Exhibit 10.1

 

PURCHASE AGREEMENT

 

 

THIS PURCHASE AGREEMENT (this “Agreement”) is made as of the 28th day of
September 2012 by and among Precision Optics Corporation, Inc., a Massachusetts
corporation (the “Company”), and the Investors set forth on the signature pages
affixed hereto (each an “Investor” and collectively the “Investors”).

 

Recitals

 

A.     The Company and the Investors are executing and delivering this Agreement
in reliance upon the exemption from securities registration afforded by the
provisions of Regulation D (“Regulation D”), as promulgated by the U.S.
Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933,
as amended; and

 

B.     The Investors wish to purchase from the Company, and the Company wishes
to sell and issue to the Investors, upon the terms and conditions stated in this
Agreement, (i) an aggregate of 2,777,795 shares of the Company’s common stock,
par value $0.01 per share (together with any securities into which such shares
may be reclassified, whether by merger, charter amendment or otherwise, the
“Common Stock”), at a purchase price of $0.90 per share, and (ii) warrants to
purchase an aggregate of 1,944,475 shares of Common Stock (subject to adjustment
as provided therein) at an exercise price of $1.25 per share (subject to
adjustment as provided therein) in the form attached hereto as Exhibit A (the
“Warrants”); and

 

C.     Contemporaneous with the sale of the Shares and the Warrants, the parties
hereto will execute and deliver a Registration Rights Agreement, in the form
attached hereto as Exhibit B (the “Registration Rights Agreement”), pursuant to
which the Company will agree to provide certain registration rights under the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder, and applicable state securities laws.

 

In consideration of the mutual promises made herein and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:

 

1.     Definitions. In addition to those terms defined above and elsewhere in
this Agreement, for the purposes of this Agreement, the following terms shall
have the meanings set forth below:

 

“Affiliate” means, with respect to any Person, any other Person which directly
or indirectly through one or more intermediaries Controls, is controlled by, or
is under common control with, such Person.

 

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

 

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

 

“Company’s Knowledge” means the actual knowledge of the executive officers (as
defined in Rule 405 under the 1933 Act) of the Company, after due inquiry.

 

“Confidential Information” means trade secrets, confidential information and
know-how (including but not limited to ideas, formulae, compositions, processes,
procedures and techniques, research and development information, computer
program code, performance specifications, support documentation, drawings,
specifications, designs, business and marketing plans, and customer and supplier
lists and related information).

 

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

 

“Effective Date” means the date on which the initial Registration Statement is
declared effective by the SEC.

 

“Effectiveness Deadline” means the date on which the initial Registration
Statement is required to be declared effective by the SEC under the terms of the
Registration Rights Agreement.

 

“Intellectual Property” means all of the following: (i) patents, patent
applications, patent disclosures and inventions (whether or not patentable and
whether or not reduced to practice); (ii) trademarks, service marks, trade
dress, trade names, corporate names, logos, slogans and Internet domain names,
together with all goodwill associated with each of the foregoing; (iii)
copyrights and copyrightable works; (iv) registrations, applications and
renewals for any of the foregoing; and (v) proprietary computer software
(including but not limited to data, data bases and documentation).

 

“Material Adverse Effect” means a material adverse effect on (i) the assets,
liabilities, results of operations, condition (financial or otherwise),
business, or prospects of the Company and its Subsidiaries taken as a whole, or
(ii) the ability of the Company to perform its obligations under the Transaction
Documents.

 

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

 

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“Purchase Price” means Two Million Five Hundred Thousand Dollars ($2,500,000).

 

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

 

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

 

“SEC Filings” has the meaning set forth in Section 4.6.

 

“Securities” means the Shares, the Warrants and the Warrant Shares.

 

“Shares” means the shares of Common Stock to be purchased by the Investors
hereunder.

 

“Subsidiary” of any Person means another Person, an amount of the voting
securities, other voting ownership or voting partnership interests of which is
sufficient to elect at least a majority of its Board of Directors or other
governing body (or, if there are no such voting interests, 50% or more of the
equity interests of which) is owned directly or indirectly by such first Person.

 

“Transaction Documents” means this Agreement, the Warrants and the Registration
Rights Agreement.

 

“Warrant Shares” means the shares of Common Stock issuable upon the exercise of
the Warrants.

 

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

 

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

 

2.     Purchase and Sale of the Shares and Warrants. Subject to the terms and
conditions of this Agreement, on the Closing Date (as defined in Section 3),
each of the Investors shall severally, and not jointly, purchase, and the
Company shall sell and issue to the Investors, the Shares and the Warrants in
the respective amounts set forth opposite the Investors’ names on the signature
pages attached hereto in exchange for the Purchase Price, as further specified
in Section 3 below.

 

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3.     Closing. Unless other arrangements have been made with a particular
Investor, upon confirmation that the other conditions to Closing (as defined
hereinafter) specified herein have been satisfied or duly waived by the
Investors, the Company shall deliver to Lowenstein Sandler PC, in trust, a
certificate or certificates, registered in such name or names as the Investors
may designate, representing the Shares and the Warrants with instructions that
such certificates are to be held for release to the Investors only upon payment
in full of the Purchase Price to the Company by all the Investors. Unless other
arrangements have been made with a particular Investor, upon such receipt by
Lowenstein Sandler PC of the certificates, each Investor shall promptly, but no
more than one Business Day thereafter, cause a wire transfer in same day funds
to be sent to the account of the Company as instructed in writing by the
Company, in an amount representing such Investor’s pro rata portion of the
Purchase Price as set forth on the signature pages to this Agreement. On the
date (the “Closing Date”) the Company receives the Purchase Price, the
certificates evidencing the Shares and the Warrants shall be released to the
Investors (the “Closing”). The Closing of the purchase and sale of the Shares
and the Warrants shall take place at the offices of Lowenstein Sandler PC, 1251
Avenue of the Americas, 18th Floor, New York, New York 10020, or at such other
location and on such other date as the Company and the Investors shall mutually
agree.

 

4.     Representations and Warranties of the Company. The Company hereby
represents and warrants to the Investors that, except as set forth in the
schedules delivered herewith (collectively, the “Disclosure Schedules”):

 

4.1     Organization, Good Standing and Qualification. Each of the Company and
its Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has all
requisite corporate power and authority to carry on its business as now
conducted and to own or lease its properties. Each of the Company and its
Subsidiaries is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction in which the conduct of its business or its
ownership or leasing of property makes such qualification or leasing necessary
unless the failure to so qualify has not had and could not reasonably be
expected to have a Material Adverse Effect. The Company’s Subsidiaries are
listed on Schedule 4.1 hereto.

 

4.2     Authorization. The Company has full power and authority and has taken
all requisite action on the part of the Company, its officers, directors and
stockholders necessary for (i) the authorization, execution and delivery of the
Transaction Documents, (ii) the authorization of the performance of all
obligations of the Company hereunder or thereunder, and (iii) the authorization,
issuance (or reservation for issuance) and delivery of the Securities. When
delivered in accordance with the terms hereof, the Transaction Documents will
constitute the legal, valid and binding obligations of the Company, enforceable
against the Company in accordance with their terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws of
general applicability, relating to or affecting creditors’ rights generally and
to general equitable principles.

 

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4.3     Capitalization. The issued and outstanding shares of Common Stock have
been duly authorized and validly issued, are fully paid and nonassessable, have
been issued in compliance with all federal and state securities laws, were not
issued in violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities, and conform in all material respects to
the description thereof contained in the Company’s filings with the SEC. Except
as set forth in the Company’s SEC Filings and except for options and other
awards that may be granted under the Company’s Amended and Restated 1997
Incentive Plan, the Company’s 2006 Equity Incentive Plan or the Company’s 2011
Equity Incentive Plan, the Company does not have outstanding any options to
purchase, or any preemptive rights or other rights to subscribe for or to
purchase, any securities or obligations convertible into, or any contracts or
commitments to issue or sell, shares of its capital stock or any such options,
rights, convertible securities or obligations. Except as contemplated by this
Agreement, neither the Company nor any of its Subsidiaries is currently in
negotiations for the issuance of any equity securities of any kind. Except as
described on Schedule 4.3 and except for the Registration Rights Agreement,
there are no voting agreements, buy-sell agreements, option or right of first
purchase agreements or other agreements of any kind among the Company and any of
the securityholders of the Company relating to the securities of the Company
held by them. Except as described on Schedule 4.3 and except as provided in the
Registration Rights Agreement, no Person has the right to require the Company to
register any securities of the Company under the 1933 Act, whether on a demand
basis or in connection with the registration of securities of the Company for
its own account or for the account of any other Person.

 

Except as described on Schedule 4.3, the issuance and sale of the Securities
hereunder will not obligate the Company to issue shares of Common Stock or other
securities to any other Person (other than the Investors) and will not result in
the adjustment of the exercise, conversion, exchange or reset price of any
outstanding security.

 

Except as described on Schedule 4.3, the Company does not have outstanding
stockholder 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.

 

4.4     Valid Issuance. The Shares have been duly and validly authorized and,
when issued and paid for pursuant to this Agreement, will be validly issued,
fully paid and nonassessable, and shall be free and clear of all encumbrances
and restrictions (other than those created by the Investors), except for
restrictions on transfer set forth in the Transaction Documents or imposed by
applicable securities laws. The Warrants have been duly and validly authorized.
Upon the due exercise of the Warrants, the Warrant Shares will be duly and
validly authorized and validly issued, fully paid and non-assessable free and
clear of all encumbrances and restrictions, except for restrictions on transfer
set forth in the Transaction Documents or imposed by applicable securities laws
and except for those created by the Investors. The Company has reserved a
sufficient number of shares of Common Stock for issuance upon the exercise of
the Warrants, free and clear of all encumbrances and restrictions, except for
restrictions on transfer set forth in the Transaction Documents or imposed by
applicable securities laws and except for those created by the Investors.

 

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4.5     Consents. The execution, delivery and performance by the Company of the
Transaction Documents and the offer, issuance and sale of the Securities require
no consent of, action by or in respect of, or filing with, any Person,
governmental body, agency, or official other than filings that have been made
pursuant to applicable state securities laws and post-sale filings pursuant to
applicable state and federal securities laws which the Company undertakes to
file within the applicable time periods. Subject to the accuracy of the
representations and warranties of each Investor set forth in Section 5 hereof,
the Company has taken all action necessary to exempt (i) the issuance and sale
of the Securities, (ii) the issuance of the Warrant Shares upon due exercise of
the Warrants, and (iii) the other transactions contemplated by the Transaction
Documents from the provisions of any stockholder rights plan or other “poison
pill” arrangement, any anti-takeover, business combination or control share law
or statute binding on the Company or to which the Company or any of its assets
and properties may be subject and any provision of the Company’s Articles of
Organization or Bylaws, as in effect as of the date hereof (the “Bylaws”), that
is or could reasonably be expected to become applicable to the Investors as a
result of the transactions contemplated hereby, including without limitation,
the issuance of the Securities and the ownership, disposition or voting of the
Securities by the Investors or the exercise of any right granted to the
Investors pursuant to this Agreement or the other Transaction Documents.

 

4.6     Delivery of SEC Filings; Business. The Company has made available to the
Investors through the EDGAR system, true and complete copies of the Company’s
most recent Annual Report on Form 10-K for the fiscal year ended June 30, 2011
(the “10-K”), and all other reports filed by the Company pursuant to the 1934
Act since the filing of the 10-K and prior to the date hereof (collectively, the
“SEC Filings”). The SEC Filings are the only filings required of the Company
pursuant to the 1934 Act for such period. The Company and its Subsidiaries are
engaged in all material respects only in the business described in the SEC
Filings and the SEC Filings contain a complete and accurate description in all
material respects of the business of the Company and its Subsidiaries, taken as
a whole.

 

4.7     Use of Proceeds. The net proceeds of the sale of the Shares and the
Warrants hereunder shall be used by the Company for working capital and general
corporate purposes.

 

4.8     No Material Adverse Change. Since June 30, 2012, except as identified
and described in the SEC Filings or as described on Schedule 4.8, there has not
been:

 

(i)     any change in the consolidated assets, liabilities, financial condition
or operating results of the Company from that reflected in the financial
statements included in the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2012, except for changes in the ordinary course of
business which have not had and could not reasonably be expected to have a
Material Adverse Effect, individually or in the aggregate;

 

(ii)     any declaration or payment of any dividend, or any authorization or
payment of any distribution, on any of the capital stock of the Company, or any
redemption or repurchase of any securities of the Company;

 

(iii)     any material damage, destruction or loss, whether or not covered by
insurance to any assets or properties of the Company or its Subsidiaries;

 

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(iv)     any waiver, not in the ordinary course of business, by the Company or
any Subsidiary of a material right or of a material debt owed to it;

 

(v)     any satisfaction or discharge of any lien, claim or encumbrance or
payment of any obligation by the Company or a Subsidiary, except in the ordinary
course of business and which is not material to the assets, properties,
financial condition, operating results or business of the Company and its
Subsidiaries taken as a whole (as such business is presently conducted and as it
is proposed to be conducted);

 

(vi)     any change or amendment to the Company's Articles of Organization or
Bylaws, or material change to any material contract or arrangement by which the
Company or any Subsidiary is bound or to which any of their respective assets or
properties is subject;

 

(vii)     any material labor difficulties or labor union organizing activities
with respect to employees of the Company or any Subsidiary;

 

(viii)     any material transaction entered into by the Company or a Subsidiary
other than in the ordinary course of business;

 

(ix)     the loss of the services of any key employee, or material change in the
composition or duties of the senior management of the Company or any Subsidiary;

 

(x)     the loss or, to the Company’s Knowledge, threatened loss of any customer
which has had or could reasonably be expected to have a Material Adverse Effect;
or

 

(xi)     any other event or condition of any character that has had or could
reasonably be expected to have a Material Adverse Effect.

 

4.9     SEC Filings.

 

(a)     At the time of filing thereof, the SEC Filings complied as to form in
all material respects with the requirements of the 1934 Act and did not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading.

 

(b)     Each registration statement and any amendment thereto filed by the
Company since January 1, 2010 pursuant to the 1933 Act and the rules and
regulations thereunder, as of the date such statement or amendment became
effective, complied as to form in all material respects with the 1933 Act and
did not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements made therein not misleading; and each prospectus filed pursuant to
Rule 424(b) under the 1933 Act, as of its issue date and as of the closing of
any sale of securities pursuant thereto did not contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading.

 

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4.10     No Conflict, Breach, Violation or Default. The execution, delivery and
performance of the Transaction Documents by the Company and the issuance and
sale of the Securities will not conflict with or result in a breach or violation
of any of the terms and provisions of, or constitute a default under (i) the
Company’s Articles of Organization or the Company’s Bylaws, both as in effect on
the date hereof (true and complete copies of which have been filed with the SEC
and made available to the Investors through EDGAR), (ii) any statute, rule,
regulation or order of any governmental agency or body or any court, domestic or
foreign, having jurisdiction over the Company, any Subsidiary or any of their
respective assets or properties, or (iii) any agreement or instrument to which
the Company or any Subsidiary is a party or by which the Company or a Subsidiary
is bound or to which any of their respective assets or properties is subject,
except, in the case of clauses (ii) and (iii) only, such breaches, violations or
defaults that individually or in the aggregate would not cause a Material
Adverse Effect.

 

4.11     Tax Matters. The Company and each Subsidiary has timely prepared and
filed all tax returns required to have been filed by the Company or such
Subsidiary with all appropriate governmental agencies and timely paid all taxes
shown thereon or otherwise owed by it (after giving effect to applicable
extensions). The charges, accruals and reserves on the books of the Company in
respect of taxes for all fiscal periods are adequate in all material respects,
and there are no material unpaid assessments against the Company or any
Subsidiary nor, to the Company’s Knowledge, any basis for the assessment of any
additional taxes, penalties or interest for any fiscal period or audits by any
federal, state or local taxing authority except for any assessment which is not
material to the Company and its Subsidiaries, taken as a whole. All taxes and
other assessments and levies that the Company or any Subsidiary is required to
withhold or to collect for payment have been duly withheld and collected and
paid to the proper governmental entity or third party when due. There are no tax
liens or claims pending or, to the Company’s Knowledge, threatened against the
Company or any Subsidiary or any of their respective assets or property. Except
as described on Schedule 4.11, there are no outstanding tax sharing agreements
or other such arrangements between the Company and any Subsidiary or other
corporation or entity.

 

4.12     Title to Properties. Except as disclosed in the SEC Filings, the
Company and each Subsidiary has good and marketable title to all real properties
and all other properties and assets owned by it, in each case free from liens,
encumbrances and defects that would materially affect the value thereof or
materially interfere with the use made or currently planned to be made thereof
by them; and except as disclosed in the SEC Filings, the Company and each
Subsidiary holds any leased real or personal property under valid and
enforceable leases with no exceptions that would materially interfere with the
use made or currently planned to be made thereof by them.

 

4.13     Certificates, Authorizations and Permits. The Company and each
Subsidiary possess adequate certificates, authorizations or permits issued by
appropriate governmental agencies or bodies necessary to conduct the business
now operated by it, except where the failure to possess such certificates,
authorizations or permits has not had and could not reasonably be expected to
have a Material Adverse Effect, and neither the Company nor any Subsidiary has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authority or permit that, if determined adversely to the
Company or such Subsidiary, could reasonably be expected to have a Material
Adverse Effect, individually or in the aggregate.

 

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4.14     Labor Matters.

 

(a)     Except as set forth on Schedule 4.14, the Company is not a party to or
bound by any collective bargaining agreements or other agreements with labor
organizations. Except as set forth on Schedule 4.14, the Company has not
violated in any material respect any laws, regulations, orders or contract
terms, affecting the collective bargaining rights of employees, labor
organizations or any laws, regulations or orders affecting employment
discrimination, equal opportunity employment, or employees’ health, safety,
welfare, wages and hours.

 

(b)     (i) There are no labor disputes existing, or to the Company's Knowledge,
threatened, involving strikes, slow-downs, work stoppages, job actions,
disputes, lockouts or any other disruptions of or by the Company's employees,
(ii) there are no unfair labor practices or petitions for election pending or,
to the Company's Knowledge, threatened before the National Labor Relations Board
or any other federal, state or local labor commission relating to the Company's
employees, (iii) no demand for recognition or certification heretofore made by
any labor organization or group of employees is pending with respect to the
Company and (iv) to the Company's Knowledge, the Company enjoys good labor and
employee relations with its employees and labor organizations.

 

(c)     Except as disclosed in the SEC Filings or as described on Schedule 4.14,
the Company is, and at all times has been, in compliance in all material
respects with all applicable laws respecting employment (including laws relating
to classification of employees and independent contractors) and employment
practices, terms and conditions of employment, wages and hours, and immigration
and naturalization. There are no claims pending against the Company before the
Equal Employment Opportunity Commission or any other administrative body or in
any court asserting any violation of Title VII of the Civil Rights Act of 1964,
the Age Discrimination Act of 1967, 42 U.S.C. §§ 1981 or 1983 or any other
federal, state or local Law, statute or ordinance barring discrimination in
employment.

 

(d)     Except as disclosed in the SEC Filings or as described on Schedule 4.14,
the Company is not a party to, or bound by, any employment or other contract or
agreement that contains any severance, termination pay or change of control
liability or obligation, including, without limitation, any “excess parachute
payment,” as defined in Section 280G(b) of the Internal Revenue Code.

 

(e)     Except as specified in Schedule 4.14, each of the Company's employees is
a Person who is either a United States citizen or a permanent resident entitled
to work in the United States. To the Company's Knowledge, the Company has no
liability for the improper classification by the Company of such employees as
independent contractors or leased employees prior to the Closing.

 

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4.15     Intellectual Property.

 

(a)     All Intellectual Property of the Company and its Subsidiaries is
currently in compliance with all legal requirements (including timely filings,
proofs and payments of fees) and is valid and enforceable. No Intellectual
Property of the Company or its Subsidiaries which is necessary for the conduct
of Company’s and each of its Subsidiaries’ respective businesses as currently
conducted or as currently proposed to be conducted has been or is now involved
in any cancellation, dispute or litigation, and, to the Company’s Knowledge, no
such action is threatened. No patent of the Company or its Subsidiaries has been
or is now involved in any interference, reissue, re-examination or opposition
proceeding.

 

(b)     All of the licenses and sublicenses and consent, royalty or other
agreements concerning Intellectual Property which are necessary for the conduct
of the Company’s and each of its Subsidiaries’ respective businesses as
currently conducted or as currently proposed to be conducted to which the
Company or any Subsidiary is a party or by which any of their assets are bound
(other than  generally commercially available, non-custom, off-the-shelf
software application programs having a retail acquisition price of less than
$10,000 per license) (collectively, “License Agreements”) are valid and binding
obligations of the Company or its Subsidiaries that are parties thereto and, to
the Company’s Knowledge, the other parties thereto, enforceable in accordance
with their terms, except to the extent that enforcement thereof may be limited
by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or
other similar laws affecting the enforcement of creditors’ rights generally, and
there exists no event or condition which will result in a material violation or
breach of or constitute (with or without due notice or lapse of time or both) a
default by the Company or any of its Subsidiaries under any such License
Agreement.

 

(c)     The Company and its Subsidiaries own or have the valid right to use all
of the Intellectual Property that is necessary for the conduct of the Company’s
and each of its Subsidiaries’ respective businesses as currently conducted or as
currently proposed to be conducted and for the ownership, maintenance and
operation of the Company’s and its Subsidiaries’ properties and assets, free and
clear of all liens, encumbrances, adverse claims or obligations to license all
such owned Intellectual Property and Confidential Information, other than
licenses entered into in the ordinary course of the Company’s and its
Subsidiaries’ businesses. The Company and its Subsidiaries have a valid and
enforceable right to use all third party Intellectual Property and Confidential
Information used or held for use in the respective businesses of the Company and
its Subsidiaries.

 

(d)     To the Company’s Knowledge, the conduct of the Company’s and its
Subsidiaries’ businesses as currently conducted does not infringe or otherwise
impair or conflict with (collectively, “Infringe”) any Intellectual Property
rights of any third party or any confidentiality obligation owed to a third
party, and, to the Company’s Knowledge, the Intellectual Property and
Confidential Information of the Company and its Subsidiaries which are necessary
for the conduct of Company’s and each of its Subsidiaries’ respective businesses
as currently conducted or as currently proposed to be conducted are not being
Infringed by any third party. There is no litigation or order pending or
outstanding or, to the Company’s Knowledge, threatened or imminent, that seeks
to limit or challenge or that concerns the ownership, use, validity or
enforceability of any Intellectual Property or Confidential Information of the
Company and its Subsidiaries and the Company’s and its Subsidiaries’ use of any
Intellectual Property or Confidential Information owned by a third party, and,
to the Company’s Knowledge, there is no valid basis for the same.

 

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(e)     The consummation of the transactions contemplated hereby and by the
other Transaction Documents will not result in the alteration, loss, impairment
of or restriction on the Company’s or any of its Subsidiaries’ ownership or
right to use any of the Intellectual Property or Confidential Information which
is necessary for the conduct of Company’s and each of its Subsidiaries’
respective businesses as currently conducted or as currently proposed to be
conducted.

 

(f)     The Company and its Subsidiaries have taken reasonable steps to protect
the Company’s and its Subsidiaries’ rights in their Intellectual Property and
Confidential Information. Except under confidentiality obligations, there has
been no material disclosure of any of the Company’s or its Subsidiaries’
Confidential Information to any third party.

 

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

 

4.17     Litigation. Except as described on Schedule 4.17, there are no pending
legal actions, suits or proceedings against or affecting the Company, its
Subsidiaries or any of its or their properties; and to the Company’s Knowledge,
no such actions, suits or proceedings are threatened or contemplated. Neither
the Company nor any Subsidiary, nor any director or officer thereof, is or since
January 1, 2007 has been the subject of any action involving a claim of
violation of or liability under federal or state securities laws or a claim of
breach of fiduciary duty. There has not been, and to the Company’s Knowledge,
there is not pending or contemplated, any investigation by the SEC involving the
Company or any current or former director or officer of the Company. The SEC has
not issued any stop order or other order suspending the effectiveness of any
registration statement filed by the Company or any Subsidiary under the 1933 Act
or the 1934 Act.

 

11

 

 

4.18     Financial Statements. The financial statements included in each SEC
Filing (as corrected pursuant to any restatement effected prior to the date
hereof) 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 (or such restatement, as applicable) and present fairly, in
all material respects, the consolidated financial position of the Company as of
the dates shown and its consolidated results of operations and cash flows for
the periods shown, and such financial statements have been prepared in
conformity with United States generally accepted accounting principles applied
on a consistent basis (“GAAP”) (except as may be disclosed therein or in the
notes thereto, and, in the case of quarterly financial statements, as permitted
by Form 10-Q under the 1934 Act); provided, however, that the unaudited
financial statements are subject to normal year-end audit adjustments (which are
not expected to be material) and do not contain all footnotes required under
generally accepted accounting principles. Except as set forth in the financial
statements of the Company included in the SEC Filings filed prior to the date
hereof or as described on Schedule 4.18, neither the Company nor any of its
Subsidiaries has incurred any liabilities, contingent or otherwise, except those
incurred in the ordinary course of business, consistent (as to amount and
nature) with past practices since the date of such financial statements, none of
which, individually or in the aggregate, have had or could reasonably be
expected to have a Material Adverse Effect.

 

4.19     Insurance Coverage. The Company and each Subsidiary maintains in full
force and effect insurance coverage that is customary for comparably situated
companies for the business being conducted and properties owned or leased by the
Company and each Subsidiary, and the Company reasonably believes such insurance
coverage to be adequate against all liabilities, claims and risks against which
it is customary for comparably situated companies to insure.

 

4.20     OTCQB Compliance. The Common Stock is registered pursuant to Section
12(g) of the 1934 Act and is quoted on the OTCQB maintained by OTC Markets Group
Inc. (the “OTCQB”), and the Company has taken no action designed to, or likely
to have the effect of, terminating the registration of the Common Stock under
the 1934 Act or removal from quotation of the Common Stock from the OTCQB, nor
has the Company received any notification that the SEC, the OTCQB or the
Financial Industry Regulatory Authority, Inc. is contemplating terminating such
registration or quotation.

 

4.21     Brokers and Finders. No Person will have, as a result of the
transactions contemplated by the Transaction Documents, any valid right,
interest or claim against or upon the Company, any Subsidiary or an Investor for
any commission, fee or other compensation pursuant to any agreement, arrangement
or understanding entered into by or on behalf of the Company, other than as
described in Schedule 4.21.

 

4.22     No Directed Selling Efforts or General Solicitation. Neither the
Company nor any Person acting on its behalf has conducted any general
solicitation or general advertising (as those terms are used in Regulation D) in
connection with the offer or sale of any of the Securities.

 

4.23     No Integrated Offering. Neither the Company nor any of its Affiliates,
nor any Person acting on its or their behalf has, directly or indirectly, made
any offers or sales of any Company security or solicited any offers to buy any
security, under circumstances that would adversely affect reliance by the
Company on Section 4(2) for the exemption from registration for the transactions
contemplated hereby or would require registration of the Securities under the
1933 Act.

 

4.24     Private Placement. The offer and sale of the Securities to the
Investors as contemplated hereby is exempt from the registration requirements of
the 1933 Act, assuming the representations of the Investors in Section 5 are
true.

 

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4.25     Questionable Payments. Neither the Company nor any of its Subsidiaries
nor, to the Company’s Knowledge, any of their respective current or former
directors, officers, employees, agents or other Persons acting on behalf of the
Company or any Subsidiary, has on behalf of the Company or any Subsidiary or in
connection with their respective businesses: (a) used any corporate funds for
unlawful contributions, gifts, entertainment or other unlawful expenses relating
to political activity; (b) made any direct or indirect unlawful payments to any
governmental officials or employees from corporate funds; (c) established or
maintained any unlawful or unrecorded fund of corporate monies or other assets;
(d) made any false or fictitious entries on the books and records of the Company
or any Subsidiary; or (e) made any unlawful bribe, rebate, payoff, influence
payment, kickback or other unlawful payment of any nature.

 

4.26     Transactions with Affiliates. Except as disclosed in the SEC Filings or
as disclosed on Schedule 4.26, 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.

 

4.27     Internal Controls. The Company is in material compliance with the
provisions of the Sarbanes-Oxley Act of 2002 currently applicable to the
Company. The Company and the Subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with GAAP and to maintain
asset accountability, (iii) access to assets is permitted only in accordance
with management's general or specific authorization, and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences. The
Company has established disclosure controls and procedures (as defined in 1934
Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed such disclosure
controls and procedures to ensure that material information relating to the
Company, including the Subsidiaries, is made known to the certifying officers by
others within those entities, particularly during the period in which the
Company’s most recently filed periodic report under the 1934 Act, as the case
may be, is being prepared. The Company's certifying officers have evaluated the
effectiveness of the Company's controls and procedures as of the end of the
period covered by the most recently filed periodic report under the 1934 Act
(such date, the "Evaluation Date"). The Company presented in its most recently
filed periodic report under the 1934 Act the conclusions of the certifying
officers about the effectiveness of the disclosure controls and procedures based
on their evaluations as of the Evaluation Date. Since the Evaluation Date, there
have been no significant changes in the Company's internal controls (as such
term is defined in Item 308 of Regulation S-K) or, to the Company's Knowledge,
in other factors that could significantly affect the Company's internal
controls. The Company maintains and will continue to maintain a standard system
of accounting established and administered in accordance with GAAP and the
requirements of the 1934 Act (to the extent applicable to the Company).

 

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4.28     Disclosures. Neither the Company nor any Person acting on its behalf
has provided the Investors or their agents or counsel with any information that
constitutes, as of the Closing Date, material non-public information, other than
the terms of the transactions contemplated hereby. The written materials
delivered to the Investors in connection with the transactions contemplated by
the Transaction Documents do not contain any untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements
contained therein, in light of the circumstances under which they were made, not
misleading.

 

5.     Representations and Warranties of the Investors. Each of the Investors
hereby severally, and not jointly, represents and warrants to the Company that:

 

5.1     Organization and Existence. If the Investor is not an individual, such
Investor is a validly existing corporation, limited partnership or limited
liability company and has all requisite corporate, partnership or limited
liability company power and authority to invest in the Securities pursuant to
this Agreement.

 

5.2     Authorization. The execution, delivery and performance by such Investor
of the Transaction Documents to which such Investor is a party have been duly
authorized and will each constitute the valid and legally binding obligation of
such Investor, enforceable against such Investor in accordance with their
respective terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability, relating
to or affecting creditors’ rights generally.

 

5.3     Purchase Entirely for Own Account. The Securities to be received by such
Investor hereunder will be acquired for such Investor’s own account, not as
nominee or agent, and not with a view to the resale or distribution of any part
thereof in violation of the 1933 Act, and such Investor has no present intention
of selling, granting any in, or otherwise distributing the same and has no
arrangement or understanding with any other Persons regarding the distribution
of such Securities in violation of the 1933 Act without prejudice, however, to
such Investor’s right at all times to sell or otherwise dispose of all or any
part of such Securities in compliance with applicable federal and state
securities laws. Such Investor is acquiring the Securities hereunder in the
ordinary course of its business. Nothing contained herein shall be deemed a
representation or warranty by such Investor to hold the Securities for any
period of time. Such Investor is not a broker-dealer registered with the SEC
under the 1934 Act or an entity engaged in a business that would require it to
be so registered.

 

5.4     Investment Experience. Such Investor acknowledges that it can bear the
economic risk and complete loss of its investment in the Securities and has such
knowledge and experience in financial or business matters that it is capable of
evaluating the merits and risks of the investment contemplated hereby.

 

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5.5     Disclosure of Information. Such Investor has had an opportunity to
receive all information related to the Company requested by it and to ask
questions of and receive answers from the Company regarding the Company, its
business and the terms and conditions of the offering of the Securities. Such
Investor acknowledges receipt of copies of the SEC Filings. Neither such
inquiries nor any other due diligence investigation conducted by such Investor
shall modify, limit or otherwise affect such Investor’s right to rely on the
Company’s representations and warranties contained in this Agreement.

 

5.6     Restricted Securities. Such Investor understands that the Securities are
characterized as “restricted securities” under the U.S. federal securities laws
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable regulations
such securities may be resold without registration under the 1933 Act only in
certain limited circumstances.

 

5.7     Legends. It is understood that, except as provided below, certificates
evidencing the Securities may bear the following or any similar legend:

 

(a)     “The securities represented hereby have 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, and, accordingly, may not be transferred unless (i) such securities
have been registered for sale pursuant to the Securities Act of 1933, as
amended, (ii) such securities may be sold pursuant to Rule 144, or (iii) the
Company has received an opinion of counsel reasonably satisfactory to it that
such transfer may lawfully be made without registration under the Securities Act
of 1933 as amended.”

 

(b)     If required by the authorities of any state in connection with the
issuance of sale of the Securities, the legend required by such state authority.

 

5.8     Accredited Investor. Such Investor is an accredited investor as defined
in Rule 501(a) of Regulation D, as amended, under the 1933 Act, as amended by
the Dodd-Frank Wall Street Reform and Consumer Protection Act.

 

5.9     No General Solicitation. Such Investor did not learn of the investment
in the Securities as a result of any general solicitation or general
advertising.

 

5.10     Brokers and Finders. No Person will have, as a result of the
transactions contemplated by the Transaction Documents, any valid right,
interest or claim against or upon the Company, any Subsidiary or an Investor for
any commission, fee or other compensation pursuant to any agreement, arrangement
or understanding entered into by or on behalf of such Investor.

 

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5.11     Prohibited Transactions. Since the earlier of (a) such time as such
Investor was first contacted by the Company or any other Person acting on behalf
of the Company regarding the transactions contemplated hereby or (b) thirty (30)
days prior to the date hereof, neither such Investor nor any Affiliate of such
Investor which (x) had knowledge of the transactions contemplated hereby, (y)
has or shares discretion relating to such Investor’s investments or trading or
information concerning such Investor’s investments, including in respect of the
Securities, or (z) is subject to such Investor’s review or input concerning such
Affiliate’s investments or trading (collectively, “Trading Affiliates”) has,
directly or indirectly, effected or agreed to effect any short sale, whether or
not against the box, established any “put equivalent position” (as defined in
Rule 16a-1(h) under the 1934 Act) with respect to the Common Stock, granted any
other right (including, without limitation, any put or call option) with respect
to the Common Stock or with respect to any security that includes, relates to or
derived any significant part of its value from the Common Stock or otherwise
sought to hedge its position in the Securities (each, a “Prohibited
Transaction”). Prior to the earliest to occur of (i) the termination of this
Agreement, (ii) the Effective Date or (iii) the Effectiveness Deadline, such
Investor shall not, and shall cause its Trading Affiliates not to, engage,
directly or indirectly, in a Prohibited Transaction. Such Investor acknowledges
that the representations, warranties and covenants contained in this Section
5.11 are being made for the benefit of the Investors as well as the Company and
that each of the other Investors shall have an independent right to assert any
claims against such Investor arising out of any breach or violation of the
provisions of this Section 5.11.

 

5.12     Reliance on Exemptions. Such Investor understands that the Securities
are being offered and sold to it in reliance upon specific exemptions from the
registration requirements of the 1933 Act, the rules and regulations promulgated
thereunder and state securities laws and that the Company is relying upon the
truth and accuracy of, and the Investor’s compliance with, the representations,
warranties, agreements, acknowledgments and understandings of the Investor set
forth herein in order to determine the availability of such exemptions and the
eligibility of the Investor to acquire the Securities.

 

5.13     Investment Decision. Such Investor understands that nothing in the
Agreement or any other materials presented to such Investor in connection with
the purchase and sale of the Securities constitutes legal, tax or investment
advice. Such Investor has consulted such legal, tax and investment advisors as
it, in its sole discretion, has deemed necessary or appropriate in connection
with its purchase of the Securities.

 

5.14     Risk of Loss. Such Investor understands that its investment in the
Securities involves a significant degree of risk, including a risk of total loss
of such Investor’s investment, and such Investor has full cognizance of and
understands all of the risk factors related to such Investor’s purchase of the
Securities, including, but not limited to, those set forth under or incorporated
by reference under the caption “Risk Factors” in the SEC Filings. Such Investor
understands that the market price of the Common Stock has been volatile and that
no representation is being made as to the future value of the Common Stock.

 

5.15     No Government Review. Such Investor understands that no United States
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Securities.

 

5.16     Residency. Such Investor's principal executive office, if an entity, or
residence, if an individual, is in the jurisdiction set forth immediately below
such Investor’s name on the signature pages hereto.

 

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6.     Conditions to Closing.

 

6.1     Conditions to the Investors’ Obligations. The obligation of each
Investor to purchase the Shares and the Warrants at the Closing is subject to
the fulfillment to such Investor’s satisfaction, on or prior to the Closing
Date, of the following conditions, any of which may be waived by such Investor
(as to itself only):

 

(a)     The representations and warranties made by the Company in Section 4
hereof qualified as to materiality shall be true and correct 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 as of such earlier date,
and, the representations and warranties made by the Company in Section 4 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. The Company shall have performed in all
material respects all obligations and covenants herein required to be performed
by it on or prior to the Closing Date.

 

(b)     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.

 

(c)     The Company shall have executed and delivered the Registration Rights
Agreement.

 

(d)     No judgment, writ, order, injunction, award or decree of or by any
court, or judge, justice or magistrate, including any bankruptcy court or judge,
or any order of or by any governmental authority, shall have been issued, and no
action or proceeding shall have been instituted by any governmental authority,
enjoining or preventing the consummation of the transactions contemplated hereby
or in the other Transaction Documents.

 

(e)     The Company shall have delivered to the Investors an officer’s
certificate, executed on behalf of the Company by its Chief Executive Officer or
its Chief Financial Officer, dated as of the Closing Date, certifying to the
fulfillment of the conditions specified in subsections (a), (b), (d) and (h) of
this Section 6.1.

 

(f)     The Company shall have delivered to the Investors a secretary’s
certificate, executed on behalf of the Company by its Secretary, dated as of the
Closing Date, certifying the resolutions adopted by the Board of Directors of
the Company approving (i) the transactions contemplated by this Agreement and
the other Transaction Documents and (ii) the issuance of the Securities,
certifying the current versions of the Articles of Organization and Bylaws of
the Company and certifying as to the signatures and authority of persons signing
the Transaction Documents and related documents on behalf of the Company.

 

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(g)     The Investors shall have received an opinion from Trombly Business Law,
PC, the Company's counsel, dated as of the Closing Date, in form and substance
reasonably acceptable to the Investors and addressing such legal matters as the
Investors may reasonably request.

 

(h)     No stop order or suspension of trading shall have been imposed by the
OTCQB, the SEC or any other governmental or regulatory body with respect to
public trading in the Common Stock.

 

6.2     Conditions to Obligations of the Company. The Company's obligation to
sell and issue the Shares and the Warrants at the Closing is subject to the
fulfillment to the satisfaction of the Company on or prior to the Closing Date
of the following conditions, any of which may be waived by the Company:

 

(a)     The representations and warranties made by the Investors in Section 5
hereof, other than the representations and warranties contained in Sections 5.3,
5.4, 5.5, 5.6, 5.7, 5.8 and 5.9 (the “Investment Representations”), shall be
true and correct in all material respects when made, and shall be true and
correct in all material respects on the Closing Date with the same force and
effect as if they had been made on and as of said date. The Investment
Representations shall be true and correct in all respects when made, and shall
be true and correct in all respects on the Closing Date with the same force and
effect as if they had been made on and as of said date. The Investors shall have
performed in all material respects all obligations and covenants herein required
to be performed by them on or prior to the Closing Date.

 

(b)     The Investors shall have executed and delivered the Registration Rights
Agreement.

 

(c)     The Investors shall have delivered the Purchase Price to the Company.

 

6.3     Termination of Obligations to Effect Closing; Effects.

 

(a)     The obligations of the Company, on the one hand, and the Investors, on
the other hand, to effect the Closing shall terminate as follows:

 

(i)     Upon the mutual written consent of the Company and the Investors;

 

(ii)     By the Company if any of the conditions set forth in Section 6.2 shall
have become incapable of fulfillment, and shall not have been waived by the
Company;

 

(iii)     By an Investor (with respect to itself only) if any of the conditions
set forth in Section 6.1 shall have become incapable of fulfillment, and shall
not have been waived by the Investor; or

 

18

 

 

(iv)     By either the Company or any Investor (with respect to itself only) if
the Closing has not occurred on or prior to September 30, 2012;

 

provided, however, that, except in the case of clause (i) above, the party
seeking to terminate its obligation to effect the Closing shall not then be in
breach of any of its representations, warranties, covenants or agreements
contained in this Agreement or the other Transaction Documents if such breach
has resulted in the circumstances giving rise to such party’s seeking to
terminate its obligation to effect the Closing.

 

(b)     In the event of termination by the Company or any Investor of its
obligations to effect the Closing pursuant to this Section 6.3, written notice
thereof shall forthwith be given to the other Investors by the Company and the
other Investors shall have the right to terminate their obligations to effect
the Closing upon written notice to the Company and the other Investors. Nothing
in this Section 6.3 shall be deemed to release any party from any liability for
any breach by such party of the terms and provisions of this Agreement or the
other Transaction Documents or to impair the right of any party to compel
specific performance by any other party of its obligations under this Agreement
or the other Transaction Documents.

 

7.     Covenants and Agreements of the Company.

 

7.1     Reservation of Common Stock. The Company shall at all times reserve and
keep available out of its authorized but unissued shares of Common Stock, solely
for the purpose of providing for the exercise of the Warrants, such number of
shares of Common Stock as shall from time to time equal the Warrant Shares
issuable from time to time.

 

7.2     Reports. The Company will furnish to the Investors such information
relating to the Company and its Subsidiaries as from time to time may reasonably
be requested by the Investors; provided, however, that the Company shall not
disclose material nonpublic information to the Investors, or to advisors to or
representatives of the Investors, unless prior to disclosure of such information
the Company identifies such information as being material nonpublic information
and provides the Investors, such advisors and representatives with the
opportunity to accept or refuse to accept such material nonpublic information
for review and any Investor wishing to obtain such information enters into an
appropriate confidentiality agreement with the Company with respect thereto.

 

7.3     No Conflicting Agreements. The Company will not take any action, enter
into any agreement or make any commitment that would conflict or interfere in
any material respect with the Company’s obligations to the Investors under the
Transaction Documents.

 

7.4     Insurance. The Company shall not materially reduce the insurance
coverages described in Section 4.19.

 

7.5     Compliance with Laws. The Company will comply in all material respects
with all applicable laws, rules, regulations, orders and decrees of all
governmental authorities.

 

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7.6     Listing of Underlying Shares and Related Matters. If the Company applies
to have its Common Stock or other securities traded on any stock exchange or
market, it shall include in such application the Shares and the Warrant Shares
and will take such other action as is necessary to cause such Common Stock to be
so listed. Following any such listing, the Company will use commercially
reasonable efforts to continue the listing and trading of its Common Stock on
such stock exchange or market and, in accordance, therewith, will use
commercially reasonable efforts to comply in all respects with the Company’s
reporting, filing and other obligations under the bylaws or rules of such stock
exchange or market, as applicable.

 

7.7     Termination of Covenants. The provisions of Sections 7.2 through 7.5
shall terminate and be of no further force and effect on the date on which the
Company’s obligations under the Registration Rights Agreement to register or
maintain the effectiveness of any registration covering the Registrable
Securities (as such term is defined in the Registration Rights Agreement) shall
terminate.

 

7.8     Removal of Legends. In connection with any sale or disposition of the
Securities by an Investor pursuant to Rule 144 or pursuant to any other
exemption under the 1933 Act such that the purchaser acquires freely tradable
shares and upon compliance by the Investor with the requirements of this
Agreement, the Company shall or, in the case of Common Stock, shall cause the
transfer agent for the Common Stock (the “Transfer Agent”) to issue replacement
certificates representing the Securities sold or disposed of without restrictive
legends. Upon the earlier of (i) registration for resale pursuant to the
Registration Rights Agreement or (ii) the Shares or the Warrant Shares, as
applicable, becoming freely tradable by a non-affiliate pursuant to Rule 144 the
Company shall (A) deliver to the Transfer Agent irrevocable instructions that
the Transfer Agent shall issue a certificate representing shares of Common Stock
without legends upon receipt by such Transfer Agent of (X) either (1) a
customary representation by the Investor that Rule 144 applies to the shares of
Common Stock represented thereby or (2) a statement by the Investor that such
Investor has sold the shares of Common Stock represented thereby in accordance
with the Plan of Distribution contained in the Registration Statement, and (Y)
if applicable, the legended certificates for such shares, and (B) cause its
counsel to deliver to the Transfer Agent one or more blanket opinions to the
effect that the removal of such legends in such circumstances may be effected
under the 1933 Act. At any time when one or more of the Securities may be freely
sold or is covered by an effective Registration Statement, the Company shall, or
shall cause the Transfer Agent to, promptly cause the Investor’s Securities to
be replaced with Securities which do not bear restrictive legends, and Warrant
Shares subsequently issued upon due exercise of the Warrants shall not bear such
restrictive legends provided such Securities may be freely sold or are covered
by an effective Registration Statement. When the Company is required to cause an
unlegended Security to be issued as provided herein, if: (1) the unlegended
Security is not delivered to an Investor within three (3) Business Days of
submission by that Investor of a request for unlegended Securities and, if
applicable, the documentation specified above to the Transfer Agent or the
Company, as applicable, and (2) prior to the time such unlegended Security is
received by the Investor, the Investor, or any third party on behalf of such
Investor or for the Investor’s account, purchases (in an open market transaction
or otherwise) another Security to deliver in satisfaction of a sale by the
Investor of such Security (a “Buy-In”), then the Company shall pay in cash to
the Investor (for costs incurred either directly by such Purchaser or on behalf
of a third party) the amount by which the total purchase price paid for the
replacement Security as a result of the Buy-In (including brokerage commissions,
if any) exceeds the proceeds received by such Investor as a result of the sale
to which such Buy-In relates. The Investor shall provide the Company written
notice indicating the amounts payable to the Investor in respect of the Buy-In.

 

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7.9     Subsequent Equity Sales. From the date hereof until such time as no
Investor holds any of the Securities, the Company shall be prohibited from
effecting or entering into an agreement to effect any Subsequent Financing
involving a “Variable Rate Transaction”. The term “Variable Rate Transaction”
shall mean a transaction in which the Company issues or sells (i) any debt or
equity securities that are convertible into, exchangeable or exercisable for, or
include the right to receive additional shares of Common Stock either (A) at a
conversion, exercise or exchange rate or other price that is based upon and/or
varies with the trading prices of or quotations for the shares of Common Stock
at any time after the initial issuance of such debt or equity securities, or (B)
with a conversion, exercise or exchange price that is subject to being reset at
some future date after the initial issuance of such debt or equity security or
upon the occurrence of specified or contingent events directly or indirectly
related to the business of the Company or the market for the Common Stock or
(ii) enters into any agreement, including, but not limited to, an equity line of
credit, whereby the Company may sell securities at a future determined price.

 

7.10     Right to Participate in Future Financings. From the date hereof until
90 days after the Effective Date, upon any financing by the Company of its
Common Stock or Common Stock Equivalents (a “Subsequent Financing”), each
Investor shall have the right to participate in such Subsequent Financing as
provided herein. Additionally, from the date hereof until two (2) years after
the Closing Date, for any Subsequent Financing in which the Company issues
equity securities in the Company (other than shares issued for compensation or
services) at a price that is below the exercise price of the Warrants each
Investor shall have the right to participate in such Subsequent Financing as
provided herein. At least five (5) Business Days prior to the closing of the
Subsequent Financing, the Company shall deliver to each Investor a written
notice of its intention to effect a Subsequent Financing (“Pre-Notice”), which
Pre-Notice shall ask such Investor if it wants to review the details of such
financing (such additional notice, a “Subsequent Financing Notice”). Upon the
request of an Investor, and only upon a request by such Investor, for a
Subsequent Financing Notice, the Company shall promptly, but no later than one
Business Day after such request, deliver a Subsequent Financing Notice to such
Investor. 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, the Person with whom such Subsequent Financing is
proposed to be effected, and attached to which shall be a term sheet or similar
document relating thereto. Each Investor shall notify the Company by 5:00 p.m.
(New York City time) on the fifth (5th) Business Day after their receipt of the
Subsequent Financing Notice of its willingness to participate in the Subsequent
Financing on the terms described in the Subsequent Financing Notice, subject to
completion of mutually acceptable documentation. The Investors agreeing to
participate in the Subsequent Financing shall have the right to purchase their
Pro Rata Portion (as defined below) of the Common Stock or Common Stock
Equivalents to be issued in such Subsequent Financing. “Pro Rata Portion” is the
ratio of (x) the number of shares of Common Stock beneficially owned amount by
such Investor (determined in accordance with Rule 13d-3 under the 1934 Act and
(y) number of shares of Common Stock then outstanding (calculated on a fully
diluted basis). Notwithstanding the foregoing, this Section 7.10 shall not apply
in respect of the issuance of (a) shares of Common Stock or options to
employees, consultants, officers or directors of the Company pursuant to any
stock or option plan duly adopted by a majority of the non-employee members of
the Board of Directors of the Company or a majority of the members of a
committee of non-employee directors established for such purpose, shares of
Common Stock issuable in respect of the Warrants, and (b) securities upon the
exercise of or conversion of any convertible securities, options or warrants
issued and outstanding on the date of this Agreement, provided that the terms of
such securities have not been amended since the date of this Agreement to
increase the number of shares of Common Stock issuable thereunder or to lower
the exercise or conversion price thereof.

 

21

 

 

7.11     Equal Treatment of Investors. No consideration 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. For clarification
purposes, this provision constitutes a separate right granted to each Investor
by the Company and negotiated separately by each Investor, and is intended for
the Company to treat the Investors as a class and shall not in any way be
construed as the Investors acting in concert or as a group with respect to the
purchase, disposition or voting of Securities or otherwise.

 

7.12     Use of Proceeds. The Company shall use the net proceeds of the sale of
the Shares and the Warrants as provided in Section 4.7.

 

8.     Survival and Indemnification.

 

8.1     Survival. The representations, warranties, covenants and agreements
contained in this Agreement shall survive the Closing of the transactions
contemplated by this Agreement.

 

8.2     Indemnification. The Company agrees to indemnify and hold harmless each
Investor and its Affiliates and their respective directors, officers, employees
and agents from and against any and all losses, claims, damages, liabilities and
expenses (including without limitation reasonable attorney fees and
disbursements and other expenses incurred in connection with investigating,
preparing or defending any action, claim or proceeding, pending or threatened
and the costs of enforcement thereof) (collectively, “Losses”) to which such
Person may become subject as a result of any breach of representation, warranty,
covenant or agreement made by or to be performed on the part of the Company
under the Transaction Documents, and will reimburse any such Person for all such
amounts as they are incurred by such Person.

 

8.3     Conduct of Indemnification Proceedings. Promptly after receipt by any
Person (the “Indemnified Person”) of notice of any demand, claim or
circumstances which would or might give rise to a claim or the commencement of
any action, proceeding or investigation in respect of which indemnity may be
sought pursuant to Section 8.2, such Indemnified Person shall promptly notify
the Company in writing and the Company shall assume the defense thereof,
including the employment of counsel reasonably satisfactory to such Indemnified
Person, and shall assume the payment of all reasonable fees and expenses;
provided, however, that the failure of any Indemnified Person so to notify the
Company shall not relieve the Company of its obligations hereunder except to the
extent that the Company is materially prejudiced by such failure to notify. In
any such proceeding, any Indemnified Person shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such Indemnified Person unless: (i) the Company and the Indemnified Person
shall have mutually agreed to the retention of such counsel; or (ii) in the
reasonable judgment of counsel to such Indemnified Person representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. The Company shall not be liable for any
settlement of any proceeding effected without its written consent, which consent
shall not be unreasonably withheld, but if settled with such consent, or if
there be a final judgment for the plaintiff, the Company shall indemnify and
hold harmless such Indemnified Person from and against any loss or liability (to
the extent stated above) by reason of such settlement or judgment. Without the
prior written consent of the Indemnified Person, which consent shall not be
unreasonably withheld, the Company shall not effect any settlement of any
pending or threatened proceeding in respect of which any Indemnified Person is
or could have been a party and indemnity could have been sought hereunder by
such Indemnified Party, unless such settlement includes an unconditional release
of such Indemnified Person from all liability arising out of such proceeding.

 

22

 

 

9.     Miscellaneous.

 

9.1     Successors and Assigns. This Agreement may not be assigned by a party
hereto without the prior written consent of the Company or the Investors, as
applicable, provided, however, that an Investor may assign its rights and
delegate its duties hereunder in whole or in part to an Affiliate or to a third
party acquiring some or all of its Securities in a transaction complying with
applicable securities laws without the prior written consent of the Company or
the other Investors. The provisions of this Agreement shall inure to the benefit
of and be binding upon the respective permitted successors and assigns of the
parties. Nothing in this Agreement, express or implied, is intended to confer
upon any party other than the parties hereto or their respective successors and
assigns any rights, remedies, obligations, or liabilities under or by reason of
this Agreement, except as expressly provided in this Agreement.

 

9.2     Counterparts; Faxes. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. This Agreement may also
be executed and transmitted via facsimile, or by portable document format via
electronic mail, each of which shall be deemed an original.

 

9.3     Titles and Subtitles. The titles and subtitles used in this Agreement
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.

 

9.4     Notices. Unless otherwise provided, any notice required or permitted
under this Agreement shall be given in writing and shall be deemed effectively
given as hereinafter described (i) if given by personal delivery, then such
notice shall be deemed given upon such delivery, (ii) if given by telex or
telecopier, then such notice shall be deemed given upon receipt of confirmation
of complete transmittal, (iii) if given by mail, then such notice shall be
deemed given upon the earlier of (A) receipt of such notice by the recipient or
(B) three days after such notice is deposited in first class mail, postage
prepaid, (iv) if given by an internationally recognized overnight air courier,
then such notice shall be deemed given one Business Day after delivery to such
carrier, and (v) if given by electronic mail, upon receipt. All notices shall be
addressed to the party to be notified at the address as follows, or at such
other address as such party may designate by ten days’ advance written notice to
the other party:

  

If to the Company:

 

Precision Optics Corporation, Inc.

22 East Broadway

Gardner, Massachusetts 01440-3338

Attention: Joseph N. Forkey,

President and Chief Executive Officer

Fax: (978) 630-1487

 

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

 

Amy Trombly, Esq.

Trombly Business Law, PC

1320 Centre Street, Suite 202

Newton, MA 02459

Fax: (617) 663-6164

 

If to the Investors:

 

to the addresses set forth on the signature pages hereto.

 

9.5     Expenses. The parties hereto shall pay their own costs and expenses in
connection herewith. The Company shall reimburse the Investors within 30 days
for all reasonable, actual out-of-pocket expenses incurred by the Investors,
including without limitation reimbursement of attorneys’ fees and disbursements,
in connection with any amendment, modification or waiver of this Agreement or
the other Transaction Documents requested by the Company. The Company will only
be obligated to reimburse Investors for the use of one counsel. Additionally,
the Company’s obligation will be capped at $5,000 per amendment, modification or
waiver. In the event that legal proceedings are commenced by any party to this
Agreement against another party to this Agreement in connection with this
Agreement or the other Transaction Documents, the party or parties which do not
prevail in such proceedings shall severally, but not jointly, pay their pro rata
share of the reasonable attorneys’ fees and other reasonable out-of-pocket costs
and expenses incurred by the prevailing party in such proceedings.

 

9.6     Amendments and Waivers. Any term of this Agreement may be amended and
the observance of any term of this Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively), only with
the written consent of the Company and the Investors. Any amendment or waiver
effected in accordance with this paragraph shall be binding upon each holder of
any Securities purchased under this Agreement at the time outstanding, each
future holder of all such Securities, and the Company.

 

9.7     Publicity. Except as set forth below, no public release or announcement
concerning the transactions contemplated hereby shall be issued by the Company
or the Investors without the prior consent of the Company (in the case of a
release or announcement by the Investors) or the Investors (in the case of a
release or announcement by the Company) (which consents shall not be
unreasonably withheld), except as such release or announcement may be required
by law or the applicable rules or regulations of any securities exchange or
securities market, in which case the Company or the Investors, as the case may
be, shall allow the Investors or the Company, as applicable, to the extent
reasonably practicable in the circumstances, reasonable time to comment on such
release or announcement in advance of such issuance. No later than one Business
Day following the Closing Date, the Company will publicly disclose the
transactions contemplated hereby and, in connection therewith, will, no later
than two Business Days following the Closing Date, file with the SEC either a
Current Report on Form 8-K, a Quarterly Report on Form 10-Q or an Annual Report
on Form 10-K, to the extent permissible, which shall attach as exhibits copies
of the Transaction Documents. In addition, the Company will make such other
filings and notices in the manner and time required by the SEC.

 

24

 

 

9.8     Severability. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof but shall be interpreted as if it were written so as
to be enforceable to the maximum extent permitted by applicable law, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction. To the extent
permitted by applicable law, the parties hereby waive any provision of law which
renders any provision hereof prohibited or unenforceable in any respect.

 

9.9     Entire Agreement. This Agreement, including the Exhibits and the
Disclosure Schedules, and the other Transaction Documents constitute the entire
agreement among the parties hereof with respect to the subject matter hereof and
thereof and supersede all prior agreements and understandings, both oral and
written, between the parties with respect to the subject matter hereof and
thereof.

 

9.10     Further Assurances. The parties shall execute and deliver all such
further instruments and documents and take all such other actions as may
reasonably be required to carry out the transactions contemplated hereby and to
evidence the fulfillment of the agreements herein contained.

 

9.11     Governing Law; Consent to Jurisdiction; Waiver of Jury Trial. This
Agreement shall be governed by, and construed in accordance with, the internal
laws of the State of New York without regard to the choice of law principles
thereof (other than Section 5-1401 of the New York General Obligation Law). Each
of the parties hereto irrevocably submits to the exclusive jurisdiction of the
courts of the State of New York located in New York County and the United States
District Court for the Southern District of New York for the purpose of any
suit, action, proceeding or judgment relating to or arising out of this
Agreement and the transactions contemplated hereby. Service of process in
connection with any such suit, action or proceeding may be served on each party
hereto anywhere in the world by the same methods as are specified for the giving
of notices under this Agreement. Each of the parties hereto irrevocably consents
to the jurisdiction of any such court in any such suit, action or proceeding and
to the laying of venue in such court. Each party hereto irrevocably waives any
objection to the laying of venue of any such suit, action or proceeding brought
in such courts and irrevocably waives any claim that any such suit, action or
proceeding brought in any such court has been brought in an inconvenient forum.
TO THE MAXIMUM EXTENT PERMITTED UNDER APPLICABLE LAW, EACH OF THE PARTIES HERETO
WAIVES ANY RIGHT TO REQUEST A TRIAL BY JURY IN ANY LITIGATION WITH RESPECT TO
THIS AGREEMENT AND REPRESENTS THAT COUNSEL HAS BEEN CONSULTED SPECIFICALLY AS TO
THIS WAIVER.

 

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

 

[Signature Page follows]

 

25

 

 

IN WITNESS WHEREOF, the parties have executed this Agreement or caused their
duly authorized officers to execute this Agreement as of the date first above
written.

 

 

The Company: PRECISION OPTICS CORPORATION, INC.       By:      Name: Joseph N.
Forkey
Title: President and Chief Executive Officer

 

 

 

 

[Signature Page for Investor Follows]

 

 

26

 

 

      [ ]               By:       Name:       Title:             Address for
Delivery of Securities to Investor:                               Fax:        
Email:                                   Address for Notice (if different):    
                  Fax:         Email:                         Subscription
Amount:     $             Shares:                   Warrant Shares:            
      EIN Number:        

 

27

 

 

Disclosure Schedules to the Purchase Agreement

 

Schedule 4.1 – Subsidiaries.

 

Name   Jurisdiction of Incorporation       Precise Medical, Inc.   Commonwealth
of Massachusetts, USA Wood’s Precision Optics Corporation, Limited   Hong Kong

 

Schedule 4.3 – Capitalization.

 

February 1, 2007 Transaction

 

On February 1, 2007, the Company entered into a Purchase Agreement (the
“February 2007 Purchase Agreement”) with institutional and other accredited
investors pursuant to which it sold an aggregate of 10,000,000 shares of common
stock at a price of $0.25 per share and warrants to purchase an aggregate of
10,000,000 shares of common stock (subject to adjustment) at an exercise price
of $0.32 per share (subject to adjustment) (the “February 2007 Warrants”),
raising gross proceeds of $2,500,000. In conjunction with the Company’s issuance
of Notes and Warrants on June 25, 2008 as described below, certain anti-dilution
provisions of the February 2007 Warrants were triggered. As a result, the number
of February 2007 Warrants was increased from 10,000,000 to 14,551,577 and the
related exercise price was decreased from $0.32 per share to $0.22 per share.
The February 2007 Warrants expired on February 1, 2012.

 

Pursuant to the February 2007 Purchase Agreement, the Company agreed to file a
registration statement with the Securities and Exchange Commission within
forty-five days after the closing date of the transaction to register the resale
of the shares and the shares of common stock issuable upon exercise of the
February 2007 Warrants, and to use its commercially reasonable best efforts to
have the Registration Statement declared effective as soon as practicable after
filing. The Company also agreed to keep the registration statement effective
until the earlier of (i) the date on which all the registrable securities
covered by such registration statement, as amended form time to time, have been
sold, and (ii) the date on which all the securities may be sold without
restriction pursuant to Rule 144 of the Securities Act of 1933.

 

June 25, 2008 Transaction

 

On June 25, 2008, the Company entered into a Purchase Agreement, as amended on
December 11, 2008, with institutional and other accredited investors (the
“Investors”) pursuant to which it sold a total of $600,000 of 10% Senior Secured
Convertible Notes (the “Notes”) that are convertible at the Investor’s option
into a total of 480,000 shares of the Company’s common stock at a conversion
rate of $1.25. The Company also issued warrants to purchase a total of 316,800
shares of its common stock at an exercise price of $1.75 per share (the
“Warrants”). Interest accrues on the Notes at a rate of 10% per year and is
payable in cash upon the earlier of conversion or maturity of the Notes. The
original maturity of the Notes was June 25, 2010 and the Warrants expire on June
25, 2015, subject to extension. By mutual agreement with the Company, the
Investors amended the Notes on several dates to extend the “Stated Maturity
Date” of the Notes. The conversion price of the Notes and the exercise price of
the Warrants may be adjusted downward in the event the Company issues shares of
common stock or securities convertible into common stock at a price lower than
the conversion price of the Notes or exercise price of the Warrants at the time
of issuance.

 

28

 

 

Pursuant to the Purchase Agreement, the Notes and Warrants were not convertible
or exercisable until the Company implemented a 1 for 6 reverse stock split,
which required the approval of its stockholders. On November 25, 2008, the
Company entered into a Side Letter Agreement in which the Investors agreed to
change the ratio of the reverse split from 1 for 6 to 1 for 25. On December 11,
2008, the Company effected a 1 for 25 reverse split of its common stock.

 

Pursuant to a Registration Rights Agreement entered into with the Investors on
June 25, 2008, the Company agreed to file a registration statement with the
Securities and Exchange Commission by the earlier of (i) two days following the
effectiveness of the amendment to implement a reverse stock split, and (ii)
December 15, 2008, to register the resale of the common stock issuable upon the
conversion of the Notes and the exercise of the Warrants. The Company agreed to
keep the registration statement effective until the earlier of (i) the date on
which all the securities have been sold, and (ii) the date on which all the
securities may be sold without restriction pursuant to Rule 144 of the
Securities Act of 1933.

 

The Notes contain covenants binding on the Company and certain events of
default, including but not limited, to:

 

  ● the failure of the Company to make a scheduled payment;         ● the
failure of the Company to make payments in excess of $100,000 on any liability
or obligation, or if there is an acceleration of the stated maturity of any
liability or obligation in excess of $100,000; or         ● the Company entering
bankruptcy.

 

If an event of default occurs and is uncured within the allowable grace period,
if any, the Investors may declare all amounts under the Notes immediately due
and payable and may pursue any other available remedies.

 

On December 15, 2011, the Company repaid Special Situations Fund III QP, L.P. a
principal repayment of $275,000 and accrued interest of $95,486, for a total
payment of $370,486. On December 15, 2011, the Company repaid Special Situations
Private Equity Fund, L.P. a principal repayment of $275,000 and accrued interest
of $95,486, for a total payment of $370,486. The Notes held by Special
Situations Fund III QP, L.P. and Special Situations Private Equity Fund, L.P.
have been satisfied in full and the obligations thereunder have been terminated.

 

On March 31, 2012, the remaining Investor, Arnold Schumsky, further amended his
remaining Note to extend the “Stated Maturity Date” of the principal to July 31,
2012 and to modify the Note such that all accrued and unpaid interest on the
Note up to and including March 31, 2012 shall be due on or before April 13,
2012, on the condition that the Company issue to him a warrant for 5,000 shares
of common stock with an exercise price of $1.20 per share and a term of three
years. On April 13, 2012, the Company repaid Mr. Schumsky a payment of the
accrued interest of $18,819, and such payment included all accrued and unpaid
interest on the Note up to and including March 31, 2012. On May 8, 2012, the
Company issued Mr. Schumsky the warrant according to the terms described in the
amended Note.

 

29

 

 

Schedule 4.8 – No Material Adverse Change.

 

None.

 

Schedule 4.11 – Tax Matters.

 

None.

 

Schedule 4.14 – Labor Matters.

 

None.

 

Schedule 4.17 – Litigation.

 

None.

 

Schedule 4.18 – Financial Statements.

 

None.

 

Schedule 4.21 – Brokers and Finders.

 

The Company engaged Loewen, Ondaatje & McCutcheon, Limited (“LOM”) on August 1,
2012. The Company will generally pay LOM a 7% cash fee plus warrants and
expenses for amounts raised in this offering.

  

Schedule 4.26 – Transactions with Affiliates.

 

None.

 

30