Exhibit 10.1



 







EXHIBIT 10.1




SECURITIES PURCHASE AGREEMENT




     SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of December 13, 2005, by and
among NGAS Resources, Inc., a corporation incorporated under the laws of the Province of British
Columbia, with headquarters located at 120 Prosperous Place, Suite 201, Lexington, Kentucky 40509,
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(2) of the Securities Act of 1933, as
amended (the “1933 Act”), Rule 506 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 convertible notes of the Company which shall be
convertible into shares of the Company’s common stock, no par value (the “Common Shares”), in
accordance with the terms of such notes.



     C. Each Buyer wishes to purchase, and (i) the Company wishes to sell, upon the terms and
conditions stated in this Agreement, that aggregate principal amount of notes, in substantially the
form attached hereto as Exhibit A (the “Notes”), set forth opposite such Buyer’s name in
column (3) on the Schedule of Buyers (which aggregate amount for all Buyers shall be 30,000) (as
converted for Common Shares pursuant to the terms of the Notes, collectively, the “Conversion
Shares”) and (ii) the Company wishes to sell, upon the terms and conditions stated in this
Agreement, warrants, in substantially the form attached hereto as Exhibit B (the
“Warrants,” to acquire up to that number of additional shares of Common Shares set forth opposite
such Buyer’s name in column (4) of 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 Conversion Shares and the Warrant
Shares under the 1933 Act and the rules and regulations promulgated thereunder, and applicable
state securities laws.



     E. 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.




               (i) Subject to the satisfaction (or waiver) of the conditions set forth in Sections 6 and 7
below, on the Closing Date (as defined below), the Company shall issue and sell to each Buyer, and
each Buyer severally, but not jointly, agrees to purchase from the Company, (A) one or more Notes
with an aggregate principal amount as is set forth opposite such Buyer’s name in column (3) on the
Schedule of Buyers and (B) one or more 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”).



               (ii) Purchase Price. The aggregate purchase price for each Buyer of the Notes and the
Warrants to be purchased by each such Buyer at the Closing (the “Purchase Price”) shall be the
amount set forth opposite such Buyer’s name in column (5) of the Schedule of Buyers. Each Buyer
shall pay $1,000 for each Note and related Warrants to be purchased by such Buyer at the Closing.



 









 





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




          (c) Form of Payment. On the Closing Date, each Buyer shall pay its Purchase Price to
the Company for the Notes and the Warrants to be issued and sold to such Buyer at such Closing, by
wire transfer of immediately available funds in accordance with the Company’s written wire
instructions. At the Closing, the Company shall deliver to each Buyer (A) the Notes (allocated in
the principal amounts as such Buyer shall request) that such Buyer is then purchasing and (B) the
Warrants (allocated in the amounts as such Buyer shall request) that such Buyer is purchasing, in
each case duly executed on behalf of the Company and registered in the name of such Buyer or its
designee.




     2. BUYER’S REPRESENTATIONS AND WARRANTIES.



          Each Buyer represents and warrants, with respect to only itself, that:




          (a) No Public Sale or Distribution. Such Buyer is acquiring the Notes and the
Warrants and upon conversion of the Notes and exercise of the Warrants (other than pursuant to a
Cashless Exercise (as defined in the Warrants)), will acquire the Conversion Shares issuable upon
conversion of 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 to distribute any of the Securities.




          (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 offering of the
Securities.




          (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 or qualified under Canadian securities laws; and (ii)
such Buyer agrees that if it decides to offer, sell or otherwise transfer any of the Notes,
Conversion Shares, Warrants or Warrant Shares, such Notes, Conversion




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Shares, Warrants and Warrant Shares may be offered, sold or otherwise transferred only: (A)
pursuant to an effective registration statement under the 1933 Act; or (B) (1) in accordance with
the exemption from registration under the 1933 Act provided by Rule 144 or Rule 144A thereunder,
and in compliance with any applicable state securities laws or (2) in a transaction that does not
require registration under the 1933 Act, or applicable state securities laws, and the seller has
provided the Company with reasonable assurance, prior to such offer, sale or transfer, that such
Securities may be so offered, sold or transferred in a transaction that does not require
registration under the 1933 Act or applicable state securities laws as applicable.




          (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 OR TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE “1933 ACT”), OR (B) REASONABLE ASSURANCE 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.


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, 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
reasonable assurance that the sale, assignment or transfer of the Securities may be made without
registration under the applicable requirements of the 1933 Act or (iii) such holder provides the
Company with reasonable assurance that the Securities can be sold, assigned or transferred pursuant
to Rule 144 or Rule 144A.




          (h) Authorization; 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 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.




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




          (k) Certain Trading Activities. Neither the Buyer nor any Person acting on behalf of,
or pursuant to any understanding with or based upon any information received from, the Buyer has,
directly or indirectly, engaged in any transactions in the securities of the Company (including,
without limitation, any Short Sales involving the Company’s securities) since the time that the
Buyer was first contacted by First Albany Capital (the “Agent”) with respect to the transactions
contemplated hereby. “Short Sales” include, without limitation, all “short sales” as defined in
Rule 200 promulgated under Regulation SHO under the 1934 Act and all types of direct and indirect
stock pledges, forward sale contracts, options, puts, calls, short sales, swaps and similar
arrangements (including on a total return basis), and sales and other transactions through non-US
broker dealers or foreign regulated brokers. The Buyer covenants that neither it, nor any Person
acting on behalf of, or pursuant to any understanding with or based upon any information received
from, the Buyer will engage in any transactions in the securities of the Company (including Short
Sales) prior to the time that the transactions contemplated by this Agreement are publicly
disclosed. Notwithstanding the foregoing, for avoidance of doubt, nothing contained herein shall
constitute a representation or warranty, or preclude any actions, with respect to the
identification of the availability of, or securing of, available shares to borrow in order to
effect Short Sales or similar transactions in the future.




     3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.



          The Company represents and warrants to each of the Buyers as follows:




          (a) Organization and Qualification. The Company and its “Subsidiaries” (which for
purposes of this Agreement means any entity in which the Company, directly or indirectly, owns any
capital stock or holds an equity or similar interest) are up to date in all filings under the
Business Corporations Act (British Columbia) (the “BCCA”). The Company and its Subsidiaries are
entities duly organized and validly existing and 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 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 any of the Company or
their respective Subsidiaries, individually or taken as a whole, or on the transactions
contemplated hereby or in the other Transaction Documents (as defined below) 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
Registration Rights Agreement, the Irrevocable Transfer Agent Instructions (as defined in Section
5(b)), the Warrants 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, the reservation for issuance and the issuance of the
Conversion Shares issuable upon conversion, or redemption of the Notes 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 (i) the filing with the SEC of one
or more Registration Statements in accordance with the requirements of the Registration Rights
Agreement, (ii) the filing of a Form D with respect to the Notes and the Warrants as required under
Regulation D and (iii) such filings required under applicable securities or “Blue Sky” laws of the
states of the United States (all of the foregoing, the “Required Approvals”), no further filing,
consent, or authorization is required by the Company or of its Board of Directors or its
shareholders. This Agreement and the other Transaction Documents of even date herewith have been
duly executed and delivered by the Company and constitute the legal, valid and binding obligations
of the 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,




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reorganization, moratorium, liquidation or similar laws relating to, or affecting generally,
the enforcement of applicable creditors’ rights and remedies. As of the Closing, the Notes in the
form attached as Exhibit A shall have been filed on or prior to the Closing Date with the
Ministry of Consumer and Commercial Relations of the Province of British Columbia (or comparable
office) and shall be in full force and effect, enforceable against the Company in with its terms
and shall not have been amended.




          (c) Issuance of Securities. The issuance of the Notes and the Warrants are duly
authorized and are free from all taxes, liens and charges with respect to the issue thereof. As of
the Closing, the Company shall have reserved from its duly authorized capital stock not less than
the sum of 150% of the maximum number of Common Shares (A) issuable upon conversion of the Notes
(without taking into account any limitations on the conversion, or redemption of the Notes set
forth in the Notes) and (B) issuable upon exercise of the Warrants (without taking into account any
limitations on the exercise of the Warrants set forth in the Warrants). Upon issuance or
conversion in accordance with the Notes or exercise 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 Shares. The offer and issuance by the Company of the Securities is exempt from
registration under the 1933 Act and all Canadian securities laws are inapplicable to such offer and
issuance.




          (d) No Conflicts. The execution, delivery and performance 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
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, the terms of any capital stock of the
Company or any of its Subsidiaries, the bylaws or any of the organizational documents 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) 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 (iii) result in a
violation of any law, rule, regulation, order, judgment or decree (including U.S. federal and state
securities laws or Canadian securities laws and regulations and the rules and regulations of the
Nasdaq Capital Markets (the “Principal Market”)) 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 is required to obtain pursuant
to the preceding sentence) have been obtained or effected, or will 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 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 Shares in the foreseeable future.




          (f) Acknowledgment Regarding Buyer’s Purchase of Securities. The Company acknowledges
and agrees that each Buyer is acting solely in the capacity of 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, (ii) an “affiliate” of the Company or any of its
Subsidiaries (as defined in Rule 144 under the 1933 Act) or (iii) to the knowledge of the Company,
a “beneficial owner” of more than 10% of the shares of Common Shares (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. 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 Agent as placement agent in connection with the sale of the Securities. Other than the 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, or 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 or cause this offering of the
Securities to be integrated with prior offerings by the Company for purposes of the 1933 Act or any
applicable shareholder approval provisions, including, without limitation, under the rules and
regulations of any exchange or automated quotation system on which any of the securities of the
Company are listed or designated. None of the Company, its Subsidiaries, their affiliates or 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.




          (i) Dilutive Effect. The Company understands and acknowledges that the number of
Conversion Shares issuable upon conversion of the Notes and the Warrant Shares issuable upon
exercise of the Warrants will increase in certain circumstances. The Company further acknowledges
that its obligation to issue Conversion Shares upon conversion of the Notes in accordance with this
Agreement and the Notes and its obligation to issue the Warrant Shares upon exercise of the
Warrants in accordance with this Agreement and the Warrants is, subject to the terms and conditions
of the applicable Transaction Documents, in each case, absolute and unconditional regardless of the
dilutive effect that such issuance may have on the ownership interests of other shareholders 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 incorporation 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 shareholder rights plan or similar arrangement relating to accumulations of
beneficial ownership of Common Shares or a change in control of the Company.




          (k) SEC Documents; Financial Statements. During the two (2) years prior to the date
hereof, the Company has filed all reports, schedules, forms, statements and other documents
required to be filed by it with the SEC and the Canadian Securities Administrators (the “CSA”)
pursuant to the reporting requirements of the 1934 Act and the securities legislation and
regulations and regulations of, and the instruments, policies, rules, orders, codes, notices and
published interpretation notes of, the securities regulatory authorities of the provinces and
territories of Canada (the “Canadian Securities Laws”) (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-CSA
Documents”). The Company has delivered to the Buyers or their respective representatives true,
correct and complete copies of all SEC-CSA Documents not available on the EDGAR and SEDAR system,
if any. As of their respective dates, the SEC-CSA Documents complied in all material respects with
the requirements of the 1934 Act and the Canadian Securities Laws and the rules and regulations of
the SEC and the CSA promulgated thereunder applicable to the SEC-CSA Documents, and none of the
SEC-CSA Documents, at the time they were filed with the SEC or CSA as applicable, 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 dates, the financial statements
of the Company included in the SEC-CSA Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of the SEC and the CSA
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




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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-CSA Documents, including, without limitation, information referred to in Section 2(d) of 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. Since December 31, 2004, there has been no material
adverse change and no material adverse development in the business, properties, operations,
condition (financial or otherwise), results of operations or prospects of the Company. Except as
disclosed in Schedule 3(l), since December 31, 2004, 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 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 (as defined in Section 3(s)), (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 or 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 Shares and which has not been publicly announced.




          (n) Conduct of Business; Regulatory Permits. Neither the Company nor its Subsidiaries
is in violation of any term of or in default under its Articles of Incorporation or the Bylaws or
their organizational charter or certificate of incorporation or bylaws, respectively. Since
December 31, 2003, neither the Company, any of its Subsidiaries nor any officer or director thereof
is or has been in violation of any judgment, decree or order or any statute, ordinance, rule or
regulation applicable to the Company, its Subsidiaries or officer or director thereof, and neither
the Company, any of its Subsidiaries nor officer or director thereof will conduct its business in
violation of any of the foregoing, except for possible violations that 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 Shares by the Principal Market in the
foreseeable future. Since December 31, 2003, (i) the Common Shares have been designated for
quotation on the Principal Market, (ii) trading in the Common Shares has not been suspended by the
SEC, the CSA or the Principal Market and (iii) the Company has received no communication, written
or oral, from the SEC, the CSA or the Principal Market regarding the suspension or delisting of the
Common Shares from the Principal Market. The Company and its Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate 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. The
Company is a reporting issuer not in default of any requirements under applicable Canadian
Securities Laws and is eligible to use the Short Form Prospectus System, established under National
Instrument 44-101 of the CSA (the “POP System”).




7









 








          (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 material compliance with any and all
applicable requirements of the Sarbanes-Oxley Act of 2002 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 in the SEC-CSA Documents filed
at least ten days prior to the date hereof and other than the grant of stock options and bonuses
disclosed 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 (i) 100,000,000 Common Shares, of which as of the date hereof, 20,499,718 are
issued and outstanding, 5,630,896 shares are reserved for issuance pursuant to the Company’s stock
option and purchase plans and 1,396,450 shares are reserved for issuance pursuant to securities
(other than the Notes and the Warrants) exercisable or exchangeable for, or convertible into,
Common Shares and (ii) 5,000,000 shares of preferred stock, no par value, of which as of the date
hereof none of which is issued and outstanding or reserved for issuance. 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 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 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 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 (as defined in Section 3(s)) 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 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-CSA Documents but not so disclosed in the SEC-CSA Documents, other than those incurred
in the ordinary course of the Company’s or its Subsidiaries’ respective businesses and which,
individually or in the aggregate, do not or could not reasonably be expected to have a Material
Adverse Effect. The Company has made available to the Buyer true, correct and complete copies of
the Company’s Notice of Articles, as amended and as in effect on the date hereof (the “Articles of
Incorporation”), and the Company’s Articles, as amended and as in effect




8









 








on the date hereof (the “Bylaws”), and the terms of all securities convertible into, or
exercisable or exchangeable for, shares of Common Shares 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 generally accepted
accounting principles (other than trade payables entered into in the ordinary course of business),
(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 generally accepted accounting principles, 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 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; (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; and (z) “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.




          (t) Absence of Litigation. Except as set forth in Schedule 3(t), 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
Shares or any of the Company’s Subsidiaries or any of the Company’s or its Subsidiaries’ officers
or directors in their capacities as such.




          (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, is, or is now
expected to be, in




9









 







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.




               (ii) The Company and its Subsidiaries are in compliance with all United States and Canadian
federal, state, provincial, 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 such as do not materially affect the value of such
property and do not interfere with the use made and proposed to be made of such property by the
Company and any of its Subsidiaries. Any real property and facilities held under lease by the
Company or 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, service marks and all applications and
registrations therefor, trade names, patents, patent rights, copyrights, original works of
authorship, inventions, trade secrets, licenses, approvals, governmental authorizations and other
intellectual property rights (“Intellectual Property Rights”) necessary to conduct their respective
businesses as now conducted. Except as set forth in Schedule 3(x), none of the Company’s
or its Subsidiaries’ Intellectual Property Rights have expired, terminated or have been abandoned,
or are expected to expire, terminate or 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 any of
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, being threatened against the
Company or any of its Subsidiaries regarding its Intellectual Property Rights. The Company and its
Subsidiaries are unaware 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 United States and Canadian federal, state, provincial,
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.




          (z) Subsidiary Rights. Except as set forth in Schedule 3(z), 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) Tax Status. The Company and each of its Subsidiaries (i) has made or filed all
foreign, United States and Canadian federal, state and provincial 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




10









 







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.




          (bb) 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 generally accepted accounting principles 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-14 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 in 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.




          (cc) 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 and Canadian Securities Laws filings and is
not so disclosed or that otherwise would be reasonably likely to have a Material Adverse Effect.




          (dd) 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.




          (ee) Acknowledgement Regarding Buyers’ Trading Activity. It is understood and
acknowledged by the Company (i) that none of the Buyers have been asked by the Company or its
Subsidiaries 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) that 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 Shares, and (iii) that 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 the Warrant Shares deliverable with respect to Securities are being determined and (b)
such hedging and/or trading activities, if any, can reduce the value of the existing Shareholders’
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.




          (ff) Form S-3 Eligibility. 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) 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 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) sold, bid for, purchased, or paid any compensation
for soliciting purchases of, any of the Securities, or (iii) paid or agreed to pay to any person
any compensation for soliciting another to purchase any other securities of the Company.




11









 









          (hh) Disclosure. 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 the Securities. All disclosure provided to the Buyers regarding the
Company and its Subsidiaries, their business and the transactions contemplated hereby, including
the 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 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.




     4. COVENANTS.



          (a) Best Efforts. Each party shall use its best efforts timely to satisfy each of 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 Buyers shall have sold all the
Conversion Shares and Warrant Shares and none of the Notes or Warrants is 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 CSA under applicable Canadian Securities Laws, and the Company
shall continue to timely file reports under the 1934 Act even if the 1934 Act or the rules and
regulations thereunder would otherwise no longer require or permit such filings and will remain in
good standing under Canadian Securities Law and eligible to use the POP System.




          (d) Use of Proceeds. The Company will use the proceeds from the sale of the
Securities for general corporate purposes, and not for the (i) repayment of any outstanding
Indebtedness of the Company or any of its Subsidiaries or (ii) redemption or repurchase of any of
its equity securities.




          (e) Financial Information. The Company agrees to send the following to each Investor
(as defined in the Registration Rights Agreement) 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 and Quarterly Reports on Form 10-K, 10-KSB, 10-Q or 10-QSB, any interim reports or any
consolidated balance sheets, income statements, shareholders’ equity statements and/or cash flow
statements for any period other than annual, any Current Reports on Form 8-K 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 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 shareholders of the Company generally, contemporaneously with the making available or giving
thereof to the shareholders. As used herein “Business Day” means any other day other than a
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 Shares is then listed (subject to
official notice of issuance) and shall




12









 







maintain such listing of all Registrable Securities from time to time issuable under the terms
of the Transaction Documents. The Company shall maintain the Common Shares’ authorization for
quotation on the Principal Market. 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
Shares on the Principal Market; provided, however, that the Company makes no
covenant regarding the trading price of the Common Shares. The Company shall pay all fees and
expenses in connection with satisfying its obligations under this Section 4(f).




          (g) Fees. Subject to Section 8 below, at the Closing, the Company shall pay an
expense allowance to Kings Road Investments Ltd. (a Buyer) or its designee(s) (in addition to any
other expense amounts paid to any Buyer prior to the date of this Agreement) to cover expenses
reasonably incurred by Kings Road Investments Ltd. or any professionals engaged by Kings Road
Investments Ltd. in relation to due diligence and investment documentation, in an amount, without
prior notice to the Company, not to exceed $100,000 (in addition to any other expense amounts paid
to any Buyer prior to the date of this Agreement), which amount may be withheld by such Buyer from
its Purchase Price at the Closing. 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 Agent. 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 (as defined in the Registration Rights Agreement) 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. 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 time, on the first Business Day following the date of this Agreement, the Company
shall issue a press release reasonably acceptable to the Buyers disclosing all material terms of
the transactions contemplated hereby and 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 and
attaching the material Transaction Documents (including, without limitation, this Agreement, the
form of the Notes, the form of Warrants and the Registration Rights Agreement) as exhibits to such
filing (including all attachments, the “8-K Filing”) and a material change report on Form 51-102F3
in accordance with National Instrument 51-102 of the CSA with respect thereto (the “Material Change
Report”). From and after the 8-K Filing with the SEC and the filing of the Material Change Report
with the CSA, no Buyer shall be in possession of any material, nonpublic information received from
the Company or any of its Subsidiaries or any of its respective officers, directors, employees or
agents, that is not disclosed in the 8-K Filing. 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 8-K Filing with the SEC and the filing of the Material Change
Report with the CSA without the express 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, it shall provide the Company with written notice thereof. The Company shall, within
five (5) 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, shareholders or agents for any such disclosure. 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




13









 







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). Without the prior written
consent of any applicable Buyer, neither the Company nor any of its Subsidiaries shall disclose the
name of any Buyer in any filing, announcement, release or otherwise.




          (j) Restriction on Redemption and Dividends. So long as any Notes or Warrants are
outstanding, the Company shall not, directly or indirectly, redeem, repurchase or otherwise acquire
for value or declare or pay any dividend or distribution on, the Common Shares without the prior
express written consent of the holders of Notes representing not less than a majority of the then
outstanding Notes.




          (k) Additional Notes; Variable Securities; Dilutive Issuances. 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 or Warrants remain outstanding, the Company
shall not, in any manner, issue or sell any rights, warrants or options to subscribe for or
purchase Common Shares or directly or indirectly convertible into or exchangeable or exercisable
for Common Shares at a price which varies or may vary with the market price of the Common Shares,
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 Shares into which any Note is convertible or the
then applicable Exercise Price (as defined in the Warrants) with respect to the Common Shares into
which any Warrant is exercisable. For so long as any Notes or Warrants remain outstanding, the
Company shall not, in any manner, enter into or affect any Dilutive Issuance (as defined in the
Notes) if the effect of such Dilutive Issuance is to cause the Company to be required to issue upon
conversion of any Note or exercise of any Warrant any shares of Common Shares in excess of that
number of shares of Common Shares which the Company may issue upon conversion of the Notes and
exercise of the Warrants without breaching the Company’s obligations under the rules or regulations
of any Eligible Market (as defined in the Notes).




          (l) Corporate Existence. So long as any Buyer beneficially owns any Securities, the
Company shall 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.




          (m) Reservation of Shares. The Company shall take all action necessary to at all
times have authorized, and reserved for the purpose of issuance, after the Closing Date, the
maximum number of (i) shares of Common Shares issuable upon conversion of all of the Notes, (ii)
shares of Common Shares issuable upon exercise of the Warrants (without taking into account any
limitations on the conversion of the Notes or exercise of the Warrants set forth in the Notes and
Warrants, respectively) and (iii) any capital stock of the Company issued or issuable with respect
to the Conversion Shares, the Notes, the Warrant Shares or the Warrants.




          (n) 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.




          (o) Additional Issuances of Securities.




               (i) For purposes of this Section 4(o), 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 Shares.




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




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



14









 





               (ii) From the date hereof until the date that is thirty (30) Trading Days (as defined in the
Notes) following the Effective Date (as defined in the Registration Rights Agreement) (the “Trigger
Date”), the Company will not, 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
shares of Common Shares or Common Share Equivalents (any such offer, sale, grant, disposition or
announcement being referred to as a “Subsequent Placement”).



               (iii) As long as 25% of the original Notes issued at the Closing are outstanding, from the
Trigger Date until the eighteen month anniversary of the Closing Date, the Company will not,
directly or indirectly, effect any Subsequent Placement unless the Company shall have first
complied with this Section 4(o)(iii).




               (1) The Company shall deliver to each Buyer by facsimile a 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 within one
Business Day of the determination of the terms of such Subsequent Placement, which Offer
Notice shall (w) identify and describe the Offered Securities, (x) describe the price and
other final 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
(which offer being non-transferable to any successor to such Buyer) a pro rata portion of at
least one-half of the Offered Securities allocated among such Buyers (a) based on such
Buyer’s pro rata portion of the 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”).




               (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 first (1st) full Business Day after such
Buyer’s receipt of the Offer Notice (for purposes of this Section 4(a)(iii)(2),
notwithstanding the provisions of Section 9(f), receipt of the Offer Notice shall not be
deemed to have occurred until the Buyer shall have physically received such 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 it deems reasonably necessary.




               (3) The Company shall have ten (10) 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”),
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.




               (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(o)(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



15









 






amount of the Offered Securities that such Buyer elected to purchase pursuant to
Section 4(o)(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(o)(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(o)(iii)(1) above.




               (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(o)(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 (i) 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,
(ii) the Buyers’ satisfaction, in their sole discretion, with the final terms and/or
conditions that differ from those contained in the Offer Notice, and (iii) the Buyers’
reasonable satisfaction with the identity of the other persons or entities to which the
Offered Securities will be sold.




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



               (iv) The restrictions contained in subsections (ii) and (iii) of this Section 4(o) shall not
apply in connection with the issuance of any Excluded Securities (as defined in the Notes) and the
restriction contained in subsection (iii) of this Section 4(o) shall not apply to the extent that
in the written opinion of counsel to the Company (which opinion shall be reasonably satisfactory to
the Buyers), the exercising of the participation right (A) would require the approval of the
shareholders of the Company in accordance with the rules of the Principal Market not otherwise
required of the Company or (B) would result in the Company not being able to offer or sell the
Offered Securities pursuant to an exemption from the registration requirements of the 1933 Act.



          (p) Holding Period. For the purposes of Rule 144, the Company acknowledges that the
holding period of the Conversion Shares, may be tacked onto the holding period of the Notes and the
Company agrees not to take a position contrary to this Section 4(p).




          (q) Shareholder Approval. The Company shall provide each stockholder entitled to vote
at a special or annual meeting of stockholders of the Company (the “Shareholder Meeting”), which
shall be promptly called and held not later than July 31, 2006 (the “Shareholder Meeting
Deadline”), a proxy statement, substantially in the form which has been previously reviewed by the
Buyers and a counsel of their choice, soliciting each such stockholder’s affirmative vote at the
Stockholder Meeting for approval of 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 “Shareholder Approval”), and the Company shall use its best efforts to solicit its
shareholders’ approval of such resolutions (which best efforts shall include, without limitation,
the requirement to hire a reputable proxy solicitor) and to cause the Board of Directors of the
Company to recommend to the shareholders that they approve such resolutions. The Company shall be
obligated to seek to obtain the Shareholder Approval by the Shareholder Meeting Deadline. If,
despite the Company’s best efforts the Shareholder Approval is not obtained on or prior to the
Shareholder Meeting Deadline, the Company shall cause an additional Shareholder Meeting to be held
each calendar year thereafter until such Shareholder Approval is obtained. The Company shall
reimburse the Buyers for the fees and disbursements of their legal counsel in connection with
review of the above mentioned proxy statement(s), which amount shall be limited to $10,000.




          (r) Additional Registration Statements. Until the date that the Registration
Statement (as defined in the Registration Rights Agreement) is first declared effective by the SEC
(the “Effective Date”), the Company shall not file a registration statement under the 1933 Act
relating to securities that are not the Securities.




16









 








     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 upon conversion 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.




          (b) Transfer Agent Instructions. The Company shall issue irrevocable instructions to
its transfer agent, and any subsequent transfer agent, to issue certificates or credit shares to
the applicable balance accounts at The Depository Trust Company (“DTC”), registered in the name of
each Buyer or its respective nominee(s), for the Conversion Shares and the Warrant Shares issued
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 in the
form of Exhibit D attached hereto (the “Irrevocable Transfer Agent Instructions”). 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(g)
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 the Company 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 Conversion Shares or 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:




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




          (b) Such Buyer and each other Buyer shall have delivered to the Company the Purchase Price
(less, in the case of Kings Road Investments Ltd., the amounts withheld pursuant to Section 4(g))
for the Notes and the related Warrants being purchased by such Buyer at the Closing by wire
transfer of immediately available funds pursuant to the wire instructions provided by the Company.




          (c) The representations and warranties of such Buyer shall be true and correct in all material
respects 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), 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.




17









 








     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:



          (a) The Company shall have duly executed and delivered to such Buyer: (A) the Notes (in such
principal amounts as such Buyer shall request) and the related Warrants (in such amounts as such
Buyer shall request) being purchased by such Buyer at the Closing pursuant to this Agreement and
(B) each of the other Transaction Documents.




          (b) Such Buyer shall have received the opinion of Stahl & Zelmanovitz, the Company’s outside
counsel, dated as of the Closing Date, in substantially the form of Exhibit E-1 attached
hereto. Such Buyer shall have received the opinion of Maitland & Company, the Company’s Canadian
counsel dated as of the Closing Date, in substantially the form of Exhibit E-2 attached
hereto.




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




          (d) The Company shall have delivered to the Buyer a certificate of status with the BCCA of the
Company as of a date within 10 days of the Closing Date.




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




          (f) The Company shall have delivered to such Buyer a certified copy of the Articles of
Incorporation of the Company as certified by the Ministry of Consumer and Commercial Relations of
the Province of British Columbia (or comparable office) of the within ten (10) days of the Closing
Date.




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




          (h) The representations and warranties of the Company shall be true and correct in all
material respects (except for those representations and warranties that are qualified by
materiality or Material Adverse Effect, which shall be true and correct in all respects) 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) and the Company shall have performed, satisfied
and complied in all material 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
G.




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




          (j) The Common Shares (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, the CSA or the
Principal Market from trading on the Principal Market nor shall suspension by the SEC, the CSA]or
the Principal Market have been threatened, as of the Closing Date, either (A) in writing by the
SEC, the CSA or the Principal Market or (B) by falling below the minimum listing maintenance
requirements of the Principal Market.




18









 








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




          (l) The Notes in the form attached as Exhibit A shall have been filed on or prior to
the Closing Date with the Ministry of Consumer and Commercial Relations of the Province of British
Columbia (or comparable office) and shall be in full force and effect, enforceable against the
Company in accordance with its terms and shall not have been amended.




          (m) 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 without
liability of any party to any other party; provided, however, this if this
Agreement is terminated pursuant to this Section 8, the Company shall remain obligated to reimburse
the non-breaching Buyers 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. 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 shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity
or enforceability of any provision of this Agreement in any other jurisdiction.




          (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




19









 







acting on their behalf with respect to the matters discussed herein and therein, and this
Agreement, the other Transaction Documents 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 any Buyer makes any
representation, warranty, covenant or undertaking with respect to such matters. No provision of
this Agreement may be amended other than by an instrument in writing signed by the Company and the
holders of at least a majority of the aggregate principal amount of Notes issued and issuable
hereunder, and any amendment to this Agreement made in conformity with the provisions of this
Section 9(e) shall be binding on all Buyers and holders of Securities, as applicable. No provision
hereof may be waived other than by an instrument in writing signed by the party against whom
enforcement is sought. No such amendment shall be effective to the extent that it applies to less
than all of the holders of the applicable Securities then outstanding. 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 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 (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
and facsimile numbers for such communications shall be:



If to the Company:


NGAS Resources, Inc.

120 Prosperous Place

Suite 201

Lexington, Kentucky 40509

Telephone: (859) 263-3948

Facsimile: (859) 263-4228

Attention: William G. Barr, III, Vice President


With a copy (for informational purposes only) to:


Stahl & Zelmanovitz

767 Third Avenue

Suite 1401

New York, New York 10017

Telephone: (212)826-6435

Facsimile: (212)826-6402

Attention: Douglas Stahl, Esq.


If to the Transfer Agent:


Pacific Corporate Trust Company

625 Howe Street, 10th Floor

Vancouver, British Columbia

Canada V6C 2T6

Telephone: (604) 689-9853

Facsimile: (604) 689-8144

Attention: Jasmin Juma


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




20









 







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.


or to such other address and/or facsimile number 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 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.




          (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 holders of at least a majority of the aggregate
principal amount of Notes issued and issuable hereunder, 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. 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.




          (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) Currency. Unless otherwise indicated, all dollar amounts referred to in this
Agreement are in United States Dollars (“US Dollars”). All amounts owing under this Agreement or
any Transaction Document shall be paid in US Dollars. All amounts denominated in other currencies
shall be converted in the US Dollar equivalent amount in accordance with the Exchange Rate on the
date of calculation. “Exchange Rate” means, in relation to any amount of currency to be converted
into US Dollars pursuant to this Agreement, the US Dollar exchange rate as published in the Wall
Street Journal on the relevant date of calculation.




          (k) 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.




          (l) Indemnification. 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
shareholders, 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




21









 







relating to (a) any inaccuracy in any representation or warranty made by the Company in the
Transaction Documents, (b) any breach of any covenant, agreement or obligation of the Company
contained in the Transaction Documents, 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, (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. Except as otherwise set forth herein, the mechanics and procedures with respect to
the rights and obligations under this Section 9(l) shall be the same as those set forth in Section
6 of the Registration Rights Agreement.




          (m) 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.




          (n) 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.




          (o) 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.




          (p) 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, United States or Canadian federal, state or
provincial law, foreign 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.




          (q) 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 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 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. 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




22









 







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.




          (r) Judgment Currency.




               (i) If for the purpose of obtaining or enforcing judgment against the Company or any
Subsidiary, in any court in any jurisdiction it becomes necessary to convert into any other
currency (such other currency being hereinafter in this Section 9(r) referred to as the “Judgment
Currency”) an amount due in US Dollars under this Agreement, the conversion shall be made at the
Exchange Rate prevailing on the Business Day immediately preceding:




               (1) the date of actual payment of the amount due, in the case of any proceeding in the
courts of New York or in the courts of any other jurisdiction that will give effect to such
conversion being made on such date: or




               (2) the date on which the foreign court determines, in the case of any proceeding in
the courts of any other jurisdiction (the date as of which such conversion is made pursuant
to this Section 9(r) being hereinafter referred to as the “Judgment Conversion Date”).



               (ii) If in the case of any proceeding in the court of any jurisdiction referred to in Section
9(r)(i)(2) above, there is a change in the Exchange Rate prevailing between the Judgment Conversion
Date and the date of actual payment of the amount due, the applicable party shall pay such adjusted
amount as may be necessary to ensure that the amount paid in the Judgment Currency, when converted
at the Exchange Rate prevailing on the date of payment, will produce the amount of US Dollars which
could have been purchased with the amount of Judgment Currency stipulated in the judgment or
judicial order at the Exchange Rate prevailing on the Judgment Conversion Date.



               (iii) Any amount due from the Company or any Subsidiary, under this provision shall be due as
a separate debt and shall not be affected by judgment being obtained for any other amounts due
under or in respect of this Agreement.


[Signature Page Follows]




23









 








     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:	 	 
	 
	 	 	 	 	 	 
	 	 	NGAS RESOURCES, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Name:	 	 
	 

	 	 	 	Title:	 	 





[Signature Page to Securities Purchase Agreement]




 









 








     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:	 	 
	 
	 	 	 	 	 	 
	 	 	KINGS ROAD INVESTMENTS LTD.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Name:	 	 
	 

	 	 	 	Title:	 	 





[Signature Page to Securities Purchase Agreement]





 









 









     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:	 	 
	 
	 	 	 	 	 	 
	 	 	PORTSIDE GROWTH & OPPORTUNITY FUND	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Name:	 	 
	 

	 	 	 	Title:	 	 





[Signature Page to Securities Purchase Agreement]





 









 









     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:	 	 
	 
	 	 	 	 	 	 
	 	 	ADVISORY RESEARCH MICROCAP VALUE FUND, LP	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Name:	 	 
	 

	 	 	 	Title:	 	 
	 
	 	 	 	 	 	 
	 	 	ADVISORY RESEARCH ENERGY FUND, LP	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Name:	 	 
	 

	 	 	 	Title:	 	 





[Signature Page to Securities Purchase Agreement]





 









 








     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:	 	 
	 
	 	 	 	 	 	 
	 	 	SHEPHERD INVESTMENTS INTERNATIONAL, LTD.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Name:	 	 
	 

	 	 	 	Title:	 	 





[Signature Page to Securities Purchase Agreement]




 









 








     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:	 	 
	 
	 	 	 	 	 	 
	 	 	CAPITAL VENTURES INTERNATIONAL	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Name:	 	 
	 

	 	 	 	Title:	 	 





[Signature Page to Securities Purchase Agreement]