EXHIBIT 10.1

 

SUBSCRIPTION AGREEMENT

 

This SUBSCRIPTION AGREEMENT (this “Agreement”) is made as of the last date set
forth on the signature page hereof between SpectraScience, Inc., a Minnesota
corporation (the “Company”), and the undersigned (the “Subscriber”).

 

W I T N E S S E T H:

WHEREAS, the Company is conducting a private offering (the “Offering”) for which
Laidlaw & Company (UK) Ltd. is acting as placement agent on a “best efforts”
basis (the “Placement Agent”), consisting of a minimum of $250,000 (the “Minimum
Offering”) and up to a maximum of $1,500,000 (the “Maximum Offering”) of 5%
original issue discount unsecured convertible debentures (the “Debentures”),
initially convertible into shares of the Company’s common stock par value $0.01
per share (the “Common Stock”) at a conversion price equal to $0.099, subject to
adjustment (the “Conversion Price”), and

 

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

 

WHEREAS, in connection with the purchase of the Debentures, each Subscriber will
receive a five-year warrant (the “Warrant”, and together with the Debenture, the
“Securities”) to purchase such number of shares of Common Stock of the Company
equal to 50% of the number of shares of Common Stock initially issuable upon
conversion of the Debentures in this Offering at an exercise price equal to
$0.1287 per share, subject to adjustment thereunder (the “Exercise Price”); and

 

WHEREAS, the Subscriber desires to purchase such amount of Debentures (together
with the associated Warrants) as set forth on the signature page hereof on the
terms and conditions hereinafter set forth.

 

NOW, THEREFORE, in consideration of the premises and the mutual representations
and covenants hereinafter set forth, the parties hereto do hereby agree as
follows:

 

I.SUBSCRIPTION FOR SECURITIES AND REPRESENTATIONS AND AGREEMENTS BY SUBSCRIBER

 

1.1      Subject to the terms and conditions hereinafter set forth, the
Subscriber hereby subscribes for and agrees to purchase from the Company, and
the Company subject to its rights to accept or reject this subscription, agrees
to sell to the Subscriber, such aggregate face amount of Debentures for the
aggregate purchase price as is set forth on the signature page hereof. The
purchase price is payable by wire transfer, to be held in escrow until the
Minimum Offering and the other conditions to closing are achieved, to Signature
Bank, the escrow agent (the “Escrow Agent”) as follows:

 

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Bank: Signature Bank

261 Madison Ave.

New York, NY 10016

ABA #:

Acct #:

Acct Name: Signature Bank, as Escrow Agent for SpectraScience, Inc.

Swift Code:

 

1.2      The Securities will be offered for sale until the earlier of (i) the
closing on the Maximum Offering or (ii) September 7, 2012, subject to the right
of the Company and the Placement Agent to mutually extend the Termination Date
to October 22, 2012 without notice to prospective investors (the “Termination
Date”). The Offering is being conducted on a “best-efforts” basis.

 

1.3      The Company may hold an initial closing (“Initial Closing”) at any time
after the receipt of accepted subscriptions for the Minimum Offering. After the
Initial Closing, subsequent closings with respect to additional Securities may
take place at any time prior to the Termination Date as determined by the
Company, with respect to subscriptions accepted prior to the Termination Date
(each such closing, together with the Initial Closing, being referred to as a
“Closing”). The last Closing of the Offering, occurring on or prior to the
Termination Date, shall be referred to as the “Final Closing”. Any subscription
documents or funds received after the Final Closing will be returned, without
interest or deduction. In the event that the any Closing does not occur prior to
the Termination Date, all amounts paid by the Subscriber shall be returned to
the Subscriber, without interest or deduction. The Subscriber may revoke its
subscription and obtain a return of the subscription amount paid to the Escrow
Agent at any time before the date of the Initial Closing by providing written
notice to the Placement Agent, the Company and the Escrow Agent as provided in
Section 6.2 below. Upon receipt of a revocation notice from the Subscriber prior
to the date of the Initial Closing, all amounts paid by the Subscriber shall be
returned to the Subscriber, without interest or deduction. The Subscriber may
not revoke this subscription or obtain a return of the subscription amount paid
to the Escrow Agent on or after the date of the Initial Closing. Any
subscription received after the Initial Closing but prior to the Termination
Date shall be irrevocable.

 

1.4      The Subscriber recognizes that the purchase of the Securities involves
a high degree of risk including, but not limited to, the following: (a) the
Company has a limited operating history and requires substantial funds in
addition to the proceeds of the Offering; (b) an investment in the Company is
highly speculative, and only investors who can afford the loss of their entire
investment should consider investing in the Company and the Securities; (c) the
Subscriber may not be able to liquidate its investment; (d) transferability of
the Securities is extremely limited; (e) in the event of a disposition, the
Subscriber could sustain the loss of its entire investment; (f) the Company has
not paid any dividends since its inception and does not anticipate paying any
dividends; and (g) the other risks associated with the Company’s business,
financial situation and the Offering set forth on Exhibit A annexed hereto.

 

 

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1.5      At the time such Subscriber was offered the Securities, it was, and as
of the date hereof it is, and on each date on which it converts the Debentures
and/or exercises any Warrants, it will be an “accredited investor” as defined in
Rule 501(a) under the Securities Act, as indicated by the Subscriber’s responses
to the questions contained in Section VII hereof, and that the Subscriber is
able to bear the economic risk of an investment in the Securities.

 

1.6      The Subscriber hereby acknowledges and represents that (a) the
Subscriber has knowledge and experience in business and financial matters, prior
investment experience, including investment in securities that are non-listed,
unregistered and/or not traded on a national securities exchange or the
Subscriber has employed the services of a “purchaser representative” (as defined
in Rule 501 of Regulation D), attorney and/or accountant to read all of the
documents furnished or made available by the Company both to the Subscriber and
to all other prospective investors in the Securities to evaluate the merits and
risks of such an investment on the Subscriber’s behalf; (b) the Subscriber
recognizes the highly speculative nature of this investment; and (c) the
Subscriber is able to bear the economic risk that the Subscriber hereby assumes.

 

1.7      The Subscriber hereby acknowledges receipt and careful review of this
Agreement, the Debenture, the Warrant and all other exhibits thereto
(collectively referred to as the “Transaction Documents”) and has had access to
the Company’s Annual Report on Form 10-K and the exhibits thereto for the fiscal
year ended December 31, 2011 (the “Form 10-K”), the Company’s Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 2012 (the “Form 10-Q”) and
all subsequent periodic and current reports filed with the SEC as publicly filed
with and available at the website of the SEC which can be accessed at
www.sec.gov, and has received any additional information that the Subscriber has
requested from the Company, and has been afforded the opportunity to ask
questions of and receive answers from duly authorized officers or other
representatives of the Company concerning the Company and the terms and
conditions of the Offering; provided, however that no investigation performed by
or on behalf of the Subscriber shall limit or otherwise affect its right to rely
on the representations and warranties of the Company contained herein.

 

1.8      (a) In making the decision to invest in the Securities the Subscriber
has relied solely upon the information provided by the Company in the
Transaction Documents and upon the information set forth in the Form 10-K, the
Form 10-Q and all subsequent periodic and current reports filed with the SEC. To
the extent necessary, the Subscriber has retained, at its own expense, and
relied upon appropriate professional advice regarding the investment, tax and
legal merits and consequences of this Agreement and the purchase of the
Securities hereunder. The Subscriber disclaims reliance on any statements made
or information provided by any person or entity in the course of Subscriber’s
consideration of an investment in the Securities other than the Transaction
Documents.

 

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(b) The Subscriber represents that (i) the Subscriber was contacted regarding
the sale of the Securities by the Placement Agent with whom the Subscriber had a
prior substantial pre-existing relationship and (ii) it did not learn of the
offering of the Securities by means of any form of general solicitation or
general advertising, and in connection therewith, the Subscriber did not (A)
receive or review any advertisement, article, notice or other communication
published in a newspaper or magazine or similar media or broadcast over
television or radio, whether closed circuit, or generally available; or (B)
attend any seminar meeting or industry investor conference whose attendees were
invited by any general solicitation or general advertising.

 

1.9      The Subscriber hereby acknowledges that the Offering has not been
reviewed by the SEC nor any state regulatory authority since the Offering is
intended to be exempt from the registration requirements of Section 5 of the
Securities Act, pursuant to Section 4(2) of the Securities Act and Rule 506 of
Regulation D. The Subscriber understands that the Securities have not been
registered under the Securities Act or under any state securities or “blue sky”
laws and agrees not to sell, pledge, assign or otherwise transfer or dispose of
the Securities unless they are registered under the Securities Act and under any
applicable state securities or “blue sky” laws or unless an exemption from such
registration is available.

 

1.10  The Subscriber understands that the Securities have not been registered
under the Securities Act by reason of a claimed exemption under the provisions
of the Securities Act that depends, in part, upon the Subscriber’s investment
intention and investment qualification. In this connection, the Subscriber
hereby represents that the Subscriber is purchasing the Securities for the
Subscriber’s own account for investment and not with a view toward the resale or
distribution to others; provided, however, that nothing contained herein shall
constitute an agreement by the Subscriber to hold the Securities for any
particular length of time and the Company acknowledges that the Subscriber shall
at all times retain the right to dispose of its property as it may determine in
its sole discretion, subject to any restrictions imposed by applicable law. The
Subscriber, if an entity, further represents that it was not formed for the
purpose of purchasing the Securities.

 

1.11  The Subscriber consents to the placement of a legend on any certificate or
other document evidencing the Securities and, when issued, the shares of Common
Stock issuable upon conversion of the Debentures (the “Conversion Shares”) and
exercise of the Warrant (the “Warrant Shares” and collectively with the
Conversion Shares, the “Shares”) that such securities have not been registered
under the Securities Act or any state securities or “blue sky” laws and setting
forth or referring to the restrictions on transferability and sale thereof
contained in this Agreement. The Subscriber is aware that the Company will make
a notation in its appropriate records with respect to the restrictions on the
transferability of such Securities or the Shares.

 

1.12  The Subscriber hereby represents that the address of the Subscriber
furnished by Subscriber on the signature page hereof is the Subscriber’s
principal residence if Subscriber is an individual or its principal business
address if it is a corporation or other entity.

 

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1.13  Such Subscriber understands that the Securities are “restricted
securities” and have not been registered under the Securities Act or any
applicable state securities law and is acquiring the Securities as principal for
its own account and not with a view to or for distributing or reselling such
Securities or any part thereof in violation of the Securities Act or any
applicable state securities law, has no present intention of distributing any of
such Securities in violation of the Securities Act or any applicable state
securities law and has no direct or indirect arrangement or understandings with
any other persons to distribute or regarding the distribution of such Securities
in violation of the Securities Act or any applicable state securities law.
Furthermore, such Subscriber is not purchasing the Securities as a result of any
advertisement, article, notice or other communication regarding the Securities
published in any newspaper, magazine or similar media or broadcast over
television or radio or presented at any seminar or any other general
solicitation or general advertisement.

 

1.14  The Subscriber represents that the Subscriber has full power and authority
(corporate, statutory and otherwise) to execute and deliver this Agreement and
to purchase the Securities. This Agreement constitutes the legal, valid and
binding obligation of the Subscriber, enforceable against the Subscriber in
accordance with its terms.

 

1.15  If the Subscriber is a corporation, partnership, limited liability
company, trust, employee benefit plan, individual retirement account, Keogh
Plan, or other tax-exempt entity, it is authorized and qualified to invest in
the Company and the person signing this Agreement on behalf of such entity has
been duly authorized by such entity to do so.

 

1.16  The Subscriber acknowledges that if he or she is a Registered
Representative of a Financial Industry Regulatory Authority (“FINRA”) member
firm, he or she must give such firm the notice required by the FINRA’s Rules of
Fair Practice, receipt of which must be acknowledged by such firm in Section 7.4
below.

 

1.17  To effectuate the terms and provisions hereof, the Subscriber hereby
appoints the Placement Agent as its attorney-in-fact (and the Placement Agent
hereby accepts such appointment) for the purpose of carrying out the provisions
of the Escrow Agreement by and between the Company, the Placement Agent and
Escrow Agent (the “Escrow Agreement”) including, without limitation, taking any
action on behalf of, or at the instruction of, the Subscriber and executing any
release notices required under the Escrow Agreement and taking any action and
executing any instrument that the Placement Agent may deem necessary or
advisable (and lawful) to accomplish the purposes hereof. All acts done under
the foregoing authorization are hereby ratified and approved and neither the
Placement Agent nor any designee nor agent thereof shall be liable for any acts
of commission or omission, for any error of judgment, for any mistake of fact or
law except for acts of gross negligence or willful misconduct. This power of
attorney, being coupled with an interest, is irrevocable while the Escrow
Agreement remains in effect.

 

1.18  The Subscriber agrees not to issue any public statement with respect to
the Offering, Subscriber’s investment or proposed investment in the Company or
the terms of any agreement or covenant between them and the Company without the
Company’s prior written consent, except such disclosures as may be required
under applicable law.

 

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1.19  The Subscriber understands, acknowledges and agrees with the Company that
this subscription may be rejected, in whole or in part, by the Company, in the
sole and absolute discretion of the Company, at any time before any Closing
notwithstanding prior receipt by the Subscriber of notice of acceptance of the
Subscriber’s subscription.

 

1.20  The Subscriber acknowledges that the information contained in the
Transaction Documents or otherwise made available to the Subscriber is
confidential and non-public and agrees that all such information shall be kept
in confidence by the Subscriber and neither used by the Subscriber for the
Subscriber’s personal benefit (other than in connection with this subscription)
nor disclosed to any third party for any reason, notwithstanding that a
Subscriber’s subscription may not be accepted by the Company; provided, however,
that (a) the Subscriber may disclose such information to its affiliates and
advisors who may have a need for such information in connection with providing
advice to the Subscriber with respect to its investment in the Company so long
as such affiliates and advisors have an obligation of confidentiality, and (b)
this obligation shall not apply to any such information that (i) is part of the
public knowledge or literature and readily accessible at the date hereof, (ii)
becomes part of the public knowledge or literature and readily accessible by
publication (except as a result of a breach of this provision) or (iii) is
received from third parties without an obligation of confidentiality (except
third parties who disclose such information in violation of any confidentiality
agreements or obligations, including, without limitation, any subscription or
other similar agreement entered into with the Company).

 

1.21  Other than with respect to the transactions contemplated herein and other
than with respect to any prior subscribers in the Company's offering of the
Securities with a final closing date of March 15, 2012 and the Company’s
subsequent offering of the Securities with a final closing date of March 30,
2012, since the time that such Subscriber was first contacted by the Company,
since the time that such Subscriber was first contacted by the Company, the
Placement Agent or any other person regarding the transactions contemplated
herein, neither the Subscriber nor any Affiliate of such Subscriber which (x)
had knowledge of the transactions contemplated hereby, (y) has or shares
discretion relating to such Subscriber’s investments or trading or information
concerning such Subscriber’s investments, including in respect of the
Securities, and (z) is subject to such Subscriber’s review or input concerning
such Affiliate’s investments or trading (collectively, “Trading Affiliates”) has
directly or indirectly, nor has any person acting on behalf of or pursuant to
any understanding with such Subscriber or Trading Affiliate, effected or agreed
to effect any transactions in the securities of the Company (including, without
limitation, any short sales involving the Company’s securities). Notwithstanding
the foregoing, in the case of a Subscriber and/or Trading Affiliate that is,
individually or collectively, a multi-managed investment vehicle whereby
separate portfolio managers manage separate portions of such Subscriber’s or
Trading Affiliate’s assets and the portfolio managers have no direct knowledge
of the investment decisions made by the portfolio managers managing other
portions of such Subscriber’s or Trading Affiliate’s assets, the representation
set forth above shall apply only with respect to the portion of assets managed
by the portfolio managers that have knowledge about the financing transaction
contemplated by this Agreement. Other than to other persons party to this
Agreement, such Subscriber has maintained the confidentiality of all disclosures
made to it in connection with this transaction (including the existence and
terms of this transaction).

 

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

 

1.23  Each Subscriber hereunder acknowledges its primary responsibilities under
the Securities Act and accordingly will not sell any of the Securities or any
interest therein without complying with the requirements of the Securities Act.
In the event at any time a registration statement covering the Securities
remains effective, each Subscriber seeking to sell Securities thereunder agrees
to sell the Securities only in accordance with the plan of distribution
contained in such registration statement and if it does so it will comply
therewith and with the related prospectus delivery requirements unless an
exemption therefrom is available.

 

1.24  The Subscriber will indemnify and hold harmless the Company and, where
applicable, its directors, officers, employees, agents, advisors, affiliates and
shareholders, and each other person, if any, who controls any of the foregoing
from and against any and all loss, liability, claim, damage and expense
whatsoever (including, but not limited to, any and all fees, costs and expenses
whatsoever reasonably incurred in investigating, preparing or defending against
any claim, lawsuit, administrative proceeding or investigation whether commenced
or threatened) (a “Loss”) arising out of or based upon any representation or
warranty of the Subscriber contained herein or in any document furnished by the
Subscriber to the Company in connection herewith being untrue in any material
respect or any breach or failure by the Subscriber to comply with any covenant
or agreement made by the Subscriber herein or therein; provided, however, that
the Subscriber shall not be liable for any Loss that in the aggregate exceeds
the Subscriber’s aggregate purchase price tendered hereunder.

 

II.REPRESENTATIONS BY AND COVENANTS OF THE COMPANY

 

The Company hereby represents and warrants to the Subscriber that:

 

2.1      Organization, Good Standing and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Minnesota and has full corporate power and authority to own and
use its properties and its assets and conduct its business as currently
conducted. Each of the Company’s subsidiaries identified on Schedule 2.1 hereto
(the “Subsidiaries”) is an entity duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation with the
requisite corporate power and authority to own and use its properties and assets
and to conduct its business as currently conducted. Neither the Company, nor any
of its Subsidiaries is in violation of any of the provisions of their respective
articles of incorporation, by-laws or other organizational or charter documents,
including, but not limited to the Charter Documents (as defined below). Each of
the Company and its Subsidiaries is duly qualified to conduct business and is in
good standing as a foreign corporation in each jurisdiction in which the nature
of the business conducted or property owned by it makes such qualification
necessary, except where the failure to be so qualified or in good standing, as
the case may be, would not result in a direct and/or indirect (i) material
adverse effect on the legality, validity or enforceability of any of the
Securities and/or this Agreement, (ii) material adverse effect on the results of
operations, assets, business, condition (financial and other) or prospects of
the Company and its Subsidiaries, taken as a whole, or (iii) material adverse
effect on the Company’s ability to perform in any material respect on a timely
basis its obligations under the Transaction Documents (any of (i), (ii) or
(iii), a “Material Adverse Effect”).

 

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2.2      Capitalization and Voting Rights. The authorized, issued and
outstanding capital stock of the Company is as set forth in Schedule 2.2 hereto
and all issued and outstanding shares of capital stock of the Company are
validly issued, fully paid and nonassessable. Except as set forth in Schedule
2.2 hereto, (i) there are no outstanding securities of the Company or any of its
Subsidiaries which contain any preemptive, redemption or similar provisions, nor
is any holder of securities of the Company or any Subsidiary entitled to
preemptive or similar rights arising out of any agreement or understanding with
the Company or any Subsidiary by virtue of any of the Transaction Documents, and
there are no contracts, commitments, understandings or arrangements by which the
Company or any of its Subsidiaries is or may become bound to redeem a security
of the Company or any of its Subsidiaries; (ii) neither the Company nor any
Subsidiary has any stock appreciation rights or "phantom stock" plans or
agreements or any similar plan or agreement; and (iii) except as set forth in
Schedule 2.2 there are no outstanding options, warrants, agreements, convertible
securities, preemptive rights or other rights to subscribe for or to purchase or
acquire, any shares of capital stock of the Company or any Subsidiary or
contracts, commitments, understandings, or arrangements by which the Company or
any Subsidiary is or may become bound to issue any shares of capital stock of
the Company or any Subsidiary, or securities or rights convertible or
exchangeable into shares of capital stock of the Company or any Subsidiary.
Except as set forth in Schedule 2.2 and as otherwise required by law, there are
no restrictions upon the voting or transfer of any of the shares of capital
stock of the Company pursuant to the Company’s Charter Documents (as defined
below) or other governing documents or any agreement or other instruments to
which the Company is a party or by which the Company is bound. All of the issued
and outstanding shares of capital stock of the Subsidiaries are validly issued,
fully paid and nonassessable and are owned by the Company, free and clear of any
mortgages, pledges, liens, claims, charges, encumbrances or other restrictions
(collectively, “Encumbrances”). All of such outstanding capital stock has been
issued in compliance in all material respects with applicable federal and state
securities laws. The issuance and sale of the Securities and, upon issuance, the
Shares, as contemplated hereby will not obligate the Company to issue shares of
Common Stock or other securities to any other person (other than the Subscriber)
and except as set forth in Schedule 2.2 will not result in the adjustment of the
exercise, conversion, exchange or reset price of any outstanding security. The
Company does not have outstanding shareholder purchase rights or “poison pill”
or any similar arrangement in effect giving any person the right to purchase any
equity interest in the Company upon the occurrence of certain events.

 

2.3      Authorization; Enforceability. The Company has the requisite corporate
right, power and authority to enter into, execute and deliver this Agreement and
each other agreement, document, instrument and certificate to be executed by the
Company in connection with the consummation of the transactions contemplated
hereby, including, but not limited to Transaction Documents and to perform fully
its obligations hereunder and thereunder. All necessary corporate action on the
part of the Company, its directors and shareholders necessary for the (a)
authorization execution, delivery and performance of this Agreement and the
Transaction Documents by the Company; and (b) authorization, sale, issuance and
delivery of the Securities and upon issuance, the Shares contemplated hereby and
the performance of the Company’s obligations under this Agreement and the
Transaction Documents has been taken. This Agreement and the Transaction
Documents have been duly executed and delivered by the Company and each
constitutes a legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its respective terms, subject to laws of
general application relating to bankruptcy, insolvency and the relief of debtors
and rules of law governing specific performance, injunctive relief or other
equitable remedies, and to limitations of public policy. The Securities are duly
authorized and, when issued and paid for in accordance with the applicable
Transaction Documents, will be duly and validly issued, fully paid and
nonassessable, free and clear of all Encumbrances other than restrictions on
transfer provided for in the Transaction Documents. The Shares, when issued and
paid for in accordance with the terms of the Transaction Documents, will be
validly issued, fully paid and nonassessable, free and clear of all Encumbrances
imposed by the Company other than restrictions on transfer provided for in the
Transaction Documents. The Company has reserved a sufficient number of
Conversion Shares and Warrant Shares for issuance upon the conversion of the
Debentures and exercise of the Warrants, respectively, free and clear of all
Encumbrances, except for restrictions on transfer set forth in the Transaction
Documents or imposed by applicable securities laws. Except as set forth on
Schedule 2.3 hereto, the issuance and sale of the Securities (including the
Shares) contemplated hereby will not give rise to any preemptive rights or
rights of first refusal on behalf of any person other than the Subscribers.

 

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2.4      No Conflict; Governmental Consents.

 

(a)                The execution and delivery by the Company of this Agreement
and the Transaction Documents, the issuance and sale of the Securities
(including, when issued, the Shares) and the consummation of the other
transactions contemplated hereby or thereby do not and will not (i) result in
the violation of any law, statute, rule, regulation, order, writ, injunction,
judgment or decree of any court or governmental authority to or by which the
Company is bound including without limitation all foreign, federal, state and
local laws applicable to its business and all such laws that affect the
environment, except in each case as could not have or reasonably be expected to
result in a Material Adverse Effect, (ii) conflict with or violate any provision
of the Company’s Amended and Restated Articles of Incorporation, as amended (the
“Articles”) or the Amended Bylaws, (and collectively with the Articles, the
“Charter Documents”) of the Company, and (iii) conflict with, or result in a
material breach or violation of, any of the terms or provisions of, or
constitute (with or without due notice or lapse of time or both) a default or
give to others any rights of termination, amendment, acceleration or
cancellation (with or without due notice, lapse of time or both) under any
agreement, credit facility, lease, loan agreement, mortgage, security agreement,
trust indenture or other agreement or instrument to which the Company or any
Subsidiary is a party or by which any of them is bound or to which any of their
respective properties or assets is subject, nor result in the creation or
imposition of any Encumbrances upon any of the properties or assets of the
Company or any Subsidiary.

 

 

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(b)               No vote, approval or consent of any holder of capital stock of
the Company or any other third parties is required to be obtained by the Company
in connection with the authorization, execution, delivery and performance of
this Agreement and the other Transaction Documents or in connection with the
authorization, issue and sale of the Securities and, upon issuance, the Shares,
except as has been previously obtained.

 

(c)                No consent, approval, authorization or other order of any
governmental authority or any other person is required to be obtained by the
Company in connection with the authorization, execution, delivery and
performance of this Agreement and the other Transaction Documents or in
connection with the authorization, issue and sale of the Securities and, upon
issuance, the Shares, except such post-sale filings as may be required to be
made with the SEC, FINRA and with any state or foreign blue sky or securities
regulatory authority, all of which shall be made when required.

 

2.5      Shell Company Status; SEC Reports; Financial Statements. The Company
has never been an issuer subject to Rule 144(i) under the Securities Act. The
Company has filed all reports required to be filed by it under the Securities
Act and Securities Exchange Act of 1934, as amended (the “Exchange Act”),
including pursuant to Section 13(a) or 15(d) thereof, for the twenty-four (24)
months preceding the date hereof (or such shorter period as the Company was
required by law to file such reports) (the foregoing materials being
collectively referred to herein as the "SEC Reports" and, together with the
Schedules to this Agreement (if any), the "Disclosure Materials") on a timely
basis or has timely filed a valid extension of such time of filing and has filed
any such SEC Reports prior to the expiration of any such extension. As of their
respective dates, the SEC Reports complied in all material respects with the
requirements of the Securities Act and the Exchange Act and the rules and
regulations of the SEC promulgated thereunder, and none of the SEC Reports, when
filed, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The 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 SEC with respect thereto as in effect at
the time of filing. Such financial statements have been prepared in accordance
with United States generally accepted accounting principles (“GAAP”) applied on
a consistent basis during the periods involved, except as may be otherwise
specified in such financial statements or the footnotes thereto, and fairly
present in all material respects the financial position of the Company and its
consolidated Subsidiaries as of and for the dates thereof and the results of
operations and cash flows for the periods then ended, subject, in the case of
unaudited statements, to normal, immaterial, year-end audit adjustments.

 

2.6      Licenses. Except as otherwise set forth in the SEC Reports, the Company
and its Subsidiaries have sufficient licenses, permits and other governmental
authorizations currently required for the conduct of their respective businesses
or ownership of properties and is in all material respects in compliance
therewith.

 

2.7      Litigation. Except as set forth in the SEC Reports, the Company knows
of no pending or threatened legal or governmental proceedings against the
Company or any Subsidiary which could reasonably be expected to have a Material
Adverse Effect on the business, property, financial condition or operations of
the Company and its Subsidiaries, taken as a whole, or which materially and
adversely questions the validity of this Agreement or the other Transaction
Documents or the right of the Company to enter into this Agreement and the other
Transaction Documents, or to perform its obligations hereunder and thereunder.
Neither the Company nor any Subsidiary is a party or subject to the provisions
of any order, writ, injunction, judgment or decree of any court or government
agency or instrumentality which could reasonably be expected to have a Material
Adverse Effect on the business, property, financial condition or operations of
the Company and its Subsidiaries taken as a whole. There is no action, suit,
proceeding or investigation by the Company or any Subsidiary currently pending
in any court or before any arbitrator or that the Company or any Subsidiary
intends to initiate. Neither the Company nor any Subsidiary, nor any director or
officer thereof, is or since the Form 10-K has been the subject of any action
involving (i) a claim of violation of or liability under federal or state
securities laws or (ii) a claim of breach of fiduciary duty. There has not been,
and to the Company’s knowledge, there is not pending or contemplated, any
investigation by the SEC involving the Company or any current or former director
or officer of the Company. For purposes of this Agreement, the term “knowledge”
when used with respect to the Company will mean the present, conscious awareness
of a particular fact or matter by the Company’s chief executive officer or chief
financial officer.

 

 

10

 

 

2.8      Compliance. Except as set forth in the SEC Reports or on Schedule 2.8,
neither the Company nor any Subsidiary: (i) is in default under or in violation
of (and no event has occurred that has not been waived that, with notice or
lapse of time or both, would result in a default by the Company or any
Subsidiary under), nor has the Company or any Subsidiary received notice of a
claim that it is in default under or that it is in violation of, any indenture,
loan or credit agreement or any other agreement or instrument to which it is a
party or by which it or any of its properties is bound (whether or not such
default or violation has been waived), (ii) is in violation of any judgment,
decree or order of any court, arbitrator or other governmental authority or
(iii) is or has been in violation of any statute, rule, ordinance or regulation
of any governmental authority, including without limitation all foreign,
federal, state and local laws 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.

 

2.9      Regulatory Permits. The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses, except where the failure to possess such permits could
not reasonably be expected to result in a Material Adverse Effect (“Material
Permits”), and neither the Company nor any Subsidiary has received any notice of
proceedings relating to the revocation or modification of any Material Permit.

 

2.10  Investment Company. The Company is not an “investment company” within the
meaning of such term under the Investment Company Act of 1940, as amended, and
the rules and regulations of the SEC thereunder.

 

2.11  Brokers. Except for the Placement Agent and as set forth on Schedule 2.11,
neither the Company nor any of the Company's officers, directors, employees or
shareholders has employed or engaged any broker or finder in connection with the
transactions contemplated by this Agreement and no fee or other compensation is
or will be due and owing to any broker, finder, underwriter, placement agent or
similar person other than the Placement Agent in connection with the
transactions contemplated by this Agreement. The Company is not party to any
agreement, arrangement or understanding whereby any person other than the
Placement Agent has an exclusive right to raise funds and/or place or purchase
any debt or equity securities for or on behalf of the Company.

 

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2.12  Intellectual Property; Employees.

 

(a)                The Company owns or possesses sufficient legal rights to all
patents, trademarks, service marks, trade names, copyrights, trade secrets,
licenses, information and other proprietary rights and processes necessary for
its business as now conducted and as presently proposed to be conducted, without
any known infringement of the rights of others as described in the SEC Reports
and which the failure to so have could have a Material Adverse Effect
(collectively, the “Intellectual Property Rights”). Except as disclosed on
Schedule 2.12 or the SEC Reports, there are no material outstanding options,
licenses or agreements of any kind relating to the Intellectual Property Rights,
nor is the Company bound by or a party to any material options, licenses or
agreements of any kind with respect to the patents, trademarks, service marks,
trade names, copyrights, trade secrets, licenses, information and other
proprietary rights and processes of any other person or entity other than such
licenses or agreements arising from the purchase of “off the shelf” or standard
products. The Company has not received any written communications alleging that
the Company has violated or, by conducting its business as presently proposed to
be conducted, would violate any Intellectual Property Rights of any other person
or entity. The Company and its Subsidiaries have taken reasonable security
measures to protect the secrecy, confidentiality and value of all of their
intellectual properties, except where failure to do so could not, individually
or in the aggregate, reasonably be expected to have a Material Adverse Effect

 

(b)               Except as disclosed in the SEC Reports, the Company is not
aware that any of its employees is obligated under any contract (including
licenses, covenants or commitments of any nature) or other agreement, or subject
to any judgment, decree or order of any court or administrative agency, that
would interfere with their duties to the Company or that would conflict with the
Company’s business as presently conducted.

 

(c)                Neither the execution nor delivery of this Agreement, nor the
carrying on of the Company’s business by the employees of the Company, nor the
conduct of the Company’s business as presently conducted, will, to the Company’s
knowledge, conflict with or result in a breach of the terms, conditions or
provisions of, or constitute a default under, any contract, covenant or
instrument under which any employee is now obligated.

 

(d)               To the Company’s knowledge, no employee of the Company, nor
any consultant with whom the Company has contracted, is in violation of any term
of any employment contract, proprietary information agreement or any other
agreement relating to the right of any such individual to be employed by, or to
contract with, the Company because of the nature of the business conducted by
the Company; and to the Company’s knowledge the continued employment by the
Company of its present employees, and the performance of the Company’s contracts
with its independent contractors, will not result in any such violation. The
Company has not received any written notice alleging that any such violation has
occurred. Except as described in SEC Reports, no employee of the Company has
been granted the right to continued employment by the Company or to any
compensation following termination of employment with the Company except for any
of the same which would not have a Material Adverse Effect on the business of
the Company. The Company is not aware that any officer, key employee or group of
employees intends to terminate his, her or their employment with the Company,
nor does the Company have a present intention to terminate the employment of any
officer, key employee or group of employees.

 

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2.13  Title to Properties and Assets; Liens, Etc. Except as described in the SEC
Reports, the Company has good and marketable title to its properties and assets,
including the properties and assets reflected in the most recent balance sheet
included in the Company’s financial statements, and good title to its leasehold
estates, in each case subject to no Encumbrances, other than (a) those resulting
from taxes which have not yet become delinquent; and (b) Encumbrances which do
not materially detract from the value of the property subject thereto or
materially impair the operations of the Company; and (c) those that have
otherwise arisen in the ordinary course of business, none of which are material.
Except as set forth in Schedule 2.13, the Company is in compliance with all
material terms of each lease to which it is a party or is otherwise bound.

 

2.14  Obligations to Related Parties. Except as described in the SEC Reports,
there are no obligations of the Company to officers, directors, shareholders who
are known to the Company to beneficially own more than 5% of the Company’s
Common Stock, or employees of the Company other than (a) for payment of salary
or other compensation for services rendered, (b) reimbursement for reasonable
expenses incurred on behalf of the Company and (c) for other standard employee
benefits made generally available to all employees (including stock option
agreements outstanding under any stock option plan approved by the Board of
Directors of the Company). Except as disclosed in the SEC Reports, none of the
officers or directors of the Company and, to the Company’s knowledge, none of
the employees of the Company is presently a party to any transaction with the
Company or any Subsidiary (other than as holders of stock options and/or
warrants, and for services as employees, officers and directors), including any
contract, agreement or other arrangement providing for the furnishing of
services to or by, providing for rental of real or personal property to or from,
or otherwise requiring payments to or from any officer, director or such
employee or, to the Company’s knowledge, any entity in which any officer,
director, or any such employee has a substantial interest or is an officer,
director, trustee or partner.

 

2.15  Material Changes. Except as set forth in Schedule 2.15, since the date of
the latest audited financial statements included within the SEC Reports, except
as specifically disclosed in the subsequent SEC Reports, (i) there has been no
event, occurrence or development that has had or that could reasonably be
expected to result in a Material Adverse Effect, (ii) the Company has not
incurred any liabilities (contingent or otherwise) other than (A) trade
payables, accrued expenses and other liabilities incurred in the ordinary course
of business consistent with past practice and (B) liabilities not required to be
reflected in the Company's financial statements pursuant to GAAP or required to
be disclosed in filings made with the SEC, (iii) the Company has not altered its
method of accounting or the identity of its auditors, (iv) the Company has not
declared or made any dividend or distribution of cash or other property to its
shareholders or purchased, redeemed or made any agreements to purchase or redeem
any shares of its capital stock, and (v) the Company has not issued any equity
securities to any officer, director or affiliate, except pursuant to existing
Company stock option plans. The Company does not have pending before the SEC any
request for confidential treatment of information.

 

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2.16  Sarbanes-Oxley. The Company is in compliance with all effective
requirements of the Sarbanes-Oxley Act of 2002, as amended, and the rules and
regulations thereunder, that are applicable to it, except where such
noncompliance could not reasonably be expected to result in a Material Adverse
Effect.

 

2.17  No General Solicitation. None of the Company, its Subsidiaries, any of
their affiliates, and any person acting on the Company’s behalf and its
direction, has engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D under the Securities Act) in
connection with the offer or sale of the Securities.

 

2.18  No Integrated Offering. Assuming the accuracy of the Subscriber
representations and warranties set forth in Section I hereunder, none of the
Company, its Subsidiaries, any of their affiliates, and any person acting on
their behalf has, directly or indirectly, made any offers or sales of any
security or solicited any offers to buy any security, under circumstances that
would require registration of any of the Securities under the Securities Act or
that, other than the Company's offering of the Securities with a final closing
date of March 15, 2012 and the Company’s subsequent financing of Securities with
a final closing date of March 30, 2012, is likely to cause this offering of the
Securities to be integrated with prior offerings by the Company for purposes of
the Securities Act or any applicable shareholder approval provisions, including
without limitation, under the rules and regulations of any exchange or automated
quotation system on which any of the securities of the Company are listed or
designated. Except as disclosed in the SEC Reports, none of the Company, its
Subsidiaries, their affiliates and any person acting on their behalf, have taken
any action or steps referred to in the preceding sentence that would require
registration of any of the Securities under the Securities Act or, except for
prior actions or steps taken with respect to the Company's offering of the
Securities with a final closing date of March 15, 2012 and the Company’s
subsequent financing of Securities with a final closing date of March 30, 2012,
cause the offering of the Securities to be integrated with other offerings.

 

2.19  Application of Takeover Protections. The Company execution and delivery of
the Transaction Documents and the consummation of the transactions contemplated
hereby and thereby will not impose any restriction on any Subscriber, or create
in any party (including any current shareholder of the Company) any rights,
under any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement), or other similar
anti--takeover provisions under the Company’s Charter Documents or the laws of
its state of incorporation.

 

2.20  Taxes. Each of the Company and its subsidiaries has filed all U.S.
federal, state, local and foreign tax returns which are required to be filed by
each of them and all such returns are true and correct in all material respects,
except for such failures to file which could not reasonably be expected to have
a Material Adverse Effect. The Company and each subsidiary has paid all taxes
pursuant to such returns or pursuant to any assessments received by any of them
or by which any of them are obligated to withhold from amounts owing to any
employee, creditor or third party. The Company and each subsidiary has properly
accrued all taxes required to be accrued and/or paid, except where the failure
to accrue would not have a Material Adverse Effect. To the knowledge of the
Company, the tax returns of the Company and its subsidiaries are not currently
being audited by any state, local or federal authorities. Neither the Company
nor any subsidiary has waived any statute of limitations with respect to taxes
or agreed to any extension of time with respect to any tax assessment or
deficiency. The Company has set aside on its books adequate provision for the
payment of any unpaid taxes.

 

14

 

 

 

2.21  Registration Rights. Except as set forth on Schedule 2.21, no person has
any right to cause the Company to effect the registration under the Securities
Act of any securities of the Company.

 

2.22  Listing and Maintenance Requirements. The Common Stock is registered
pursuant to Section 12(b) or 12(g) of the Exchange Act, and the Company has
taken no action designed to, or which to its knowledge is likely to have the
effect of, terminating the registration of the Common Stock under the Exchange
Act nor has the Company received any notification that the SEC is contemplating
terminating such registration. The Company has not, in the 12 months preceding
the date hereof, received notice from any trading market on which the Common
Stock is or has been listed or quoted to the effect that the Company is not in
compliance with the listing or maintenance requirements of such trading market.
The Company is, and has no reason to believe that it will not in the foreseeable
future continue to be, in material compliance with all such listing and
maintenance requirements

 

2.23  Disclosure. All disclosure furnished by or on behalf of the Company to the
Subscriber in the Transaction Documents regarding the Company, its business and
the transactions contemplated hereby, including the Disclosure Schedules to this
Agreement, is true and correct and does not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.

 

2.24  Seniority. No indebtedness of the Company is senior to the Debentures in
right of payment, whether with respect to interest or upon liquidation or
dissolution, or otherwise, other than indebtedness secured by purchase money
security interests (which is senior only as to underlying assets covered
thereby) and capital lease obligations (which is senior only as to the property
covered thereby).

 

2.25  Private Placement. Assuming the accuracy of the Subscribers’
representations and warranties set forth in Section I, no registration under the
Securities Act is required for the offer and sale of the Securities by the
Company to the Subscriber as contemplated hereby.

 

15

 

 

 

III.TERMS OF SUBSCRIPTION

 

3.1      The minimum purchase that may be made by any prospective investor shall
be $10,000. Subscriptions for investment below the minimum investment may be
accepted at the discretion of the Placement Agent and the Company. The Company
and the Placement Agent each reserve the right to reject any subscription made
hereby, in whole or in part, in its sole discretion. The Company’s agreement
with each Subscriber is a separate agreement and the sale of the Securities to
each Subscriber is a separate sale.

 

3.2      All funds shall be deposited in the account identified in Section 1.1
hereof.

 

3.3      Certificates representing the Debentures and the Warrants purchased by
the Subscriber pursuant to this Agreement will be prepared for delivery to the
Subscriber as soon as practicable (but in no event more than seven (7) calendar
days) following the Closing at which such purchase takes place. The Subscriber
hereby authorizes and directs the Company to deliver the certificates
representing the Debentures and the Warrants purchased by the Subscriber
pursuant to this Agreement directly to the Placement Agent unless otherwise
indicated on the signature page hereto.

 

IV.CONDITIONS TO OBLIGATIONS OF THE SUBSCRIBER

 

4.1      The Subscriber’s obligation to purchase the Securities at the Closing
at which such purchase is to be consummated is subject to the fulfillment on or
prior to such Closing of the following conditions, which conditions may be
waived at the option of each Subscriber to the extent permitted by law:

 

(a)                Representations and Warranties; Covenants. The
representations and warranties made by the Company in Section 2 hereof qualified
as to materiality shall be true and correct as of the Initial Closing at all
times prior to and on the Closing Date, except (i) to the extent any such
representation or warranty expressly speaks as of an earlier date, in which case
such representation or warranty shall be true and correct as of such earlier
date, and, (ii) the representations and warranties made by the Company in
Section 2 hereof not qualified as to materiality shall be true and correct in
all material respects at all times prior to and on the Closing Date, except to
the extent any such representation or warranty expressly speaks as of an earlier
date, in which case such representation or warranty shall be true and correct in
all material respects as of such earlier date; provided however, that
notwithstanding the foregoing, the Company shall only be required to update the
Disclosure Schedules by the delivery to the Subscribers by the Company of an
amended Disclosure Schedule with respect to any information that is of a
material nature as of such proposed Closing Date. All covenants, agreements and
conditions contained in this Agreement to be performed by the Company on or
prior to the date of such Closing shall have been performed or complied with in
all material respects.

 

(b)               No Legal Order Pending. There shall not then be in effect any
legal or other order enjoining or restraining the transactions contemplated by
this Agreement.

 

(c)                No Law Prohibiting or Restricting Such Sale. There shall not
be in effect any law, rule or regulation prohibiting or restricting such sale or
requiring any consent or approval of any person, which shall not have been
obtained, to issue the Securities (except as otherwise provided in this
Agreement).

 

16

 

 

 

(d)               Required Consents. The Company shall have obtained any and all
consents, permits, approvals, registrations and waivers necessary or appropriate
for consummation of the purchase and sale of the Securities and the consummation
of the other transactions contemplated by the Transaction Documents, all of
which shall be in full force and effect.

 

(e) Adverse Changes. Since the date of execution of this Agreement, no event or
series of events shall have occurred that reasonably could have or result in a
Material Adverse Effect.

 

(f) No Suspensions of Trading in Common Stock; Listing. Trading in the Common
Stock shall not have been suspended by the SEC or any trading market (except for
any suspensions of trading of not more than one trading day solely to permit
dissemination of material information regarding the Company) at any time since
the date of execution of this Agreement, and the Common Stock shall have been at
all times since such date listed for trading on a trading market.

 

(g) Blue Sky. The Company shall have completed any necessary qualification for
the Securities and the Shares under applicable Blue Sky laws.

 

(h) Legal Opinion. The Company’s corporate counsel shall have delivered a legal
opinion addressed to the Subscribers in a form reasonably acceptable to the
Placement Agent.

 

(i)                 Disclosure Schedules. The Company shall have delivered to
the Subscriber a copy of its Disclosure Schedules (or amended Disclosure
Schedules) qualifying any of the representations and warranties contained in
Section II which original Disclosure Schedules will speak only as Initial
Closing.

 

 

V.COVENANTS OF THE PARTIES

 

5.1      Transfer Restrictions.

 

(a)                The Securities may only be disposed of in compliance with
state and federal securities laws. In connection with any transfer of Securities
other than pursuant to an effective registration statement or Rule 144
promulgated under the Securities Act, to the Company or to an affiliate of a
Subscriber or in connection with, the Company may require the transferor thereof
to provide to the Company an opinion of counsel selected by the transferor and
reasonably acceptable to the Company, the form and substance of which opinion
shall be reasonably satisfactory to the Company, to the effect that such
transfer does not require registration of such transferred Securities under the
Securities Act. As a condition of transfer, any such transferee shall agree in
writing to be bound by the terms of this Agreement, and shall have the rights of
a Subscriber under this Agreement.

 

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(b)               The Subscriber agrees to the imprinting, so long as is
required by this Section 5.1, of a legend on any of the Securities, including
the Shares, substantially in the following form:

 

[NEITHER] THIS SECURITY [NOR THE SECURITIES INTO WHICH THIS SECURITY IS
[EXERCISABLE] [CONVERTIBLE]] HAS [NOT] BEEN REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON
AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD OR OTHERWISE
TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY.

 

 

(c)                Certificates evidencing the Shares shall not be required to
contain any legend (including the legend set forth in Section 5.1(b) hereof):
(i) while a registration statement covering the resale of such security is
effective under the Securities Act, or (ii) following any sale of such Shares
pursuant to Rule 144, or (iii) if such Shares are eligible for sale under Rule
144, without the requirement for the Company to be in compliance with the
current public information required under Rule 144 as to such Shares and without
volume or manner-of-sale restrictions. Upon request by a Subscriber in the event
the foregoing permits removal of any legend from certificates evidencing the
Shares, the Company shall cause its counsel, at the Company’s expense, to issue
a legal opinion to the Company’s transfer agent promptly (but in no event later
than the requisite share delivery date set forth in the Debenture and the
Warrant) if required by the Company’s transfer agent to effect the removal of
the legend hereunder.

 

5.2      Listing of Securities. The Company agrees, (i) if the Company applies
to have the Common Stock traded on any other trading market, it will include in
such application the Shares, and will take such other action as is necessary or
desirable to cause the Shares to be listed on such other trading market as
promptly as possible, and (ii) during the three-year period from and after the
Final Closing it will take all action reasonably necessary to continue the
listing and trading of its Common Stock on a Trading Market (as defined in the
Debenture) and will comply in all material respects with the Company’s
reporting, filing and other obligations under the bylaws or rules of any such
Trading Market (as defined in the Debenture).

 

5.3      Reservation of Shares. The Company shall at all times while the
Debenture and/or Warrants are outstanding maintain a reserve from its duly
authorized shares of Common Stock of a number of shares of Common Stock
sufficient to allow for the issuance of the Shares.

 

5.4      Replacement of Securities. If any certificate or instrument evidencing
any Securities or the Shares is mutilated, lost, stolen or destroyed, the
Company shall issue or cause to be issued in exchange and substitution for and
upon cancellation thereof, or in lieu of and substitution therefor, a new
certificate or instrument, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction and customary and
reasonable indemnity, if requested. The applicants for a new certificate or
instrument under such circumstances shall also pay any reasonable third-party
costs associated with the issuance of such replacement securities. If a
replacement certificate or instrument evidencing any securities is requested due
to a mutilation thereof, the Company may require delivery of such mutilated
certificate or instrument as a condition precedent to any issuance of a
replacement.

 

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5.5      Furnishing of Information. Until the three year anniversary of the
Final Closing, the Company covenants to maintain the registration of the Common
Stock under Section 12(b) or 12(g) of the Exchange Act and to timely file (or
obtain extensions in respect thereof and file within the applicable grace
period) all reports required to be filed by the Company after the date hereof
pursuant to the Exchange Act. Until the three year anniversary of the Final
Closing, if the Company is not required to file reports pursuant to such laws,
it will prepare and furnish to the Subscribers and make publicly available in
accordance with Rule 144(c) such information as is required for the Subscribers
to sell the Securities and/or the Shares under Rule 144. The Company further
covenants that it will take such further action as any holder of Securities
and/or Shares may reasonably request, to the extent required from time to time
to enable such person to sell such Securities and/or Shares without registration
under the Securities Act within the requirements of the exemption provided by
Rule 144.

 

5.6      Securities Laws; Publicity. The Company shall, by 8:30 a.m. (New York
City time) on the fourth (4th) trading day immediately following a Closing
hereunder, file a Current Report on Form 8-K disclosing the material terms of
the transactions contemplated hereby and including the Transaction Documents as
exhibits thereto to the extent required by law. The Company shall not publicly
disclose the name of Subscriber, or include the name of any Subscriber in any
filing with the SEC or any regulatory agency or trading market, without the
prior written consent of Subscriber, except: (a) as required by federal
securities law in connection with the filing of final Transaction Documents
(including signature pages thereto) with the SEC and (b) to the extent such
disclosure is required by law, in which case the Company shall provide the
Subscriber with prior notice of such disclosure permitted under this clause (b).

 

5.7      Form D; Blue Sky Filings. The Company agrees to timely file a Form D
with respect to the Securities as required under Regulation D promulgated under
the Securities Act and to provide a copy thereof, promptly upon request of the
Subscriber. The Company shall take such action as the Company shall reasonably
determine is necessary in order to obtain an exemption for, or to qualify the
Securities for, sale to the Subscriber at the Closing under applicable
securities or “Blue Sky” laws of the states of the United States, and shall
provide evidence of such actions promptly upon request of any Subscriber.

 

5.8      Equal Treatment of Subscribers. No consideration (including any
modification of any Transaction Document) shall be offered or paid to any person
to amend or consent to a waiver or modification of any provision of any of the
Transaction Documents unless the same consideration is also offered to all of
the parties to the Transaction Documents.

 

 

19

 

5.9      Indemnification. 

 

(a)        The Company agrees to indemnify and hold harmless the Subscriber, its
affiliates and their respective officers, directors, employees, agents and
controlling persons (collectively, the “Indemnified Parties”) from and against ,
any and all loss, liability, damage or deficiency suffered or incurred by any
Indemnified Party by reason of any misrepresentation or breach of warranty by
the Company or, after notice and a reasonable cure period, nonfulfillment of any
covenant or agreement to be performed or complied with by the Company under this
Agreement or the Transaction Documents; and will promptly reimburse the
Indemnified Parties for all expenses (including reasonable fees and expenses of
legal counsel) as incurred in connection with the investigation of, preparation
for or defense of any pending or threatened claim related to or arising in any
manner out of any of the foregoing, or any action or proceeding arising
therefrom (collectively, “Proceedings”), whether or not such Indemnified Party
is a formal party to any such Proceeding.

 

(b)       If for any reason (other than a final non-appealable judgment finding
any Indemnified Party liable for losses, claims, damages, liabilities or
expenses for its gross negligence or willful misconduct) the foregoing indemnity
is unavailable to an Indemnified Party or insufficient to hold an Indemnified
Party harmless, then the Company shall contribute to the amount paid or payable
by an Indemnified Party as a result of such loss, claim, damage, liability or
expense in such proportion as is appropriate to reflect not only the relative
benefits received by the Company on the one hand and the Indemnified Party on
the other, but also the relative fault by the Company and the Indemnified Party,
as well as any relevant equitable considerations.

 

5.10 Non-Public Information. Except with respect to the material terms and
conditions of the transactions contemplated by the Transaction Documents, the
Company covenants and agrees that neither it, nor any other person acting on its
behalf, will provide Subscriber or its agents or counsel with any information
that the Company believes constitutes material non-public information, unless
prior thereto Subscriber shall have executed a written agreement regarding the
confidentiality and use of such information. The Company understands and
confirms that Subscriber shall be relying on the foregoing covenant in effecting
transactions in securities of the Company.

 

5.11 Use of Proceeds. Except as set forth on Schedule 5.11 attached hereto, the
Company shall use the net proceeds from the sale of the Securities hereunder for
working capital purposes and shall not use such proceeds for: (a) the
satisfaction of any portion of the Company’s debt (other than payment of trade
payables in the ordinary course of the Company’s business and prior practices),
(b) the redemption of any Common Stock or Common Stock Equivalents (as defined
in the Debenture and Warrant) or (c) the settlement of any outstanding
litigation.

 

5.12 Participation in Future Financing.

 

(a)                From the date hereof until the one year anniversary of the
Final Closing, upon any issuance by the Company or any of its Subsidiaries of
Common Stock or Common Stock Equivalents (a “Subsequent Financing”), each
Subscriber shall have the right to participate in up to an amount of the
Subsequent Financing equal to such Subscriber’s proportionate share of the
Subsequent Financing based on such Subscriber’s participation in this Offering
(the “Participation Maximum”) on the same terms, conditions and price provided
for in the Subsequent Financing.

 

20

 

 

 

(b)               At least 5 trading days prior to the closing of the Subsequent
Financing, the Company shall deliver to each Subscriber a written notice of its
intention to effect a Subsequent Financing (“Pre-Notice”), which Pre-Notice
shall ask such Subscriber if it wants to review the details of such financing
(such additional notice, a “Subsequent Financing Notice”). Upon the request of a
Subscriber, and only upon a request by such Subscriber, for a Subsequent
Financing Notice, the Company shall promptly, but no later than 1 trading day
after such request, deliver a Subsequent Financing Notice to such Subscriber.
The Subsequent Financing Notice shall describe in reasonable detail the proposed
terms of such Subsequent Financing, the amount of proceeds intended to be raised
thereunder and the person or persons through or with whom such Subsequent
Financing is proposed to be effected and shall include a term sheet or similar
document relating thereto as an attachment.

 

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

 

(d)               If by 5:30 p.m. (New York City time) on the 5th trading day
after all of the Subscribers have received the Pre-Notice, notifications by the
Subscribers of their willingness to participate in the Subsequent Financing (or
to cause their designees to participate) is, in the aggregate, less than the
total amount of the Subsequent Financing, then the Company may effect the
remaining portion of such Subsequent Financing on the terms and with the persons
set forth in the Subsequent Financing Notice.

 

(e)    If by 5:30 p.m. (New York City time) on the 5th trading day after all of
the Subscribers have received the Pre-Notice, the Company receives responses to
a Subsequent Financing Notice from Subscribers seeking to purchase more than the
aggregate amount of the Participation Maximum, each such Subscriber shall have
the right to purchase its Pro Rata Portion (as defined below) of the
Participation Maximum.  “Pro Rata Portion” means the ratio of (x) the
Subscription Amount of Securities purchased on the Closing Date by a Subscriber
participating under this Section 5.12 and (y) the sum of the aggregate
Subscription Amounts of Securities purchased by all Subscribers participating
under this Section 5.12.

 

(f)                The Company must provide the Subscribers with a second
Subsequent Financing Notice, and the Subscribers will again have the right of
participation set forth above in this Section 5.12, if the Subsequent Financing
subject to the initial Subsequent Financing Notice is not consummated for any
reason on the terms set forth in such Subsequent Financing Notice within 30
trading days after the date of the initial Subsequent Financing Notice.

 

21

 

 

 

(g)               Notwithstanding the foregoing, this Section 5.12 shall not
apply in respect of (i) an Exempt Issuance (as defined in the Debentures), or
(ii) an underwritten public offering of Common Stock.

 

5.13 Most Favored Nation Provision. For as long as the Debentures are
outstanding (including any extension or modification thereto), if the Company
effects a Subsequent Financing, Subscriber may elect, in its sole discretion, to
exchange all, but not less than all, of the Securities (not including any
Shares) then held by Subscriber for any securities issued in a Subsequent
Financing on a $1.00 for $1.00 basis based on the outstanding principal amount
of the Debentures, along with any liquidated damages and other amounts owing
thereon, and the effective price at which such securities are to be sold in such
Subsequent Financing; provided, however, that this Section 5.13 shall not apply
with respect to (i) an Exempt Issuance (as defined in the Debentures) or (ii) an
underwritten public offering of Common Stock.

 

 

VI.MISCELLANEOUS

 

6.1      Fees and Expenses. The Company and the Subscribers shall each pay the
fees and expenses of their respective advisers, counsel, accountants and other
experts, if any, and all other expenses incurred by such party in connection
with the negotiation, preparation, execution, delivery and performance of this
Agreement. The Company shall pay its transfer agents’ fees, stamp taxes and
other taxes and duties levied in connection with the sale and issuance of the
Securities to the Subscribers

 

6.2      Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of: (a) the date of transmission, if
such notice or communication is delivered via facsimile or by electronic
communication at or prior to 5:30 p.m. (New York City time) on a day in which
the New York Stock Exchange is open for trading (a “Trading Day”), (b) the next
Trading Day after the date of transmission, if such notice or communication is
delivered via facsimile or electronic communication on a day that is not a
Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (c)
the second (2nd) Trading Day following the date of mailing, if sent by U.S.
nationally recognized overnight courier service or (d) upon actual receipt by
the party to whom such notice is required to be given. The address for such
notices and communications shall be addressed as follows:

 

if to the Company, to it at:

SpectraScience, Inc.

11568 Sorrento Valley Rd., Suite 11

San Diego, California 92121

Attn: Michael P. Oliver, CEO

 

With a copy to (which shall not constitute notice):

 

22

 

 

 

Fredrikson & Byron, P.A.

200 South Sixth Street, Suite 4000
Minneapolis, MN 55402-1425

Attn: Ryan C. Brauer, Esq.

Email: rbrauer@fredlaw.com

Fax: (612) 492-7077

 

if to the Subscriber, to the Subscriber’s address indicated on the signature
page of this Agreement.

 

With a copy to (which shall not constitute notice):

 

Sichenzia Ross Friedman Ference LLP

61 Broadway, 32nd Floor

New York, NY 10006
Attn: Richard A. Friedman, Esq.

Fax: (212) 930-9725

 

if to the Escrow Agent, to it at:

 

Signature Bank

261 Madison Ave.

New York, NY 10016

Attn: Cliff Broder, Group Director and Senior Vice President

Fax: 646-822-1359

 

6.3      Amendments; Waivers. Except as otherwise provided herein, this
Agreement shall not be changed, modified or amended except by a writing signed
by the parties to be charged, and this Agreement may not be discharged except by
performance in accordance with its terms or by a writing signed by the party to
be charged. No waiver of any default with respect to any provision, condition or
requirement of this Agreement shall be deemed to be a continuing waiver in the
future or a waiver of any subsequent default or a waiver of any other provision,
condition or requirement hereof, nor shall any delay or omission of any party to
exercise any right hereunder in any manner impair the exercise of any such
right.

 

6.4      Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and to their respective heirs, legal
representatives, successors and assigns. The Company may not assign this
Agreement or any rights or obligations hereunder without the prior written
consent of Subscriber (other than by merger). Subscriber may assign any or all
of its rights under this Agreement to any person to whom Subscriber assigns or
transfers any Securities, provided that such transferee agrees in writing to be
bound, with respect to the transferred Securities, by the provisions of the
Transaction Documents

 

6.5      Entire Agreement. The Transaction Documents, together with the exhibits
and schedules thereto, contain the entire understanding of the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules.

23

 

 

 

6.6      Company’s Right of Acceptance. Upon the execution and delivery of this
Agreement by the Subscriber and the Company, this Agreement shall become a
binding obligation of the Subscriber with respect to the purchase of Securities
as herein provided, subject, however, to the right hereby reserved by the
Company to enter into the same agreements with other Subscribers and to reject
any subscription, in whole or in part, provided the Company returns to
Subscriber any funds paid by Subscriber with respect to such rejected
subscription or portion thereof, without interest or deduction.

 

6.7      Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of the Transaction Documents shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflicts of law thereof. Each
party agrees that all legal proceedings concerning the interpretations,
enforcement and defense of the transactions contemplated by this Agreement and
any other Transaction Documents (whether brought against a party hereto or its
respective affiliates, directors, officers, shareholders, employees or agents)
shall be commenced exclusively in the state and federal courts sitting in the
City of New York. Each party hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting in the City of New York,
borough of Manhattan for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein (including with respect to the enforcement of any of the Transaction
Documents), and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is improper
or is an inconvenient venue for such proceeding.

 

6.8      Attorneys’ Fees. Notwithstanding anything to the contrary in this
Agreement, in order to discourage frivolous claims the parties agree that unless
a claimant in any proceeding arising out of this Agreement succeeds in
establishing his claim and recovering a judgment against another party
(regardless of whether such claimant succeeds against one of the other parties
to the action), then the other party shall be entitled to recover from such
claimant all of its/their reasonable legal costs and expenses relating to such
proceeding and/or incurred in preparation therefor.

 

6.9      Severability. The holding of any provision of this Agreement to be
invalid or unenforceable by a court of competent jurisdiction shall not affect
any other provision of this Agreement, which shall remain in full force and
effect. If any provision of this Agreement shall be declared by a court of
competent jurisdiction to be invalid, illegal or incapable of being enforced in
whole or in part, such provision shall be interpreted so as to remain
enforceable to the maximum extent permissible consistent with applicable law and
the remaining conditions and provisions or portions thereof shall nevertheless
remain in full force and effect and enforceable to the extent they are valid,
legal and enforceable, and no provisions shall be deemed dependent upon any
other covenant or provision unless so expressed herein.

 

24

 

 

 

6.10  Further Assurances. The Company and each Subscriber agrees to execute and
deliver all such further documents, agreements and instruments and take such
other and further action as may be necessary or appropriate to carry out the
purposes and intent of this Agreement.

 

6.11  Counterparts. This Agreement may be executed in two or more counterparts
each of which shall be deemed an original, but all of which shall together
constitute one and the same instrument. In the event that any signature is
delivered by facsimile transmission or by e-mail delivery of a “.pdf” format
data file, such signature shall create a valid and binding obligation of the
party executing (or on whose behalf such signature is executed) with the same
force and effect as if such facsimile or “.pdf” signature page were an original
thereof.

 

6.12  No Third Party Beneficiaries. Nothing in this Agreement shall create or be
deemed to create any rights in any person or entity not a party to this
Agreement.

 

6.13  Injunctive Relief. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, the Subscriber
and the Company will be entitled to specific performance under this Agreement.
The parties agree that monetary damages may not be adequate compensation for any
loss incurred by reason of any breach of obligations described in this Agreement
and hereby agrees to waive in any action for specific performance of any such
obligation the defense that a remedy at law would be adequate.

 

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

25

 

 

 

VII.CONFIDENTIAL INVESTOR QUESTIONNAIRE

 

7.1      The Subscriber represents and warrants that he, she or it comes within
one category marked below, and that for any category marked, he, she or it has
truthfully set forth, where applicable, the factual basis or reason the
Subscriber comes within that category. ALL INFORMATION IN RESPONSE TO THIS
SECTION WILL BE KEPT STRICTLY CONFIDENTIAL. The undersigned agrees to furnish
any additional information which the Company deems necessary in order to verify
the answers set forth below.

 

Category A  __ The undersigned is an individual (not a partnership, corporation,
etc.) whose individual net worth, or joint net worth with his or her spouse,
presently exceeds $1,000,000. For purposes of calculating net worth under this
paragraph, (i) the primary residence shall not be included as an asset, (ii) to
the extent that the indebtedness that is secured by the primary residence is in
excess of the fair market value of the primary residence, the excess amount
shall be included as a liability, and (iii) if the amount of outstanding
indebtedness that is secured by the primary residence exceeds the amount
outstanding 60 days prior to the execution of this Subscription Agreement, other
than as a result of the acquisition of the primary residence, the amount of such
excess shall be included as a liability.     Category B __ The undersigned is an
individual (not a partnership, corporation, etc.) who had an income in excess of
$200,000 in each of the two most recent years, or joint income with his or her
spouse in excess of $300,000 in each of those years (in each case including
foreign income, tax exempt income and full amount of capital gains and losses
but excluding any income of other family members and any unrealized capital
appreciation) and has a reasonable expectation of reaching the same income level
in the current year.     Category C __ The undersigned is a director or
executive officer of the Company which is issuing and selling the Securities.  
  Category D __ The undersigned is a bank; a savings and loan association;
insurance company; registered investment company; registered business
development company; licensed small business investment company (“SBIC”); or
employee benefit plan within the meaning of Title 1 of ERISA and (a) the
investment decision is made by a plan fiduciary which is either a bank, savings
and loan association, insurance company or registered investment advisor, or (b)
the plan has total assets in excess of $5,000,000 or (c) is a self directed plan
with investment decisions made solely by persons that are accredited investors.
(describe entity)        

 

26

 

 

 

Category E __ The undersigned is a private business development company as
defined in section 202(a)(22) of the Investment Advisors Act of 1940. (describe
entity)               Category F __ The undersigned is either a corporation,
partnership, Massachusetts business trust, or non-profit organization within the
meaning of Section 501(c)(3) of the Internal Revenue Code, in each case not
formed for the specific purpose of acquiring the Securities and with total
assets in excess of $5,000,000. (describe entity)                 Category G __
The undersigned is a trust with total assets in excess of $5,000,000, not formed
for the specific purpose of acquiring the Securities, where the purchase is
directed by a “sophisticated investor” as defined in Regulation 506(b)(2)(ii)
under the Act.     Category H __  The undersigned is an entity (other than a
trust) in which all of the equity owners are “accredited investors” within one
or more of the above categories.  If relying upon this Category alone, each
equity owner must complete a separate copy of this Agreement.  (describe entity)
                Category I __  The undersigned is not within any of the
categories above and is therefore not an accredited investor.     The
undersigned agrees that the undersigned will notify the Company at any time on
or prior to the Closing in the event that the representations and warranties in
this Agreement shall cease to be true, accurate and complete.

 

7.2      SUITABILITY (please answer each question)

 

(a) For an individual Subscriber, please describe your current employment,
including the company by which you are employed and its principal business:

 

 

 

  

 

 

 

  

 

 

27

 

 

 

(b) For all Subscribers, are you familiar with the risk aspects and the
non-liquidity of investments such as the securities for which you seek to
subscribe?

 

YES_______ NO_______

 

(c) For all Subscribers, do you understand that there is no guarantee of
financial return on this investment and that you run the risk of losing your
entire investment?

 

YES_______ NO_______

 

7.3      MANNER IN WHICH TITLE IS TO BE HELD. (circle one)

 

(a)Individual Ownership

(b)Community Property

(c)Joint Tenant with Right of

Survivorship (both parties

must sign)

(d)Partnership*

(e)Tenants in Common

(f)Company*

(g)Trust*

(h)Other*

 

*If Securities are being subscribed for by an entity, the attached Certificate
of Signatory must also be completed.

 

7.4      FINRA AFFILIATION.

 

Are you affiliated or associated with an FINRA member firm (please check one):

Yes _________ No __________

 

If Yes, please describe:

 

 

 

 

 

 

 

 

*If Subscriber is a Registered Representative with an FINRA member firm, have
the following acknowledgment signed by the appropriate party:

 

 

28

 

  

 

The undersigned FINRA member firm acknowledges receipt of the notice required by
Article 3, Sections 28(a) and (b) of the Rules of Fair Practice.

 

 

 

_________________________________

Name of FINRA Member Firm

 

By: ______________________________

Authorized Officer

 

Date: ____________________________

 

7.5      The undersigned is informed of the significance to the Company of the
foregoing representations and answers contained in the Confidential Investor
Questionnaire contained in this Section VII and such answers have been provided
under the assumption that the Company will rely on them.

 

 

 

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

29

 

 

 

AGGREGATE PURCHASE PRICE OF THE DEBENTURE = $_________ (the “Purchase Price”)

 

      Signature   Signature (if purchasing jointly)             Name Typed or
Printed   Name Typed or Printed             Title (if Subscriber is an Entity)  
Title (if Subscriber is an Entity)             Entity Name (if applicable)  
Entity Name (if applicable                   Address   Address             City,
State and Zip Code   City, State and Zip Code             Telephone-Business  
Telephone-Business             Telephone-Residence   Telephone-Residence        
    Facsimile-Business   Facsimile-Business             Facsimile-Residence  
Facsimile-Residence             Tax ID # or Social Security #   Tax ID # or
Social Security #             E-Mail Address   E-Mail Address

Name in which securities should be issued: ___________________________________

 

Delivery Address (if not to Placement Agent):
_________________________________________________

 

Dated: ___________________ , 2012

 

This Subscription Agreement is agreed to and accepted as of ________________,
2012.

 

  SPECTRASCIENCE, INC.             By:       Name:   Title:  

 

30

 

 

CERTIFICATE OF SIGNATORY

 

(To be completed if Securities are

being subscribed for by an entity)

 

 

I, ____________________________, am the ____________________________ of
__________________________________________ (the “Entity”).

 

I certify that I am empowered and duly authorized by the Entity to execute and
carry out the terms of the Subscription Agreement and to purchase and hold the
Debentures and Warrants (and, upon issuance, the Shares), and certify further
that the Subscription Agreement has been duly and validly executed on behalf of
the Entity and constitutes a legal and binding obligation of the Entity.

 

IN WITNESS WHEREOF, I have set my hand this ________ day of _________________,
20__

 

          (Signature)

 

 

31

 

 

Exhibit A

 

Portions of the following Exhibit are an excerpt of the information contained in
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2011 as filed with the Securities and Exchange Commission (the “Form 10-K”). As
such, this Exhibit is qualified in its entirety by the more detailed information
regarding the Company’s business and financial conditions as set forth in the
Form 10-K and subsequently filed Forms 10-Q and Forms 8-K. In addition,
investors are advised that certain of the information in this Exhibit has not
been updated since the filing of the Form 10-K. Investors should review the
Company’s financial statements and other information set forth in the Form 10-K
and other periodic reports, including Forms 10-Q and 8-K, filed with the
Securities and Exchange Commission, as well as the Disclosure Schedules to the
Transaction Documents. You are encouraged to seek the advice of your attorney,
tax consultant, and business advisor with respect to the legal, tax, and
business aspects of an investment in the Securities.

 

RISK FACTORS

 

An investment in the Securities involves a high degree of risk and is subject to
many uncertainties. These risks and uncertainties may adversely affect our
business, operating results and financial condition. In such an event, the
trading price for our common stock could decline substantially, and you could
lose all or part of your investment. In order to attain an appreciation for
these risks and uncertainties, you should read these risk factors in their
entirety and consider all of the information and advisements contained in the
Transaction Documents, including the following risk factors and uncertainties.

 

RISKS RELATED TO OUR BUSINESS

 

We have a limited operating history with significant losses and expect losses to
continue for the foreseeable future.

 

We have yet to establish any history of profitable operations. We have incurred
annual operating losses of approximately $4,768,000 and $4,098,000,
respectively, during the past two years of operations and an approximate
$1,037,000 operating loss for the three-month period ended March 31, 2012. As a
result, at March 31, 2012, we had an accumulated deficit of approximately
$32,686,000. We have incurred net losses from continuing operations of
approximately $4,762,000 and $4,098,000 for the fiscal years ending 2011 and
2010, respectively, and a net loss from continuing operations of approximately
$2,115,000. Our revenues have not been sufficient to sustain our operations and
we expect that they will be insufficient to sustain our operations for the
foreseeable future. Our failure to generate meaningful revenues and ultimately
profits from the WavSTAT System and applications of our technology could and
will likely require that we raise additional capital which may not be available
or available on acceptable terms. This could ultimately reduce or suspend our
operations and ultimately cause us to go out of business. Our profitability will
require the successful commercialization of our imaging systems and no
assurances can be given when this will occur or if we will ever be profitable.

 

 

A-1

 

 

 

We will require additional financing to sustain our operations and without it,
we may not be able to continue operations.

 

At March 31, 2012, we had a working capital deficit of approximately $934,000.
We had an operating cash flow deficit of approximately $1,095,000 for the
three-month period ending March 31, 2012, $3,263,000 for the fiscal year ended
December 31, 2011 and $2,328,000 in 2010. We may not have sufficient financial
resources to fund our operations and will likely require additional funds to
continue our operations. 

 

We may face intense competition from companies that have greater financial,
personnel and research and development resources.

 

Competitive forces may impact our projected growth and ability to generate
revenues and profits, which would have a negative impact on our business and the
price of our common stock. Our competitors may be developing products that
compete with the WavSTAT Systems. Our commercial opportunities would then be
reduced or eliminated should our competitors develop and market products for any
of the diseases that we target that are more effective or are less expensive
than the products or product candidates we are developing.

 

Even if we are successful in developing an effective WavSTAT System, and we
obtain FDA and other regulatory approvals necessary for commercialization, our
products may not compete effectively with other successful products. Researchers
are continually learning more about diseases, which may lead to new technologies
and tools for analysis.

 

Our competitors include fully integrated medical device companies, universities
and public and private research institutions. Many of the organizations
competing with us may have substantially greater capital resources, larger
research and development staffs and facilities, greater experience in product
development and in obtaining regulatory approvals, and greater marketing
capabilities than we do.

 

The market for medical devices is intensely competitive. Many of our potential
competitors have longer operating histories, greater name recognition, more
employees, and significantly greater financial, technical, marketing, public
relations, and distribution resources than we have. This intense competitive
environment may require us to make changes in our products, pricing, licensing,
services or marketing to develop, maintain and extend our current technology.
Price concessions or the emergence of other pricing or distribution strategies
of competitors may diminish our revenues, adversely impact our margins or lead
to a reduction in our market share, any of which may harm our business.

 

Our WavSTAT System technology may become obsolete.

 

Our WavSTAT System products may be made unmarketable by new scientific or
technological developments where new treatment modalities are introduced that
are more efficacious or more economical. Any one of our competitors could
develop a more effective product which would render our technology obsolete.

 

A-2

 

 

 

Our inability to attract and retain qualified personnel could impede our ability
to generate revenues and profits and to otherwise implement our business plan
and growth strategies, which would have a negative impact on our business and
could adversely affect the price of our common stock.  

 

We currently have a staff of eight full time employees, consisting of, among
others, our Chief Executive Officer, Chief Financial Officer, Director of
International Business Development and Chief Engineer Director, as well as
administrative employees and other personnel retained on a contract basis.
Although we believe that these employees, together with the consultants
currently engaged by the Company, will be able to handle most of our additional
administrative, research and development and business development in the near
term, we will nevertheless be required over the longer-term to hire highly
skilled managerial, scientific and administrative personnel to fully implement
our business plan and growth strategies. We cannot assure you that we will be
able to engage the services of such qualified personnel at competitive prices or
at all, particularly given the risks of employment attributable to our limited
financial resources and lack of an established track record.

 

Our planned growth will place strains on our management team and other company
resources to both implement more sophisticated managerial, operational and
financial systems, procedures and controls and to train and manage the personnel
necessary to perform those functions. Our inability to manage our growth could
impede our ability to generate revenues and profits and to otherwise implement
our business plan and growth strategies, which would have a negative impact on
our business and the market value of the Company.

 

We will need to significantly expand our operations to implement our longer-term
business plan and growth strategies. We will also be required to manage multiple
relationships with various strategic partners, technology licensors, customers,
manufacturers and suppliers, consultants and other third parties. This expansion
and these expanded relationships will require us to significantly improve or
replace our existing managerial, operational and financial systems, procedures
and controls; to improve the coordination between our various corporate
functions; and to manage, train, motivate and maintain a growing employee base.
The time and costs to effectuate these steps may place a significant strain on
our management personnel, systems and resources, particularly given the limited
amount of financial resources and skilled employees that may be available at the
time. We cannot assure you that we will institute, in a timely manner or at all,
the improvements to our managerial, operational and financial systems,
procedures and controls necessary to support our anticipated increased levels of
operations and to coordinate our various corporate functions, or that we will be
able to properly manage, train, motivate and retain the anticipated increased
number of employees.

 

 

A-3

 

 

We may have difficulty in developing and retaining an effective sales force or
in obtaining effective distribution partners and may not be able to achieve
sufficient revenues to effect our business plan.

 

The market for skilled sales and marketing personnel is highly competitive and
specialized. If we are unable to hire and retain skilled and knowledgeable sales
people it may negatively impact our ability to introduce our products or
generate revenue sufficient to affect our future business plans. In addition,
our inability to develop business relationships with key technical distributors
may also negatively impact our ability to successfully market our products.

 

We may have difficulty in attracting and retaining management and outside
independent members to our Board of Directors as a result of their concerns
relating to their increased personal exposure to lawsuits and shareholder claims
by virtue of holding these positions in a publicly held company.

 

The directors and management of publicly traded corporations are increasingly
concerned with the extent of their personal exposure to lawsuits and shareholder
claims, as well as governmental and creditor claims which may be made against
them, particularly in view of recent changes in securities laws imposing
additional duties, obligations and liabilities on management and directors. Due
to these perceived risks, directors and management are also becoming
increasingly concerned with the availability of directors and officers liability
insurance to pay on a timely basis the costs incurred in defending such claims.
We currently carry directors and officers liability insurance, but such
insurance is expensive and can be difficult to obtain. If we are unable to
obtain directors and officers liability insurance at affordable rates or at all
in the future, it may become increasingly more difficult to attract and retain
qualified outside directors to serve on our board of directors. The fees of
directors are also rising in response to their increased duties, obligations and
liabilities as well as increased exposure to such risks. As a company with a
limited operating history and limited resources, we will have a more difficult
time attracting and retaining management and outside independent directors than
a more established company due to these enhanced duties, obligations and
liabilities.  

 

If we fail to comply with extensive regulations enforced by domestic and foreign
regulatory authorities, the commercialization of our products could be prevented
or delayed.

 

Our WavSTAT Systems are subject to extensive government regulations related to
development, testing, manufacturing and commercialization in the United States
and other countries. The determination of when and whether a product is ready
for large scale purchase and potential use will be made by the government
through consultation with a number of governmental agencies, including the FDA,
the National Institutes of Health, and the Centers for Disease Control and
Prevention. Our products have not received required regulatory approval from the
FDA for applications we hope to commercially market. The process of obtaining
and complying with the FDA and other governmental regulatory approvals and
regulations is costly, time consuming, uncertain and subject to unanticipated
delays. Despite the time and expense incurred, regulatory approval is never
guaranteed. We also are subject to the following risks and obligations, among
others:

 

A-4

 

 

  · The FDA may refuse to approve an application if they believe that applicable
regulatory criteria are not satisfied;   · The FDA may require additional
testing for safety and effectiveness;   · The FDA may interpret data from
pre-clinical testing and clinical trials in different ways than us;   · If
regulatory approval of a product is granted, the approval may be limited to
specific indications or limited with respect to its distribution; and   · The
FDA may change their approval policies and/or adopt new regulations.

 

Failure to comply with these or other regulatory requirements of the FDA may
subject us to administrative or judicially imposed sanctions, including:

 

  · Warning letters;   · Civil penalties;   · Criminal penalties;   ·
Injunctions;   · Product seizure or detention;   · Product recalls; and   ·
Total or partial suspension of production.

 

Delays in successfully completing our clinical trials could jeopardize our
ability to obtain regulatory approval or market our WavSTAT System candidates on
a timely basis.

 

Our business prospects will depend on our ability to complete clinical trials,
obtain satisfactory results, obtain required regulatory approvals and
successfully commercialize our WavSTAT System product candidates. Completion of
our clinical trials, announcement of results of the trials and our ability to
obtain regulatory approvals could be delayed for a variety of reasons,
including:

 

  · Unsatisfactory results of any clinical trial;   · The failure of principal
third-party investigators to perform clinical trials on our anticipated
schedules; and   · Different interpretations of pre-clinical and clinical data,
which could lead to inconclusive results.

 

Our development costs will increase if we have material delays in any clinical
trial or if we need to perform more or larger clinical trials than planned.  

 

If clinical trial delays are significant, or if any of our WavSTAT System
product candidates do not prove to be safe or effective or do not receive
required regulatory approvals, our financial results and the commercial
prospects for our product candidates will be harmed. Furthermore, our inability
to complete our clinical trials in a timely manner could jeopardize our ability
to obtain regulatory approval.

 

 

A-5

 

 

The independent clinical investigators that we rely upon to conduct our clinical
trials may not be diligent, careful or timely, and may make mistakes, in the
conduct of our clinical trials.

 

We depend on independent clinical investigators to conduct our clinical trials.
The investigators are not our employees, and we cannot control the amount or
timing of resources that they devote to our product development programs. If
independent investigators fail to devote sufficient time and resources to our
product development programs, or if their performance is substandard, it may
delay FDA approval of our products. These independent investigators may also
have relationships with other commercial entities, some of which may compete
with us. If these independent investigators assist our competitors at our
expense, it could harm our competitive position.

 

Our product development efforts may not yield marketable products due to results
of studies or trials, failure to achieve regulatory approvals or market
acceptance, proprietary rights of others or manufacturing issues.

 

Our success depends on our ability to successfully develop and obtain regulatory
approval to market new products. We expect that a significant portion of the
research that we will conduct will involve new and unproven technologies.
Development of a product requires substantial technical, financial and human
resources even if the product is not successfully completed.

 

Potential products may appear to be promising at various stages of development
yet fail to reach the market for a number of reasons, including the:

 

  · Lack of adequate quality or sufficient prevention benefit, or unacceptable
safety during pre-clinical studies or clinical trials;   · Failure to receive
necessary regulatory approvals;   · Existence of proprietary rights of third
parties; and/or   · Inability to develop manufacturing methods that are
efficient, cost-effective and capable of meeting stringent regulatory standards.

  

Our inability to protect our intellectual property rights could negatively
impact our projected growth and ability to generate revenues and profits, which
would have a negative impact on our business and the value of your investment.

  

We rely on a combination of patent, patent pending, copyright, trademark and
trade secret laws, proprietary rights agreements and non-disclosure agreements
to protect our intellectual properties. These measures may not prove to be
effective in protecting our intellectual properties.

 

In the case of patents, our existing patents may be invalidated, any patents
that we currently or prospectively apply may not be granted, or any of these
patents may not ultimately provide significant commercial benefits. Further,
competing companies may circumvent any patents that we may hold by developing
products which closely emulate but do not infringe our patents. While we
currently have and intend to seek patent protection for our products in selected
foreign countries, those patents may not receive the same degree of protection
as they would in the United States. We may not be able to successfully defend
our patents and proprietary rights in any action we may file for patent
infringement. Similarly, we may be required to defend litigation involving the
patents or proprietary rights of others, or we may be able to obtain licenses
for these rights. Legal and accounting costs relating to prosecuting or
defending patent infringement litigation may be substantial.

 

 

A-6

 

 

The WavSTAT System is protected by 41 issued patents, in the United States and
approximately 25 foreign patents, which we own, and one additional patent for
which we own the exclusive license. We also rely on proprietary designs,
technologies, processes and know-how not eligible for patent protection. Our
competitors may independently develop the same or superior designs,
technologies, processes and know-how.  

 

While we have and will continue to enter into proprietary rights agreements with
our employees and third parties giving us proprietary rights to certain
technology developed by those employees or parties while engaged by the Company,
courts of competent jurisdiction may not enforce those agreements.

 

The patents we own comprise a large portion of our assets, which could limit our
financial viability.

 

Our patents comprise approximately 50% of our assets at March 31, 2012. If our
existing patents are invalidated or if they fail to provide significant
commercial benefits, it will severely hurt our financial condition, as a
significant percentage of our assets would lose their value. Further, since our
patents are amortized over the course of their term until they expire, our
assets comprised of patents will continually be written down to zero.

 

Legislative actions and potential new accounting pronouncements are likely to
impact our future financial position and results of operations.

 

Compliance with publicly-traded company regulations adversely impacts our
resources. As a publicly-traded company, we are subject to rules and regulations
that increase our legal and financial compliance costs, make some activities
more time-consuming and costly, and divert our management's attention away from
the operation of our business. We are obligated to file with the U.S. Securities
and Exchange Commission, or the SEC, annual and quarterly information and other
reports that are specified in the Securities Exchange Act of 1934, or the
Exchange Act, and are also subject to other reporting and corporate governance
requirements, including requirements of the Sarbanes-Oxley Act of 2002, and the
rules and regulations promulgated thereunder, which impose significant
compliance and reporting obligations upon us.  We may not be successful in
complying with these obligations, and compliance with these obligations could be
time consuming and expensive. Failure to comply with the additional reporting
and corporate governance requirements could lead to fines imposed on us,
deregistration under the Exchange Act and, in the most egregious cases, criminal
sanctions could be imposed.

 

Our products may be subject to recall or product liability claims.

 

Our WavSTAT System products may be used in connection with medical procedures in
which it is important that those products function with precision and accuracy.
If our products do not function as designed, or are designed improperly, we may
be forced by regulatory agencies to withdraw such products from the market. In
addition, if medical personnel or their patients suffer injury as a result of
any failure of our products to function as designed, or due to an inappropriate
design, we may be subject to lawsuits seeking significant compensatory and
punitive damages. Any product recall or lawsuit seeking significant monetary
damages may have a material effect on our business and financial condition.

 

 

A-7

 

 

RISKS RELATED TO OUR CAPITAL STOCK

 

The application of the “penny stock” rules could adversely affect the market
price of our Common Stock and increase your transaction costs to sell your
stock.

 

As long as the trading price of our Common Stock is below $5 per share, the
open-market trading of our Common Stock will be subject to the “penny stock”
rules. The “penny stock” rules impose additional sales practice requirements on
broker-dealers who sell securities to persons other than established customers
and accredited investors (generally those with assets in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 together with their spouse). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of securities and have received the
purchaser’s written consent to the transaction before the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
broker-dealer must deliver, before the transaction, a disclosure schedule
prescribed by the SEC relating to the penny stock market. The broker-dealer also
must disclose the commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Finally,
monthly statements must be sent disclosing recent price information on the
limited market in penny stocks. These additional burdens imposed on
broker-dealers may restrict the ability or decrease the willingness of
broker-dealers to sell our common stock, and may result in decreased liquidity
for our common stock and increased transaction costs for sales and purchases of
our common stock as compared to other securities.

 

Our common stock is thinly traded, so investors may be unable to sell at or near
ask prices or at all.

 

Our common stock has historically been sporadically or “thinly-traded”, meaning
that the number of persons interested in purchasing our Common Stock at or near
ask prices at any given time may be relatively small or non-existent. As of July
13, 2012, our average trading volume per day for the past three months was
approximately 49,800 shares a day with a high of 304,400 shares traded and a low
of 0 shares traded per day. This situation is attributable to a number of
factors, including the fact that we are a small company which is relatively
unknown to stock analysts, stock brokers, institutional investors and others in
the investment community that generate or influence sales volume, and that even
if we came to the attention of such persons, they tend to be risk-averse and
would be reluctant to follow an unproven company such as ours or purchase or
recommend the purchase of our shares until such time as we became more seasoned
and viable. As a consequence, there may be periods of several days or more when
trading activity in our shares is minimal or non-existent, as compared to a
seasoned issuer which has a large and steady volume of trading activity that
will generally support continuous sales without an adverse effect on share
price. A broader or more active public trading market for our common stock may
not develop or be sustained, and current trading levels may not be sustained.

 

A-8

 

 

 

The market price for our common stock is particularly volatile, given our status
as a relatively unknown company with a small and thinly-traded public float,
limited operating history and lack of revenues which could lead to wide
fluctuations in our share price.

 

The market for our Common Stock is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the foreseeable future.
In fact, during the 90-day period ended July 13, 2012, the high and low closing
prices of a share of our Common Stock were $0.22 and $0.05, respectively. The
volatility in our share price is attributable to a number of factors. First, as
noted above, our stock is sporadically and/or thinly-traded. As a consequence of
this lack of liquidity, the trading of relatively small quantities of shares by
our shareholders may disproportionately influence the price of those shares in
either direction. The price for our shares could, for example, decline
precipitously in the event that a large number of our shares are sold on the
market without commensurate demand, as compared to a seasoned issuer which could
better absorb those sales without adverse impact on its share price. Secondly,
we are a speculative or “risky” investment due to our limited operating history
and lack of revenues or profits to date and uncertainty of future market
acceptance for our potential products. As a consequence of this enhanced risk,
more risk-adverse investors may, under the fear of losing all or most of their
investment in the event of negative news or lack of progress, be more inclined
to sell their shares on the market more quickly and at greater discounts than
would be the case with the stock of a seasoned issuer. The following factors may
add to the volatility in the price of our common stock: actual or anticipated
variations in our quarterly or annual operating results; acceptance of our
proprietary technology; government regulations, announcements of significant
acquisitions, strategic partnerships or joint ventures; our capital commitments;
and additions or departures of our key personnel. Many of these factors are
beyond our control and may decrease the market price of our common stock,
regardless of our operating performance. We cannot make any predictions or
projections as to what the prevailing market price for our common stock will be
at any time, including as to whether our common stock will sustain its current
market prices, or as to what effect that the sale of shares or the availability
of common stock for sale at any time will have on the prevailing market price.

 

The market for penny stocks such as ours has been subject to fraud and abuse and
may cause our stock price to be more volatile.

 

Shareholders should be aware that, according to SEC Release No. 34-29093, the
market for penny stocks has suffered in recent years from patterns of fraud and
abuse. Such patterns include (1) control of the market for the security by one
or a few broker-dealers that are often related to the promoter or issuer; (2)
manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases; (3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (4) excessive and undisclosed bid-ask differential and markups by
selling broker-dealers; and (5) the wholesale dumping of the same securities by
promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and
consequent investor losses. Our management is aware of the abuses that have
occurred historically in the penny stock market. The occurrence of these
patterns or practices could increase the volatility of our share price. In
addition, potential dilutive effects of future sales of shares of common stock
by shareholders and by the Company, including in this offering, could have an
adverse effect on the market price of our shares.

 

A-9

 

 

 

Volatility in our common stock price may subject us to securities litigation.

 

The market for our common stock is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
In the past, plaintiffs have sometimes initiated securities class action
litigation against a company following periods of volatility in the market price
of its securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and liabilities and
could divert management’s attention and resources.

 

A large number of shares of common stock are issuable upon exercise of
outstanding options and the exercise of these securities could result in the
substantial dilution of the investment of other shareholders in terms of
percentage ownership in the Company as well as the book value of the common
stock.

 

As of July 13, 2012, there are outstanding common stock purchase options
entitling the holders to purchase 16,320,000 shares of common stock at a
weighted average exercise price of $0.20 per share (8,624,894 of these shares
are exercisable within 60 days of July 13, 2012). The exercise price for all of
the options may be less than the cost to acquire our common stock. In addition,
the holders of the common stock purchase options may sell common stock in tandem
with their exercise of those options to finance that exercise, or may resell the
shares purchased in order to cover any income tax liabilities that may arise
from their exercise of the options, which could substantially depress the
prevailing market price of our common stock.

 

Our issuance of additional common stock, or options to purchase our common
stock, would dilute the proportionate ownership and voting rights of
shareholders.

 

We are entitled under our articles of incorporation to issue up to 325,000,000
shares of capital stock which includes 275,000,000 shares of common stock,
3,585,000 shares of preferred stock and 46,415,000 undesignated shares. Our
undesignated shares may be designated as in a senior position to our common
stock. After taking into consideration our outstanding common stock at July 13,
2012, we will be entitled to issue up to 101,093,560 additional shares of Common
Stock (275,000,000 authorized less 108,041,084 common shares outstanding,
3,585,000 shares for issuance upon conversion of Preferred Stock, 17,495,000
shares reserved for issuance of stock options, 53,396,441 shares reserved for
issuance of Common Stock purchase warrants, 41,021,402 shares for issuance of
convertible debentures and 371,846 shares of Common Stock issued for payment of
cumulative preferred dividends) and up to 46,415,000 shares of undesignated
capital stock. Our board of directors may generally issue stock, or options or
warrants to purchase that stock, without further approval by our shareholders
based upon such factors as our board of directors may deem relevant at that
time. It is likely that we will be required to issue a large amount of
additional securities to raise capital to further our development. It is also
likely that we will be required to issue a large amount of additional securities
to directors, officers, employees and consultants as compensatory grants in
connection with their services, both in the form of stand-alone grants or under
our stock plans. We may not be able to issue additional shares of Common Stock,
or options or warrants to purchase those shares, under circumstances we may deem
appropriate at the time.

 

A-10

 

 

 

The limitation of monetary liability of our directors, officers and employees
under our articles of incorporation and the indemnification rights of our
directors, officers, consultants and employees may result in substantial
expenditures by us and may discourage lawsuits against our directors, officers,
consultants and employees.

 

Our amended and restated articles of incorporation, as amended, contain
provisions which eliminate the liability of our directors and officers for
monetary damages to the Company and shareholders. Our bylaws also require us to
indemnify our officers and directors. We may also have contractual
indemnification obligations under our agreements with our directors, officers,
consultants and employees. The foregoing indemnification obligations could
result in the Company incurring substantial expenditures to cover the cost of
settlement or damage awards against directors, officers, consultants and
employees, which we may be unable to recoup. These provisions and resultant
costs may also discourage us from bringing a lawsuit against directors,
officers, consultants and employees for breaches of their fiduciary duties, and
may similarly discourage the filing of derivative litigation by our shareholders
against our directors, officers, consultants and employees even though such
actions, if successful, might otherwise benefit the Company and shareholders.

 

Anti-takeover provisions may impede the acquisition of the Company.

 

Certain provisions of the Minnesota Business Corporation Act and other Minnesota
laws have anti-takeover effects and may inhibit a non-negotiated merger or other
business combination. These provisions are intended to encourage any person
interested in acquiring us to negotiate with, and to obtain the approval of, our
board of directors in connection with such a transaction. However, certain of
these provisions may discourage a future acquisition of the Company, including
an acquisition in which the shareholders might otherwise receive a premium for
their shares. As a result, shareholders who might desire to participate in such
a transaction may not have the opportunity to do so.

 

RISKS RELATED TO THIS OFFERING

 

There will be restrictions on resale of the securities and the shares and there
is no assurance of the registration of the securities.

 

None of the Securities or Shares may be sold unless, at the time of such
intended sale, there is a current registration statement covering the resale of
the Securities and Shares or there exists an exemption from registration under
the Securities Act, and such Securities and Shares have been registered,
qualified, or deemed to be exempt under applicable securities or “blue sky” laws
in the state of residence of the seller or in the state where sales are being
effected. If no registration statement is filed and declared effective covering
the resale of any of the Securities or Shares sold pursuant to this Agreement,
investors will be precluded from disposing of such securities unless such
securities may become eligible to be disposed of under the exemptions provided
by Rule 144 under the Securities Act without restriction. If the securities sold
pursuant to this Offering are not registered for resale under the Securities
Act, or exempt therefrom, and registered or qualified under applicable
securities or “blue sky” laws, or deemed exempt therefrom, the value of the such
securities will be greatly reduced.

 

A-11

 

 

 

We have significant discretion over the use of certain of the net proceeds.

 

Assuming that all of the Securities offered by this Agreement are sold, the
proceeds to us from the sale of the Securities will be approximately $1,470,000
if the Maximum Offering is sold. A significant portion of the net proceeds of
this Offering will be applied to working capital and other general corporate
purposes. Accordingly, our management will have broad discretion as to the
application of such proceeds. There can be no assurance that management’s use of
proceeds generated through this Offering will prove optimal or translate into
revenue or profitability for the Company. Investors are urged to consult with
their attorneys, accountants and personal investment advisors prior to making
any decision to invest in the Company.

 

The offering price for the securities has been arbitrarily determined by us.

 

The offering price of the Securities was arbitrarily determined by us. The price
of the Securities does not necessarily bear any relationship to established
valuation criteria such as earnings, book value or assets. Rather, the price of
the Securities may be derived as a result of our negotiations with the investors
based upon various factors including prevailing market conditions, our future
prospects and our capital structure. These prices do not necessarily accurately
reflect the actual value of the Securities or the price that may be realized
upon disposition of the Securities or the Shares.

 

An investment in our securities is speculative and there can be no assurance of
any return on any such investment.

 

An investment in the Securities is speculative and there is no assurance that
investors will obtain any return on their investment. Investors will be subject
to substantial risks involved in an investment in the Company, including the
risk of losing their entire investment.

 

The Securities will be offered by us on a “Best Efforts” basis, and we may not
raise the Maximum Offering.

 

We are offering the Securities on a “best efforts” basis. In a best efforts
offering such as this one, there is no assurance that we will sell the Maximum
Offering. Accordingly, we may close upon amounts less than the Maximum Offering,
which may not provide us with sufficient funds to fully implement our business
plan.

 

Investor funds will not accrue interest while in escrow prior to closing.

 

We anticipate that the funds that are delivered in connection with subscriptions
will be held in a non-interest bearing escrow account until the closing of the
Offering, if any. If we terminate the Offering prior to accepting an investor’s
subscription, such amount will be returned, without interest or deduction, to
the investor. Investors may not have the use of such funds or receive interest
thereon pending the completion of the Offering.

 

A-12

 

 

 

If the Maximum Offering amount is not raised, it may increase our long-term debt
or the amount of additional equity we need to raise.

 

There is no assurance that the maximum number of Securities offered in this
Offering will be sold. If the Maximum Offering amount is not sold, we may need
to incur additional debt or raise additional equity in order to finance our
operations. Increasing the amount of debt will increase our debt service
obligations and make less cash available for distribution to our shareholders.
Increasing the amount of additional equity we are required to raise will further
dilute investors participating in this Offering.

 

Your ownership interest is subject to dilution.

 

If you purchase Securities in this Offering, you will experience immediate
dilution in the value of your Shares received upon conversion or exercise. In
addition, each investor’s proportionate ownership interest may be diluted when
we issue additional shares of our common stock. We may raise additional capital
in the future through additional sales of shares of our common stock, and your
percentage interest in our common stock would be diluted if you do not
participate in such additional sales.

 

FORWARD-LOOKING STATEMENTS

 

We have included in this Agreement, including Exhibit A, certain forward-looking
statements. Such statements can be identified by the use of forward-looking
terminology such as “believe,” “expect,” “may,” “should,” “seek,” “on-track,”
“plan,” “project,” “forecast,” “intend” or “anticipate,” or the negative thereof
or comparable terminology, or by discussions of vision, strategy or outlook,
including statements related to revenues and profitability, pricing and
competition, the continued viability of our technology, our growth and expansion
plans, including retaining new employees, compliance with governmental
regulations, our intellectual property protection strategies, payment of
dividends, the volatility of our common stock and the market for our common
stock, dilution, trading restrictions, use of proceeds and the need for
additional debt or equity funding. You are cautioned that our business and
operations are subject to a variety of risks and uncertainties, many of which
are beyond our control and, consequently, our actual results may differ
materially from those projected by any forward-looking statements. See the
section titled “Risk Factors” on Exhibit A for information regarding certain
important factors that could cause our actual results to differ materially from
those projected in our forward-looking statements. Our forward-looking
statements contained herein speak only as of the date of this Agreement. We make
no commitment to revise or update any forward-looking statements in order to
reflect events or circumstances after the date any such statements are made.

 

A-13