Exhibit 10.38



 


Exhibit
10.38


 


SECURITIES
PURCHASE AGREEMENT


 


SECURITIES
PURCHASE AGREEMENT (the “Agreement”), dated as of March 21, 2014, by and among Digital Ally, Inc., a Nevada
corporation, with headquarters located at 9705 Loiret Boulevard, Lenexa, Kansas 66219 (the “Company”), and
the investors listed on the Schedule of Buyers attached hereto (individually, a “Buyer” and collectively, the
“Buyers”).


 


WHEREAS:


 


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


 


B.
The Company has authorized a new series of senior secured convertible notes of the Company, in substantially the form
attached hereto as Exhibit A (the “Notes”), which Notes shall be convertible into the
Company’s common stock, par value $0.001 per share (the “Common Stock”) (the shares of Common Stock
issuable pursuant to the terms of the Notes, including, without limitation, upon conversion or otherwise, collectively, the
“Conversion Shares”), in accordance with the terms of the Notes.


 


C.
Each Buyer wishes to purchase, and the Company wishes to sell, upon the terms and conditions stated in this Agreement, (i)
that aggregate principal amount of Notes set forth opposite such Buyer’s name in column (3) on the Schedule of Buyers
attached hereto (which aggregate principal amount of Notes for all Buyers shall be $2,000,000), and (ii) Warrants, in
substantially the form attached hereto as Exhibit B (the “Warrants”), representing the right to
acquire that number of shares of Common Stock set forth opposite such Buyer’s name in column (4) on the Schedule of
Buyers (as exercised, collectively, the “Warrant Shares”).


 


D.
Contemporaneously with the execution and delivery of this Agreement, the parties hereto are executing and delivering a
Registration Rights Agreement, substantially in the form attached hereto as Exhibit C (the “Registration
Rights Agreement”), pursuant to which the Company has agreed to provide certain registration rights with respect to
the Registrable Securities (as defined in the Registration Rights Agreement) under the 1933 Act and the rules and regulations
promulgated thereunder, and applicable state securities laws.


 


E.
The Notes will rank senior to all outstanding and future indebtedness of the Company, and its Subsidiaries (as defined
below), will be guaranteed by all direct and indirect Subsidiaries (as defined in Section 3(a)) of the Company, currently
formed or formed in the future, as evidenced by a guarantee agreement, in the form attached hereto as Exhibit D (as
amended or modified from time to time in accordance with its terms, the “Guarantee Agreement”), and will
be secured by a first priority perfected security interest (subject to Permitted Liens under and as defined in the Notes) in
all of the current and future assets of the Company and all direct and indirect Subsidiaries of the Company, currently formed
or formed in the future, as evidenced by a pledge and security agreement, substantially in the form attached hereto as Exhibit
E, (as amended or modified from time to time in accordance with its terms, the “Security
Agreement”).


 




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F.
The Notes, the Conversion Shares, the Warrants and the Warrant Shares collectively are referred to herein as the “Securities”.


 


NOW,
THEREFORE, the Company and each Buyer hereby agree as follows:


 


1.
PURCHASE AND SALE OF NOTES AND WARRANTS.


 


(a)
Purchase of Notes and Warrants. Subject to the satisfaction (or waiver) of the conditions set forth in Sections 6 and 7
below, the Company shall issue and sell to each Buyer, and each Buyer severally, but not jointly, agrees to purchase from the
Company on the Closing Date (as defined below), (x) a principal amount of Notes as is set forth opposite such Buyer’s name
in column (3) on the Schedule of Buyers and (y) Warrants to acquire up to that number of Warrant Shares as is set forth opposite
such Buyer’s name in column (4) on the Schedule of Buyers (the “Closing”).


 


(b) Closing.
The date and time of the Closing (the “Closing Date”) shall be 10:00 a.m., New York City time, on the date
hereof (or such other date and time as is mutually agreed to by the Company and each Buyer) after notification
of satisfaction (or waiver) of the conditions to the Closing set forth in Sections 6 and 7 below, at the offices of Schulte
Roth & Zabel LLP, 919 Third Avenue, New York, New York 10022.


 


(c)
Purchase Price. The aggregate purchase price for the Notes and the Warrants to be purchased by each Buyer at the Closing
(the “Purchase Price”) shall be the amount set forth opposite each Buyer’s name in column (5) of the
Schedule of Buyers. Each Buyer shall pay $1,000 for each $1,000 of principal amount of Notes and related Warrants to be purchased
by such Buyer at the Closing. The Buyers and the Company agree that the Notes and the Warrants constitute an “investment
unit” for purposes of Section 1273(c)(2) of the Internal Revenue Code of 1986, as amended (the “Code”).
The Buyers and the Company mutually agree that the allocation of the issue price of such investment unit between the Notes and
the Warrants in accordance with Section 1273(c)(2) of the Code and Treasury Regulation Section 1.1273-2(h) shall be an aggregate
amount of $5,000 allocated to the Warrants and the balance of the Purchase Price allocated to the Notes, and neither the Buyers
nor the Company shall take any position inconsistent with such allocation in any tax return or in any judicial or administrative
proceeding in respect of taxes.


 


(d)
Form of Payment. On the Closing Date, (i) each Buyer shall pay its applicable purchase price to the Company for the Notes
and the Warrants to be issued and sold to such Buyer at the Closing (less, in the case of Hudson Bay Master Fund Ltd. (“Hudson
Bay”), the amounts withheld pursuant to Section 4(g)), by wire transfer of immediately available funds in accordance
with the Company’s written wire instructions and (ii) the Company shall deliver to each Buyer the Notes (allocated in the
principal amounts as such Buyer shall request) which such Buyer is then purchasing hereunder along with the Warrants (allocated
in the amounts as such Buyer shall request) which such Buyer is purchasing hereunder, in each case duly executed on behalf of
the Company and registered in the name of such Buyer or its designee.


 




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2.
BUYER’S REPRESENTATIONS AND WARRANTIES. Each Buyer, severally and not jointly, represents and warrants with respect
to only itself that:


 


(a)
No Public Sale or Distribution. Such Buyer is (i) acquiring the Notes and the Warrants and (ii) upon conversion of the
Notes and exercise of the Warrants will acquire the Conversion Shares issuable pursuant to the Notes and the Warrant Shares issuable
upon exercise of the Warrants, for its own account and not with a view towards, or for resale in connection with, the public sale
or distribution thereof, except pursuant to sales registered or exempted under the 1933 Act; provided, however,
that by making the representations herein, such Buyer does not agree to hold any of the Securities for any minimum or other specific
term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement
or an exemption under the 1933 Act. Such Buyer is acquiring the Securities hereunder in the ordinary course of its business. Such
Buyer does not presently have any agreement or understanding, directly or indirectly, with any Person (as defined below) to distribute
any of the Securities. For purposes of this Agreement, “Person” means an individual, a limited liability company,
a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency
thereof.


 


(b)
Accredited Investor Status. Such Buyer is an “accredited investor” as that term is defined in Rule 501(a) of
Regulation D.


 


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


 


(d)
Information. Such Buyer and its advisors, if any, have been furnished with all materials relating to the business, finances
and operations of the Company and materials relating to the offer and sale of the Securities that have been requested by such
Buyer. Such Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the Company. Neither such inquiries
nor any other due diligence investigations conducted by such Buyer or its advisors, if any, or its representatives shall modify,
amend or affect such Buyer’s right to rely on the Company’s representations and warranties contained herein. Such
Buyer understands that its investment in the Securities involves a high degree of risk. Such Buyer has sought such accounting,
legal and tax advice as it has considered necessary to make an informed investment decision with respect to its acquisition of
the Securities.


 


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


 




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offering
of the Securities. Such Buyer acknowledges and agrees that neither the Placement Agent (as defined below) nor any Affiliate of
the Placement Agent has provided such Buyer with any information or advice with respect to the Securities nor is such information
or advice necessary or desired. Neither the Placement Agent nor any Affiliate has made or makes any representation as to the Company
or the quality of the Securities and the Placement Agent and any Affiliate may have acquired non-public information with respect
to the Company which such Buyer agrees need not be provided to it. In connection with the issuance of the Securities to such Buyer,
neither the Placement Agent nor any of its Affiliates has acted as a financial advisor or fiduciary to such Buyer.


 


(f)
Transfer or Resale. Such Buyer understands that except as provided in the Registration Rights Agreement: (i) the Securities
have not been and are not being registered under the 1933 Act or any state securities laws, and may not be offered for sale, sold,
assigned or transferred unless (A) subsequently registered thereunder, (B) such Buyer shall have delivered to the Company an opinion
of counsel, in a generally acceptable form, to the effect that such Securities to be sold, assigned or transferred may be sold,
assigned or transferred pursuant to an exemption from such registration, or (C) such Buyer provides the Company with reasonable
assurance that such Securities can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A promulgated under the 1933
Act, as amended, (or a successor rule thereto) (collectively, “Rule 144”); (ii) any sale of the Securities
made in reliance on Rule 144 may be made only in accordance with the terms of Rule 144 and further, if Rule 144 is not applicable,
any resale of the Securities under circumstances in which the seller (or the Person) through whom the sale is made) may be deemed
to be an underwriter (as that term is defined in the 1933 Act) may require compliance with some other exemption under the 1933
Act or the rules and regulations of the SEC thereunder; and (iii) neither the Company nor any other Person is under any obligation
to register the Securities under the 1933 Act or any state securities laws or to comply with the terms and conditions of any exemption
thereunder. Notwithstanding the foregoing, the Securities may be pledged in connection with a bona fide margin account or other
loan or financing arrangement secured by the Securities and such pledge of Securities shall not be deemed to be a transfer, sale
or assignment of the Securities hereunder, and no Buyer effecting a pledge of Securities shall be required to provide the Company
with any notice thereof or otherwise make any delivery to the Company pursuant to this Agreement or any other Transaction Document
(as defined in Section 3(b)), including, without limitation, this Section 2(f).


 


(g)
Legends. Such Buyer understands that the certificates or other instruments representing the Notes and the Warrants and,
until such time as the resale of the Conversion Shares and the Warrant Shares have been registered under the 1933 Act as contemplated
by the Registration Rights Agreement, the stock certificates representing the Conversion Shares and the Warrant Shares, except
as set forth below, shall bear any legend as required by the “blue sky” laws of any state and a restrictive legend
in substantially the following form (and a stop-transfer order may be placed against transfer of such stock certificates):


 


[NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE]
[EXERCISABLE] HAVE BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN] REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR
SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS
NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE
FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT
SECURED BY THE SECURITIES.


 




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The
legend set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of the Securities
upon which it is stamped or issue to such holder by electronic delivery at the applicable balance account at The Depository Trust
Company (“DTC”), if, unless otherwise required by state securities laws, (i) such Securities are registered
for resale under the 1933 Act, (ii) in connection with a sale, assignment or other transfer, such holder provides the Company
with an opinion of counsel, in a generally acceptable form, to the effect that such sale, assignment or transfer of the Securities
may be made without registration under the applicable requirements of the 1933 Act, or (iii) the Securities can be sold, assigned
or transferred pursuant to Rule 144 or Rule 144A. The Company shall be responsible for the fees of its transfer agent and all
DTC fees associated with such issuance.


 


(h)
Validity; Enforcement. This Agreement and the Registration Rights Agreement have been duly and validly authorized, executed
and delivered on behalf of such Buyer and shall constitute the legal, valid and binding obligations of such Buyer enforceable
against such Buyer in accordance with their respective terms, except as such enforceability may be limited by general principles
of equity or to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws relating to,
or affecting generally, the enforcement of applicable creditors’ rights and remedies.


 


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


 


(j)
Residency. Such Buyer is a resident of that jurisdiction specified below its address on the Schedule of Buyers.


 




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3.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY.


 


The
Company represents and warrants to each of the Buyers that:


 


(a)
Organization and Qualification. Each of the Company and its “Subsidiaries” (which for purposes of this
Agreement means any entity in which the Company, directly or indirectly, owns any of the capital stock or holds an equity or similar
interest) are entities duly organized and validly existing in good standing under the laws of the jurisdiction in which they are
formed, and have the requisite power and authorization to own their properties and to carry on their business as now being conducted.
Each of the Company and its Subsidiaries is duly qualified as a foreign entity to do business and is in good standing in every
jurisdiction in which its ownership of property or the nature of the business conducted by it makes such qualification necessary,
except to the extent that the failure to be so qualified or be in good standing would not reasonably be expected to have a Material
Adverse Effect. As used in this Agreement, “Material Adverse Effect” means any material adverse effect on the
business, properties, assets, operations, results of operations, condition (financial or otherwise) or prospects of the Company
and its Subsidiaries, individually or taken as a whole, or on the transactions contemplated hereby or on the other Transaction
Documents or by the agreements and instruments to be entered into in connection herewith or therewith, or on the authority or
ability of the Company to perform its obligations under the Transaction Documents. The Company has no Subsidiaries except as set
forth on Schedule 3(a).


 


(b)
Authorization; Enforcement; Validity. The Company has the requisite power and authority to enter into and perform its obligations
under this Agreement, the Notes, the Warrants, the Registration Rights Agreement, the Lock-up Agreements (as defined in Section7(x)),
the Irrevocable Transfer Agent Instructions (as defined in Section 5(b)), the Security Documents (as defined below), the Voting
Agreements (as defined in Section 4(s)) and each of the other agreements entered into by the parties hereto in connection with
the transactions contemplated by this Agreement (collectively, the “Transaction Documents”) and to issue the
Securities in accordance with the terms hereof and thereof. The execution and delivery of the Transaction Documents by the Company
and the consummation by the Company of the transactions contemplated hereby and thereby, including, without limitation, the issuance
of the Notes and the Warrants, and the reservation for issuance and the issuance of the Conversion Shares and the reservation
for issuance and issuance of Warrant Shares issuable upon exercise of the Warrants have been duly authorized by the Company’s
Board of Directors and (other than the filing with the SEC of one or more Registration Statements (as defined in the Registration
Rights Agreement) in accordance with the requirements of the Registration Rights Agreement and (other filings as may be required
by state securities agencies) no further filing, consent, or authorization is required by the Company, its Board of Directors
or its stockholders. This Agreement and the other Transaction Documents have been duly executed and delivered by the Company,
and constitute the legal, valid and binding obligations of the


 




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Company,
enforceable against the Company in accordance with their respective terms, except as such enforceability may be limited by general
principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to,
or affecting generally, the enforcement of applicable creditors’ rights and remedies. Each of the Subsidiaries party to
any of the Transaction Documents has the requisite power and authority to enter into and perform its obligations under such Transaction
Documents. The execution and delivery by the Subsidiaries party to any of the Transaction Documents of such Transaction Documents
and the consummation by such Subsidiaries of the transactions contemplated thereby have been duly authorized by such Subsidiaries’
respective boards of directors (or other applicable governing body) and (other than filings as may be required by state securities
agencies) no further filing, consent, or authorization is required by such Subsidiaries, their respective boards of directors
(or other applicable governing body) or stockholders (or other applicable owners of equity of such Subsidiaries). The Transaction
Documents to which any of the Subsidiaries are parties have been duly executed and delivered by such Subsidiaries, and constitute
the legal, valid and binding obligations of such Subsidiaries, enforceable against them in accordance with their respective terms,
except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights
and remedies. For purposes of this Agreement, the term “Security Documents” means Guarantee Agreement, the
Security Agreement, any account control agreement, any and all financing statements, fixture filings, security agreements, pledges,
assignments, mortgages, deeds of trust, opinions of counsel, and all other documents requested by the Collateral Agent to create,
perfect, and continue perfected or to better perfect the Collateral Agent’s security interest in and liens on all of the
assets of the Company and each of its Subsidiaries (whether now owned or hereafter arising or acquired, tangible or intangible,
real or personal), and in order to fully consummate all of the transactions contemplated hereby and under the other Transaction
Documents.


 


(c)
Issuance of Securities. The issuance of the Notes and the Warrants are duly authorized and, upon issuance, shall be validly
issued and free from all taxes, liens and charges with respect to the issue thereof. As of the Closing, a number of shares of
Common Stock shall have been duly authorized and reserved for issuance which equals or exceeds (the “Required Reserved
Amount) 130% of the sum of (i) the maximum number of Conversion Shares issued and issuable pursuant to the Notes based on
the Conversion Price (as defined in the Notes) (without taking into account any limitations on the issuance thereof pursuant to
the terms of the Notes) and (ii) the maximum number of Warrant Shares issued and issuable pursuant to the Warrants, each as of
the Trading Day (as defined in the Warrants) immediately preceding the applicable date of determination (without taking into account
any limitations on the exercise of the Warrants set forth in the Warrants). As of the date hereof, there are 7,030,929 shares
of Common Stock authorized and unissued. Upon conversion of the Notes in accordance with the Notes or exercise of the Warrants
in accordance with the Warrants, as the case may be, the Conversion Shares and the Warrant Shares, respectively, will be validly
issued, fully paid and nonassessable and free from all preemptive or similar rights, taxes, liens and charges with respect to
the issue thereof, with the holders being entitled to all rights accorded to a holder of Common Stock. Assuming the accuracy of
each of the representations and warranties set forth in Section 2 of this Agreement, the offer and issuance by the Company of
the Securities is exempt from registration under the 1933 Act.


 




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(d)
No Conflicts. The execution, delivery and performance of the Transaction Documents by the Company and any of its Subsidiaries
parties to any of the Transaction Documents and the consummation by the Company and any of its Subsidiaries of the transactions
contemplated hereby and thereby (including, without limitation, the issuance of the Notes and the Warrants and reservation for
issuance and issuance of the Conversion Shares and the Warrant Shares) will not (i) result in a violation of the Articles of Incorporation
(as defined in Section (3(r)) or ByLaws (as defined in Section (3(r)), any memorandum of association, certificate of incorporation,
certificate of formation, bylaws, any certificate of designations or other constituent documents of the Company or any of its
Subsidiaries, any capital stock of the Company or any of its Subsidiaries or the articles of association or bylaws of the Company
or any of its Subsidiaries or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both
would become a default) in any respect under, or give to others any rights of termination, amendment, acceleration or cancellation
of, any material agreement, indenture or instrument to which the Company or any of its Subsidiaries is a party, or (iii) result
in a violation of any law, rule, regulation, order, judgment or decree (including foreign, federal and state securities laws and
regulations and the rules and regulations of The NASDAQ Capital Market (the “Principal Market”) and including
all applicable foreign, federal and state laws, rules and regulations) applicable to the Company or any of its Subsidiaries or
by which any property or asset of the Company or any of its Subsidiaries is bound or affected.


 


(e)
Consents. Neither the Company nor any of its Subsidiaries is required to obtain any consent, authorization or order of,
or make any filing or registration with, any court, governmental agency or any regulatory or self-regulatory agency or any other
Person in order for it to execute, deliver or perform any of its obligations under or contemplated by the Transaction Documents,
in each case in accordance with the terms hereof or thereof. All consents, authorizations, orders, filings and registrations which
the Company or any of its Subsidiaries is required to obtain pursuant to the preceding sentence have been obtained or effected
on or prior to the Closing Date, and the Company and its Subsidiaries are unaware of any facts or circumstances that might prevent
the Company or any of its Subsidiaries from obtaining or effecting any of the registration, application or filings pursuant to
the preceding sentence. The Company is not in violation of the listing requirements of the Principal Market and has no knowledge
of any facts that would reasonably lead to delisting or suspension of the Common Stock in the foreseeable future. The issuance
by the Company of the Securities shall not have the effect of delisting or suspending the Common Stock from the Principal Market.



 


(f)
Acknowledgment Regarding Buyer’s Purchase of Securities. The Company acknowledges and agrees that each Buyer is acting
solely in the capacity of an arm’s length purchaser with respect to the Transaction Documents and the transactions contemplated
hereby and thereby and that no Buyer is (i) an officer or director of the Company or any of its Subsidiaries, (ii) an “affiliate”
of the Company or any of its Subsidiaries (as defined in Rule 144) or (iii) to the knowledge of the Company, a “beneficial
owner” of more than 10% of the shares of Common Stock (as defined for purposes of Rule 13d-3 of the Securities Exchange
Act of 1934, as amended (the “1934 Act”)). The Company further acknowledges that no Buyer is acting as a financial
advisor or fiduciary of the Company or any of its Subsidiaries (or in any similar capacity) with respect to the Transaction Documents
and the transactions contemplated hereby and thereby, and any advice given by a Buyer or any of its representatives or agents
in connection with the Transaction Documents and the transactions contemplated hereby and thereby is merely incidental to such
Buyer’s purchase of the Securities. The Company further represents to each Buyer that the Company’s decision to enter
into the Transaction Documents has been based solely on the independent evaluation by the Company and its representatives.


 




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(g)
No General Solicitation; Placement Agent’s Fees. Neither the Company, nor any of its Subsidiaries or affiliates,
nor any Person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the
meaning of Regulation D) in connection with the offer or sale of the Securities. The Company shall be responsible for the payment
of any placement agent’s fees, financial advisory fees, or brokers’ commissions (other than for persons engaged by
any Buyer or its investment advisor) relating to or arising out of the transactions contemplated hereby, including, without limitation,
placement agent fees payable to WestPark Capital, Inc., as placement agent (the “Placement Agent”) in connection
with the sale of the Securities. The fees and expenses of the Placement Agent to be paid by the Company are as set forth on Schedule
3(g) attached hereto. The Company shall pay, and hold each Buyer harmless against, any liability, loss or expense (including,
without limitation, attorney’s fees and out-of-pocket expenses) arising in connection with any such claim. The Company acknowledges
that it has engaged the Placement Agent in connection with the sale of the Securities. Other than the Placement Agent, neither
the Company nor any of its Subsidiaries has engaged any placement agent or other agent in connection with the sale of the Securities.


 


(h)
No Integrated Offering. None of the Company, its Subsidiaries, any of their affiliates, and any Person acting on their
behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under
circumstances that would require registration of any of the Securities under the 1933 Act, whether through integration with prior
offerings or otherwise, or cause this offering of the Securities to require approval of stockholders of the Company for purposes
of the 1933 Act or any applicable stockholder approval provisions, including, without limitation, under the rules and regulations
of any exchange or automated quotation system on which any of the securities of the Company are listed or designated. None of
the Company, its Subsidiaries, their affiliates and any Person acting on their behalf will take any action or steps referred to
in the preceding sentence that would require registration of any of the Securities under the 1933 Act or cause the offering of
the Securities to be integrated with other offerings for purposes of any such applicable stockholder approval provisions.


 


(i)
Dilutive Effect. The Company understands and acknowledges that the number of Conversion Shares issuable pursuant to terms
of the Notes will increase in certain circumstances. The Company further acknowledges that its obligation to issue Conversion
Shares pursuant to the terms of the Notes in accordance with this Agreement and the Notes is absolute and unconditional regardless
of the dilutive effect that such issuance may have on the ownership interests of other stockholders of the Company.


 


(j)
Application of Takeover Protections; Rights Agreement. The Company and its board of directors have taken all necessary
action, if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any
distribution under a rights agreement) or other similar anti-takeover provision under the Articles of Incorporation or the laws
of the jurisdiction of its formation which is or could become applicable to any Buyer as a result of the transactions contemplated
by this Agreement, including, without limitation, the Company’s issuance of the Securities and any Buyer’s ownership
of the Securities. The Company has not adopted a stockholder rights plan or similar arrangement relating to accumulations of beneficial
ownership of Common Stock or a change in control of the Company.


 



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(k)
SEC Documents; Financial Statements. Except as disclosed in Schedule 3(k), during the two (2) years prior to the
date hereof, the Company has timely filed all reports, schedules, forms, statements and other documents required to be filed by
it with the SEC pursuant to the reporting requirements of the 1934 Act (all of the foregoing filed prior to the date hereof, and
all exhibits included therein and financial statements, notes and schedules thereto and documents incorporated by reference therein
being hereinafter referred to as the “SEC Documents”). The Company has delivered to the Buyers or their respective
representatives true, correct and complete copies of the SEC Documents not available on the EDGAR system. As of their respective
filing dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act and the rules and regulations
of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed
with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
As of their respective filing dates, the financial statements of the Company included in the SEC Documents complied as to form
in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect
thereto. Such financial statements have been prepared in accordance with United States generally accepted accounting principles,
consistently applied (“GAAP”), during the periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the
Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case
of unaudited statements, to normal year-end audit adjustments). No other information provided by or on behalf of the Company to
the Buyers which is not included in the SEC Documents, including, without limitation, information referred to in Section 2(d)
of this Agreement or in the disclosure schedules to this Agreement, contains any untrue statement of a material fact or omits
to state any material fact necessary in order to make the statements therein, in the light of the circumstance under which they
are or were made, not misleading.


 


(l)
Absence of Certain Changes. Except as disclosed in Schedule 3(l), since December 31, 2012, there has been no material
adverse change and no material adverse development in the business, assets, properties, operations, condition (financial or otherwise),
results of operations or prospects of the Company or its Subsidiaries. Except as disclosed in Schedule 3(l), since December
31, 2012, neither the Company nor any of its Subsidiaries has (i) declared or paid any dividends, (ii) sold any assets, individually
or in the aggregate, in excess of $100,000 outside of the ordinary course of business or (iii) had capital expenditures, individually
or in the aggregate, in excess of $100,000. Neither the Company nor any of its Subsidiaries has taken any steps to seek protection
pursuant to any bankruptcy law nor does the Company have any knowledge or reason to believe that its creditors intend to initiate
involuntary bankruptcy proceedings or any actual knowledge of any fact that would reasonably


 




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lead
a creditor to do so. The Company and its Subsidiaries, individually and on a consolidated basis, are not as of the date hereof,
and after giving effect to the transactions contemplated hereby to occur at the Closing, will not be Insolvent (as defined below).
For purposes of this Section 3(l), “Insolvent” means, with respect to any Person, (i) the present fair saleable
value of such Person’s assets is less than the amount required to pay such Person’s total Indebtedness (as defined
in Section 3(s)), (ii) such Person is unable to pay its debts and liabilities, subordinated, contingent or otherwise, as such
debts and liabilities become absolute and matured, (iii) such Person intends to incur or believes that it will incur debts that
would be beyond its ability to pay as such debts mature or (iv) such Person has unreasonably small capital with which to conduct
the business in which it is engaged as such business is now conducted and is proposed to be conducted.


 


(m)
No Undisclosed Events, Liabilities, Developments or Circumstances. No event, liability, development or circumstance has
occurred or exists, or is contemplated to occur with respect to the Company, its Subsidiaries or their respective business, properties,
prospects, operations or financial condition, that would be required to be disclosed by the Company under applicable securities
laws on a registration statement on Form S-1 filed with the SEC relating to an issuance and sale by the Company of its Common
Stock and which has not been publicly announced.


 


(n)
Conduct of Business; Regulatory Permits. Neither the Company nor any of its Subsidiaries is in violation of any term of
or in default under any certificate of designations of any outstanding series of preferred stock of the Company (if any), its
Articles of Incorporation or Bylaws or their organizational charter or memorandum of association or certificate of incorporation
or articles of association or bylaws, respectively. Neither the Company nor any of its Subsidiaries is in violation of any judgment,
decree or order or any statute, ordinance, rule or regulation applicable to the Company or any of its Subsidiaries, and neither
the Company nor any of its Subsidiaries will conduct its business in violation of any of the foregoing, except for possible violations
which could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Without limiting
the generality of the foregoing, the Company is not in violation of any of the rules, regulations or requirements of the Principal
Market and has no knowledge of any facts or circumstances that would reasonably lead to delisting or suspension of the Common
Stock by the Principal Market in the foreseeable future. Except as set forth in Schedule 3(n), during the two (2) years
prior to the date hereof, the Common Stock has been designated for quotation on the Principal Market. Except as set forth in Schedule
3(n), during the two (2) years prior to the date hereof, (i) trading in the Common Stock has not been suspended by the SEC
or the Principal Market and (ii) the Company has received no communication, written or oral, from the SEC or the Principal Market
regarding the suspension or delisting of the Common Stock from the Principal Market. The Company and its Subsidiaries possess
all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary
to conduct their respective businesses, except where the failure to possess such certificates, authorizations or permits would
not have, individually or in the aggregate, a Material Adverse Effect, and neither the Company nor any such Subsidiary has received
any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit.


 




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(o)
Foreign Corrupt Practices. Neither the Company, nor any of its Subsidiaries, nor any director, officer, agent, employee
or other Person acting on behalf of the Company or any of its Subsidiaries has, in the course of its actions for, or on behalf
of, the Company or any of its Subsidiaries (i) used any corporate funds for any unlawful contribution, gift, entertainment or
other unlawful expenses relating to political activity; (ii) made any direct or indirect unlawful payment to any foreign or domestic
government official or employee from corporate funds; (iii) violated or is in violation of any provision of the U.S. Foreign Corrupt
Practices Act of 1977, as amended; or (iv) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful
payment to any foreign or domestic government official or employee.


 


(p)
Sarbanes-Oxley Act. The Company is in compliance with any and all applicable requirements of the Sarbanes-Oxley Act of
2002, as amended, that are effective as of the date hereof, and any and all applicable rules and regulations promulgated by the
SEC thereunder that are effective as of the date hereof.


 


(q)
Transactions With Affiliates. Except as set forth on Schedule 3(q), none of the officers, directors or employees
of the Company or any of its Subsidiaries is presently a party to any transaction with the Company or any of its Subsidiaries
(other than for ordinary course services as employees, officers or 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 such officer, director or employee or, to the knowledge of the Company or any of its Subsidiaries,
any corporation, partnership, trust or other entity in which any such officer, director, or employee has a substantial interest
or is an officer, director, trustee or partner.


 


(r)
Equity Capitalization. As of the date hereof, the authorized capital stock of the Company consists of 9,375,000 shares
of Common Stock, of which as of the date hereof, 2,280,553 shares are issued and outstanding, 506,107 shares are reserved for
issuance pursuant to the Company’s stock option and purchase plans and 78,438 shares are reserved for issuance pursuant
to securities (other than the aforementioned options, the Notes and the Warrants) exercisable or exchangeable for, or convertible
into, Common Stock. All of such outstanding shares have been, or upon issuance will be, validly issued and are fully paid and
nonassessable. Except as disclosed in Schedule 3(r): (i) none of the Company’s capital stock is subject to preemptive
rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company; (ii) there are no outstanding
options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities
or rights convertible into, or exercisable or exchangeable for, any shares of capital stock of the Company or any of its Subsidiaries,
or contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound
to issue additional shares or capital stock of the Company or any of its Subsidiaries or options, warrants, scrip, rights to subscribe
to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, or exercisable or
exchangeable for, any shares of capital stock of the Company or any of its Subsidiaries; (iii) there are no outstanding debt securities,
notes, credit agreements, credit facilities or other agreements, documents or instruments evidencing Indebtedness of the Company
or any of its Subsidiaries or by which the Company or any of its Subsidiaries is or may become bound; (iv) there are no financing
statements securing obligations in any material


 




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amounts,
either singly or in the aggregate, filed in connection with the Company or any of its Subsidiaries; (v) there are no agreements
or arrangements under which the Company or any of its Subsidiaries is obligated to register the sale of any of their securities
under the 1933 Act (except pursuant to the Registration Rights Agreement); (vi) there are no outstanding securities or instruments
of the Company or any of its Subsidiaries which contain any redemption or similar provisions, and there are no contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound to redeem a security of
the Company or any of its Subsidiaries; (vii) there are no securities or instruments containing anti-dilution or similar provisions
that will be triggered by the issuance of the Securities; (viii) the Company does not have any stock appreciation rights or “phantom
stock” plans or agreements or any similar plan or agreement; and (ix) the Company and its Subsidiaries have no liabilities
or obligations required to be disclosed in the SEC Documents but not so disclosed in the SEC Documents, other than those incurred
in the ordinary course of the Company’s or any of its Subsidiary’s’ respective businesses and which, individually
or in the aggregate, do not or would not have a Material Adverse Effect. The Company has furnished or made available to the Buyers
true, correct and complete copies of the Company’s Articles of Incorporation, as amended and as in effect on the date hereof
(the “Articles of Incorporation”), and the Company’s ByLaws, as amended and as in effect on the date
hereof (the “ByLaws”), and the terms of all securities convertible into, or exercisable or exchangeable for
shares of Common Stock and the material rights of the holders thereof in respect thereto.


 


(s)
Indebtedness and Other Contracts. Except as disclosed in Schedule 3(s), neither the Company nor any of its Subsidiaries
(i) has any outstanding Indebtedness (as defined below), (ii) is a party to any contract, agreement or instrument, the violation
of which, or default under which, by the other party(ies) to such contract, agreement or instrument could reasonably be expected
to result in a Material Adverse Effect, (iii) is in violation of any term of or in default under any contract, agreement or instrument
relating to any Indebtedness, except where such violations and defaults would not result, individually or in the aggregate, in
a Material Adverse Effect, or (iv) is a party to any contract, agreement or instrument relating to any Indebtedness, the performance
of which, in the judgment of the Company’s officers, has or is expected to have a Material Adverse Effect. Schedule 3(s)
provides a detailed description of the material terms of any such outstanding Indebtedness. For purposes of this Agreement:
(x) “Indebtedness” of any Person means, without duplication (A) all indebtedness for borrowed money, (B) all
obligations issued, undertaken or assumed as the deferred purchase price of property or services, including, without limitation,
“capital leases” in accordance with GAAP (other than trade payables entered into in the ordinary course of business
consistent with past practice), (C) all reimbursement or payment obligations with respect to letters of credit, surety bonds and
other similar instruments, (D) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations
so evidenced incurred in connection with the acquisition of property, assets or businesses, (E) all indebtedness created or arising
under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to any property
or assets acquired with the proceeds of such indebtedness (even though the rights and remedies of the seller or bank under such
agreement in the event of default are limited to repossession or sale of such property), (F) all monetary obligations under any
leasing or similar arrangement which, in connection with GAAP, consistently applied for the periods covered thereby, is classified
as a capital lease, (G) all indebtedness referred to in clauses (A) through (F) above secured by (or for which the holder of such
Indebtedness has an existing


 




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right,
contingent or otherwise, to be secured by) any mortgage, lien, pledge, charge, security interest or other encumbrance upon or
in any property or assets (including accounts and contract rights) owned by any Person, even though the Person which owns such
assets or property has not assumed or become liable for the payment of such indebtedness, and (H) all Contingent Obligations in
respect of indebtedness or obligations of others of the kinds referred to in clauses (A) through (G) above; and (y) “Contingent
Obligation” means, as to any Person, any direct or indirect liability, contingent or otherwise, of that Person with
respect to any Indebtedness, lease, dividend or other obligation of another Person if the primary purpose or intent of the Person
incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of such liability that such liability
will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such liability
will be protected (in whole or in part) against loss with respect thereto.


 


(t)
Absence of Litigation. There is no action, suit, proceeding, inquiry or investigation before or by the Principal Market,
any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company,
threatened against or affecting the Company or any of its Subsidiaries, the Common Stock or any of the Company’s Subsidiaries
or any of the Company’s or its Subsidiaries’ officers or directors, whether of a civil or criminal nature or otherwise,
in their capacities as such, except as set forth in Schedule 3(t). The matters set forth in Schedule 3(t) would
not reasonably be expected to have a Material Adverse Effect.


 


(u)
Insurance. The Company and each of its Subsidiaries are insured by insurers of recognized financial responsibility against
such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses
in which the Company and its Subsidiaries are engaged. Neither the Company nor any such Subsidiary has been refused any insurance
coverage sought or applied for and neither the Company nor any such Subsidiary has any reason to believe that it will not be able
to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would not have a Material Adverse Effect.


 


(v)
Employee Relations. 


 


(i)
Neither the Company nor any of its Subsidiaries is a party to any collective bargaining agreement or employs any member of a union.
The Company and its Subsidiaries believe that their relations with their employees are good. No executive officer of the Company
or any of its Subsidiaries (as defined in Rule 501(f) of the 1933 Act) has notified the Company or any such Subsidiary that such
officer intends to leave the Company or any such Subsidiary or otherwise terminate such officer’s employment with the Company
or any such Subsidiary. No executive officer of the Company or any of its Subsidiaries, to the knowledge of the Company or any
of its Subsidiaries, is, or is now expected to be, in violation of any material term of any employment contract, confidentiality,
disclosure or proprietary information agreement, non-competition agreement, or any other contract or agreement or any restrictive
covenant, and the continued employment of each such executive officer does not subject the Company or any of its Subsidiaries
to any liability with respect to any of the foregoing matters.


 




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(ii)
The Company and its Subsidiaries are in compliance with all federal, state, local and foreign laws and regulations respecting
labor, employment and employment practices and benefits, terms and conditions of employment and wages and hours, except where
failure to be in compliance would not, either individually or in the aggregate, reasonably be expected to result in a Material
Adverse Effect.


 


(w)
Title. The Company and its Subsidiaries have good and marketable title in fee simple to all real property and good and
marketable title to all personal property owned by them which is material to the business of the Company and its Subsidiaries,
in each case free and clear of all liens, encumbrances and defects except for Permitted Liens. Any real property and facilities
held under lease by the Company and any of its Subsidiaries are held by them under valid, subsisting and enforceable leases with
such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings
by the Company and its Subsidiaries.


 


(x)
Intellectual Property Rights. The Company and its Subsidiaries own or possess adequate rights or licenses to use all trademarks,
trade names, service marks, service mark registrations, service names, original works of authorship, patents, patent rights, copyrights,
inventions, licenses, approvals, governmental authorizations, trade secrets and other intellectual property rights and all applications
and registrations therefor (“Intellectual Property Rights”) necessary to conduct their respective businesses
as now conducted. Each of patents owned by the Company or any of its Subsidiaries is listed on Schedule 3(x)(i). Except
as set forth in Schedule 3(x)(ii), none of the Company’s Intellectual Property Rights have expired or terminated
or have been abandoned or are expected to expire or terminate or are expected to be abandoned, within three years from the date
of this Agreement. The Company does not have any knowledge of any infringement by the Company or its Subsidiaries of Intellectual
Property Rights of others. There is no claim, action or proceeding being made or brought, or to the knowledge of the Company or
any of its Subsidiaries, being threatened, against the Company or any of its Subsidiaries regarding its Intellectual Property
Rights. Neither the Company nor any of its Subsidiaries is aware of any facts or circumstances which might give rise to any of
the foregoing infringements or claims, actions or proceedings. The Company and its Subsidiaries have taken reasonable security
measures to protect the secrecy, confidentiality and value of all of their Intellectual Property Rights.


 


(y)
Environmental Laws. The Company and its Subsidiaries (i) are in compliance with any and all Environmental Laws (as hereinafter
defined), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to
conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval
where, in each of the foregoing clauses (i), (ii) and (iii), the failure to so comply could be reasonably expected to have, individually
or in the aggregate, a Material Adverse Effect. The term “Environmental Laws” means all federal, state, local
or foreign laws relating to pollution or protection of human health or the environment (including, without limitation, ambient
air, surface water, groundwater, land surface or subsurface strata), including, without limitation, laws relating to emissions,
discharges, releases or threatened releases of chemicals, pollutants, contaminants, or toxic or hazardous substances or wastes
(collectively, “Hazardous Materials”) into the environment, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all authorizations,
codes, decrees, demands or demand letters, injunctions, judgments, licenses, notices or notice letters, orders, permits, plans
or regulations issued, entered, promulgated or approved thereunder.


 




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(z)
Subsidiary Rights. The Company or one of its Subsidiaries has the unrestricted right to vote, and (subject to limitations
imposed by applicable law) to receive dividends and distributions on, all capital securities of its Subsidiaries as owned by the
Company or such Subsidiary.


 


(aa)
Investment Company Status. The Company is not, and upon consummation of the sale of the Securities, and for so long any
Buyer holds any Securities, will not be, an “investment company,” a company controlled by an “investment company”
or an “affiliated person” of, or “promoter” or “principal underwriter” for, an “investment
company” as such terms are defined in the Investment Company Act of 1940, as amended.


 


(bb)
Tax Status. The Company and each of its Subsidiaries (i) has made or filed all U.S. federal, state and foreign income and
all other tax returns, reports and declarations required by any jurisdiction to which it is subject, (ii) has paid all taxes and
other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports
and declarations, except those being contested in good faith and (iii) has set aside on its books provision reasonably adequate
for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There
are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of
the Company know of no basis for any such claim.


 


(cc)
Internal Accounting and Disclosure Controls. The Company and each of its 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 and liability accountability, (iii) access to assets or incurrence of liabilities is permitted
only in accordance with management’s general or specific authorization and (iv) the recorded accountability for assets and
liabilities is compared with the existing assets and liabilities at reasonable intervals and appropriate action is taken with
respect to any difference. The Company maintains disclosure controls and procedures (as such term is defined in Rule 13a-15 under
the 1934 Act) that are effective in ensuring that information required to be disclosed by the Company in the reports that it files
or submits under the 1934 Act is recorded, processed, summarized and reported, within the time periods specified in the rules
and forms of the SEC, including, without limitation, controls and procedures designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the 1934 Act is accumulated and communicated to the Company’s
management, including its principal executive officer or officers and its principal financial officer or officers, as appropriate,
to allow timely decisions regarding required disclosure. During the twelve months prior to the date hereof neither the Company
nor any of its Subsidiaries has received any notice or correspondence from any accountant relating to any material weakness in
any part of the system of internal accounting controls of the Company or any of its Subsidiaries.


 




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(dd)
Off Balance Sheet Arrangements. There is no transaction, arrangement, or other relationship between the Company and an
unconsolidated or other off balance sheet entity that is required to be disclosed by the Company in its 1934 Act filings and is
not so disclosed or that otherwise would be reasonably likely to have a Material Adverse Effect. 


 


(ee)
Ranking of Notes. Except as set forth in Schedule 3(ee), no Indebtedness of the Company or any of its Subsidiaries
is senior to or ranks pari passu with the Notes in right of payment, whether with respect of payment of redemptions, interest,
damages or upon liquidation or dissolution or otherwise.


 


(ff)
Eligibility for Registration. The Company is eligible to register the Conversion Shares and the Warrant Shares for resale
by the Buyers using Form S-3 promulgated under the 1933 Act.


 


(gg)
Transfer Taxes. On the Closing Date, all stock transfer or other taxes (other than income or similar taxes) which are required
to be paid in connection with the sale and transfer of the Securities to be sold to each Buyer hereunder will be, or will have
been, fully paid or provided for by the Company, and all laws imposing such taxes will be or will have been complied with.


 


(hh)
Manipulation of Price. The Company has not, and to its knowledge no one acting on its behalf has, (i) taken, directly or
indirectly, any action designed to cause or to result, or that could reasonably be expected to cause or result, in the stabilization
or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Securities, (ii) other
than the Placement Agent, sold, bid for, purchased, or paid any compensation for soliciting purchases of, any of the Securities,
or (iii) other than the Placement Agent, paid or agreed to pay to any person any compensation for soliciting another to purchase
any other securities of the Company.


 


(ii)
Acknowledgement Regarding Buyers’ Trading Activity. The Company acknowledges and agrees that (i) none of the Buyers
has been asked to agree, nor has any Buyer agreed, to desist from purchasing or selling, long and/or short, securities of the
Company, or “derivative” securities based on securities issued by the Company or to hold the Securities for any specified
term; (ii) any Buyer, and counter-parties in “derivative” transactions to which any such Buyer is a party, directly
or indirectly, presently may have a “short” position in the Common Stock, and (iii) each Buyer shall not be deemed
to have any affiliation with or control over any arm’s length counter-party in any “derivative” transaction.
The Company further understands and acknowledges that one or more Buyers may engage in hedging and/or trading activities at various
times during the period that the Securities are outstanding, including, without limitation, during the periods that the value
of the Conversion Shares and/or the Warrant Shares are being determined and (b) such hedging and/or trading activities, if any,
can reduce the value of the existing stockholders’ equity interest in the Company both at and after the time the hedging
and/or trading activities are being conducted. The Company acknowledges that such aforementioned hedging and/or trading activities
do not constitute a breach of this Agreement, the Notes, the Warrants or any of the documents executed in connection herewith.


 




    	- 17 -



    	 



    


 


(jj)
U.S. Real Property Holding Corporation. The Company is not, has never been, and so long as any Securities remain outstanding,
shall not become, a U.S. real property holding corporation within the meaning of Section 897 of the Code and the Company shall
so certify upon any Buyer’s request.


 


(kk)
Bank Holding Company Act. Neither the Company nor any of its Subsidiaries or affiliates is subject to the Bank Holding
Company Act of 1956, as amended (the “BHCA”) and to regulation by the Board of Governors of the Federal Reserve
System (the “Federal Reserve”). Neither the Company nor any of its Subsidiaries or affiliates owns or controls,
directly or indirectly, five percent (5%) or more of the outstanding shares of any class of voting securities or twenty-five percent
(25%) or more of the total equity of a bank or any entity that is subject to the BHCA and to regulation by the Federal Reserve.
Neither the Company nor any of its Subsidiaries or affiliates exercises a controlling influence over the management or policies
of a bank or any entity that is subject to the BHCA and to regulation by the Federal Reserve.


 


(ll)
No Additional Agreements. Neither the Company nor any of its Subsidiaries has any agreement or understanding with any Buyer
with respect to the transactions contemplated by the Transaction Documents other than as specified in the Transaction Documents.


 


(mm)
Disclosure. Except for information contained in a draft of the Company’s Annual Report on Form 10-K for the year
ended December 31, 2013 provided to the Buyers, which will be publicly disclosed pursuant to Section 4(i) hereof, the Company
confirms that neither it nor any other Person acting on its behalf has provided any of the Buyers or their agents or counsel with
any information that constitutes or could reasonably be expected to constitute material, nonpublic information. The Company understands
and confirms that each of the Buyers will rely on the foregoing representations in effecting transactions in securities of the
Company. All disclosure provided to the Buyers regarding the Company, or any of its Subsidiaries, their business and the transactions
contemplated hereby, including the disclosure schedules to this Agreement, furnished by or on behalf of the Company is true and
correct and does not contain any untrue statement of a material fact or omit to state any material fact necessary in order to
make the statements made therein, in the light of the circumstances under which they were made, not misleading. Each press release
issued by the Company or any of its Subsidiaries during the twelve (12) months preceding the date of this Agreement did not at
the time of release contain any untrue statement of a material fact or omit to state a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
No event or circumstance has occurred or information exists with respect to the Company or any of its Subsidiaries or its or their
business, properties, prospects, operations or financial conditions, which, under applicable law, rule or regulation, requires
public disclosure or announcement by the Company but which has not been so publicly announced or disclosed. The Company acknowledges
and agrees that no Buyer makes or has made any representations or warranties with respect to the transactions contemplated hereby
other than those specifically set forth in Section 2.


 


(nn)
Shell Company Status. The Company is not an issuer identified in Rule 144(i)(1) of the 1933 Act. The Company was such an
issuer prior to November 30, 2004. On such date it entered into a Plan of Merger through which it acquired a privately held corporation
known as Digital Ally, Inc., a Nevada corporation.


 




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(oo) Stock
Option Plans. Each stock option granted by the Company was granted (i) in accordance with the terms of the applicable
stock option plan of the Company (except for 1,250 shares subject to options granted outside any such plan) and (ii) with an
exercise price at least equal to the fair market value of the Common Stock on the date such stock option would be considered
granted under GAAP and applicable law. No stock option granted under the Company’s stock option plan has been
backdated. The Company has not knowingly granted, and there is no and has been no policy or practice of the Company to
knowingly grant, stock options prior to, or otherwise knowingly coordinate the grant of stock options with, the release or
other public announcement of material information regarding the Company or its Subsidiaries or their financial results or
prospects.


 


(pp)
No Disagreements with Accountants and Lawyers. There are no material disagreements of any kind presently existing, or reasonably
anticipated by the Company to arise, between the Company and the accountants and lawyers formerly or presently employed by the
Company and the Company is current with respect to any fees owed to its accountants and lawyers which could affect the Company’s
ability to perform any of its obligations under any of the Transaction Documents. In addition, on or prior to the date hereof,
the Company had discussions with its accountants about its financial statements previously filed with the SEC. Based on those
discussions, the Company has no reason to believe that it will need to restate any such financial statements or any part thereof.


 


(qq)
No Disqualification Events. With respect to Securities to be offered and sold hereunder in reliance on Rule 506(b) under
the 1933 Act (“Regulation D Securities”), none of the Company, any of its predecessors, any affiliated issuer,
any director, executive officer, other officer of the Company participating in the offering hereunder, any beneficial owner of
20% or more of the Company’s outstanding voting equity securities, calculated on the basis of voting power, nor any promoter
(as that term is defined in Rule 405 under the 1933 Act) connected with the Company in any capacity at the time of sale (each,
an “Issuer Covered Person” and, together, “Issuer Covered Persons”) is subject to any of
the “Bad Actor” disqualifications described in Rule 506(d)(1)(i) to (viii) under the 1933 Act (a “Disqualification
Event”), except for a Disqualification Event covered by Rule 506(d)(2) or (d)(3). The Company has exercised reasonable
care to determine whether any Issuer Covered Person is subject to a Disqualification Event. The Company has complied, to the extent
applicable, with its disclosure obligations under Rule 506(e), and has furnished to the Buyers a copy of any disclosures provided
thereunder.


 


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


 




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4.
COVENANTS.


 


(a)
Best Efforts. Each party shall use its best efforts timely to satisfy each of the covenants and the conditions to be satisfied
by it as provided in Sections 6 and 7 of this Agreement.


 


(b)
Form D and Blue Sky. The Company agrees to file a Form D with respect to the Securities as required under Regulation D
and to provide a copy thereof to each Buyer promptly after such filing. The Company shall, on or before the Closing Date, take
such action as the Company shall reasonably determine is necessary in order to obtain an exemption for or to qualify the Securities
for sale to the Buyers at the Closing pursuant to this Agreement under applicable securities or “Blue Sky” laws of
the states of the United States (or to obtain an exemption from such qualification), and shall provide evidence of any such action
so taken to the Buyers on or prior to the Closing Date. The Company shall make all filings and reports relating to the offer and
sale of the Securities required under applicable securities or “Blue Sky” laws of the states of the United States
following the Closing Date. 


 


(c)
Reporting Status. Until the date on which the Investors (as defined in the Registration Rights Agreement) shall have sold
all of the Conversion Shares and Warrant Shares and none of the Notes or Warrants are outstanding (the “Reporting
Period”), the Company shall timely file all reports required to be filed with the SEC pursuant to the 1934 Act, and
the Company shall not terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the
rules and regulations thereunder would no longer require or otherwise permit such termination, and the Company shall take all
actions necessary to maintain its eligibility to register the Conversion Shares and Warrant Shares for resale by the Investors
on Form S-3.


 


(d)
Use of Proceeds. The Company will use the proceeds from the sale of the Securities solely as set forth on Schedule 4(d).



 


(e)
Financial Information. The Company agrees to send the following to each Investor during the Reporting Period (i) unless
the following are filed with the SEC through EDGAR and are available to the public through the EDGAR system, within one (1) Business
Day after the filing thereof with the SEC, a copy of its Annual Reports on Form 10-K, any Quarterly Reports on Form 10-Q, any
Current Reports on Form 8-K (or any analogous reports under the 1934 Act) and any registration statements (other than on Form
S-8) or amendments filed pursuant to the 1933 Act, (ii) on the same day as the release thereof, facsimile or e-mailed copies of
all press releases issued by the Company or any of its Subsidiaries, and (iii) copies of any notices and other information made
available or given to the stockholders of the Company generally, contemporaneously with the making available or giving thereof
to the stockholders. As used herein, “Business Day” means any day other than Saturday, Sunday or other day
on which commercial banks in The City of New York are authorized or required by law to remain closed.


 


(f)
Listing. The Company shall promptly secure the listing of all of the Registrable Securities (as defined in the Registration
Rights Agreement) upon each national securities exchange and automated quotation system, if any, upon which the Common Stock


 




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then
listed (subject to official notice of issuance) and shall maintain such listing of all Registrable Securities from time to time
issuable under the terms of the Transaction Documents. The Company shall maintain the authorization for quotation of the Common
Stock on the Principal Market or any other Eligible Market (as defined in the Warrants). Neither the Company nor any of its Subsidiaries
shall take any action which would be reasonably expected to result in the delisting or suspension of the Common Stock on the Principal
Market. The Company shall pay all fees and expenses in connection with satisfying its obligations under this Section 4(f).


 


(g)
Fees. The Company shall reimburse Hudson Bay (a Buyer) or its designee(s) (in addition to any other expense amounts paid
to any Buyer or its counsel prior to the date of this Agreement) for all costs and expenses incurred in connection with the transactions
contemplated by the Transaction Documents (including all legal fees and disbursements in connection therewith, documentation and
implementation of the transactions contemplated by the Transaction Documents and due diligence in connection therewith), which
amount may be withheld by such Buyer from its purchase price for any Notes purchased at the Closing to the extent not previously
reimbursed by the Company. Notwithstanding the foregoing, in no event will the fees of counsel of Hudson Bay reimbursed by the
Company pursuant to this Section 4(g) exceed $65,000 without the prior approval from the Company. The Company shall be responsible
for the payment of any placement agent’s fees, financial advisory fees, or broker’s commissions (other than for Persons
engaged by any Buyer) relating to or arising out of the transactions contemplated hereby, including, without limitation, any fees
or commissions payable to the Placement Agent as well as any fees relating to the Collection Account. The Company shall pay, and
hold each Buyer harmless against, any liability, loss or expense (including, without limitation, reasonable attorney’s fees
and out-of-pocket expenses) arising in connection with any claim relating to any such payment. Except as otherwise set forth in
the Transaction Documents, each party to this Agreement shall bear its own expenses in connection with the sale of the Securities
to the Buyers.


 


(h)
Pledge of Securities. The Company acknowledges and agrees that the Securities may be pledged by an Investor in connection
with a bona fide margin agreement or other loan or financing arrangement that is secured by the Securities. The pledge of Securities
shall not be deemed to be a transfer, sale or assignment of the Securities hereunder, and no Investor effecting a pledge of Securities
shall be required to provide the Company with any notice thereof or otherwise make any delivery to the Company pursuant to this
Agreement or any other Transaction Document, including, without limitation, Section 2(f) hereof; provided that an Investor
and its pledgee shall be required to comply with the provisions of Section 2(f) hereof in order to effect a sale, transfer or
assignment of Securities to such pledgee. The Company hereby agrees to execute and deliver such documentation as a pledgee of
the Securities may reasonably request in connection with a pledge of the Securities to such pledgee by an Investor.


 


(i)
Disclosure of Transactions and Other Material Information. On or before 8:30 a.m., New York City time, on the earliest
of (i) the date of the 10-K Filing (as defined below), (ii) March 31, 2014 and (iii) the fourth Business Day after this Agreement
has been executed, the Company shall file a Current Report on Form 8-K describing the terms of the transactions contemplated by
the Transaction Documents in the form required by the 1934 Act


 




    	- 21 -



    	 



    


 


and
attaching the material Transaction Documents (including, without limitation, this Agreement (and all schedules and exhibits to
this Agreement), the form of Warrant, the form of Note, the form of Lock-Up Agreement, the Registration Rights Agreement, the
form of Voting Agreement and the Security Documents as exhibits to such filing (including all attachments), the “8-K
Filing”). From and after the earlier of (i) the filing of (x) the Company’s Annual Report on 10-K for the fiscal
year ended December 31, 2013 with the SEC (the “10-K Filing”) and (y) March 31, 2014, no Buyer shall be in
possession of any material, nonpublic information received from the Company, any of its Subsidiaries or any of their respective
officers, directors, employees or agents, that is not disclosed in the 10-K Filing or the 8-K Filing. In addition, immediately
following the earlier of the filing of the 10-K Filing and Mach 31, 2014, the Company acknowledges and agrees that any and all
confidentiality or similar obligations under any agreement, whether written or oral, between the Company, any of its Subsidiaries
or any of their respective officers, directors, affiliates, employees or agents, on the one hand, and any of the Buyers or any
of their affiliates, on the other hand, shall terminate. The Company shall not, and shall cause each of its Subsidiaries and its
and each of their respective officers, directors, employees and agents, not to, provide any Buyer with any material, nonpublic
information regarding the Company or any of its Subsidiaries from and after the filing of the 8-K Filing with the SEC without
the express prior written consent of such Buyer. If a Buyer has, or believes it has, received any such material, nonpublic information
regarding the Company or any of its Subsidiaries from the Company, any of its Subsidiaries or any of their respective officers,
directors, affiliates or agents, it may provide the Company with written notice thereof. The Company shall, within two (2) Trading
Days of receipt of such notice, make public disclosure of such material, nonpublic information. In the event of a breach of the
foregoing covenant by the Company, any of its Subsidiaries, or any of its or their respective officers, directors, employees and
agents, in addition to any other remedy provided herein or in the Transaction Documents, a Buyer shall have the right to make
a public disclosure, in the form of a press release, public advertisement or otherwise, of such material, nonpublic information
without the prior approval by the Company, its Subsidiaries, or any of its or their respective officers, directors, employees
or agents. No Buyer shall have any liability to the Company, its Subsidiaries, or any of its or their respective officers, directors,
employees, stockholders or agents for any such disclosure. To the extent that the Company delivers any material, non-public information
to a Buyer without such Buyer’s consent, the Company hereby covenants and agrees that such Buyer shall not have any duty
of confidentiality with respect to, or a duty not to trade on the basis of, such material, non-public information. Subject to
the foregoing, neither the Company, its Subsidiaries nor any Buyer shall issue any press releases or any other public statements
with respect to the transactions contemplated hereby; provided, however, that the Company shall be entitled, without the prior
approval of any Buyer, to make any press release or other public disclosure with respect to such transactions (i) in substantial
conformity with the 8-K Filing and contemporaneously therewith and (ii) as is required by applicable law and regulations (provided
that in the case of clause (i) each Buyer shall be consulted by the Company in connection with any such press release or other
public disclosure prior to its release). Except for the Registration Statement required to be filed pursuant to the Registration
Rights Agreement, without the prior written consent of any applicable Buyer, neither the Company nor any of its Subsidiaries or
affiliates shall disclose the name of such Buyer in any filing, announcement, release or otherwise.


 




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(j)
Additional Notes; Variable Securities. So long as any Buyer beneficially owns any Securities, the Company will not issue
any Notes other than to the Buyers as contemplated hereby and the Company shall not issue any other securities that would cause
a breach or default under the Notes. For so long as any Notes remain outstanding, the Company shall not, in any manner, issue
or sell any rights, warrants or options to subscribe for or purchase Common Stock or directly or indirectly convertible into or
exchangeable or exercisable for Common Stock at a price which varies or may vary with the market price of the Common Stock, including
by way of one or more reset(s) to any fixed price unless the conversion, exchange or exercise price of any such security cannot
be less than the then applicable Conversion Price (as defined in the Notes) with respect to the Common Stock into which any Note
is convertible or the then applicable Exercise Price (as defined in the Warrants) with respect to the Common Stock into which
any Warrant is exercisable. 


 


(k)
Corporate Existence. So long as any Buyer beneficially owns any Securities, the Company shall (i) maintain its corporate
existence and (ii) not be party to any Fundamental Transaction (as defined in the Notes) unless the Company is in compliance with
the applicable provisions governing Fundamental Transactions set forth in the Notes and the Warrants.


 


(l)
Reservation of Shares. So long as any Buyer owns any Securities, the Company shall take all action necessary to at all
times have authorized, and reserved for the purpose of issuance, no less than the Required Reserve Amount. If at any time the
number of shares of Common Stock authorized and reserved for issuance is not sufficient to meet the Required Reserved Amount,
the Company will promptly take all corporate action necessary to authorize and reserve a sufficient number of shares, including,
without limitation, calling a special meeting of stockholders to authorize additional shares to meet the Company’s obligations
under Section 3(c), in the case of an insufficient number of authorized shares, obtain stockholder approval of an increase in
such authorized number of shares, and voting the management shares of the Company in favor of an increase in the authorized shares
of the Company to ensure that the number of authorized shares is sufficient to meet the Required Reserved Amount. 


 


(m)
Conduct of Business. The business of the Company and its Subsidiaries shall not be conducted in violation of any law, ordinance
or regulation of any governmental entity, except where such violations would not result, either individually or in the aggregate,
in a Material Adverse Effect. 


 


(n)
Additional Issuances of Securities.


 


(i)
For purposes of this Section 4(n), the following definitions shall apply.


 


(1)
“Convertible Securities” means any stock or securities (other than Options) convertible into or exercisable
or exchangeable for shares of Common Stock.


 




    	- 23 -



    	 



    


 


(2)
“Options” means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities.


 


(3)
“Common Stock Equivalents” means, collectively, Options and Convertible Securities.


 


(ii)
From the date hereof until the earlier of (x) the time of the registration of all of the Registrable Securities (as defined in
the Registration Rights Agreement) pursuant to and in accordance with the Registration Rights Agreement, which registration remains
in effect or (y) such time as all of the Registrable Securities, if a registration statement is not available for the resale of
all of the Registrable Securities, may be sold without restriction or limitation pursuant to Rule 144 and without the requirement
to be in compliance with Rule 144(c)(1), the Company shall not, directly or indirectly, file any registration statement with the
SEC, or file any amendment or supplement thereto, or grant any registration rights to any Person that can be exercised prior to
the earlier of such time as set forth above, other than pursuant to the Registration Rights Agreement and any registration statement
for the issuance of securities pursuant to an employee benefit plan or securities award, as registered on Form S-8.


 


(iii)
From the date hereof until the date that the Company obtains the Stockholder Approval (as defined below) (the “Trigger
Date”), the Company will not, (i) directly or indirectly, enter into any transaction or series of transactions that
constitutes a Dilutive Issuance (as defined in the Notes) or (ii) be party to any solicitations, negotiations or discussions with
regard to the foregoing.


 


(iv)
From the date hereof until the two (2) year anniversary of the Closing Date, the Company shall not, (i) directly or indirectly,
offer, sell, grant any option to purchase, or otherwise dispose of (or announce any offer, sale, grant or any option to purchase
or other disposition of) any of its or its Subsidiaries’ equity or equity equivalent securities, including without limitation
any debt, preferred stock or other instrument or security that is, at any time during its life and under any circumstances, convertible
into or exchangeable or exercisable for Common Stock or Common Stock Equivalents (any such offer, sale, grant, disposition or
announcement being referred to as a “Subsequent Placement”) unless the Company shall have first complied with
this Section 4(n)(iv).


 


(1)
The Company shall deliver to each Buyer an irrevocable written notice (the “Offer Notice”) of any proposed
or intended issuance or sale or exchange (the “Offer”) of the securities being offered (the “Offered
Securities”) in a Subsequent Placement, which Offer Notice shall (w) identify and describe the Offered Securities, (x)
describe the price and other terms upon which they are to be issued, sold or exchanged, and the number or amount of the Offered
Securities to be issued, sold or exchanged, (y) identify the persons or entities (if known) to which or with which the Offered
Securities are to be offered, issued, sold or exchanged and (z) offer to issue and sell to or exchange with such Buyers at least
fifty percent (50%) of the Offered Securities, allocated among such Buyers (a) based on such Buyer’s pro rata portion of
the aggregate principal amount of Notes purchased hereunder (the “Basic Amount”), and (b) with respect to each
Buyer that elects to purchase its Basic Amount, any additional portion
of the Offered Securities attributable to the Basic Amounts of other Buyers as such Buyer shall indicate it will purchase or acquire
should the other Buyers subscribe for less than their Basic Amounts (the “Undersubscription Amount”), which
process shall be repeated until the Buyers shall have an opportunity to subscribe for any remaining Undersubscription Amount.


 




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(2)
To accept an Offer, in whole or in part, such Buyer must deliver a written notice to the Company prior to the end of the tenth
(10th) Business Day after such Buyer’s receipt of the Offer Notice (the “Offer Period”), setting forth
the portion of such Buyer’s Basic Amount that such Buyer elects to purchase and, if such Buyer shall elect to purchase all
of its Basic Amount, the Undersubscription Amount, if any, that such Buyer elects to purchase (in either case, the “Notice
of Acceptance”). If the Basic Amounts subscribed for by all Buyers are less than the total of all of the Basic Amounts,
then each Buyer who has set forth an Undersubscription Amount in its Notice of Acceptance shall be entitled to purchase, in addition
to the Basic Amounts subscribed for, the Undersubscription Amount it has subscribed for; provided, however, that
if the Undersubscription Amounts subscribed for exceed the difference between the total of all the Basic Amounts and the Basic
Amounts subscribed for (the “Available Undersubscription Amount”), each Buyer who has subscribed for any Undersubscription
Amount shall be entitled to purchase only that portion of the Available Undersubscription Amount as the Basic Amount of such Buyer
bears to the total Basic Amounts of all Buyers that have subscribed for Undersubscription Amounts, subject to rounding by the
Company to the extent its deems reasonably necessary. Notwithstanding anything to the contrary contained herein, if the Company
desires to modify or amend the terms and conditions of the Offer prior to the expiration of the Offer Period, the Company may
deliver to the Buyers a new Offer Notice and the Offer Period shall expire on the tenth (10th) Business Day after such Buyer’s
receipt of such new Offer Notice.


 


(3)
The Company shall have five (5) Business Days from the expiration of the Offer Period above to offer, issue, sell or exchange
all or any part of such Offered Securities as to which a Notice of Acceptance has not been given by the Buyers (the “Refused
Securities”) pursuant to a definitive agreement (the “Subsequent Placement Agreement”) but only to
the offerees described in the Offer Notice (if so described therein) and only upon terms and conditions (including, without limitation,
unit prices and interest rates) that are not more favorable to the acquiring Person or Persons or less favorable to the Company
than those set forth in the Offer Notice and (ii) to publicly announce (a) the execution of such Subsequent Placement Agreement,
and (b) either (x) the consummation of the transactions contemplated by such Subsequent Placement Agreement or (y) the termination
of such Subsequent Placement Agreement, which shall be filed with the SEC on a Current Report on Form 8-K with such Subsequent
Placement Agreement and any documents contemplated therein filed as exhibits thereto.


 


(4)
In the event the Company shall propose to sell less than all the Refused Securities (any such sale to be in the manner and on
the terms specified in Section 4(n)(iii)(3) above), then each Buyer may, at its sole option and in its sole discretion, reduce
the number or amount of the Offered Securities specified in its Notice of Acceptance to an amount that shall be not less than
the number or amount of the Offered
Securities that such Buyer elected to purchase pursuant to Section 4(n)(iii)(2) above multiplied by a fraction, (i) the numerator
of which shall be the number or amount of Offered Securities the Company actually proposes to issue, sell or exchange (including
Offered Securities to be issued or sold to Buyers pursuant to Section 4(n)(iii)(3) above prior to such reduction) and (ii) the
denominator of which shall be the original amount of the Offered Securities. In the event that any Buyer so elects to reduce the
number or amount of Offered Securities specified in its Notice of Acceptance, the Company may not issue, sell or exchange more
than the reduced number or amount of the Offered Securities unless and until such securities have again been offered to the Buyers
in accordance with Section 4(n)(iii)(1) above.


 




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(5)
Upon the closing of the issuance, sale or exchange of all or less than all of the Refused Securities, the Buyers shall acquire
from the Company, and the Company shall issue to the Buyers, the number or amount of Offered Securities specified in the Notices
of Acceptance, as reduced pursuant to Section 4(n)(iii)(3) above if the Buyers have so elected, upon the terms and conditions
specified in the Offer. The purchase by the Buyers of any Offered Securities is subject in all cases to the preparation, execution
and delivery by the Company and the Buyers of a purchase agreement relating to such Offered Securities reasonably satisfactory
in form and substance to the Buyers and their respective counsel.


 


(6)
Any Offered Securities not acquired by the Buyers or other persons in accordance with Section 4(n)(iii)(3) above may not be issued,
sold or exchanged until they are again offered to the Buyers under the procedures specified in this Agreement.


 


(7)
The Company and the Buyers agree that if any Buyer elects to participate in the Offer, (x) neither the Subsequent Placement Agreement
with respect to such Offer nor any other transaction documents related thereto (collectively, the “Subsequent Placement
Documents”) shall include any term or provisions whereby any Buyer shall be required to agree to any restrictions in
trading as to any securities of the Company owned by such Buyer prior to such Subsequent Placement, and (y) any registration rights
set forth in such Subsequent Placement Documents shall be similar in all material respects to the registration rights contained
in the Registration Rights Agreement.


 


(8)
Notwithstanding anything to the contrary in this Section 4(n) and unless otherwise agreed to by the Buyers, the Company shall
either confirm in writing to the Buyers that the transaction with respect to the Subsequent Placement has been abandoned or shall
publicly disclose its intention to issue the Offered Securities, in either case in such a manner such that the Buyers will not
be in possession of material non-public information, by the fifteenth (15th) Business Day following delivery of the Offer Notice.
If by the fifteenth (15th) Business Day following delivery of the Offer Notice no public disclosure regarding a transaction with
respect to the Offered Securities has been made, and no notice regarding the abandonment of such transaction has been received
by the Buyers, such transaction shall be deemed to have been abandoned and the Buyers shall not be deemed to be in possession
of any material, non-public information with
respect to the Company. Should the Company decide to pursue such transaction with respect to the Offered Securities, the Company
shall provide each Buyer with another Offer Notice and each Buyer will again have the right of participation set forth in this
Section 4(n)(iii). The Company shall not be permitted to deliver more than one such Offer Notice to the Buyers in any 60 day period.


 




    	- 26 -



    	 



    


  


(v)
The restrictions contained in subsection (iii) of this Section 4(n) shall not apply in connection with the issuance of any Excluded
Securities (as defined in the Notes). 


 


(o)
Public Information. At any time during the period commencing from the six (6) month anniversary of the Closing Date and
ending at such time that all of the Securities, if a registration statement is not available for the resale of all of the Securities,
may be sold without restriction or limitation pursuant to Rule 144 and without the requirement to be in compliance with Rule 144(c)(1),
if the Company shall (i) fail for any reason to satisfy the requirements of Rule 144(c)(1), including, without limitation, the
failure to satisfy the current public information requirement under Rule 144(c) or (ii) if the Company has ever been an issuer
described in Rule 144(i)(1)(i) or becomes such an issuer in the future, and the Company shall fail to satisfy any condition set
forth in Rule 144(i)(2) (a “Public Information Failure”) then, as partial relief for the damages to any holder
of Securities by reason of any such delay in or reduction of its ability to sell the Securities (which remedy shall not be exclusive
of any other remedies available at law or in equity), the Company shall pay to each such holder an amount in cash equal to two
percent (2.0%) of the aggregate purchase price of such holder’s Securities on the day of a Public Information Failure and
on every thirtieth day (pro rated for periods totaling less than thirty days) thereafter until the earlier of (i) the date such
Public Information Failure is cured and (ii) such time that such public information is no longer required pursuant to Rule 144.
The payments to which a holder shall be entitled pursuant to this Section 4(o) are referred to herein as “Public Information
Failure Payments.” Public Information Failure Payments shall be paid on the earlier of (I) the last day of the
calendar month during which such Public Information Failure Payments are incurred and (II) the third Business Day after
the event or failure giving rise to the Public Information Failure Payments is cured. In the event the Company fails to
make Public Information Failure Payments in a timely manner, such Public Information Failure Payments shall bear
interest at the rate of 1.5% per month (prorated for partial months) until paid in full.


 


(p)
Stockholder Approval. 


 


(i)
The Company shall provide each stockholder entitled to vote at the next special or annual meeting of stockholders of the Company
(the “First Stockholder Meeting”), which shall be promptly called and held not later than June 30, 2014 (the
“First Stockholder Meeting Deadline”), a proxy statement, substantially in the form which has been previously
reviewed by the Buyers and Schulte Roth & Zabel LLP, at the expense of the Company, soliciting each such stockholder’s
affirmative vote at the First Stockholder Meeting for approval of resolutions (the “Resolutions”) providing
for the Company’s issuance of all of the Securities as described in the Transaction Documents in accordance with applicable
law and the rules and regulations of the Principal Market (such affirmative approval being referred to herein as the “Stockholder
Approval”), The Company shall file a definitive proxy statement relating to the First Stockholder Meeting no later than
the earlier of (x) 45 calendar days after the date of the 10-K Filing and (y) May 15, 2014. The Company shall be obligated to
use its reasonable best efforts to obtain the Stockholder Approval by the First Stockholder Meeting Deadline.


 




    	- 27 -



    	 



    


 


(ii)
If, despite the Company’s reasonable best efforts the Stockholder Approval is not obtained on or prior to the First Stockholder
Meeting Deadline, the Company shall (i) cause an additional stockholder meeting to be called and held not later than September
30, 2014 (the “Second Stockholder Meeting Deadline”) and (ii) be obligated to use its reasonable best efforts
to obtain the Stockholder Approval by the Second Stockholder Meeting Deadline. The Company shall provide each stockholder entitled
to vote at the stockholders’ meeting contemplated by this Section 4(p)(ii) a proxy statement, substantially in the form
which has been previously reviewed by the Buyers and Schulte Roth & Zabel LLP, at the expense of the Company, soliciting the
Stockholder Approval. 


 


(iii)
If, despite the Company’s reasonable best efforts the Stockholder Approval is not obtained on or prior to the Second Stockholder
Meeting Deadline, the Company shall (i) cause an additional stockholder meeting to be called and held not later than June 30,
2015 (the “Third Stockholder Meeting Deadline”) and (ii) be obligated to use its reasonable best efforts to
obtain the Stockholder Approval by the Third Stockholder Meeting Deadline. The Company shall provide each stockholder entitled
to vote at the stockholders’ meeting contemplated by this Section 4(p)(iii) a proxy statement, substantially in the form
which has been previously reviewed by the Buyers and Schulte Roth & Zabel LLP, at the expense of the Company, soliciting the
Stockholder Approval. 


 


(iv)
If, despite the Company’s reasonable best efforts the Stockholder Approval is not obtained on or prior to the Third Stockholder
Meeting Deadline, the Company shall (i) solicit the Stockholder Approval in connection with each annual meeting of the stockholders
following the meeting of the stockholders contemplated by Section 4(p)(iii) (each such meeting, a “Subsequent Annual
Meeting”) and (ii) be obligated to use its reasonable best efforts to obtain the Stockholder Approval in connection
with each Subsequent Annual Meeting, in each case until the earlier to occur of (x) the receipt of Stockholder Approval or (y)
such time as no Securities are outstanding. The Company shall provide each stockholder entitled to vote at each Subsequent Annual
Meeting a proxy statement, substantially in the form which has been previously reviewed by the Buyers and Schulte Roth & Zabel
LLP, at the expense of the Company, soliciting the Stockholder Approval. 


 


(v)
In connection with each stockholders’ meeting contemplated by this Section 4(p), the Company shall (i) use its reasonable
best efforts to solicit its stockholders’ approval of the Resolutions, (ii) engage a proxy solicitation firm reasonably
acceptable to the Required Holders, which proxy solicitation firm shall undertake a scope of work with respect to such Meeting
which is reasonably acceptable to the Required Holders, and (iii) cause at least a majority of the Board of Directors of the Company
to recommend to the stockholders that they approve the Resolutions. 


 




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(q)
Voting Agreement. The Company shall use its reasonable best efforts to effectuate the transactions contemplated by the
Voting Agreement substantially in the form attached hereto as Exhibit D (the “Voting Agreement”), executed
on or prior to the Closing by the Company and the stockholders set forth on Schedule 4(r)(i) (collectively, the “Principal
Stockholders”). The Company shall not amend, except as contemplated in the immediately preceding sentence, or waive
any provision of the Voting Agreements and shall enforce the provisions of the Voting Agreements in accordance with its terms.
If any of the Principal Stockholders breach any provisions of either of the Voting Agreements, the Company shall promptly use
its best efforts to seek specific performance of the terms of such Voting Agreement in accordance with Section 4.02 thereof. In
addition, if the Company receives any notice from any of the Principal Stockholders pursuant to the Voting Agreement, the Company
shall promptly, but in no event later than two (2) Business Days, deliver a copy of such notice to each Buyer.


 


(r)
Lock-Up. The Company shall not amend, modify, waive or terminate any provision of any of the Lock-Up Agreements except
to extend the term of the lock-up period and shall enforce the provisions of each Lock-Up Agreement in accordance with its terms.
If any officer or director that is a party to a Lock-Up Agreement breaches any provision of a Lock-Up Agreement, the Company shall
promptly use its reasonable best efforts to seek specific performance of the terms of such Lock-Up Agreement.


 


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


 


(t)
Collateral Agent. 


 


(i)
Each Buyer hereby (a) appoints Hudson Bay as the collateral agent hereunder and under the Security Documents (in such capacity,
the “Collateral Agent”), and (b) authorizes the Collateral Agent (and its officers, directors, employees and
agents) to take such action on such Buyer’s behalf in accordance with the terms hereof and thereof. The Collateral Agent
shall not have, by reason hereof or pursuant to any Security Documents, a fiduciary relationship in respect of any Buyer. Neither
the Collateral Agent nor any of its officers, directors, employees and agents shall have any liability to any Buyer for any action
taken or omitted to be taken in connection hereof or the Security Documents except to the extent caused by its own gross negligence
or willful misconduct, and each Buyer agrees to defend, protect, indemnify and hold harmless the Collateral Agent and all of its
officers, directors, employees and agents (collectively, the “Collateral Agent Indemnitees”) from and
against any losses, damages, liabilities, obligations, penalties, actions, judgments, suits, fees, costs and expenses (including,
without limitation, reasonable attorneys’ fees, costs and expenses) incurred by such Collateral Agent Indemnitee, whether
direct, indirect or consequential, arising from or in connection with the performance by such Collateral Agent Indemnitee of the
duties and obligations of Collateral Agent pursuant hereto or any of the Security Documents.


 




    	- 29 -



    	 



    


 


(ii)
The Collateral Agent shall be entitled to rely upon any written notices, statements, certificates, orders or other documents or
any telephone message believed by it in good faith to be genuine and correct and to have been signed, sent or made by the proper
Person, and with respect to all matters pertaining to this Agreement or any of the other Transaction Documents and its duties
hereunder or thereunder, upon advice of counsel selected by it.


 


(iii)
The Collateral Agent may resign from the performance of all its functions and duties hereunder and under the Notes and the Security
Documents at any time by giving at least ten (10) Business Days prior written notice to the Company and each holder of the Notes.
Such resignation shall take effect upon the acceptance by a successor Collateral Agent of appointment as provided below. Upon
any such notice of resignation, the holders of a majority of the outstanding principal amount of Notes shall appoint a successor
Collateral Agent. Upon the acceptance of the appointment as Collateral Agent, such successor Collateral Agent shall succeed to
and become vested with all the rights, powers, privileges and duties of the retiring Collateral Agent, and the retiring Collateral
Agent shall be discharged from its duties and obligations under this Agreement, the Notes and the Security Agreement. After any
Collateral Agent’s resignation hereunder, the provisions of this Section 4(u) shall inure to its benefit. If a successor
Collateral Agent shall not have been so appointed within said ten (10) Business Day period, the retiring Collateral Agent shall
then appoint a successor Collateral Agent who shall serve until such time, if any, as the holders of a majority of the outstanding
principal amount of Notes appoints a successor Collateral Agent as provided above.


 


(iv)
The Company hereby covenants and agrees to take all actions as promptly as practicable reasonably requested by either the holders
of a majority of the outstanding principal amount of Notes or the Collateral Agent (or its successor), from time to time pursuant
to the terms of this Section 4(u), to secure a successor Collateral Agent satisfactory to such requesting part(y)(ies), in their
sole discretion, including, without limitation, by paying all fees of such successor Collateral Agent, by having the Company agree
to indemnify any successor Collateral Agent and by each of the Company executing a collateral agency agreement or similar agreement
and/or any amendment to the Security Documents reasonably requested or required by the successor Collateral Agent.


 


(v)
The Collateral Agent shall terminate the Security Documents promptly following the date that the Investors may sell all of the
Registrable Securities without restriction or limitation pursuant to Rule 144 (or any successor thereto) promulgated under the
1933 Act continuously for forty-five (45) consecutive days.


 


(u)
Collection Account. The Company and its Subsidiaries shall deposit or cause to be deposited promptly (and in any event
no later than the next Business Day after the date of receipt thereof) into the account listed below (the “Collection
Account”) (or to such other account as agreed to in writing or directed by the Collateral Agent, or after the occurrence
and during the continuance of an event of default under the Notes as specified by the Collateral Agent), (i) all proceeds in respect
of any Collateral (under and as defined in the Security Agreement), (ii) all cash, checks, notes, instruments, and other items
of payment (including insurance proceeds, proceeds of cash sales, rental proceeds, and tax refunds) received by the Company and
its Subsidiaries and (iii) all other amounts received by the Company and its Subsidiaries, including payments made by any debtor,
customer or obligor in any way obligated on or in connection with any account receivable, directly to the Company or any of its
Subsidiaries:


 




    	- 30 -



    	 



    


 


	Borrower
    or Guarantor:	 	Name
    and Address of

Institution

Maintaining Account:	 	Account
    Number:	 	Type
    of Account:
	Digital
    Ally, Inc.	 	Citizens
    Bank & Trust

    7280 NW 87th Terrace

    Suite 300

    Kansas City, No. 64153	 	8754888	 	DDA





 


The
Company may withdraw funds from the Collection Account at any time or from time to time, and the Collateral Agent shall permit
such withdrawals, so long as at the time of such withdrawal or disbursement and after giving effect thereto, no default or event
of default under the Notes has occurred and is continuing.


 


(v)
Assignment of Patents. From the date of this Agreement until the second anniversary of the Closing Date, neither the Company
nor any of its Subsidiaries shall, directly or indirectly, sell, assign, pledge, hypothecate, dispose of, transfer or license
any of the patents listed on Schedule 3(x)(i) or any patent of which the Company or any of its Subsidiaries becomes the
owner following the date of this Agreement. 


 


(w)
Amendment to Subordinated Notes. The Company shall use its best efforts to amend its Subordinated Notes (as defined in
the Notes) as soon as practicable following the Closing, which amendment shall include (i) the extension of the maturity date
of the Subordinated Notes to a date not less than 91 calendar days after the Maturity Date (as defined in the Notes) and (ii)
the subordination of the Subordinated Notes to the Notes on terms reasonably acceptable to the Required Holders. 


 


(x)
Closing Documents. On or prior to fourteen (14) calendar days after the Closing Date, the Company agrees to deliver, or
cause to be delivered, to each Buyer and Schulte Roth & Zabel LLP a complete closing set of the executed Transaction Documents,
Securities and any other documents required to be delivered to any party pursuant to Section 7 hereof or otherwise. 


 


5.
REGISTER; TRANSFER AGENT INSTRUCTIONS.


 


(a)
Register. The Company shall maintain at its principal executive offices (or such other office or agency of the Company
as it may designate by notice to each holder of Securities), a register for the Notes and the Warrants in which the Company shall
record the name and address of the Person in whose name the Notes and the Warrants have been issued (including the name
and address of each transferee), the principal amount of Notes held by such Person, the number of Conversion Shares issuable pursuant
to the terms of the Notes and the number of Warrant Shares issuable upon exercise of the Warrants held by such Person. The Company
shall keep the register open and available at all times during business hours for inspection of any Buyer or its legal representatives.


 




    	- 31 -



    	 



    


 


(b)
Transfer Agent Instructions. The Company shall issue irrevocable instructions to its transfer agent, and any subsequent
transfer agent, in the form of Exhibit G attached hereto (the “Irrevocable Transfer Agent Instructions”)
to issue certificates or credit shares to the applicable balance accounts at DTC, registered in the name of each Buyer or its
respective nominee(s), for the Conversion Shares and the Warrant Shares issued at the Closing or upon conversion of the Notes
or exercise of the Warrants in such amounts as specified from time to time by each Buyer to the Company upon conversion of the
Notes or exercise of the Warrants. The Company warrants that no instruction other than the Irrevocable Transfer Agent Instructions
referred to in this Section 5(b), and stop transfer instructions to give effect to Section 2(f) hereof, will be given by the Company
to its transfer agent, and that the Securities shall otherwise be freely transferable on the books and records of the Company
as and to the extent provided in this Agreement and the other Transaction Documents. If a Buyer effects a sale, assignment or
transfer of the Securities in accordance with Section 2(f), the Company shall permit the transfer and shall promptly instruct
its transfer agent to issue one or more certificates or credit shares to the applicable balance accounts at DTC in such name and
in such denominations as specified by such Buyer to effect such sale, transfer or assignment. In the event that such sale, assignment
or transfer involves the Conversion Shares or the Warrant Shares sold, assigned or transferred pursuant to an effective registration
statement or pursuant to Rule 144, the transfer agent shall issue such Securities to the Buyer, assignee or transferee, as the
case may be, without any restrictive legend. The Company acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to a Buyer. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under
this Section 5(b) will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions
of this Section 5(b), that a Buyer shall be entitled, in addition to all other available remedies, to an order and/or injunction
restraining any breach and requiring immediate issuance and transfer, without the necessity of showing economic loss and without
any bond or other security being required.


 


6.
CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL.


 


The
obligation of the Company hereunder to issue and sell the Notes and the related Warrants to each Buyer at the Closing is subject
to the satisfaction, at or before the Closing Date, of each of the following conditions, provided that these conditions are for
the Company’s sole benefit and may be waived by the Company at any time in its sole discretion by providing each Buyer with
prior written notice thereof:


 


(i)
Such Buyer shall have executed each of the Transaction Documents to which it is a party and delivered the same to the Company.


 


(ii)
Such Buyer shall have delivered the purchase price contemplated by Section 1(c) hereof (less, in the case of Hudson Bay, the amounts
withheld pursuant to Section 4(g)) for the Notes and the related Warrants being purchased by such Buyer at the Closing pursuant
to Section 1(d) hereof by wire transfer of immediately available funds pursuant to the wire instructions provided by the Company.


 




    	- 32 -



    	 



    


 


(iii)
The representations and warranties of such Buyer shall be true and correct as of the date when made and as of the Closing Date
as though made at that time (except for representations and warranties that speak as of a specific date which shall be true and
correct as of such specified date), and such Buyer shall have performed, satisfied and complied in all material respects with
the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by such Buyer
at or prior to the Closing Date.


 


7.CONDITIONS
TO EACH BUYER’S OBLIGATION TO PURCHASE.


 


The
obligation of each Buyer hereunder to purchase the Notes and the related Warrants at the Closing is subject to the satisfaction,
at or before the Closing Date, of each of the following conditions, provided that these conditions are for each Buyer’s
sole benefit and may be waived by such Buyer at any time in its sole discretion by providing the Company with prior written notice
thereof:


 


(i)
The Company and each of its Subsidiaries shall have duly executed and delivered to such Buyer each of the following documents
to which it is a party: (A) each of the Transaction Documents, (B) the Notes (allocated in such principal amounts as such Buyer
shall request), being purchased by such Buyer at the Closing pursuant to this Agreement and (C) the related Warrants (allocated
in such amounts as such Buyer shall request) being purchased by such Buyer at the Closing pursuant to this Agreement.


 


(ii)
The Company shall have delivered to such Buyer the Voting Agreement duly executed and delivered by the Principal Stockholders.


 


(iii)
Such Buyer shall have received the opinion of (i) Christian J. Hoffman, the Company’s general counsel, dated as of the Closing
Date, in substantially the form of Exhibit H-1 attached hereto and (ii) Ashcraft & Barr LLP, the Company’s outside
counsel, dated as of the Closing Date, in substantially the form of Exhibit H-2 attached hereto.


 


(iv)
The Company shall have delivered to such Buyer a copy of the Irrevocable Transfer Agent Instructions, in the form of Exhibit
G attached hereto, which instructions shall have been delivered to and acknowledged in writing by the Company’s transfer
agent.


 


(v)
The Company shall have delivered to such Buyer a certificate evidencing the formation and good standing of the Company and each
of its Subsidiaries in such entity’s jurisdiction of formation issued by the Secretary of State (or comparable office) of
such jurisdiction, as of a date within ten (10) days of the Closing Date.


 


(vi)
The Company shall have delivered to such Buyer a certificate evidencing the Company’s and each of its Subsidiaries’
qualification as a foreign corporation and good standing issued by the Secretary of State (or comparable office) of each jurisdiction
in which the Company and its Subsidiaries conduct business, as of a date within ten (10) days of the Closing Date.


 




    	- 33 -



    	 



    


 


(vii)
The Company shall have delivered to such Buyer a certified copy of the Articles of Incorporation of the Company and each of its
Subsidiaries as certified by the Secretary of State (or comparable office) of the jurisdiction of formation of the Company and
each of its Subsidiaries within ten (10) days of the Closing Date.


 


(viii)
The Company shall have delivered to such Buyer a certificate, executed by the Secretary of the Company and dated as of the Closing
Date, as to (i) the resolutions consistent with Section 3(b) as adopted by the Company’s and each of its Subsidiaries’
Board of Directors in a form reasonably acceptable to such Buyer, (ii) the Articles of Incorporation of the Company and each of
its Subsidiaries and (iii) the Bylaws of the Company and each of its Subsidiaries, each as in effect at the Closing, in the form
attached hereto as Exhibit I.


 


(ix)
The representations and warranties of the Company shall be true and correct as of the date when made and as of the Closing Date
as though made at that time (except for representations and warranties that speak as of a specific date which shall be true and
correct as of such specified date) and the Company shall have performed, satisfied and complied in all respects with the covenants,
agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Company at
or prior to the Closing Date. Such Buyer shall have received a certificate, executed by the Chief Executive Officer of the Company,
dated as of the Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by such Buyer
in the form attached hereto as Exhibit J.


 


(x)
The Company shall have delivered to such Buyer a letter from the Company’s transfer agent certifying the number of shares
of Common Stock outstanding as of a date within five (5) days of the Closing Date.


 


(xi)
The Company shall have delivered to each Buyer a lock-up agreement in the form attached hereto as Exhibit K executed and
delivered by each of the Persons listed on Schedule 7(x)(i) (collectively, the “Lock Up Agreements”).


 


(xii)
The Common Stock (I) shall be designated for quotation or listed on the Principal Market and (II) shall not have been suspended,
as of the Closing Date, by the SEC or the Principal Market from trading on the Principal Market nor shall suspension by the SEC
or the Principal Market have been threatened, as of the Closing Date, either (A) in writing by the SEC or the Principal Market
or (B) by falling below the minimum listing maintenance requirements of the Principal Market.


 


(xiii)
The Company shall have obtained all governmental, regulatory or third party consents and approvals, if any, necessary for the
sale of the Securities.


 


(xiv)
Each of the Company’s Subsidiaries shall have executed and delivered to such Buyer the Guarantee Agreement.


 




    	- 34 -



    	 



    





 


(xv)
The Collateral Agent shall have received certified copies of request for copies of information on Form UCC-11, listing all effective
financing statements which name as debtor the Company or any of its Subsidiaries and which are filed in such office or offices
as may be necessary or, in the opinion of the Collateral Agent, desirable to perfect the security interests purported to be created
by the Security Agreement, together with copies of such financing statements, none of which, except as otherwise agreed in writing
by the Collateral Agent, shall cover any of the Collateral, and the results of searches for any tax lien and judgment lien filed
against such person or its property, which results, except as otherwise agreed to in writing by the Collateral Agent, shall not
show any such liens.


 


(xvi)
The Collateral Agent shall have received the Security Agreement, duly executed by the Company and each of its Subsidiaries, together
with (A) the original stock certificates representing all of the equity interests and all promissory notes required to be pledged
thereunder, accompanied by undated stock powers and allonges executed in blank and other proper instruments of transfer and (B)
any copyright, patent and trademark agreements required by the terms of the Security Agreement. 


 


(xvii)
The Collateral Agent shall have received an account control agreement, in form and substance satisfactory to the Collateral Agent,
duly executed by the Company and/or its Subsidiaries (as applicable) and such bank or financial institution (as applicable), or
enter into other arrangements in form and substance satisfactory to the Collateral Agent, with respect to the Collection Account
and each other account required under Section 5(i) of the Security Agreement, and each such agreement shall be in full force and
effect.


 


(xviii)
The Company shall have delivered to such Buyer such other documents relating to the transactions contemplated by this Agreement
as such Buyer or its counsel may reasonably request. 


 


8.TERMINATION.
In the event that the Closing shall not have occurred with respect to a Buyer on or before five (5) Business Days from the date
hereof due to the Company’s or such Buyer’s failure to satisfy the conditions set forth in Sections 6 and 7 above
(and the nonbreaching party’s failure to waive such unsatisfied condition(s)), the nonbreaching party shall have the option
to terminate this Agreement with respect to such breaching party at the close of business on such date by delivering a written
notice to that effect to each other party to this Agreement and without liability of any party to any other party; provided,
however, that if this Agreement is terminated pursuant to this Section 8, the Company shall remain obligated to reimburse
Hudson Bay or its designee(s), as applicable, for the expenses described in Section 4(g) above.


 


9.MISCELLANEOUS.


 


(a)
Governing Law; Jurisdiction; Jury Trial. All questions concerning the construction, validity, enforcement and interpretation
of this Agreement shall be governed by the internal laws of the State of New York, without giving effect to any choice of law
or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application
of the laws of any jurisdictions other than the State of New York.


 



    	- 35 -



    	 



    

 


Each
party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in The City of New York,
Borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated
hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an
inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal
service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY
TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION
CONTEMPLATED HEREBY.


 


(b)
Counterparts. This Agreement may be executed in two or more identical counterparts, all of which shall be considered one
and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other
party; provided that a facsimile signature shall be considered due execution and shall be binding upon the signatory thereto with
the same force and effect as if the signature were an original, not a facsimile signature.


 


(c)
Headings. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation
of, this Agreement.


 


(d)
Severability. If any provision of this Agreement is prohibited by law or otherwise determined to be invalid or unenforceable
by a court of competent jurisdiction, the provision that would otherwise be prohibited, invalid or unenforceable shall be deemed
amended to apply to the broadest extent that it would be valid and enforceable, and the invalidity or unenforceability of such
provision shall not affect the validity of the remaining provisions of this Agreement so long as this Agreement as so modified
continues to express, without material change, the original intentions of the parties as to the subject matter hereof and the
prohibited nature, invalidity or unenforceability of the provision(s) in question does not substantially impair the respective
expectations or reciprocal obligations of the parties or the practical realization of the benefits that would otherwise be conferred
upon the parties. The parties will endeavor in good faith negotiations to replace the prohibited, invalid or unenforceable provision(s)
with a valid provision(s), the effect of which comes as close as possible to that of the prohibited, invalid or unenforceable
provision(s).


 


(e)
Entire Agreement; Amendments. This Agreement and the other Transaction Documents supersede all other prior oral or written
agreements between the Buyers, the Company, their affiliates and Persons acting on their behalf with respect to the matters discussed
herein, and this Agreement, the other Transaction Documents and the instruments referenced herein and therein contain the entire
understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein
or








 



    	- 36 -



    	 



    

 


therein,
neither the Company nor any Buyer makes any representation, warranty, covenant or undertaking with respect to such matters. Provisions
of this Agreement may be amended and the observance thereof 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 holders of at least a majority of the aggregate
number of Registrable Securities issued or issuable under the Notes and Warrants and shall include Hudson Bay so long as Hudson
Bay or any of its affiliates holds any Registrable Securities (the “Required Holders”); provided that any such
amendment or waiver that complies with the foregoing but that disproportionately, materially and adversely affects the rights
and obligations of any Buyer relative to the comparable rights and obligations of the other Buyers shall require the prior written
consent of such adversely affected Buyer; provided, further, that the provisions of Section 4(t) cannot be amended
without the additional prior written approval of the Collateral Agent or its successor. Any amendment or waiver effected in accordance
with this Section 9(e) shall be binding upon each Buyer and holder of Securities and the Company. No such amendment shall be effective
to the extent that it applies to less than all of the Buyers or holders of Securities. 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 (other than the reimbursement of legal fees) also is offered to all of the parties to the Transaction Documents,
holders of Notes or holders of the Warrants, as the case may be. The Company has not, directly or indirectly, made any agreements
with any Buyers relating to the terms or conditions of the transactions contemplated by the Transaction Documents except as set
forth in the Transaction Documents. Without limiting the foregoing, the Company confirms that, except as set forth in this Agreement,
no Buyer has made any commitment or promise or has any other obligation to provide any financing to the Company or otherwise.


 


(f)
Notices. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon
receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on
file by the sending party) or by electronic mail; or (iii) one Business Day after deposit with an overnight courier service, in
each case properly addressed to the party to receive the same. The addresses, facsimile numbers and e-mail addresses for such
communications shall be:


 


	 	If to the Company:
	 	 	 
	 	 	Digital Ally, Inc.
	 	 	9705 Loiret Blvd.
	 	 	Lenexa, Kansas 66219
	 	 	Telephone:    
    913-814-7774
	 	 	Facsimile:      913-213-5762
	 	 	Attention:      Stanton Ross


 



    	- 37 -



    	 



    

 


	 	With a copy to:
	 	 	 
	 	 	Christian J. Hoffman
	 	 	[Address]
	 	 	Telephone:   602-370-0150
	 	 	Facsimile:    [          ]
	 	 	Attention:    [          ]
	 	 	E-mail:        CJHOFF3@gmail.com
	 	 	 
	 	If to the Transfer Agent:
	 	 	 
	 	 	First
    American Stock Transfer, Inc.
	 	 	 
	 	 	4747
    N. 7th Street
	 	 	Suite
    17C
	 	 	Phoenix,
    AZ 85014
	 	 	Telephone:
    602-485-1346
	 	 	 
	 	 	Facsimile:
    602-788-0423
	 	 	 
	 	 	Attention:
    Erica Holt
	 	 	 
	 	 	E-mail:
    Erica@FirstAmericanStock.com


 


If
to a Buyer, to its address, facsimile number and e-mail address set forth on the Schedule of Buyers, with copies to such Buyer’s
representatives as set forth on the Schedule of Buyers,


 


	 	with a copy (for informational purposes only) to:
	 	 	 
	 	 	Schulte Roth & Zabel LLP 
	 	 	919 Third Avenue
	 	 	New York, New York 10022
	 	 	Telephone:    (212) 756-2000
	 	 	Facsimile:     (212) 593-5955
	 	 	Attention:      Eleazer N. Klein, Esq.
	 	 	E-mail:          eleazer.klein@srz.com


 


or
to such other address, facsimile number and/or e-mail address and/or to the attention of such other Person as the recipient party
has specified by written notice given to each other party five (5) days prior to the effectiveness of such change. Written confirmation
of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically
generated by the sender’s facsimile machine or e-mail containing the time, date, recipient facsimile number and an image
of the first page of such transmission or (C) provided by an overnight courier service shall be rebuttable evidence of personal
service, receipt by facsimile or receipt from an overnight courier service in accordance with clause (i), (ii) or (iii) above,
respectively.


 




    	- 38 -



    	 



    


 


(g)
Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their respective
successors and assigns, including any purchasers of the Notes or the Warrants. The Company shall not assign this Agreement or
any rights or obligations hereunder without the prior written consent of the Required Holders, including by way of a Fundamental
Transaction (unless the Company is in compliance with the applicable provisions governing Fundamental Transactions set forth in
the Notes and the Warrants). A Buyer may assign some or all of its rights hereunder without the consent of the Company, in which
event such assignee shall be deemed to be a Buyer hereunder with respect to such assigned rights.


 


(h)
No Third Party Beneficiaries. Except for the Placement Agent who shall be a third party beneficiary of the representations
and warranties of the Company in Section 3 and the representation and warranty of the Buyers in Section 2(e), this Agreement is
intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit
of, nor may any provision hereof be enforced by, any other Person, except that each Indemnitee shall have the right to enforce
the obligations of the Company with respect to Section 9(k).


 


(i)
Survival. Unless this Agreement is terminated under Section 8, the representations and warranties of the Company and the
Buyers contained in Sections 2 and 3, and the agreements and covenants set forth in Sections 4, 5 and 9 shall survive the Closing.
Each Buyer shall be responsible only for its own representations, warranties, agreements and covenants hereunder.


 


(j)
Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things,
and shall execute and deliver all such other agreements, certificates, instruments and documents, as any other party may reasonably
request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions
contemplated hereby.


 


(k)
Indemnification. i) In consideration of each Buyer’s execution and delivery of the Transaction Documents and acquiring
the Securities thereunder and in addition to all of the Company’s other obligations under the Transaction Documents, the
Company shall defend, protect, indemnify and hold harmless each Buyer and each other holder of the Securities and all of their
stockholders, partners, members, officers, directors, employees and direct or indirect investors and any of the foregoing Persons’
agents or other representatives (including, without limitation, those retained in connection with the transactions contemplated
by this Agreement) (collectively, the “Indemnitees”) from and against any and all actions, causes of action,
suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of
whether any such Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable
attorneys’ fees and disbursements (the “Indemnified Liabilities”), incurred by any Indemnitee as a result
of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Company
in the Transaction Documents or any other certificate,


 




    	- 39 -



    	 



    


 


instrument
or document contemplated hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained in
the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby or (c) any cause of
action, suit or claim brought or made against such Indemnitee by a third party (including for these purposes a derivative action
brought on behalf of the Company) and arising out of or resulting from (i) the execution, delivery, performance or enforcement
of the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby, (ii) any transaction
financed or to be financed in whole or in part, directly or indirectly, with the proceeds of the issuance of the Securities, (iii)
any disclosure made by such Buyer pursuant to Section 4(i), or (iv) the status of such Buyer or holder of the Securities as an
investor in the Company pursuant to the transactions contemplated by the Transaction Documents. To the extent that the foregoing
undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment
and satisfaction of each of the Indemnified Liabilities that is permissible under applicable law.


 


(i)
Promptly after receipt by an Indemnitee under this Section 9(k) of notice of the commencement of any action or proceeding (including
any governmental action or proceeding) involving an Indemnified Liability, such Indemnitee shall, if a claim for indemnification
in respect thereof is to be made against any indemnifying party under this Section 9(k), deliver to the indemnifying party a written
notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the
indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof
with counsel mutually satisfactory to the indemnifying party and the Indemnitee; provided, however, that an Indemnitee
shall have the right to retain its own counsel with the fees and expenses of not more than one counsel for such Indemnitee to
be paid by the indemnifying party, if, in the reasonable opinion of the Indemnitee, the representation by such counsel of the
Indemnitee and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnitee
and any other party represented by such counsel in such proceeding. Legal counsel referred to in the immediately preceding sentence
shall be selected by the Buyers holding at least a majority of the Securities issued and issuable hereunder. The Indemnitee shall
cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action or Indemnified Liabilities
by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnitee that
relates to such action or Indemnified Liabilities. The indemnifying party shall keep the Indemnitee fully apprised at all times
as to the status of the defense or any settlement negotiations with respect thereto. No indemnifying party shall be liable for
any settlement of any action, claim or proceeding effected without its prior written consent, provided, however,
that the indemnifying party shall not unreasonably withhold, delay or condition its consent. No indemnifying party shall, without
the prior written consent of the Indemnitee, which consent shall not be unreasonably withheld conditioned or delayed, consent
to entry of any judgment or enter into any settlement or other compromise which (i) does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnitee of a release from all liability in respect to such Indemnified
Liabilities or litigation, (ii) requires any admission of wrongdoing by such Indemnitee, or (iii) obligates or requires an Indemnitee
to take, or refrain from taking, any action. Following indemnification as provided for hereunder, the indemnifying party shall
be subrogated to all rights of the Indemnitee with respect to all third parties, firms or corporations relating to the matter
for which indemnification has been made. The failure to deliver written notice to the indemnifying party within a reasonable time
of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnitee under this
Section 9(k), except to the extent that the indemnifying party is prejudiced in its ability to defend such action.









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(ii)
The indemnification required by this Section 9(k) shall be made by periodic payments of the amount thereof during the course of
the investigation or defense, as and when bills are received or Indemnified Liabilities are incurred.


 


(iii)
The indemnity agreements contained herein shall be in addition to (x) any cause of action or similar right of the Indemnitee against
the indemnifying party or others, and (y) any liabilities the indemnifying party may be subject to pursuant to the law.


 


(l)
No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to
express their mutual intent, and no rules of strict construction will be applied against any party.


 


(m)
Remedies. Each Buyer and each holder of the Securities shall have all rights and remedies set forth in the Transaction
Documents and all rights and remedies which such holders have been granted at any time under any other agreement or contract and
all of the rights which such holders have under any law. Any Person having any rights under any provision of this Agreement shall
be entitled to enforce such rights specifically (without posting a bond or other security), to recover damages by reason of any
breach of any provision of this Agreement and to exercise all other rights granted by law. Furthermore, the Company recognizes
that in the event that it fails to perform, observe, or discharge any or all of its obligations under the Transaction Documents,
any remedy at law may prove to be inadequate relief to the Buyers. The Company therefore agrees that the Buyers shall be entitled
to seek temporary and permanent injunctive relief in any such case without the necessity of proving actual damages and without
posting a bond or other security.


 


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


 


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


 




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(p)
Independent Nature of Buyers’ Obligations and Rights. The obligations of each Buyer under any Transaction Document
are several and not joint with the obligations of any other Buyer, and no Buyer shall be responsible in any way for the performance
of the obligations of any other Buyer under any Transaction Document. Nothing contained herein or in any other Transaction Document,
and no action taken by any Buyer pursuant hereto or thereto, shall be deemed to constitute the Buyers as, and the Company acknowledges
that the Buyers do not so constitute, a partnership, an association, a joint venture or any other kind of entity, or create a
presumption that the Buyers are in any way acting in concert or as a group, and the Company shall not assert any such claim with
respect to such obligations or the transactions contemplated by the Transaction Documents and the Company acknowledges that the
Buyers are not acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction
Documents. The Company acknowledges and each Buyer confirms that it has independently participated in the negotiation of the transaction
contemplated hereby with the advice of its own counsel and advisors. Each Buyer shall be entitled to independently protect and
enforce its rights, including, without limitation, the rights arising out of this Agreement or out of any other Transaction Documents,
and it shall not be necessary for any other Buyer to be joined as an additional party in any proceeding for such purpose.


 


[Signature
Page Follows]


 




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IN
WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to this Securities Purchase Agreement
to be duly executed as of the date first written above.


 


	 	COMPANY:
	 	 
	 	DIGITAL
    ALLY, INC.
	 	 	 
	 	By:	/s/
                                         Stanton E. Ross

	 	Name:	Stanton
    E. Ross
	 	Title:	Chairman,
    President and CEO


 




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IN
WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to this Securities Purchase Agreement
to be duly executed as of the date first written above.


 


	 	BUYERS:
	 	 
	 	HUDSON
    BAY MASTER FUND LTD.
	 	 
	 	By:	Hudson
    Bay Capital Management LP, as its Investment Manager
	 	 	 
	 	By:	/s/
        George Antonopoulous

	 	Name:	George
    Antonopoulos
	 	Title:	Authorized
    Signatory


 




    	- 44 -



    	 



    


 


SCHEDULE
OF BUYERS


 


	(1)		 	(2)	 	 	(3)		 	 	(4)		 	 	(5)		 	(6)
	Buyer
	 	 	Address
    and
 Facsimile Number	 	 	Aggregate

                                         Principal
 Amount of Notes
	 	 	 	Number
                                         of
 Warrant Shares
	 	 	 	Purchase
                                         Price
	 	 	Legal
    Representative’s Address and Facsimile Number
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Hudson
    Bay Master Fund Ltd.	 	 	777 Third

                                                                                Avenue, 30th Floor
 New York, NY 10017
 Attention: Yoav Roth

                                                                                George Antonopolous

                                                                                Facsimile: 646-214-7946
 Telephone: 212-571-1244 
Residence: Cayman Islands
 E-mail: investments@hudsonbaycapital.com 
operations@hudsonbaycapital.com
 

	 	$	2,000,000	 	 	 	100,000	 	 	$	2,000,000	 	 	Schulte
    Roth & Zabel LLP
 919 Third Avenue
 New York, New York 10022
 Attention: Eleazer Klein, Esq.
 Facsimile: (212)
    593-5955
 Telephone: (212) 756-2376



 




    	- 45 -



    	 



    


 


EXHIBITS


 


	Exhibit A	 	Form of Notes
	 	 	 
	Exhibit B	 	Form of Warrants
	 	 	 
	Exhibit C	 	Form of Registration Rights Agreement
	 	 	 
	Exhibit D	 	Form of Guarantee Agreement
	 	 	 
	Exhibit E	 	Form of Security Agreement
	 	 	 
	Exhibit F	 	[Intentionally Omitted]
	 	 	 
	Exhibit G	 	Form of Irrevocable Transfer Agent Instructions
	 	 	 
	Exhibit H-1	 	Form of Opinion of Company General Counsel
	 	 	 
	Exhibit H-2	 	Form of Opinion of Company Outside Counsel
	 	 	 
	Exhibit I	 	Form of Secretary’s Certificate
	 	 	 
	Exhibit J	 	Form of Officer’s Certificate
	 	 	 
	Exhibit K	 	Form of Lock-Up Agreement


 


SCHEDULES


 


	Schedule 3(a)	 	Subsidiaries
	 	 	 
	Schedule 3(g)	 	Placement Agent Fees
	 	 	 
	Schedule 3(k)	 	SEC Documents
	 	 	 
	Schedule 3(l)	 	Absence of Certain Changes
	 	 	 
	Schedule 3(n)	 	Regulatory Permits
	 	 	 
	Schedule 3(q)	 	Transactions with Affiliates 
	 	 	 
	Schedule 3(r)	 	Equity Capitalization
	 	 	 
	Schedule 3(s)	 	Indebtedness and Other Contracts
	 	 	 
	Schedule 3(t)	 	Absence of Litigation
	 	 	 
	Schedule 3(x) 	 	Intellectual Property Rights
	 	 	 
	Schedule 3(ee)	 	Ranking of Notes
	 	 	 
	Schedule 4(d)	 	Use of Proceeds
	 	 	 
	Schedule 7(x)	 	Lock-Up Parties


 




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