EXHIBIT
10.1


 


STANDBY EQUITY
DISTRIBUTION AGREEMENT


 


THIS AGREEMENT dated as of
the 22nd day of July 2005 (the “Agreement”) between CORNELL CAPITAL PARTNERS, LP, a Delaware
limited partnership (the “Investor”), and SPHERIX INCORPORATED, a corporation organized and existing
under the laws of the State of Delaware (the “Company”).


 


WHEREAS, the
parties desire that, upon the terms and subject to the conditions contained
herein, the Company shall issue and sell to the Investor, from time to time as
provided herein, and the Investor shall purchase from the Company, up to Four
Million Dollars ($4,000,000) of the Company’s common stock, par value
$0.005 per share (the “Common Stock”); and


 


WHEREAS, such
investments will be made in reliance upon the provisions of Regulation D (“Regulation
D”) of the Securities Act of 1933, as amended, and the regulations
promulgated thereunder (the “Securities Act”), and or upon such other
exemption from the registration requirements of the Securities Act as may be
available with respect to any or all of the investments to be made hereunder.


 


WHEREAS, the
Company has engaged Newbridge Securities Corporation (the “Placement
Agent”), to act as the Company’s exclusive placement agent in connection
with the sale of the Common Stock to the Investor hereunder pursuant to the
Placement Agent Agreement dated the date hereof by and among the Company, the
Placement Agent and the Investor (the “Placement Agent Agreement”).


 


NOW, THEREFORE, the parties hereto agree as
follows:


 


ARTICLE
I.

Certain Definitions


 


Section 1.1.                                   “Advance”
shall mean the portion of the Commitment Amount requested by the Company in the
Advance Notice.


 


Section 1.2.                                   “Advance
Date” shall mean the date the David Gonzalez Attorney Trust Account is in
receipt of the funds from the Investor and David Gonzalez, Esq., is in
possession of free trading shares from the Company and therefore an Advance by
the Investor to the Company can be made and David Gonzalez, Esq. can release
the free trading shares to the Investor. The Advance Date shall be the first (1st)
Trading Day after expiration of the applicable Pricing Period for each Advance.


 


Section 1.3.                                   “Advance
Notice” shall mean a written notice to the Investor setting forth the
Advance amount that the Company requests from the Investor and the Advance
Date.


 


Section 1.4.                                   “Advance
Notice Date” shall mean each date the Company delivers to the Investor an
Advance Notice requiring the Investor to advance funds to the Company, subject
to the terms of this Agreement.  No
Advance Notice Date shall be less than five (5) Trading Days after the prior
Advance Notice Date.


 


Section 1.5.                                   “Bid
Price” shall mean, on any date, the closing bid price (as reported by
Bloomberg L.P.) of the Common Stock on the Principal Market or if the Common
Stock is not


 


 





















 


traded on a Principal Market, the highest
reported bid price for the Common Stock, as furnished by the National
Association of Securities Dealers, Inc.


 


Section 1.6.                                   “Closing”
shall mean one of the closings of a purchase and sale of Common Stock pursuant
to Section 2.3.


 


Section 1.7.                                   “Commitment
Amount” shall mean the aggregate amount of up to Four Million
Dollars ($4,000,000) which the Investor has agreed to provide to the
Company in order to purchase the Common Stock pursuant to the terms and conditions
of this Agreement, provided that the Company shall
not have the right to request an Advance if the issuance of the full number of
shares of Common Stock issuable in connection with such Advance would, together
with all shares of Common Stock previously issued under this Agreement, exceed
2,378,726 shares of Common Stock (which is no more than 19.99% of the
11,953,398 outstanding shares of Common Stock as of the date of this Agreement)
unless the necessary shareholder approval or consent has been received prior to
such request.


 


Section 1.8.                                   “Commitment
Period” shall mean the period commencing on the earlier to occur of (i) the
Effective Date, or (ii) such earlier date as the Company and the Investor may
mutually agree in writing, and expiring on the earliest to occur of (x) the
date on which the Investor shall have made payment of Advances pursuant to this
Agreement in the aggregate amount of Four Million Dollars ($4,000,000),
(y) the date this Agreement is terminated pursuant to Section 2.4, or (z) the
date occurring twenty-four (24) months after the Effective Date.


 


Section 1.9.                                   “Common
Stock” shall mean the Company’s common stock, par value $0.005 per share.


 


Section 1.10.                             “Condition
Satisfaction Date” shall have the meaning set forth in Section 7.2.


 


Section 1.11.                             “Damages”
shall mean any loss, claim, damage, liability, costs and expenses (including,
without limitation, reasonable attorney’s fees and disbursements and costs and
expenses of expert witnesses and investigation).


 


Section 1.12.                             “Effective
Date” shall mean the date on which the SEC first declares effective a
Registration Statement registering the resale of the Registrable Securities as
set forth in Section 7.2(a).


 


Section 1.13.                             “Escrow
Agreement” shall mean the escrow agreement among the Company, the Investor,
and David Gonzalez, Esq., dated the date hereof.


 


Section 1.14.                             “Exchange
Act” shall mean the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.


 


Section 1.15.                             “Material
Adverse Effect” shall mean any condition, circumstance, or situation that
would prohibit or otherwise materially interfere with the ability of the
Company to enter into and perform any of its obligations under this Agreement
or the Registration Rights Agreement in any material respect.


 


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Section 1.16.                             “Market
Price” shall mean the lowest VWAP of the Common Stock during the Pricing
Period.


 


Section 1.17.                             “Maximum
Advance Amount” shall be Three Hundred Fifty Thousand Dollars ($350,000)
per Advance Notice.


 


Section 1.18.                             “NASD”
shall mean the National Association of Securities Dealers, Inc.


 


Section 1.19.                             “Person”
shall mean an individual, a corporation, a partnership, an association, a trust
or other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.


 


Section 1.20.                             “Placement
Agent” shall mean Newbridge Securities Corporation, a registered
broker-dealer.


 


Section 1.21.                             “Pricing
Period” shall mean the five (5) consecutive Trading Days after the Advance
Notice Date.


 


Section 1.22.                             “Principal
Market” shall mean the Nasdaq National Market, the Nasdaq SmallCap Market,
the American Stock Exchange, the OTC Bulletin Board (“OTCBB”) or the New
York Stock Exchange (but not the Pink Sheets or the Grey Sheets), whichever is
at the time the principal trading exchange or market for the Common Stock.


 


Section 1.23.                             “Purchase
Price” shall be set at ninety five percent (95%) of the Market Price during
the Pricing Period.


 


Section 1.24.                             “Registrable
Securities” shall mean the shares of Common Stock to be issued hereunder (i) in respect of which the Registration
Statement has not been declared effective by the SEC, (ii) which have not been
sold under circumstances meeting all of the applicable conditions of Rule 144
(or any similar provision then in force) under the Securities Act (“Rule 144”)
or (iii) which have not been otherwise transferred to a holder who may trade
such shares without restriction under the Securities Act, and the Company has
delivered a new certificate or other evidence of ownership for such securities
not bearing a restrictive legend.


 


Section 1.25.                             “Registration
Rights Agreement” shall mean the Registration Rights Agreement dated the
date hereof, regarding the filing of the Registration Statement for the resale
of the Registrable Securities, entered into between the Company and the
Investor.


 


Section 1.26.                             “Registration
Statement” shall mean a registration statement on Form S-2 (if use of such
form is then available to the Company pursuant to the rules of the SEC and, if
not, on such other form promulgated by the SEC for which the Company then
qualifies and which counsel for the Company shall deem appropriate, and which
form shall be available for the resale of the Registrable Securities to be
registered thereunder in accordance with the provisions of this Agreement and
the Registration Rights Agreement, and in accordance with the intended method
of distribution of such securities), for the registration of the resale by the
Investor of the Registrable Securities under the Securities Act.


 


Section 1.27.                             “Regulation
D” shall have the meaning set forth in the recitals of this Agreement.


 


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Section 1.28.                             “SEC”
shall mean the Securities and Exchange Commission.


 


Section 1.29.                             “Securities
Act” shall have the meaning set forth in the recitals of this Agreement.


 


Section 1.30.                             “SEC
Documents” shall mean Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and Proxy Statements of the Company as
supplemented to the date hereof, filed by the Company for a period of at least
twelve (12) months immediately preceding the date hereof or the Advance Date,
as the case may be, until such time as the Company no longer has an obligation
to maintain the effectiveness of a Registration Statement as set forth in the
Registration Rights Agreement.


 


Section 1.31.                             “Trading
Day” shall mean any day during which the New York Stock Exchange shall be
open for business.


 


Section 1.32.                             “VWAP”
shall mean the volume weighted average price of the Common Stock as quoted by
Bloomberg, LP.


 


ARTICLE II.

Advances


 


Section 2.1.                                   Investments.


 


(a)                                  Advances.  Upon the terms and conditions set forth
herein (including, without limitation, the provisions of Article VII hereof),
on any Advance Notice Date the Company may request an Advance by the Investor
by the delivery of an Advance Notice. 
The number of shares of Common Stock that the Investor shall receive for
each Advance shall be determined by dividing the amount of the Advance by the
Purchase Price.  No fractional shares
shall be issued. Fractional shares shall be rounded to the next higher whole
number of shares.  The aggregate maximum
amount of all Advances that the Investor shall be obligated to make under this
Agreement shall not exceed the Commitment Amount.


 


Section 2.2.                                   Mechanics.


 


(a)                                  Advance
Notice.  At any time during the
Commitment Period, the Company may deliver an Advance Notice to the Investor,
subject to the conditions set forth in Section 7.2; provided, however, the
amount for each Advance as designated by the Company in the applicable Advance
Notice, shall not be more than the Maximum Advance Amount.  The aggregate amount of the Advances pursuant
to this Agreement shall not exceed the Commitment Amount.  The Company acknowledges that the Investor
may sell shares of the Company’s Common Stock corresponding with a particular
Advance Notice on the day the Advance Notice is received by the Investor.  There shall be a minimum of five (5) Trading
Days between each Advance Notice Date.


 


(b)                                 Date
of Delivery of Advance Notice.  An
Advance Notice shall be deemed delivered on (i) the Trading Day it is received
by facsimile or otherwise by the Investor if such notice is received prior to
12:00 noon Eastern Time, or (ii) the immediately succeeding Trading Day if it
is received by facsimile or otherwise after 12:00 noon Eastern Time on a
Trading Day


 


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or at any time on a day which is not a
Trading Day.  No Advance Notice may be
deemed delivered on a day that is not a Trading Day.


 


Section 2.3.                                   Closings.  On
each Advance Date, which shall be the first (1st) Trading Day after
expiration of the applicable Pricing Period for each Advance, (i) the Company
shall deliver to David Gonzalez, Esq. (the “Escrow Agent”) shares of the
Company’s Common Stock, representing the amount of the Advance by the Investor
pursuant to Section 2.1 herein, registered in the name of the Investor which
shall be delivered to the Investor, or otherwise in accordance with the Escrow
Agreement and (ii) the Investor shall deliver to Escrow Agent the amount of the
Advance specified in the Advance Notice by wire transfer of immediately
available funds which shall be delivered to the Company, or otherwise in
accordance with the Escrow Agreement.  In
addition, on or prior to the Advance Date, each of the Company and the Investor
shall deliver to the other through the Investor’s counsel, all documents,
instruments and writings required to be delivered by either of them pursuant to
this Agreement in order to implement and effect the transactions contemplated
herein.  Payment of funds to the Company
and delivery of the Company’s Common Stock to the Investor shall occur in accordance
with the conditions set forth above and those contained in the Escrow
Agreement; provided, however, that to the extent the Company has
not paid the fees, expenses, and disbursements of the Investor, the Investor’s
counsel, or the Company’s counsel in accordance with Section 12.4, the amount
of such fees, expenses, and disbursements may be deducted by the Investor (and
shall be paid to the relevant party) from the amount of the Advance with no
reduction in the amount of shares of the Company’s Common Stock to be delivered
on such Advance Date.


 


Section 2.4.                                   Termination of Investment.  The obligation of the Investor to make an
Advance to the Company pursuant to this Agreement shall terminate permanently
(including with respect to an Advance Date that has not yet occurred) in the
event that (i) there shall occur any stop order or suspension of the
effectiveness of the Registration Statement for an aggregate of fifty (50)
Trading Days, other than due to the acts of the Investor, during the Commitment
Period, or (ii) the Company shall at any time fail materially to comply with
the requirements of Article VI and such failure is not cured within thirty (30)
days after receipt of written notice from the Investor, provided, however,
that this termination provision shall not apply to any period commencing upon
the filing of a post-effective amendment to such Registration Statement and
ending upon the date on which such post effective amendment is declared
effective by the SEC.


 


Section 2.5.                                   Agreement to Advance Funds.  The Investor agrees to advance the amount
specified in the Advance Notice to the Company after the completion of each of
the following conditions and the other conditions set forth in this Agreement:


 


(a)                              the
execution and delivery by the Company, and the Investor, of this Agreement and
the Exhibits hereto;


 


(b)                             the Escrow Agent shall have received the shares of Common
Stock applicable to the Advance in accordance with Section 2.3.  Such shares shall be free of restrictive
legends.


 


(c)                              the Company’s Registration Statement with respect to the
resale of the Registrable Securities in accordance with the terms of the
Registration Rights Agreement shall have been declared effective by the SEC;


 


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(d)                             the Company shall have obtained all material permits and
qualifications required by any applicable state for the offer and sale of the
Registrable Securities, or shall have the availability of exemptions
therefrom.  The sale and issuance of the
Registrable Securities shall be legally permitted by all laws and regulations
to which the Company is subject;


 


(e)                              the
Company shall have filed with the Commission in a timely manner all reports,
notices and other documents required of a “reporting company” under the Exchange
Act and applicable Commission regulations;


 


(f)                                the
fees as set forth in Section 12.4 below shall have been paid or can be withheld
as provided in Section 2.3; and


 


(g)                             the conditions set forth in Section 7.2 shall have been
satisfied.


 


(h)                             The
Company’s transfer agent shall be DWAC eligible.


 


Section 2.6.                                   Lock
Up Period.  On the date hereof, the
Company shall obtain from each officer and director a lock-up agreement, as
defined below, in the form annexed hereto as Schedule 2.6 agreeing to only
sell in compliance with the volume limitation of Rule 144.


 


Section 2.7.                                   Hardship.  In
the event the Investor sells shares of the Company’s Common Stock after receipt
of an Advance Notice and the Company fails to perform its obligations as
mandated in Section 2.3, and specifically the Company fails to deliver to the
Escrow Agent on the Advance Date the shares of Common Stock corresponding to
the applicable Advance, the Company acknowledges that the Investor shall suffer
financial hardship and therefore shall be liable for any and all losses,
commissions, fees, or financial hardship caused to the Investor.


 


ARTICLE III.

Representations and Warranties of Investor


 


Investor hereby represents and warrants to, and
agrees with, the Company that the following are true and correct as of the date
hereof and as of each Advance Date:


 


Section 3.1.                                   Organization and Authorization.  The Investor is duly incorporated or
organized and validly existing in the jurisdiction of its incorporation or
organization and has all requisite power and authority to purchase and hold the
securities issuable hereunder.  The
decision to invest and the execution and delivery of this Agreement by such
Investor, the performance by such Investor of its obligations hereunder and the
consummation by such Investor of the transactions contemplated hereby have been
duly authorized and requires no other proceedings on the part of the
Investor.  The undersigned has the right,
power and authority to execute and deliver this Agreement and all other
instruments (including, without limitations, the Registration Rights
Agreement), on behalf of the Investor. 
This Agreement has been duly executed and delivered by the Investor and,
assuming the execution and delivery hereof and acceptance thereof by the
Company, will constitute the legal, valid and binding obligations of the
Investor, enforceable against the Investor in accordance with its terms.


 


Section 3.2.                                   Evaluation of Risks. 
The Investor has such knowledge and experience in financial, tax and
business matters as to be capable of evaluating the merits and risks of, and


 


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bearing the economic risks entailed by, an
investment in the Company and of protecting its interests in connection with
this transaction.  It recognizes that its
investment in the Company involves a high degree of risk.


 


Section 3.3.                                   No
Legal Advice From the Company.  The Investor acknowledges that it had the
opportunity to review this Agreement and the transactions contemplated by this
Agreement with his or its own legal counsel and investment and tax
advisors.  The Investor is relying solely
on such counsel and advisors and not on any statements or representations of
the Company or any of its representatives or agents for legal, tax or
investment advice with respect to this investment, the transactions
contemplated by this Agreement or the securities laws of any jurisdiction.


 


Section 3.4.                                   Investment Purpose. The securities are being
purchased by the Investor for its own account, and for investment purposes.  The Investor agrees not to assign or in any
way transfer the Investor’s rights to the securities or any interest therein
and acknowledges that the Company will not recognize any purported assignment
or transfer except in accordance with applicable Federal and state securities
laws.  No other person has or will have a
direct or indirect beneficial interest in the securities.  The Investor agrees not to sell, hypothecate
or otherwise transfer the Investor’s securities unless the securities are
registered under Federal and applicable state securities laws or unless, in the
opinion of counsel satisfactory to the Company, an exemption from such laws is
available.


 


Section 3.5.                                   Accredited Investor. 
The Investor is an “Accredited Investor” as that term is defined
in Rule 501(a)(3) of Regulation D of the Securities
Act.


 


Section 3.6.                                   Information. 
The Investor and its advisors (and its counsel), if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and information it deemed material to making an informed
investment decision.  The Investor and
its advisors, if any, have been afforded the opportunity to ask questions of
the Company and its management.  Neither
such inquiries nor any other due diligence investigations conducted by such
Investor or its advisors, if any, or its representatives shall modify, amend or
affect the Investor’s right to rely on the Company’s representations and
warranties contained in this Agreement. 
The Investor understands that its investment involves a high degree of
risk.  The Investor is in a position
regarding the Company, which, based upon employment, family relationship or
economic bargaining power, enabled and enables such Investor to obtain
information from the Company in order to evaluate the merits and risks of this
investment.  The Investor has sought such
accounting, legal and tax advice, as it has considered necessary to make an
informed investment decision with respect to this transaction.


 


Section 3.7.                                   Receipt of Documents. The Investor and its counsel
have received and read in their entirety: 
(i) this Agreement and the Exhibits annexed hereto; (ii) all due
diligence and other information necessary to verify the accuracy and completeness
of such representations, warranties and covenants; (iii) the Company’s Form
10-K for the year ended December 31, 2004 and Form 10-Q for the period ended
March 31, 2005; and (iv) answers to all questions the Investor submitted
to the Company regarding an investment in the Company; and the Investor has
relied on the information contained therein and has not been furnished any
other documents, literature, memorandum or prospectus.


 


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Section 3.8.                                   Registration Rights Agreement and Escrow Agreement.  The parties have entered into the
Registration Rights Agreement and the Escrow Agreement, each dated the date
hereof.


 


Section 3.9.                                   No
General Solicitation.  Neither the
Company, nor any of its 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 under the Securities Act) in connection with the
offer or sale of the shares of Common Stock offered hereby.


 


Section 3.10.                             Not
an Affiliate.  The Investor is not an
officer, director or a person that directly, or indirectly through one or more
intermediaries, controls or is controlled by, or is under common control with
the Company or any “Affiliate” of the Company (as that term is defined
in Rule 405 of the Securities Act).


 


Section 3.11.                             Trading Activities. 
The Investor’s trading activities with respect to the Company’s Common
Stock shall be in compliance with all applicable federal and state securities
laws, rules and regulations and the rules and regulations of the Principal
Market on which the Company’s Common Stock is listed or traded. Neither the
Investor nor its affiliates has an open short position in the Common Stock of
the Company, the Investor agrees that it shall not, and that it will cause its
affiliates not to, engage in any short sales of or hedging transactions with
respect to the Common Stock, provided that
the Company acknowledges and agrees that upon receipt of an Advance Notice the
Investor has the right to sell the shares to be issued to the Investor pursuant
to the Advance Notice during the applicable Pricing Period.  


 


ARTICLE IV.

Representations and Warranties of the Company


 


Except as stated below, on the disclosure
schedules attached hereto or in the SEC Documents (as defined herein), the
Company hereby represents and warrants to, and covenants with, the Investor
that the following are true and correct as of the date hereof:


 


Section 4.1.                                   Organization and Qualification.  The Company is duly incorporated or organized
and validly existing in the jurisdiction of its incorporation or organization
and has all requisite corporate power to own its properties and to carry on its
business as now being conducted.  Each of
the Company and its subsidiaries is duly qualified as a foreign corporation to
do business and is in good standing in every jurisdiction in which 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
have a Material Adverse Effect on the Company and its subsidiaries taken as a
whole.


 


Section 4.2.                                   Authorization, Enforcement, Compliance with Other Instruments.  (i) The Company has the requisite corporate
power and authority to enter into and perform this Agreement, the Registration
Rights Agreement, the Escrow Agreement, the Placement Agent Agreement and any
related agreements, in accordance with the terms hereof and thereof, (ii) the
execution and delivery of this Agreement, the Registration Rights Agreement,
the Escrow Agreement, the Placement Agent Agreement and any related agreements
by the Company and the consummation by it of the transactions contemplated
hereby and thereby, have been duly authorized by the Company’s Board of
Directors and no further consent or authorization is required by the Company,
its Board of Directors or its stockholders, (iii) this Agreement, the


 


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Registration
Rights Agreement, the Escrow Agreement, the Placement Agent Agreement and any
related agreements have been duly executed and delivered by the Company, (iv)
this Agreement, the Registration Rights Agreement, the Escrow Agreement, the
Placement Agent Agreement and assuming the execution and delivery thereof and
acceptance by the Investor and any related agreements constitute the valid and
binding obligations of the Company enforceable against the Company in
accordance with their 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 creditors’ rights and remedies.


 


Section 4.3.                                   Capitalization. 
As of the date hereof, the authorized capital stock of the Company
consists of 50,000,000 shares of Common Stock, par value $0.005 per share and
2,000,000 shares of Preferred Stock, $0.01 par value per share (“Preferred
Stock”), of which 11,953,398 shares of Common Stock and no shares of
Preferred Stock were issued and outstanding. 
All of such outstanding shares have been validly issued and are fully
paid and nonassessable.  Except as
disclosed in the SEC Documents, no shares of Common Stock are subject to
preemptive rights or any other similar rights or any liens or encumbrances
suffered or permitted by the Company. 
Except as disclosed in the SEC Documents, as of the date hereof,
(i) 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, 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 of 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, any
shares of capital stock of the Company or any of its subsidiaries, (ii) there
are no outstanding debt securities (iii) there
are no outstanding registration statements other than on Form S-8 and (iv)
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 Securities Act (except pursuant to the Registration Rights Agreement).  Except with respect to the warrants
outstanding, there are no securities or instruments containing anti-dilution or
similar provisions that will be triggered by this Agreement or any related
agreement or the consummation of the transactions described herein or
therein.  The Company has furnished to
the Investor true and correct copies of the Company’s Certificate of
Incorporation, as amended and as in effect on the date hereof (the “Certificate
of Incorporation”), and the Company’s By-laws, as in effect on the date
hereof (the “By-laws”), and the terms of all securities convertible into
or exercisable for Common Stock and the material rights of the holders thereof
in respect thereto.


 


Section 4.4.                                   No
Conflict.  The execution, delivery
and performance of this Agreement by the Company and the consummation by the
Company of the transactions contemplated hereby will not (i) result in a
violation of the Certificate of Incorporation, any certificate of designations
of any outstanding series of preferred stock of the Company or By-laws 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 the Company or any of its subsidiaries is a
party, or result in a violation of any law, rule, regulation, order, judgment
or decree (including federal and state securities laws and regulations and the
rules and regulations of the Principal Market on which the Common Stock is
quoted) applicable to the Company or


 


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any of its subsidiaries or by which any
material property or asset of the Company or any of its subsidiaries is bound
or affected and which would cause a Material Adverse Effect.  Except as disclosed in the SEC Documents,
neither the Company nor its subsidiaries is in violation of any term of or in
default under its Articles of Incorporation or By-laws or their organizational
charter or by-laws, respectively, or any material contract, agreement,
mortgage, indebtedness, indenture, instrument, judgment, decree or order or any
statute, rule or regulation applicable to the Company or its subsidiaries.  The business of the Company and its
subsidiaries is not being conducted in violation of any material law, ordinance,
regulation of any governmental entity.  Except as specifically contemplated by this
Agreement and as required under the Securities Act and any applicable state
securities laws, the Company is not required to obtain any consent,
authorization or order of, or make any filing or registration with, any court
or governmental agency in order for it to execute, deliver or perform any of
its obligations under or contemplated by this Agreement or the Registration
Rights Agreement in accordance with the terms hereof or thereof.  All consents, authorizations, orders, filings
and registrations which the Company is required to obtain pursuant to the
preceding sentence have been obtained or effected on or prior to the date hereof.  The Company and its subsidiaries are unaware
of any fact or circumstance which might give rise to any of the foregoing.


 


Section 4.5.                                   SEC Documents; Financial Statements.  Since January 1, 2003, the Company has filed
all reports, schedules, forms, statements and other documents required to be
filed by it with the SEC under the Exchange Act.  The Company has delivered to the Investor or
its representatives, or made available through the SEC’s website at
http://www.sec.gov, true and complete copies of the SEC Documents.  As of their respective dates, the financial
statements of the Company disclosed in the SEC Documents (the “Financial
Statements”) 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 generally accepted accounting
principles, consistently applied, 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 Investor which is
not included in the SEC Documents 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 circumstances under which they were
made, not misleading.


 


Section 4.6.                                   10b-5.  The SEC Documents do not include any untrue
statements of material fact, nor do they omit to state any material fact
required to be stated therein necessary to make the statements made, in light
of the circumstances under which they were made, not misleading.


 


Section 4.7.                                   No
Default.  Except as disclosed in the
SEC Documents, the Company is not in default in the performance or observance
of any material obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust or other material instrument or agreement to
which it is a party or by which it is or its property is bound and neither the
execution, nor the delivery by the Company, nor the performance by the Company
of its


 


10





















 


obligations
under this Agreement or any of the exhibits or attachments hereto will conflict
with or result in the breach or violation of any of the terms or provisions of,
or constitute a default or result in the creation or imposition of any lien or
charge on any assets or properties of the Company under its Certificate of
Incorporation, By-Laws, any material indenture, mortgage, deed of trust or
other material agreement applicable to the Company or instrument to which the
Company is a party or by which it is bound, or any statute, or any decree,
judgment, order, rules or regulation of any court or governmental agency or
body having jurisdiction over the Company or its properties, in each case which
default, lien or charge is likely to cause a Material Adverse Effect on the
Company’s business or financial condition.


 


Section 4.8.                                   Absence of Events of Default.  Except for matters described in the SEC
Documents and/or this Agreement, no Event of Default, as defined in the
respective agreement to which the Company is a party, and no event which, with
the giving of notice or the passage of time or both, would become an Event of
Default (as so defined), has occurred and is continuing, which would have a
Material Adverse Effect on the Company’s business, properties, prospects,
financial condition or results of operations.


 


Section 4.9.                                   Intellectual Property Rights.  The Company and its subsidiaries own or
possess adequate rights or licenses to use all material trademarks, trade
names, service marks, service mark registrations, service names, patents,
patent rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their respective
businesses as now conducted.   The
Company and its subsidiaries do not have any knowledge of any infringement by
the Company or its subsidiaries of trademark, trade name rights, patents,
patent rights, copyrights, inventions, licenses, service names, service marks,
service mark registrations, trade secret or other similar rights of others,
and, to the knowledge of the Company, there is no claim, action or proceeding
being made or brought against, or to the Company’s knowledge, being threatened
against, the Company or its subsidiaries regarding trademark, trade name,
patents, patent rights, invention, copyright, license, service names, service
marks, service mark registrations, trade secret or other infringement; and the
Company and its subsidiaries are unaware of any facts or circumstances which
might give rise to any of the foregoing.


 


Section 4.10.                             Employee Relations. 
Neither the Company nor any of its subsidiaries is involved in any labor dispute nor, to the knowledge of the Company or
any of its subsidiaries, is any such dispute threatened.  None of the Company’s or its subsidiaries’
employees is a member of a union and the Company and its subsidiaries believe
that their relations with their employees are good.


 


Section 4.11.                             Environmental Laws. 
The Company and its subsidiaries are (i) in compliance with any and all
applicable material foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants (“Environmental
Laws”), (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.


 


Section 4.12.                             Title.  Except
as set forth in the SEC Documents, the Company has good and marketable title to
its properties and material assets owned by it, free and clear of any


 


11





















 


pledge, lien, security interest,
encumbrance, claim or equitable interest other than such as are not material to
the business of the Company.  Any real
property and facilities held under lease by the Company and 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.


 


Section 4.13.                             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 materially and adversely affect
the condition, financial or otherwise, or the earnings, business or operations
of the Company and its subsidiaries, taken as a whole.


 


Section 4.14.                             Regulatory Permits. 
The Company and its subsidiaries possess all material certificates,
authorizations and permits issued by the appropriate federal, state or foreign
regulatory authorities necessary to conduct their respective businesses, 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.


 


Section 4.15.                             Internal Accounting 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
generally accepted accounting principles and to maintain asset accountability,
(iii) access to assets is permitted only in accordance with management’s
general or specific authorization and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.


 


Section 4.16.                             No
Material Adverse Breaches, etc. 
Except as set forth in the SEC Documents, neither the Company nor any of
its subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation which in the
judgment of the Company’s officers has or is expected in the future to have a
Material Adverse Effect on the business, properties, operations, financial
condition, results of operations or prospects of the Company or its
subsidiaries.  Except as set forth in the
SEC Documents, neither the Company nor any of its subsidiaries is in breach of
any contract or agreement which breach, in the judgment of the Company’s
officers, has or is expected to have a Material Adverse Effect on the business,
properties, operations, financial condition, results of operations or prospects
of the Company or its subsidiaries.


 


12





















 


Section 4.17.                             Absence of Litigation.  Except as set forth in the SEC Documents,
there is no action, suit, proceeding, inquiry or investigation before or by any
court, public board, government agency, self-regulatory organization or body
pending against or affecting the Company, the Common Stock or any of the
Company’s subsidiaries, wherein an unfavorable decision, ruling or finding
would (i) have a Material Adverse Effect on the transactions contemplated
hereby (ii) adversely affect the validity or enforceability of, or the
authority or ability of the Company to perform its obligations under, this
Agreement or any of the documents contemplated herein, or (iii) except as
expressly disclosed in the SEC Documents, have a Material Adverse Effect on the
business, operations, properties, financial condition or results of operation
of the Company and its subsidiaries taken as a whole.


 


Section 4.18.                             Subsidiaries. 
Except as disclosed in the SEC Documents, the Company does not presently
own or control, directly or indirectly, any interest in any other corporation,
partnership, association or other business entity.


 


Section 4.19.                             Tax Status. 
Except as disclosed in the SEC Documents, the Company and each of its
subsidiaries has made or filed all federal and state income and all other tax
returns, reports and declarations required by any jurisdiction to which it is
subject and (unless and only to the extent that the Company and each of its
subsidiaries has set aside on its books provisions reasonably adequate for the
payment of all unpaid and unreported taxes) 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 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.


 


Section 4.20.                             Certain Transactions. 
Except as set forth in the SEC Documents none of the officers,
directors, or employees of the Company is presently a party to any transaction
with the Company (other than for services as employees, officers and
directors), including any contract, agreement or other arrangement providing
for the furnishing of services to or by, providing for rental of real or
personal property to or from, or otherwise requiring payments to or from any
officer, director or such employee or, to the knowledge of the Company, any
corporation, partnership, trust or other entity in which any officer, director,
or any such employee has a substantial interest or is an officer, director,
trustee or partner.


 


Section 4.21.                             Fees and Rights of First Refusal.  The Company is not obligated to offer the securities
offered hereunder on a right of first refusal basis or otherwise to any third
parties including, but not limited to, current or former shareholders of the
Company, underwriters, brokers, agents or other third parties.


 


Section 4.22.                             Use of Proceeds. 
The Company shall use the net proceeds from this offering for general
corporate purposes, including, without limitation, the payment of loans
incurred by the Company.  However, in no
event shall the Company use the net proceeds from this offering for the payment
(or loan to any such person for the payment) of any judgment, or other
liability, incurred by any executive officer, officer, director or employee of
the Company, except for any liability owed to such person for services
rendered, or if any judgment or other


 


13





















 


liability is incurred by such person
originating from services rendered to the Company, or the Company has
indemnified such person from liability.


 


Section 4.23.                             Further Representation and Warranties of the Company.  For so long as any securities issuable
hereunder held by the Investor remain outstanding, the Company acknowledges,
represents, warrants and agrees that it will maintain the listing of its Common
Stock on the Principal Market.


 


Section 4.24.                             Opinion of Counsel. 
Investor shall receive an opinion letter from counsel to the Company on
the date hereof.


 


Section 4.25.                             Opinion of Counsel. 
The Company will obtain for the Investor, at the Company’s expense, any
and all opinions of counsel which may be reasonably required in order to sell
the securities issuable hereunder without restriction.


 


Section 4.26.                             Dilution.  The
Company is aware and acknowledges that issuance of shares of the Company’s
Common Stock could cause dilution to existing shareholders and could
significantly increase the outstanding number of shares of Common Stock.


 


ARTICLE
V.

Indemnification


 


The Investor and the Company represent to the
other the following with respect to itself:


 


Section 5.1.                                   Indemnification.


 


(a)                                  In
consideration of the Investor’s execution and delivery of this Agreement, and
in addition to all of the Company’s other obligations under this Agreement, the
Company shall defend, protect, indemnify and hold harmless the Investor, and
all of its officers, directors, partners, employees and agents (including,
without limitation, those retained in connection with the transactions
contemplated by this Agreement) (collectively, the “Investor 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 Investor 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 the Investor Indemnitees or any of them 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 this Agreement or the
Registration Rights Agreement or any other certificate, instrument or document
contemplated hereby or thereby, (b) any breach of any covenant, agreement or
obligation of the Company contained in this Agreement or the Registration
Rights Agreement 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 Investor Indemnitee not arising out of any action or inaction of
an Investor Indemnitee, and arising out of or resulting from the execution,
delivery, performance or enforcement of this Agreement or any other instrument,
document or agreement executed pursuant hereto by any of the Investor
Indemnitees.  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, which is permissible under applicable law.


 


14





















 


(b)                                 In
consideration of the Company’s execution and delivery of this Agreement, and in
addition to all of the Investor’s other obligations under this Agreement, the
Investor shall defend, protect, indemnify and hold harmless the Company and all
of its officers, directors, shareholders, employees and agents (including,
without limitation, those retained in connection with the transactions
contemplated by this Agreement) (collectively, the “Company Indemnitees”)
from and against any and all Indemnified Liabilities incurred by the Company
Indemnitees or any of them as a result of, or arising out of, or relating to
(a) any misrepresentation or breach of any representation or warranty made by
the Investor in this Agreement, the Registration Rights Agreement, or any
instrument or document contemplated hereby or thereby executed by the Investor,
(b) any breach of any covenant, agreement or obligation of the Investor(s)
contained in this Agreement,  the
Registration Rights Agreement or any other certificate, instrument or document
contemplated hereby or thereby executed by the Investor, or (c) any cause of
action, suit or claim brought or made against such Company Indemnitee based on
misrepresentations or due to a breach by the Investor and arising out of or
resulting from the execution, delivery, performance or enforcement of this
Agreement or any other instrument, document or agreement executed pursuant
hereto by any of the Company Indemnitees. 
To the extent that the foregoing undertaking by the Investor may be
unenforceable for any reason, the Investor shall make the maximum contribution
to the payment and satisfaction of each of the Indemnified Liabilities, which
is permissible under applicable law.


 


(c)                                  The
obligations of the parties to indemnify or make contribution under this Section
5.1 shall survive termination.


 


ARTICLE VI.

Covenants of the Company


 


Section 6.1.                                   Registration Rights. 
The Company shall cause the Registration Rights Agreement to remain in
full force and effect and the Company shall comply in all material respects
with the terms thereof.


 


Section 6.2.                                   Listing of Common Stock.  The Company shall maintain the Common Stock’s
authorization for quotation on the NASDAQ National Market, the NASDAQ SmallCap
Market or the OTCBB.


 


Section 6.3.                                   Exchange
Act Registration.  The Company will
cause its Common Stock to continue to be registered under Section 12(g) of the
Exchange Act, will file in a timely manner all reports and other documents
required of it as a reporting company under the Exchange Act and will not take
any action or file any document (whether or not permitted by Exchange Act or
the rules thereunder) to terminate or suspend such registration or to terminate
or suspend its reporting and filing obligations under said Exchange Act.


 


Section 6.4.                                   Transfer
Agent Instructions.  Upon
effectiveness of the Registration Statement the Company shall deliver
instructions to its transfer agent to issue shares of Common Stock to the
Investor free of restrictive legends on or before each Advance Date


 


Section 6.5.                                   Corporate Existence. 
The Company will take all steps necessary to preserve and continue the
corporate existence of the Company.


 


15





















 


Section 6.6.                                   Notice of Certain Events Affecting Registration; Suspension of
Right to Make an Advance.  The
Company will immediately notify the Investor upon its becoming aware of the
occurrence of any of the following events in respect of a registration
statement or related prospectus relating to an offering of Registrable
Securities: (i) receipt of any request for additional information by the SEC or
any other Federal or state governmental authority during the period of
effectiveness of the Registration Statement for amendments or supplements to the
registration statement or related prospectus; (ii) the issuance by the SEC or
any other Federal or state governmental authority of any stop order suspending
the effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose; (iii) receipt of any notification with respect to
the suspension of the qualification or exemption from qualification of any of
the Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; (iv) the happening of any event
that makes any statement made in the Registration Statement or related
prospectus of any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires the making of any
changes in the Registration Statement, related prospectus or documents so that,
in the case of the Registration Statement, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
that in the case of the related prospectus, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and (v) the Company’s
reasonable determination that a post-effective amendment to the Registration
Statement would be appropriate; and the Company will promptly make available to
the Investor any such supplement or amendment to the related prospectus.  The Company shall not deliver to the Investor
any Advance Notice during the continuation of any of the foregoing events.


 


Section 6.7.                                   Restriction on Sale of Capital Stock.  During the Commitment Period, the Company
shall not, without the prior written consent of the Investor, (i) issue or sell
any Common Stock or Preferred Stock without consideration or for a
consideration per share less than the Bid Price of the Common Stock determined
immediately prior to its issuance, (ii) issue or sell any Preferred Stock warrant, option, right, contract,
call, or other security or instrument granting the holder thereof the right to
acquire Common Stock without consideration or for a consideration per share
less than such Common Stock’s Bid Price determined immediately prior to its
issuance, or (iii) file any registration statement on Form S-8.


 


Section 6.8.                                   Consolidation; Merger.  The Company shall not, at any time after the date
hereof, effect any merger or consolidation of the Company with or into, or a
transfer of all or substantially all the assets of the Company to another
entity (a “Consolidation Event”) unless the resulting successor or
acquiring entity (if not the Company) assumes by written instrument the
obligation to deliver to the Investor such shares of stock and/or securities as
the Investor is entitled to receive pursuant to this Agreement.


 


Section 6.9.                                   Issuance of the Company’s Common Stock.  The sale of the shares of Common Stock shall
be made in accordance with the provisions and requirements of Regulation D
and any applicable state securities law.


 


16





















 


ARTICLE VII.

Conditions for Advance and Conditions to Closing


 


Section 7.1.                                   Conditions Precedent to the Obligations of the Company.  The obligation hereunder of the Company to
issue and sell the shares of Common Stock to the Investor incident to each
Closing is subject to the satisfaction, or waiver by the Company, at or before
each such Closing, of each of the conditions set forth below.


 


(a)                                  Accuracy
of the Investor’s Representations and Warranties.  The representations and warranties of the
Investor shall be true and correct in all material respects.


 


(b)                                 Performance
by the Investor.  The Investor shall
have performed, satisfied and complied in all respects with all covenants,
agreements and conditions required by this Agreement and the Registration
Rights Agreement to be performed, satisfied or complied with by the Investor at
or prior to such Closing.


 


Section 7.2.                                   Conditions
Precedent to the Right of the Company to Deliver an Advance Notice and the
Obligation of the Investor to Purchase Shares of Common Stock.  The right of the Company to deliver an
Advance Notice and the obligation of the Investor hereunder to acquire and pay
for shares of the Company’s Common Stock incident to a Closing is subject to
the fulfillment by the Company, on (i) the date of delivery of such Advance
Notice and (ii) the applicable Advance Date (each a “Condition
Satisfaction Date”), of each of the following conditions:


 


(a)                                  Registration
of the Common Stock with the SEC. 
The Company shall have filed with the SEC a Registration Statement with
respect to the resale of the Registrable Securities in accordance with the
terms of the Registration Rights Agreement. 
As set forth in the Registration Rights Agreement, the Registration
Statement shall have previously become effective and shall remain effective on
each Condition Satisfaction Date and (i) neither the Company nor the Investor
shall have received notice that the SEC has issued or intends to issue a stop
order with respect to the Registration Statement or that the SEC otherwise has
suspended or withdrawn the effectiveness of the Registration Statement, either
temporarily or permanently, or intends or has threatened to do so (unless the
SEC’s concerns have been addressed and the Investor is reasonably satisfied
that the SEC no longer is considering or intends to take such action), and (ii)
no other suspension of the use or withdrawal of the effectiveness of the
Registration Statement or related prospectus shall exist.  The Registration Statement must have been
declared effective by the SEC prior to the first Advance Notice Date.


 


(b)                                 Authority.  The Company shall have obtained all permits
and qualifications required by any applicable state in accordance with the
Registration Rights Agreement for the offer and sale of the shares of Common
Stock, or shall have the availability of exemptions therefrom.  The sale and issuance of the shares of Common
Stock shall be legally permitted by all laws and regulations to which the
Company is subject.


 


(c)                                  Fundamental
Changes. There shall not exist any fundamental
changes to the information set forth in the Registration Statement which would
require the Company to file a post-effective amendment to the Registration
Statement.


 


17





















 


(d)                                 Performance
by the Company.  The Company shall
have performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by this Agreement (including,
without limitation, the conditions specified in Section 2.5 hereof) and
the Registration Rights Agreement to be performed, satisfied or complied with
by the Company at or prior to each Condition Satisfaction Date.


 


(e)                                  No
Injunction.  No statute, rule,
regulation, executive order, decree, ruling or injunction shall have been
enacted, entered, promulgated or endorsed by any court or governmental
authority of competent jurisdiction that prohibits or directly and adversely
affects any of the transactions contemplated by this Agreement, and no
proceeding shall have been commenced that may have the effect of prohibiting or
adversely affecting any of the transactions contemplated by this Agreement.


 


(f)                                    No
Suspension of Trading in or Delisting of Common Stock.  The trading of the Common Stock is not
suspended by the SEC or the Principal Market (if the Common Stock is traded on
a Principal Market).  The issuance of
shares of Common Stock with respect to the applicable Closing, if any, shall
not violate the shareholder approval requirements of the Principal Market (if
the Common Stock is traded on a Principal Market).  The Company shall not have received any
notice threatening the continued listing of the Common Stock on the OTCBB (if
the Common Stock is traded on the OTCBB).


 


(g)                                 Maximum
Advance Amount.  The amount of an
Advance requested by the Company shall not exceed the Maximum Advance
Amount.  In addition, in no event shall
the number of shares issuable to the Investor pursuant to an Advance cause the
aggregate number of shares of Common Stock beneficially owned by the Investor
and its affiliates to exceed nine and 9/10 percent (9.9%) of the then
outstanding Common Stock of the Company. 
For the purposes of this section beneficial ownership shall be
calculated in accordance with Section 13(d) of the Exchange Act.


 


(h)                                 No
Knowledge.  The Company has no
knowledge of any event which would be more likely than not to have the effect
of causing such Registration Statement to be suspended or otherwise
ineffective.


 


(i)                                     Other.  On each Condition Satisfaction Date, the
Investor shall have received the certificate executed by an officer of the
Company in the form of Exhibit A attached hereto.


 


ARTICLE VIII.

Due Diligence Review; Non-Disclosure of Non-Public Information


 


Section 8.1.                                   Due Diligence Review. 
Prior to the filing of the Registration Statement the Company shall make
available for inspection and review by the Investor, its advisors and
representatives, and any underwriter participating in any disposition of the
Registrable Securities on behalf of the Investor pursuant to the Registration
Statement, any such registration statement or amendment or supplement thereto
or any blue sky, NASD or other filing, all financial and other records, all SEC
Documents and other filings with the SEC, and all other corporate documents and
properties of the Company as may be reasonably necessary for the purpose of such
review, and cause the Company’s officers, directors and employees to supply all
such information reasonably requested by the Investor or any such
representative, advisor or


 


18





















 


underwriter in
connection with such Registration Statement (including, without limitation, in
response to all questions and other inquiries reasonably made or submitted by
any of them), prior to and from time to time after the filing and effectiveness
of the Registration Statement for the sole purpose of enabling the Investor and
such representatives, advisors and underwriters and their respective
accountants and attorneys to conduct initial and ongoing due diligence with
respect to the Company and the accuracy of the Registration Statement.


 


Section 8.2.                                   Non-Disclosure of Non-Public Information.


 


(a)                                  The
Company shall not disclose non-public information to the Investor, its
advisors, or its representatives, unless prior to disclosure of such
information the Company identifies such information as being non-public
information and provides the Investor, such advisors and representatives with
the opportunity to accept or refuse to accept such non-public information for
review.  The Company may, as a condition
to disclosing any non-public information hereunder, require the Investor’s
advisors and representatives to enter into a confidentiality agreement in form
reasonably satisfactory to the Company and the Investor.


 


(b)                                 Nothing
herein shall require the Company to disclose non-public information to the
Investor or its advisors or representatives, and the Company represents that it
does not disseminate non-public information to any investors who purchase stock
in the Company in a public offering, to money managers or to securities
analysts, provided, however, that notwithstanding anything herein to the
contrary, the Company will, as hereinabove provided, immediately notify the
advisors and representatives of the Investor and, if any, underwriters, of any
event or the existence of any circumstance (without any obligation to disclose
the specific event or circumstance) of which it becomes aware, constituting
non-public information (whether or not requested of the Company specifically or
generally during the course of due diligence by such persons or entities),
which, if not disclosed in the prospectus included in the Registration
Statement would cause such prospectus to include a material misstatement or to
omit a material fact required to be stated therein in order to make the
statements, therein, in light of the circumstances in which they were made, not
misleading.  Nothing contained in this
Section 8.2 shall be construed to mean that such persons or entities other than
the Investor (without the written consent of the Investor prior to disclosure of
such information) may not obtain non-public information in the course of
conducting due diligence in accordance with the terms of this Agreement and
nothing herein shall prevent any such persons or entities from notifying the
Company of their opinion that based on such due diligence by such persons or
entities, that the Registration Statement contains an untrue statement of
material fact or omits a material fact required to be stated in the
Registration Statement or necessary to make the statements contained therein,
in light of the circumstances in which they were made, not misleading.


 


ARTICLE IX.

Choice of Law/Jurisdiction


 


Section 9.1.                                   Governing Law. 
This Agreement shall be governed by and interpreted in accordance with
the laws of the State of New Jersey without regard to the principles of
conflict of laws.  The parties further
agree that any action between them shall be heard in Hudson County, New Jersey,
and expressly consent to the jurisdiction and venue of the Superior Court of
New Jersey, sitting in Hudson County, New Jersey and the United States District
Court of New


 


19





















 


Jersey,
sitting in Newark, New Jersey, for the adjudication of any civil action
asserted pursuant to this paragraph.


 


ARTICLE
X.

Assignment; Termination


 


Section 10.1.                             Assignment. 
Neither this Agreement nor any rights of the Company hereunder may be
assigned to any other Person.


 


Section 10.2.                             Termination.


 


(a)                                  The
obligations of the Investor to make Advances under Article II hereof shall
terminate twenty-four (24) months after the Effective Date.


 


(b)                                 The
Company may terminate this Agreement upon fifteen (15) days written notice to
the Investor provided that (i) there are no Advances outstanding, and (ii) The
Company has paid all amounts owed to the Investor pursuant to this Agreement or
any other agreements between the Company and the Investor.  Any termination of this Agreement pursuant to
this Section 10.2 (b) shall not terminate the Registration Rights Agreement
unless the Investor has disposed of all the Investor Shares (as defined below)
and all shares issued to the Investor pursuant to Advances, or all such shares
are eligible for resale pursuant to Rule 144(k).


 


RTICLE
XI.

Notices


 


Section 11.1.                             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 a copy is mailed by U.S. certified
mail, return receipt requested; (iii) three (3) days after being sent by U.S.
certified mail, return receipt requested, or (iv) one (1) day after deposit
with a nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. 
The addresses and facsimile numbers for such communications shall be:


 


	
  If to the Company, to:

  	
  Spherix Incorporated

  
	
   

  	
  12051 Indian Creek Court

  
	
   

  	
  Beltsville, Maryland 20705

  
	
   

  	
  Attention:

  	
  President

  
	
   

  	
  Telephone:

  	
  (301) 419-3900

  
	
   

  	
  Facsimile:

  	
  (301) 210-4908

  
	
   

  	
   

  
	
  With a copy to:

  	
  James E. Baker, Jr., Esq.

  
	
   

  	
  Baxter, Baker, Sidle, Conn & Jones, P.A.

  
	
   

  	
  120 E. Baltimore Street, Suite 2100

  
	
   

  	
  Baltimore, MD 21202

  
	
   

  	
  Facsimile:

  	
  (410) 230-3801

  



 


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  If to the Investor(s):

  	
  Cornell Capital Partners, LP

  
	
   

  	
  101 Hudson Street –Suite 3700

  
	
   

  	
  Jersey City, NJ 07302

  
	
   

  	
  Attention:

  	
  Mark Angelo

  
	
   

  	
   

  	
  Portfolio Manager

  
	
   

  	
  Telephone:

  	
  (201) 985-8300

  
	
   

  	
  Facsimile:

  	
  (201) 985-8266

  
	
   

  	
   

  
	
  With a Copy to:

  	
  Troy Rillo, Esq.

  
	
   

  	
  101 Hudson Street – Suite 3700

  
	
   

  	
  Jersey City, NJ 07302

  
	
   

  	
  Telephone:

  	
  (201) 985-8300

  
	
   

  	
  Facsimile:

  	
  (201) 985-8266

  



 


Each party
shall provide five (5) days’ prior written notice to the other party of any
change in address or facsimile number.


 


ARTICLE XII.

Miscellaneous


 


Section 12.1.                             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.  In the event any signature
page is delivered by facsimile transmission, the party using such means of
delivery shall cause four (4) additional original executed signature pages to
be physically delivered to the other party within five (5) days of the
execution and delivery hereof, though failure to deliver such copies shall not
affect the validity of this Agreement.


 


Section 12.2.                             Entire Agreement; Amendments.  This Agreement supersedes all other prior oral
or written agreements between the Investor, the Company, their affiliates and
persons acting on their behalf with respect to the matters discussed herein,
and this Agreement and the instruments referenced herein contain the entire
understanding of the parties with respect to the matters covered herein and
therein and, except as specifically set forth herein or therein, neither the
Company nor the Investor makes any representation, warranty, covenant or
undertaking with respect to such matters. 
No provision of this Agreement may be waived or amended other than by an
instrument in writing signed by the party to be charged with enforcement.


 


Section 12.3.                             Reporting Entity for the Common Stock.  The reporting entity relied upon for the
determination of the trading price or trading volume of the Common Stock on any
given Trading Day for the purposes of this Agreement shall be Bloomberg, L.P.
or any successor thereto.  The written
mutual consent of the Investor and the Company shall be required to employ any
other reporting entity.


 


Section 12.4.                             Fees and Expenses. 
The Company hereby agrees to pay the following fees:


 


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(a)                                  Structuring
Fees.  Each of the parties shall pay
its own fees and expenses (including the fees of any attorneys,
accountants, appraisers or others engaged by such party) in connection with
this Agreement and the transactions contemplated hereby, except that the
Company will pay a structuring fee of Fifteen Thousand Dollars ($15,000)
to Yorkville Advisors Management, LLC, which shall be paid on the date
hereof.  Subsequently on each advance
date, the Company will pay Yorkville Advisors Management, LLC a structuring fee
of Five Hundred Dollars ($500) directly out the proceeds of any Advances
hereunder.


 


(b)                                 Due
Diligence Fee. Company shall pay the Investor a non-refundable due
diligence fee of Five Thousand Dollars ($5,000) which was paid upon submission
of the due diligence documents to the Investor.


 


(c)                                  Commitment
Fees.


 


(i)                                     On
each Advance Date the Company shall pay to the Investor, directly from the
gross proceeds held in escrow, an amount equal to five percent (5%) of the
amount of each Advance.  The Company
hereby agrees that if such payment, as is described above, is not made by the
Company on the Advance Date, such payment will be made at the direction of the
Investor as outlined and mandated by Section 2.3 of this Agreement.


 


(ii)                                  Upon
the execution of this Agreement the Company shall issue to the Investor shares
of the Company’s Common Stock in an amount equal to One Hundred Ninety Thousand
Dollars ($190,000) divided by by Two Dollars ($2) per share (the agreed
upon market value of the Common Stock on the date hereof) (the “Investor’s
Shares”).


 


(iii)                               Fully
Earned.  The Investor’s Shares shall
be deemed fully earned as of the date hereof.


 


(iv)                              Registration
Rights.  The Investor’s Shares will
have “piggy-back” registration rights.


 


Section 12.5.                             Brokerage. 
Each of the parties hereto represents that it has had no dealings in
connection with this transaction with any finder or broker who will demand
payment of any fee or commission from the other party.  The Company on the one hand, and the
Investor, on the other hand, agree to indemnify the other against and hold the
other harmless from any and all liabilities to any person claiming brokerage
commissions or finder’s fees on account of services purported to have been
rendered on behalf of the indemnifying party in connection with this Agreement
or the transactions contemplated hereby.


 


Section 12.6.                             Confidentiality. 
If for any reason the transactions contemplated by this Agreement are
not consummated, each of the parties hereto shall keep confidential any
information obtained from any other party (except information publicly available
or in such party’s domain prior to the date hereof, and except as required by
court order) and shall promptly return to the other parties all schedules,
documents, instruments, work papers or other written information without
retaining copies thereof, previously furnished by it as a result of this
Agreement or in connection herein.


 


[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]


 


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IN WITNESS WHEREOF, the
parties hereto have caused this Standby Equity Distribution Agreement to be
executed by the undersigned, thereunto duly authorized, as of the date first
set forth above.


 


	
   

  	
  COMPANY:

  
	
   

  	
  SPHERIX INCORPORATED

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
  Richard C. Levin

  
	
   

  	
  Title:

  	
  President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  INVESTOR:

  
	
   

  	
  CORNELL CAPITAL PARTNERS, LP

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Yorkville Advisors, LLC

  
	
   

  	
  Its:

  	
  General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
  Mark Angelo

  
	
   

  	
  Title:

  	
  Portfolio Manager

  
						



 


23





















 


EXHIBIT A


 


ADVANCE NOTICE/COMPLIANCE CERTIFICATE


 


SPHERIX INCORPORATED


 


The undersigned,                                      
hereby certifies, with respect to the sale of shares of Common Stock of SPHERIX INCORPORATED (the “Company”),
issuable in connection with this Advance Notice and Compliance Certificate
dated                       
(the “Notice”), delivered pursuant to the Standby Equity Distribution
Agreement (the “Agreement”), as follows:


 


1.                                       The
undersigned is the duly elected                       
of the Company.


 


2.                                       There are no
fundamental changes to the information set forth in the Registration Statement
which would require the Company to file a post effective amendment to the
Registration Statement.


 


3.                                       The Company
has performed in all material respects all covenants and agreements
to be performed by the Company on or prior to the Advance Date related to the
Notice and has complied in all material respects with all obligations
and conditions contained in the Agreement.


 


4.                                       The
undersigned hereby represents, warrants and covenants that it has made all
filings (“SEC Filings”) required to be made by it pursuant to applicable
securities laws (including, without limitation, all filings required under the
Securities Exchange Act of 1934, which include Forms 10-Q, 10-K, 8-K, etc.  All SEC Filings and other public disclosures
made by the Company, including, without limitation, all press releases,
analysts meetings and calls, etc. (collectively, the “Public Disclosures”),
have been reviewed and approved for release by the Company’s attorneys and, if
containing financial information, the Company’s independent certified public
accountants.  None of the Company’s
Public Disclosures contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.


 


5.                                       The Advance
requested is                                            .


 


The undersigned has executed this Certificate
this           day of                                        .


 


	
   

  	
  SPHERIX INCORPORATED

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  



 


24





















 


SCHEDULE 2.6


 


SPHERIX
INCORPORATED


 


The undersigned hereby agrees that for a period
commencing on July      , 2005 and expiring on the
termination of the Standby Equity Distribution Agreement dated July       ,
2005 between the Company and the Investor (the “Lock-up Period”), he,
she or it will not, directly or indirectly, without the prior written consent
of the Investor, issue, offer, agree or offer to sell, sell, grant an option
for the purchase or sale of, transfer, pledge, assign, hypothecate, distribute
or otherwise encumber or dispose of any securities of the Company, including
common stock or options, rights, warrants or other securities underlying, convertible
into, exchangeable or exercisable for or evidencing any right to purchase or
subscribe for any common stock (whether or not beneficially owned by the
undersigned), or any beneficial interest therein (collectively, the “Securities”)
except in accordance with the volume limitations set forth in Rule 144(e) of
the General Rules and Regulations under the Securities Act of 1933, as amended,
and except for planned sales pursuant
to a plan in effect prior to the date hereof made in accordance with Rule
10b5-1 of the Securities Exchange Act of 1934, as amended.


 


In order to enable the aforesaid covenants to be
enforced, the undersigned hereby consents to the placing of legends and/or
stop-transfer orders with the transfer agent of the Company’s securities with respect
to any of the Securities registered in the name of the undersigned or
beneficially owned by the undersigned, and the undersigned hereby confirms the
undersigned’s investment in the Company.


 


	
  Dated:

  	
   

  	
  , 2005

  	
   

  
	
   

  	
   

  
	
   

  	
  Signature

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Name: 

  	
   

  
	
   

  	
  Address:

  	
   

  
	
   

  	
  City, State, Zip Code:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Print Social Security Number

  or Taxpayer I.D. Number

  
							



 


25