMITED LIABILITY COMPANY and, further, that the undersigned
CORPORATION or LIMITED LIABILITY COMPANY has all requisite authority to purchase
the Securities and enter into this Subscription Agreement.

IN WITNESS WHEREOF, the undersigned has duly executed this Subscription
Agreement and agrees to the terms hereof.

Dated:                              , 2014

Subscription Amount (Principal Amount of Convertible Notes purchased):
$                    

 

 

 

Name of Corporation

 

Or Limited Liability Company

 

(Please Type or Print)

By:

 

 

 

Signature

Name:

 

 

 

(Please Type or Print)

Title:

 

 

 

(Please Type or Print)

 

Exact name Securities are to be issued under:

  

 

Address for Delivery of Certificates

(if not the same as in Questionnaire):

  

 

  

 

  

 

 

32

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XENONICS HOLDINGS, INC.

TRUST/RETIREMENT PLAN SIGNATURE PAGE

The undersigned TRUST or RETIREMENT PLAN hereby represents and warrants that the
persons signing this Subscription Agreement on behalf of the TRUST or RETIREMENT
PLAN are duly authorized to acquire the Securities and sign this Subscription
Agreement on behalf of the TRUST or RETIREMENT PLAN and, further, that the
undersigned TRUST or RETIREMENT PLAN has all requisite authority to purchase
such Securities and enter into the Subscription Agreement.

IN WITNESS WHEREOF, the undersigned has duly executed this Subscription
Agreement and agrees to the terms hereof.

Dated:                              , 2014

Subscription Amount (Principal Amount of Convertible Notes purchased):
$                    

 

 

Title of Trust or Retirement Plan

(Please Type or Print)

By:

 

 

 

Signature of Trustee or

 

Authorized Signatory

Name of Trustee:

 

 

 

(Please Type or Print)

By:

 

 

 

Signature of Co-Trustee if applicable

Name of Co-Trustee:

 

 

 

(Please Type or Print)

 

Exact name Securities are to be issued under:

  

 

Address for Delivery of Certificates

(if not the same as in Questionnaire):

  

 

  

 

  

 

 

33

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EXHIBIT A

XENONICS HOLDINGS, INC.

Private Placement of Secured Convertible Notes

INVESTOR SUITABILITY QUESTIONNAIRE

The following information is needed in order to determine (i) whether an
investment in XENONICS HOLDINGS, INC. (the “Company” or “Xenonics”) by the
undersigned (the “Investor”) is suitable in light of the Investor’s personal and
financial position, and (ii) whether the Investor, either alone or with a
representative, has sufficient knowledge and experience in financial and
business affairs to evaluate the merits and risks of the prospective investment
(the “Investment”) in Secured Convertible Notes of Xenonics as described in the
Subscription Agreement dated as of June 23, 2014 (“Agreement”). Terms not
otherwise defined herein shall have the meaning ascribed to such terms in the
Agreement.

The Investor understands that this questionnaire (this “Questionnaire”) is
intended to enable the Company and Sandlapper Securities, LLC, as selling agent
(“Placement Agent”), to discharge their respective responsibilities under an
exemption from registration under the Securities Act of 1933 (the “Act”), and
with respect to the Placement Agent, its obligations under applicable FINRA
rules, and thus the Company, the Placement Agent and their respective advisors
will rely upon the information contained herein. Accordingly, the undersigned
represents to the Company and the Placement Agent as follows:

(i) The information contained herein is complete and accurate and may be relied
upon by the Company and its advisors; and

(ii) The Investor will notify the Company immediately of any material change in
any information provided herein occurring prior to the acceptance or rejection
of a subscription agreement between the Company and the Investor.

The Investor understands and agrees that, although the Company will use its best
efforts to keep the information provided in the answers to this Questionnaire
strictly confidential, the Company may present this Questionnaire and the
information provided in it by the Investor to such parties as the Company deems
advisable if called upon to establish the availability under any federal or
state securities laws of an exemption from registration or if the contents
thereof are relevant to any issue in any action, suit, or proceeding to which
the Company is a party or by which it is or may be bound.

The Investor realizes that this Questionnaire does not constitute an offer of
securities by the Company, but rather is a request for information.

Investor Information

INSTRUCTIONS: Please print or type all answers.

If the answer to any question is “none” or “not applicable,” please so state.

Part A — Personal Data

 

1. Name of the
Investor:_____________________________________________________________

 

2. Date of
Birth:____________________________________________________________________

 

3. Social Security No.:
______________________________________________________________

 

4. Marital Status:
__________________________________________________________________

 

5. Home Address (The address given must be your residence address where you are
registered to vote.

 

34

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Post office boxes and other addresses including addresses care of a
representative will not be accepted.)

__________________________________________________________________________________

__________________________________________________________________________________

 

6. Home Telephone
Number:______________________________________________________________

 

7. Profession:
__________________________________________________________________________

 

8. Name of Employer:
___________________________________________________________________

 

9. Business Address:
___________________________________________________________________

 

10. Business Telephone Number:
__________________________________________________________

 

11. Position/ Title:
______________________________________________________________________

 

12. Nature of Duties:
____________________________________________________________________

Part B — Financial Data and Investment History

13. Please state whether you are an “accredited investor,” as such term is
defined under the Securities Act of 1933. Check the applicable category below:

 

         (a)

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

         (b)

   Any broker or dealer registered pursuant to Section 15 of the Securities
Exchange Act of 1934 (the “Exchange Act”);

         (c)

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

         (d)

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

         (e)

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

         (f)

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

         (g)

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

         (h)

   A “Private Business Development Company” as defined in Section 202(a)(22) of
the Investment Advisers Act of 1940.

         (i)

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

 

35

--------------------------------------------------------------------------------

         (j)

   A natural person whose individual net worth,* or joint net worth with that
person’s spouse, at the time of purchase exceeds $1,000,000.

         (k)

   A natural person who had an individual income** in excess of $200,000 in each
of the two most recent years or joint income with that person’s spouse in excess
of $300,000 in each of those years and has a reasonable expectation of reaching
the same income level in the current year.

         (l)

   A trust, with total assets in excess of $5,000,000, not formed for the
specific purpose of acquiring the Units, whose purchase is directed by a
sophisticated person as described in Rule 506(b)(2)(ii) of Regulation D
promulgated under the Act.

         (m)

   Any entity in which all of the equity owners are Accredited Investors.***

 

* For purposes hereof net worth shall be deemed to include ALL of your assets,
liquid or illiquid (excluding the value of your principal residence) MINUS any
liabilities (including such items as home mortgages and other debts and
liabilities).

** For purposes hereof the term “income” is not limited to “adjusted gross
income” as that term is defined for federal income tax purposes, but rather
includes certain items of income which are deducted in computing “adjusted gross
income.” For Subscribers who are salaried employees, the gross salary of such
Subscribers, minus any significant expenses personally incurred by such
Subscriber in connection with earning the salary, plus any income from any other
source including unearned income, is a fair measure of “income” for purposes
hereof. For Subscribers who are self-employed, “income” is generally construed
to mean total revenues received during the calendar year minus significant
expenses incurred in connection with earning such revenues.

*** If the Subscriber intends to qualify under (m), then all owners of the
entity must complete a Subscription Agreement as an individual.

14. Please provide your net worth (together with your joint net worth including
your spouse, if married) as of the time of your investment. Joint net worth is
the sum of the individual net worth of both spouses. The term is not limited to
property which is jointly held in a formal sense (e.g., tenancy in common,
tenancy by the entirety, or community property). In calculating net worth, all
assets, such as home, home furnishings and automobiles, less liabilities, should
be considered.

15. Indicate (a) your individual income from all sources for the calendar years
2012 and 2013 and estimated income for 2014 or (b) your joint income with your
spouse from all sources for the calendar years 2012 and 2013 and estimated
income for 2014 (It is important that you check the highest applicable amount;
for guidance in computing “income” for purposes of this Subscription Agreement,
see the notes at the end of “Section B: Accredited Investor Status.”):

(a) individual income:

 

    

$200,000

to

$299,000

  

$300,000

to

$399,000

  

$400,000

to

$499,000

  

$500,000

and

over

2012

   _________    _________    _________    _________

2013

   _________    _________    _________    _________

2014

   _________    _________    _________    _________

(b) joint income:

 

36

--------------------------------------------------------------------------------

    

$200,000

to

$299,000

  

$300,000

to

$399,000

  

$400,000

to

$499,000

  

$500,000

and

over

2012

   _________    _________    _________    _________

2013

   _________    _________    _________    _________

2014

   _________    _________    _________    _________

16. Will you have following the time of your investment in the Company adequate
liquid assets (defined as cash, cash equivalents and freely marketable
securities) to meet your current needs and personal contingencies without
considering the funds used to make the investment?

Yes  ¨                     No  ¨

17. Please indicate below any additional matter of a financial nature that is
relevant to an analysis of your financial position, including whether you have
filed for or been involved in personal bankruptcy proceedings within the past
five years; whether there have been any lawsuits or claims pending or threatened
against you materially affecting your net worth as reported in this
questionnaire; and whether other significant liabilities have existed for which
you may have been obligated:

18. Have you invested in securities offered through private placements in the
last five years?

Yes  ¨                     No  ¨

 

19. Do you always make your own ultimate decisions on your investments?

Yes  ¨                    No  ¨

20. Do you believe that you have sufficient knowledge and experience in
financial and business matters to evaluate the merits and risks of your
investment in the Company?

Yes  ¨                     No  ¨

21. Have you used a purchaser representative in connection with your investment
in the Company (i.e., someone who has such knowledge and experience in financial
and business matters that he or she is capable of evaluating the merits and
risks of your investment in the Company and whom you acknowledged in writing
during the course of your investment to be your purchaser representative)?

Yes  ¨                    No  ¨

If yes, please provide name and contact information:

                                                                 
                                         
                                         
                                         
                                                    

 

                                                                 
                                         
                                         
                                         
                                                    

 

                                                                 
                                         
                                         
                                         
                                                    

 

22. Education:    Please describe your business or professional education or
training, listing any schools you have attended and degrees you have received.

 

37

--------------------------------------------------------------------------------

Dates    School   

Degrees and Area of

Concentration (if any)

__________________________    __________________________   
__________________________ __________________________   
__________________________    __________________________
__________________________    __________________________   
__________________________

 

  23. Do you understand that there is no guarantee of any financial return on
this investment?

Yes  ¨                      No  ¨

 

  24 Do you understand that this investment is not liquid and the securities of
the Company may not continue to be publicly traded?

Yes  ¨                      No  ¨

 

  25 Do you have adequate means of providing for your current needs and personal
contingencies in view of the fact that this is not a liquid investment and you
may incur a complete loss of your entire investment?

Yes  ¨                      No  ¨

 

  26 Are you aware of the Company’s business affairs and financial condition,
and have you acquired all such information about the Company as you deem
necessary and appropriate to enable you to reach an informed and knowledgeable
decision to acquire the Units?

Yes  ¨                      No  ¨

 

  27 Do you have a “pre-existing relationship” with the Company or any of its
officers, managers or members?

Yes  ¨                      No  ¨

(For purposes hereof, “Pre-existing relationship” means any relationship
consisting of personal or business contacts of a nature and duration such as
would enable a reasonably prudent Subscriber to be aware of the character,
business acumen, and general business and financial circumstances of the person
with whom such relationship exists.)

If so, please indicate whether the relationship is with the Company, and/or name
the individual(s) with whom you have a pre-existing relationship and describe
the relationship:

  

 

 

 

 

 

 

38

--------------------------------------------------------------------------------

28. In order for the Company and its selling agents to comply with applicable
anti-money laundering/U.S. Treasury Department Office of Foreign Assets Control
(“OFAC”) rules and regulations, Subscriber is required to provide the following
information:

 

  (a) Payment Information

(i) Name and address (including country) of the bank from which Subscriber’s
payment to the Company is being wired (the “Wiring Bank”):

 

 

         

 

     

 

     

 

     

(ii) Subscriber’s wiring instructions at the Wiring Bank:

 

 

     

 

     

 

     

(iii) Is the Wiring Bank located in the U.S. or another “FATF Country”*?

¨  Yes    ¨   No

(iv) Is Subscriber a customer of the Wiring Bank?

¨  Yes    ¨   No

 

  (b) Additional Information

Investors wishing to subscribe must provide the following additional information
or documents.

For Individual Investors:

 

          A government issued form of picture identification (e.g., passport or
drivers license).

          Proof of the individual’s current address (e.g., current utility
bill), if not included in the form of picture identification.

For Funds of Funds or Entities that Invest on Behalf of Third Parties:

 

          A certificate of due formation and organization and continued
authorization to conduct business in the jurisdiction of its organization (e.g.,
certificate of good standing).

          An “incumbency certificate” attesting to the title of the individual
executing these subscription materials on behalf of the prospective investor.

 

 

*  As of the date hereof, countries that are members of the Financial Action
Task Force on Money Laundering (“FATF Country”) are: Argentina, Australia,
Austria, Belgium, Brazil, Canada, Denmark, Finland, France, Germany, Greece,
Hong Kong, Iceland, Ireland, Italy, Japan, Luxembourg, Mexico, Kingdom of the
Netherlands, New Zealand, Norway, Portugal, Russian Federation, Singapore, South
Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom and the United States
of America.

 

39

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_____   A completed copy of a certification that the entity has adequate
anti-money laundering policies and procedures (“AML Policies and Procedures”) in
place that are consistent with the USA PATRIOT Act, OFAC and other relevant
federal, state or non-U.S. anti-money laundering laws and regulations (with a
copy of the entity’s current AML Policies and Procedures to which such
certification relates). _____   A letter of reference any entity not located in
the U.S. or other FATF country, from the entity’s local office of a reputable
bank or brokerage firm that is incorporated, or has its principal place of
business located, in the U.S. or other FATF Country certifying that the
prospective investor maintains an account at such bank/brokerage firm for a
length of time and containing a statement affirming the prospective investor’s
integrity.

For all other Entity Investors:

 

_____   A certificate of due formation and organization and continued
authorization to conduct business in the jurisdiction of its organization (e.g.,
certificate of good standing). _____   An “incumbency certificate” attesting to
the title of the individual executing these subscription materials on behalf of
the prospective investor. _____   A letter of reference from the entity’s local
office of a reputable bank or brokerage firm that is incorporated, or has its
principal place of business located, in the U.S. or other FATF Country
certifying that the prospective investor maintains an account at such
bank/brokerage firm for a length of time and containing a statement affirming
the prospective investor’s integrity.

_____

  If the prospective investor is a privately-held entity, a certified list of
the names of every person or entity who is directly or indirectly the beneficial
owner of 25% or more of any voting or non-voting class of equity interests of
the Subscriber, including (i) country of citizenship (for individuals) or
principal place of business (for entities) and, (ii) for individuals, such
individual’s principal employer and position.

ARTICLE II.             If the prospective investor is a trust, a certified list
of (i) the names of the current beneficiaries of the trust that have, directly
or indirectly, 25% or more of any interest in the trust, (ii) the name of the
settlor of the trust, (iii) the name(s) of the trustee(s) of the trust, and (iv)
the country of citizenship (for individuals) or principal place of business (for
entities).

 

29. For Trusts only:

Certain trusts generally may not qualify as accredited investors except under
special circumstances. Therefore, if you intend to purchase the shares of the
Company’s securities in whole or in part through a trust, please answer each of
the following questions.

Is the trustee of the trust a national or state bank that is acting in its
fiduciary capacity in making the investment on behalf of the trust?

Yes  ¨                     No  ¨

Does this investment in the Company exceed 10% of the trust assets?

Yes  ¨                     No  ¨

(b). If the trust is a revocable trust, please complete Question 1 below. If the
trust is an irrevocable trust, please complete Question 2 below.

1. REVOCABLE TRUSTS

Can the trust be amended or revoked at any time by its grantors:

Yes  ¨                     No  ¨

 

40

--------------------------------------------------------------------------------

If yes, please answer the following questions relating to each grantor (please
add sheets if necessary):

Grantor Name:                     

Net worth of grantor (including spouse, if applicable), including home, home
furnishings and automobiles exceeds $1,000,000?

Yes  ¨                     No  ¨

OR

Income (exclusive of any income attributable to spouse) was in excess of
$200,000 for 2011 and 2012 and is reasonably expected to be in excess of
$200,000 for 2013?

Yes  ¨                     No  ¨

OR

Income (including income attributable to spouse) was in excess of $300,000 for
2006 and 2007 and is reasonably expected to be in excess of $300,000 for 2008?

Yes  ¨                     No  ¨

 

  2. IRREVOCABLE TRUSTS

If the trust is an irrevocable trust, please answer the following questions:

Please provide the name of each trustee:

Trustee Name: ____________________________________________________________

Trustee Name: ___________________________________________________________

A. Does the trust have assets greater than $5 million?

Yes  ¨                     No  ¨

B. Do you have such knowledge and experience in financial and business matters
as to be capable of evaluating the merits and risks of an investment in the
Company?

Yes  ¨                     No  ¨

C. Indicate how often you invest in:

Marketable Securities

Often  ¨    Occasionally  ¨    Seldom  ¨    Never  ¨

Restricted Securities

Often  ¨    Occasionally  ¨    Seldom  ¨    Never  ¨

Venture Capital Companies

Often  ¨    Occasionally  ¨    Seldom  ¨    Never  ¨

 

41

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Signature Page to

XENONICS HOLDINGS, INC.

INVESTOR SUITABILITY QUESTIONNAIRE

IN WITNESS WHEREOF, the Investor has executed this questionnaire as of the date
of the Investor’s investment in the Company and declared that it is truthful and
correct.

Dated as of                              , 2014

 

Name of Investor(s):

 

 

 

 

Authorized Signature(s):

 

 

 

 

 

42

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EXHIBIT B

FORM OF CONVERTIBLE SENIOR SECURED NOTE

(see attached)

 

43

--------------------------------------------------------------------------------

EXHIBIT C

FORM OF SECURITY AGREEMENT

(see attached)

 

44