Unassociated Document


    DATED
      [11TH DAY OF AUGUST 2006]

     

    $400,000

     

    FACILITY
      AGREEMENT

     

    BETWEEN

     

    OWLSTONE
      NANOTECH, INC.

     

    AS
      BORROWER

     

      
        

      

    

    
      -AND-

       

      ADVANCE
        NANOTECH, INC.

       

      AS
        LENDER

       

        
          

        

      

       

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    



    THIS
      AGREEMENT
      is made
      on the [11th day of August 2006]

     

    BETWEEN

     

    
      	 	
              (1)

            	
              OWLSTONE
                NANOTECH, INC. whose
                registered office is at 600 Lexington Avenue, New York, NY 10022
                (“the
                Borrower”)
                and;

            


    

     

    
      	 	
              (2)

            	
              ADVANCE
                NANOTECH, INC.
                whose registered office is at 600 Lexington Avenue, New York, NY
                10022
                (“the Lender”)
                (which expression shall, where applicable, include the Lender’s successors
                and assigns)

            


    

     

    NOW
      IT IS HEREBY AGREED
      as
      follows:

     

    1.  Interpretation

     

    1.1  In
      this
      Agreement.

     

    “Advance”
means,
      save as otherwise provided herein, an advance (as from time to time reduced
      by
      repayment) made or to be made by the Lender hereunder. For the avoidance of
      doubt “Advance” shall include amounts remitted to the Borrower by the Lender
      pursuant to Clause 5.1;

     

    “Available
      Facility”
means,
      at any time and save as otherwise provided herein, $400,000 less the amount
      of
      each Advance which has then been made hereunder,

     

    “Designated
      Account”
means
      such bank account of the Borrower as the Borrower may from time to time notify
      the Lender, the first such account being Account No. 89584422 at the
      Natwest Commercial Banking, Sort code: 60 04 23.

     

    “Equity
      Financing” the
      completion of an equity financing for the Borrower. 

     

    “Equity
      Financing Closing” the
      determination by the Lender and the Borrower of the completion of the Equity
      Financing. 

     

    “Event
      of Default”
means
      any of those events specified in Clause 15;

     

    “Facility”
means
      the dollar loan facility granted to the Borrower in this Agreement;


     

    “Group”
means
      the Borrower and its subsidiaries;

     

    “Highest
      Lawful Rate” shall
      mean, on any day, the maximum nonusurious rate of interest permitted for that
      day by whichever applicable Federal or State law permits the higher interest
      rate, stated as a rate per annum

     

    “Loan”
means
      the aggregate principal amount for the time being outstanding hereunder;


     

    “Notice
      of Drawdown”
means
      a
      notice substantially in the form set out in the Second Schedule;

     

    
      
         

      

      
        1

        
          

        

      

      
         

      

    

    “Potential
      Event of Default”
means
      any event which could reasonably be expected to become (with the passage of
      time, the giving of notice, the making of any determination hereunder or any
      combination thereof) an Event of Default;

     

    “Repayment
      Date”
means
      the earlier of (i) the Equity Financing Closing or (ii) October 28,
      2006;

     

    “Tranche
      A Commitment” the
      Lender’s obligation to make one or more loans in an amount of up to
      $200,000.

     

    “Tranche
      B Commitment”
      the
      Lender’s obligation to make one or more loans in an amount of up to
      $200,000.

     

    1.2  Any
      reference in this Agreement to:

     

    the
      “Lender”
shall
      be construed so as to include its and any subsequent successors and assigns
      in
      accordance with their respective interests;

     

    a
      “business
      day”
shall
      be construed as a reference to a day (other than a Saturday or Sunday) on which
      Lenders are generally open for business in New York and London;

     

    a
      “Clause”
shall,
      subject to any contrary indication, be construed as a reference to a clause
      hereof;

     

    an
      “encumbrance”
shall
      be construed as a reference to a mortgage, charge, pledge, lien or other
      encumbrance securing any obligation of any person or any other type of
      preferential arrangement (including, without limitation, title transfer and
      retention arrangements) having a similar effect;

     

    a
      “holding
      company”
of
      a
      company of incorporation shall be construed as a reference to any company or
      corporation of which the first mentioned company or corporation is a
      subsidiary;

     

    “indebtedness”
shall
      be construed so as to include any obligation (whether incurred as principal
      or
      as surety) fore the payment or repayment of money, whether present or future,
      actual or contingent;

     

    a
      “month”
is
      a
      reference to a period starting on one day in a calendar month and ending on
      the
      numerically corresponding day in the next succeeding calendar month save that,
      where any such period would otherwise end on a day which is not a business
      day,
      it shall end on the next succeeding business day, unless that day falls in
      the
      calendar month succeeding that in which it would otherwise have ended, in which
      case it shall end on the immediately preceding business day provided that,
      if a
      period starts on the last business day in a calendar month or if there is no
      numerically corresponding day in the month in which that period ends, that
      period shall end on the last business day in that later month (and references
      to
“months” shall be construed accordingly);

     

    a
      “person”
shall
      be construed as a reference to any person, firm, company, corporation,
      government, state or agency of a state of any association or partnership
      (whether or not having separate legal personality) of two or more of the
      foregoing;

     

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

    “repay”
(or
      any
      derivative form thereof) shall, subject to any contrary indication, be construed
      to include “prepay’ (or, as the case may be, the corresponding derivative form
      thereof);

     

    a
      “Schedule”
shall,
      subject to any contrary indication, be construed as a reference to a schedule
      hereto;

     

    a
      “subsidiary”
of
      a
      company or corporation shall be construed as a reference to any company or
      corporation:

     

    	(i)  	
            which
              is controlled, directly or indirectly, by the first-mentioned company
              or
              corporation;

          


     

    	(ii)  	
            more
              than half the issued share capital of which is beneficially owned,
              directly or indirectly, by the first mentioned company or corporation;
              or

          


     

    	(iii)  	
            which
              is a subsidiary of another subsidiary of the first-mentioned company
              or
              corporation

          


     

    and,
      for
      these purposes, a company of corporation shall be treated as being controlled
      by
      another if that other company or corporation is able to direct its affairs
      and/or to control the composition of its board of directors or equivalent
      body;

     

    “tax”
shall
      be construed so as to include any tax, levy, impost, duty or other charge of
      a
      similar nature (including, without limitation, any penalty or interest payable
      in connection with any failure to pay or any delay in paying any of the
      same);

     

    “VAT”
shall
      be construed as a reference to value added tax including any similar tax which
      may be imposed in place thereof from time to time;

     

    a
      “wholly-owned
      subsidiary”
of
      a
      company or corporation shall be construed as a reference to any company or
      corporation which has no other members except that other company or corporation
      and that other company’s or corporation’s wholly-owned subsidiaries or persons
      acting on behalf of that other company or corporation or its wholly-owned
      subsidiaries; and

     

    the
      “winding-up”,
      “dissolution”
or
      “administration”
of
      a
      company or corporation shall be construed so as to include any equivalent or
      analogous proceedings under the law of the jurisdiction in which such company
      or
      corporation is incorporated or any jurisdiction in which such company of
      corporation carries on business including the seeking of liquidation,
      winding-up, reorganisation, dissolution, administration, arrangement,
      adjustment, protection or relief of debtors.

     

    1.3  Save
      where the contrary is indicated, any reference in this Agreement
      to:

     

    	(i)  	
            this
              Agreement or any other agreement or document shall be construed as
              a
              reference to this Agreement or, as the case may be, such other agreement
              or document as the same may have been, or may from time to time be,
              amended, varied, novated or supplemented;

          


     

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

     

    	(ii)  	
            a
              statute shall be construed as a reference to such status as the same
              may
              have been, or may from time to time be, amended or re-enacted;
              and

          


     

    	(iii)  	
            a
              time of day shall be construed as a reference to New York
              time.

          


     

    1.4  Clause
      and Schedule headings are for ease of reference only.

     

    2.  The
      Facility

     

    2.1  The
      Lender grants to the Borrower, upon the terms and subject to the conditions
      hereof, a loan facility in aggregate amount of $400,000 (four hundred US
      Dollars).

     

    
      	
              2.2

            	
              The
                Loan made pursuant to this Agreement shall be evidenced by Notes
                in an
                aggregate amount equal to the aggregate unpaid principal amount of
                the
                Loan. Each such Note shall be substantially in the from of Exhibit
                A
                hereto. At any time the Lender may elect to convert any or all amounts
                due
                and unpaid under the Notes, and all accrued by unpaid interest hereunder,
                into shares of common stock of Borrower at a conversion price of
                $2.50 per
                share, or such lower price to equal the lowest per share price of
                the
                Borrower’s common stock sold in the Equity Financing.
                

            


    

     

    3.  Purpose

     

    3.1  The
      Facility is intended for general corporate and working capital purposes of
      the
      Borrower.

     

    3.2  Without
      prejudice to the obligations of the Borrower hereunder, the Lender shall not
      be
      obliged to concern itself with the application of amounts raised by the Borrower
      hereunder.

     

    4.  Conditions
      Precedent

     

    Save
      as
      the Lender may otherwise agree, the Borrower may not deliver any Notice of
      Drawdown for the Tranche B Commitment and no drawings will take place under
      Clause 5.1 unless the Lender has confirmed to the Borrower that (i) it has
      received all of the documents listed in the First Schedule and that each is,
      in
      form and substance, satisfactory to the Lender, and (ii) the Chief Executive
      Officer or Chief Financial Officer of the Lender has approved such
      drawing.

     

    5.  Availability
      of the Facility

     

    5.1  On
      the
      date hereof, subject to the delivery to the Lender of all the documents listed
      in the First Schedule, the Lender will remit to the Borrower an Advance in
      the
      amount of US Dollar equivalent to the Tranche A Commitment to the Designated
      Account.

     

    5.2  The
      Lender will, subject to Clause 4, remit by cheque or wire transfer to the
      Designated Account upon the delivery of the Notice of Drawdown (or if such
      day
      is not a business day, on the next following business day), an amount equal
      to
      the amount set forth in such Notice of Drawdown, up to the Tranche B Commitment,
      less all amounts previously paid pursuant to Section 5.3.

     

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

    5.3  Alternatively,
      the Lender will, subject to Clause 4, directly pay Borrower obligations upon
      receipt of invoice or demand (or if such day is not a business day, on the
      next
      following business day), an amount equal to the invoiced or demanded amount,
      up
      to the Tranche B Commitment, less all amounts previously paid pursuant to
      Section 5.2.

     

    6.  Interest

     

    6.1  Each
      Advance shall bear interest on the outstanding principal amount thereof, for
      each day from the date such Advance is made, at a rate per annum equal to 10%,
      and shall be computed on the basis of a year of 360 days, and in each case
      shall
      be payable for the actual number of days elapsed (including the first day but
      excluding the last day).

     

    6.2  All
      accrued and unpaid interest shall be due on the Repayment Date. 

     

    6.3  Upon
      the
      Occurrence and during the continuation of an Event of Default in accordance
      with
      clause 15, the principal of and, to the extent permitted by law, interest on
      the
      Loans and any other amounts owing hereunder or under the Notes shall bear
      interest at a per annum rate equal to 18% and shall be paid by the Borrower
      on a
      monthly basis or on such other date or dates as the Lender may specific by
      written notice to the Borrower. .

     

    6.4  The
      Borrower undertakes to indemnify the Lender against:

     

    	(i)  	
            any
              cost, claim, loss, expense (including legal fees) or liability together
              with any VAT thereon, which it may sustain or incur as a consequence
              of
              the occurrence of any Event of Default or any default by the Borrower
              in
              the performance of any of the obligations expressed to be assumed by
              it in
              this. Agreement; and

          


     

    	(ii)  	
            any
              loss it may suffer as a result of its funding an Advance requested
              by the
              Borrower hereunder but not made by reason of the operation of any one
              of
              more of the provisions hereof.

          


     

    
      	
              7.4

            	
              The
                Borrower and the Lender intend to strictly comply with all applicable
                laws, including applicable usury laws. In no event shall the Borrower
                or
                any other person be obligated to pay, or the Lender have any right
                or
                privilege to reserve, receive or retain, (a) any interest in excess
                of the
                maximum amount of nonusurious interest permitted under any laws of
                the
                United States any other applicable State, or (b) total interest in
                excess
                of the amount which such Lender could lawfully have contracted for,
                reserved, received, retained or charged had the interest been calculated
                for the full term of the Loan at the Highest Lawful Rate. On each
                day, if
                any, that the interest rate (the “Stated
                Rate”)
                called for under this Agreement exceeds the Highest Lawful Rate,
                the rate
                at which interest shall accrue shall automatically be fixed by operation
                of this sentence at the Highest Lawful Rate for that day, and shall
                remain
                fixed at the Highest Lawful Rate for each day thereafter until the
                total
                amount of interest accrued equals the total amount of interest which
                would
                have accrued if there were no such ceiling rate as is imposed by
                this
                sentence. Thereafter, interest shall accrue at the Stated Rate unless
                and
                until the Stated Rate again exceeds the Highest Lawful Rate when
                the
                provisions of the immediately preceding sentence shall again automatically
                operate to limit the interest accrual rate. The daily interest rates
                to be
                used in calculating interest at the Highest Lawful Rate shall be
                determined by dividing the applicable Highest Lawful Rate per annum
                by the
                number of days in the calendar year for which such calculation is
                being
                made. None of the terms and provisions contained in this Agreement
                which
                directly or indirectly relate to interest shall ever be construed
                to
                create a contract to pay for the use, forbearance or detention of
                money at
                an interest rate in excess of the Highest Lawful Rate.
                

            


    

     

     

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

    7.  Repayment

     

    Subject
      to any requirement to make early repayment in accordance with Clause 15.1 the
      Loan shall be repayable by the Borrower on the Repayment Date.

     

    8.  Cancellation
      and Prepayment

     

    8.1  The
      Borrower may, by giving to the Lender not less than thirty days’ prior notice to
      that effect, terminate the Available Facility, without penalty. 

     

    8.2  The
      Borrower may, if it has given to the Lender not less than thirty days’ prior
      notice to that effect, prepay without penalty the whole of the
      Loan.

     

    8.3  Any
      notice of cancellation or prepayment given by the Borrower pursuant to Clause
      8.1 or 8.2 shall be irrevocable, shall specify the date upon which such
      cancellation or prepayment is to be made and the amount of such cancellation
      or
      prepayment and, in the case of a notice of prepayment, shall oblige the Borrower
      to make such prepayment on such date.

     

    8.4  The
      Borrower shall not repay all or any part of the Loan except at the times and
      in
      the manner expressly provided for in the Agreement and shall not be entitled
      to
      reborrow any amount repaid.

     

    
      	
              9.5

            	
              Upon
                the termination of all the Available Facility and the prepayment
                of the
                entire Loan, including all accrued and unpaid interest thereon and
                any the
                satisfaction of any other obligations outstanding hereunder this
                Agreement
                shall terminate. 

            


    

     

    9.  Taxes

     

    9.1  All
      payments to be made by the Borrower to the Lender hereunder shall be made free
      and clear of and without deduction for or on account of tax unless the Borrower
      is required to make such a payment subject to the deduction or withholding
      of
      tax, in which case the sum payable by the Borrower in respect of which such
      deduction or withholding is required to be made shall be increased to the extent
      necessary to ensure that, after the making of the required deduction or
      withholding, the Lender receives and retains (free from any liability in respect
      of any such deduction or withholding) a net sum equal to the sum which it would
      have received and so retained had no such deduction or withholding been made
      or
      required to be made.

     

    9.2  Without
      prejudice to the provisions of Clause 9.1, if the Lender is required to make
      any
      payment on account of tax (not being a tax imposed on the net income of the
      Lender by the jurisdiction in which it is incorporated) or otherwise on or
      in
      relation to any sum received or receivable by it hereunder (including, without
      limitation, any sum received or receivable under this Clause 9) or any liability
      in respect of any such payment is asserted, imposed, levied or assessed against
      the Lender, the Borrower shall, upon demand of the Lender, promptly indemnify
      the Lender against such payment or liability, together with any interest,
      penalties and expenses payable or incurred in connection therewith.

     

    
      
         

      

      
        6

        
          

        

      

      
         

      

    

    9.3  If
      the
      Lender intends to make a claim pursuant to Clause 9, it shall notify the
      Borrower of the event by reason of which it is entitled to make such claim
      provided that nothing herein shall require the Lender to disclose any
      confidential information relating to the organisation of its
      affairs.

     

    10.  Tax
      receipts

     

    10.1  If,
      at
      any time, the Borrower is required by law to make any deduction or withholding
      from any sum payable by it hereunder (or if thereafter there is any change
      in
      the rates at which or the manner in which such deductions or withholdings are
      calculated), the Borrower shall promptly notify the Lender.

     

    10.2  If
      the
      Borrower makes any payment hereunder in respect of which it is required to
      make
      any deduction of withholding, it shall pay the full amount required to be
      deducted or withheld to the relevant taxation or other authority within the
      time
      allowed for such payment under applicable law and shall deliver to the Lender,
      promptly upon receipt of the same, an original receipt (or a certified copy
      thereof) issued by such authority evidencing the payment to such authority
      of
      all amounts so required to be deducted or withheld in respect of such
      payment.

     

    11.  Increased
      Costs

     

    11.1  If,
      by
      reason of any change in law of in its interpretation or
      administration:

     

    	(a)  	
            there
              is any increase in the cost to the Lender of funding or maintaining
              all or
              any of the advances comprised in a class of advances formed by or
              including the Advances; or

          


     

    	(b)  	
            the
              Lender becomes liable to make any payment on account of tax or otherwise
              (not being a tax imposed on the net income of the Lender by the
              jurisdiction in which it is incorporated) on or calculated by reference
              to
              the amount of the Advances and/or to any sum received or receivable
              by it
              hereunder.

          


     

    then
      the
      Borrower shall, from time to time on demand of the Lender, promptly pay to
      the
      Lender amounts sufficient to indemnify it or any such holding company against,
      as the case me be, (1) such increased cost (or such proportion of such
      increased cost as is, in the opinion of the Lender, attributable to its funding
      or maintaining Advances) or (2) such liability.

     

    11.2  If
      the
      Lender intends to make a claim pursuant to Clause 11.1, it shall notify the
      Borrower of the event by reason of which it is entitled to do so provided that
      nothing herein shall require the Lender to disclose any confidential information
      relating to the organisation of its affairs.

     

    
      
         

      

      
        7

        
          

        

      

      
         

      

    

    12.  Illegality

     

    If,
      at
      any time, it is unlawful for the Lender to make, fund or allow to remain
      outstanding all or any of the Advances, then the Lender shall, promptly after
      becomes aware of the same, deliver to the Borrower a certificate to that effect
      and:

     

    	(i)  	
            the
              Lender shall not thereafter be obliged to make any Advances and the
              amount
              of the Available Facility shall be immediately reduced to zero;
              and

          


     

    	(ii)  	
            if
              the Lender so requires, the Borrower shall on such date as the Lender
              shall have specified repay each outstanding Advance and all other amount
              owing to the Lender hereunder.

          


     

    In
      the
      event that this Clause shall become operative, the Lender will discuss in good
      faith with the Borrower what alternative funding methods shall be available
      and
      agrees to give assistance to the Borrower in obtaining such
      funding.

     

    13.  Representations
      

     

    The
      Borrower represents that:

     

    	(i)  	
            it
              is a corporation duly organised under the Laws of Delaware with power
              to
              enter into this Agreement and to exercise its rights and perform its
              obligations hereunder and all corporate and other action required to
              authorise its execution of this Agreement and its performance of its
              obligations hereunder has been duly
              taken;

          


     

    	(ii)  	
            all
              acts, conditions and things required to be done, fulfilled and performed
              in order (a) to enable it lawfully to enter into, exercise its rights
              under and perform and comply with the obligations expressed to be assumed
              by it in this Agreement and (b) to ensure that the obligations
              expressed to be assumed by it in this Agreement are legal, valid and
              binding;

          


     

    	(iii)  	
            it
              has not taken any corporate action nor have any other steps been taken
              or
              legal proceedings been started or (to the best of its knowledge and
              belief) threatened against the Borrower for its winding-up, dissolution,
              administration or re-organisation or for the appointment of a receiver,
              administrator, administrative received, trustee or similar officer
              of it
              or of any or all of its assets or
              revenues;

          


     

    	(iv)  	
            it
              is not in breach of or in default under any agreement to which it is
              a
              party or which is binding on it or any of its assets to an extent or
              in a
              manner which might have a material adverse effect on the business or
              financial condition of the Group;

          


     

    	(v)  	
            no
              action or administrative proceeding of or before any court of agency
              which
              might have a material adverse effect on the business or financial
              condition of the Borrower has been started or
              threatened;

          


     

    	(vi)  	
            save
              as permitted hereunder no encumbrance exists over all or any of the
              present or future revenues or assets of the
              Borrower;

          


     

    
      
         

      

      
        8

        
          

        

      

      
         

      

    

     

    	(vii)  	
            the
              execution by the Borrower of this Agreement and the Borrower’s exercise of
              its rights and performance of its obligations hereunder will not result
              in
              the existence of nor oblige the Borrower to create any encumbrance
              over
              all of any of its present or future revenues or assets (other than
              as
              created by the Note);

          


     

    	(viii)  	
            the
              execution by the Borrower of this Agreement and the Borrower’s exercise of
              its rights and performance of its obligations hereunder do not and
              will
              not:

          


     

    	(a)  	
            conflict
              with any agreement, mortgage, bond or other instrument or treaty to
              which
              such party is a party or which is binding upon it or any of its
              assets;

          


     

    	(b)  	
            conflict
              with such party’s constitutional documents and rules and regulations;
              or

          


     

    	(c)  	
            conflict
              with any applicable law, regulation or official or judicial
              order.

          


     

    14.  Covenants
      

     

    14.1  The
      Borrower shall:

     

    	(i)  	
            obtain,
              comply with the terms of and do all that is necessary to maintain in
              full
              force and effect all material authorisations, approvals, licenses and
              consents required in or by the laws and regulations of is jurisdiction
              of
              incorporation to enable it lawfully to enter into and perform its
              obligations under this Agreement or to ensure the legality, validity,
              enforceability or admissibility in evidence in its jurisdiction of
              incorporation of this Agreement;

          


     

    	(ii)  	
            maintain
              insurances on and in relation to its business and material assets with
              reputable underwriters or insurance companies against such risks and
              to
              such extent as is usual for companies carrying on a business such as
              that
              carried on by the Group;

          


     

    	(iii)  	
            after
              the delivery of any Notice of Drawdown and before the proposed making
              of
              the Advance requested therein, notify the Lender of the occurrence
              of any
              event which results in or may reasonably be expected to result in any
              of
              the representations contained in Clause 13 being untrue in any material
              respect at or before the time of the proposed making of such
              Advance;

          


     

    	(iv)  	
            promptly
              inform the Lender of the occurrence of any Event of Default or Potential
              Event of Default and, upon receipt of a written request to that effect
              from the Lender, confirm to the Lender that, save as previously notified
              to the Lender or as notified in such confirmation, no Event of Default
              or
              Potential Event of Default has occurred;
              and

          


     

    	(v)  	
            ensure
              that at all times the claims of the Lender against it under this Agreement
              rank at least pari passu with the claims of all its other unsecured
              creditors save those whole claims are preferred by any bankruptcy,
              insolvency, liquidation or other similar laws of general
              application.

          


     

     

    
      
         

      

      
        9

        
          

        

      

      
         

      

    

    14.2  No
      member
      of the Group shall, without the prior written consent of the
      Lender:

     

    	(i)  	
            pay,
              make or declare any dividend or other distribution in respect of any
              financial year;

          


     

    	(ii)  	
            create
              or permit to subsist any encumbrance over all or any of its present
              or
              future revenues or assets other than an encumbrance which has been
              disclosed in writing to the Lender prior to the execution hereof and
              secures only indebtedness outstanding at the date
              hereof;

          


     

    	(iii)  	
            make
              any loans, grant any credit (save in the ordinary course of business)
              or
              give any guarantee or indemnity (except as required hereby) to or for
              the
              benefit of any person or otherwise voluntarily assume any liability,
              whether actual or contingent, in respect of any obligation of any other
              person;

          


     

    	(iv)  	
            issue
              any further shares or alter any rights attaching to its issued shares
              in
              existence at the date hereof; or

          


     

    	(v)  	
            (disregarding
              sales of stock in trade and licensing of intellectual property rights
              in
              each case in the ordinary course of business) sell, lease, transfer
              or
              otherwise dispose of, by one of more transactions or series of transaction
              (whether related or not), the whole or any material part of its revenues
              or its assets.

          


     

    15.  Events
      of Default 

     

    15.1  If:

     

    	(i)  	
            the
              Borrower shall fail to pay, within three business days of the due date
              of
              any such further period as may be agreed in writing by the Lender,
              any sum
              due from it hereunder- at the time, in the currency and in the manner
              specified herein; or

          


     

    	(ii)  	
            any
              representation or statement made by the Borrower in this Agreement
              or in
              any notice or other document, certificate or statement delivered by
              it
              pursuant hereto or in connection herewith is or proves td have been
              misleading or materially incorrect when made;
              or

          


     

    	(iii)  	
            the
              Borrower fails duly to perform of comply with any other obligation
              expressed to be assumed by it in this Agreement and such failure, if
              capable of remedy, is not remedied within fourteen days after the Lender
              has given notice thereof to such party;
              or

          


     

    	(iv)  	
            any
              indebtedness of any member of the Group being in aggregate in excess
              of
              £10,000 is not paid when due or is declared to be or otherwise becomes
              due
              and payable prior to its specified maturity or any creditor or creditors
              of any members of the Group become entitled to declare any indebtedness
              of
              such party due and payable prior to its specified maturity;
              or

          


     

    
      
         

      

      
        10

        
          

        

      

      
         

      

    

     

    	(v)  	
            any
              member of the Group is unable to pay its debts as they fall due, commences
              negotiations with any one or more of ‘its creditors with a view to the
              general readjustment or rescheduling of its indebtedness or makes a
              general assignment for the benefit of or a composition with its creditors;
              or

          


     

    	(vi)  	
            any
              member of the Group takes any corporate action or other steps are taken
              or
              legal proceedings are started for its winding up, dissolution,
              administration or re-organisation or for the appointment of a receiver,
              administrator, administrative receiver, trustee or similar officer
              of it
              or of any or all of its revenues and assets save that this clause will
              not
              apply in respect of any action taken vexatiously or without cause;
              or

          


     

    	(vii)  	
            any
              execution of distress is levied against, or an encumbrances takes
              possession of the whole or any material part of, the property, undertaking
              or assets of any member of the Group; or

          


     

    	(viii)  	
            by
              or under the authority of any government, (a) the management of any
              member
              of the Group is wholly or partially displaced or the authority of any
              member of the Group in the conduct of its business is wholly or partially
              curtailed or (b) all or a majority of the issued shares of the Borrower
              or
              the whole or any party (the book value of which is twenty per cent
              or more
              of the book value of the whole) of the revenues or assets of the Group
              is
              seized, nationalised, expropriated or compulsorily acquired;
              or

          


     

    	(ix)  	
            the
              Borrower repudiates this Agreement or does or causes to be done any
              act or
              thing evidencing an intention to repudiate this Agreement;
              or

          


     

    	(x)  	
            at
              any time it is or becomes unlawful for the Borrower to perform or comply
              with any or all of its obligations hereunder or any of the obligations
              of
              the Borrower hereunder are not or cease to be legal, valid and binding
              which would have a material adverse effect on the Lender;
              

          


     

    then,
      and
      in any such case and at any time thereafter, the Lender may by written notice
      to
      the Borrower: 

     

    	(a)  	
            declare
              the Advances to be immediately due and payable (whereupon the same
              shall
              become so payable together with any other sums then owed by the Borrower
              hereunder) or declare the Advances to be due and payable on demand
              of the
              Lender; and/or

          


     

    	(b)  	
            declare
              that any undrawn portion of the Facility shall be cancelled, whereupon
              the
              same shall be cancelled and the Available Facility shall be reduced
              to
              zero.

          


     

    
      
         

      

      
        11

        
          

        

      

      
         

      

    

     

    15.2  If,
      pursuant to Clause 15.1, the Lender declares the Advances to be due and payable
      on demand of the Lender, then, and at any time thereafter, the Lender may by
      written notice to the Borrower call for repayment of the Advances on such date
      as it may specify in such notice (whereupon the same shall become due and
      payable on such date together with any other sums then owed by the Borrower
      hereunder) or withdraw its declaration with effect from such date as it may
      specify in such notice.

     

    16.  Payment
      Procedures

     

    16.1  On
      each
      date on which this Agreement requires an amount denominated in US Dollars to
      be
      paid by the Borrower, the Borrower shall make the same available to the Lender
      by payment in US Dollars and in immediately available, freely transferable,
      cleared funds to the Lender’s bank account as the Lender may have specified for
      this purpose.

     

    16.2  On
      each
      date on which this Agreement requires an amount denominated in US Dollars to
      be
      paid by the Lender to the Borrower or, on behalf of Borrower, directly to a
      third party upon invoice or demand, the Lender shall make the same available
      to
      the Borrower by payment in Dollars and in immediately available, freely
      transferable, cleared funds to the Designated Account (or such account as the
      Borrower may have specified for this purpose).

     

    16.3  All
      payments required to be made by the Borrower hereunder shall be calculated
      without reference to any set-off or counterclaim and shall be made free and
      clear of and without any deduction for or on account of any set-off or
      counterclaim.

     

    16.4  All
      moneys received, recovered or realised by the Lender by virtue of Clause 16.2
      may, in the Lender’s discretion, be credited to a suspense or impersonal account
      and many be held in such account for so long as the Lender thinks fit pending
      the application from time to time (as the Lender Imay
      think
      fit) of such moneys in or towards the payment and discharge of any amounts
      owing
      by the Borrower to the Lender hereunder.

     

    17.  Set-Off

     

    The
      Borrower authorises the Lender to apply any credit balance to which the Borrower
      is entitled on any account of the Borrower with the Lender in satisfaction
      of
      any sum due and payable from the Borrower to the Lender hereunder but unpaid;
      for this purpose, the Lender is authorised to purchase with the moneys standing
      to the credit of any such account such other currencies as may be necessary
      to
      effect such application. The Lender shall not be obliged to exercise any right
      given to it by this Clause 17.

     

    18.  Costs
      and Expenses

     

    18.1  The
      Borrower shall, from time to time on demand of the Lender, reimburse the Lender
      for all costs and expenses (including legal fees) together with any VAT thereon
      incurred in or in connection with the preservation and/or enforcement of any
      of
      its rights under this Agreement.

     

    18.2  The
      Borrower shall pay all stamp, registration and other taxes to which this
      Agreement or any judgment given in connection herewith is or at any time may
      be
      subject and shall, from time to time on demand, indemnify the Lender against
      any
      liabilities, costs, claims and expenses resulting from any failure to pay or
      any
      delay in paying any such tax.

     

    
      
         

      

      
        12

        
          

        

      

      
         

      

    

    19.  Benefit
      of Agreement

     

    This
      Agreement shall be binding upon and enure to the benefit of each party hereto
      and its or any subsequence successors and assigns.

     

    20.  Assignments

     

    20.1  The
      Borrower shall not be entitled to assign or transfer all or any of its rights,
      benefits and obligations hereunder.

     

    20.2  The
      Lender may assign all or any of its rights and benefits hereunder
      to:

     

    	20.2.1  	
            any
              other person provided that the Lender can demonstrate to the reasonable
              satisfaction of the Borrower that person is of good credit standing
              and
              does not have any interests which conflict with those of the Borrower;
              or

          


     

    20.3  any
      subsidiary or holding company of the Lender or other subsidiary of such holding
      company (as such terms are defined in the Companies Act 1985) provided that
      the
      Borrower agrees to guarantee the performance of the obligations under this
      Agreement of such company.

     

    21.  Calculation—and
      Evidence of Debt

     

    21.1  The
      Lender shall maintain in accordance with its usual practice accounts evidencing
      the amounts from time to time lent by and owing to it hereunder.

     

    22.  Remedies
      and Waivers

     

    No
      failure by the Lender to exercise, nor any delay by the Lender in exercising,
      any right or remedy hereunder shall operate as a waiver thereof, nor shall
      any
      single or partial exercise of any right or remedy prevent any further or other
      exercise thereof or the exercise of any other right or remedy. The rights and
      remedies herein provided are cumulative and not exclusive of any rights or
      remedies provided by law.

     

    23.  Partial
      Invalidity

     

    If,
      at
      any time, any provision hereof is or becomes illegal, invalid or unenforceable
      in any respect under the law of any jurisdiction, neither the legality, validity
      or enforceability of the remaining provisions hereof nor the legality or
      enforceability of such provision under the law of any other jurisdiction shall
      in any way be affected or impaired thereby.

     

    24.  Notices

     

    24.1  Each
      communication to be made hereunder shall be made in writing but, unless
      otherwise states, may be made by telefax, letter.

     

    
      
         

      

      
        13

        
          

        

      

      
         

      

    

    24.2  Any
      communication or document to be made or delivered by one person to another
      pursuant to this Agreement shall (unless that other person has by fifteen days’
written notice to the one specified another address) be made or delivered to
      that other person at the address identified with its signature below and shall
      be deemed to have been made or delivered at the opening of business on the
      business day following the date of despatch (in the case of any communication
      made by telefax) or when left at that address (in the case of any communication
      made by letter) or
      (as
      the case may be) ten days after being deposited in the post postage prepaid
      in
      an envelope addresses to it at that address provided that any communication
      or
      document to be made or delivered by the Borrower to the Lender shall be
      effective only when received by the Lender and then only if the same is
      expressly marked for the attention of the department or officer identified
      with
      the Lender’s signature below (or such other department or officer as the Lender
      shall from time to time specific for this purpose).

     

    25.  Law
      

     

    This
      Agreement shall be governed by, and shall be construed in accordance with the
      laws of the State of New York, without giving effect to its principals or rules
      of conflicts of laws to the extent such principals or rules would require the
      application of the laws of another jurisdiction. 

     

    26.  Jurisdiction

     

    26.1  Each
      party hereto hereby irrevocably and unconditionally submits, for itself and
      its
      property, to the exclusive jurisdiction of the Supreme Court of the State of
      New
      York sitting in New York County and of the United States District Court of
      the
      Southern District of New York, and any appellate court from any thereof, in
      any
      action or proceeding arising out of or relating to this Agreement, or for
      recognition or enforcement of any judgment, and each of the parties hereto
      hereby irrevocably and unconditionally agrees that all claims in respect of
      any
      such action or proceeding may be heard and determined in such New York State
      or,
      to the extent permitted by law, in such Federal court. Each of the parties
      hereto agrees that a final judgment in any such action or proceeding shall
      be
      conclusive and may be enforced in other jurisdictions by suit on the judgment
      or
      in any other manner provided by law. 

     

    AS
      WITNESS
      the
      hands of the duly authorised representatives of the parties hereto on the date
      set out above.

     

    
      
         

      

      
        14

        
          

        

      

      
         

      

    

     

    
      	
              THE
                BORROWER:

              
OWLSTONE
                NANOTECH, INC., 

            	 	 
	By: 	
               

              
 
                

            	 	 
	 	 
	 	 
	
              Address:
                600 Lexington Avenue

              New
                York, NY 10022

              Tel:
                (212) 583-0098

              Fax:
                (212) 583-0001

              Email:
                bret.bader@owlstonenanotech.com

              Atten:
                Bret Bader, CEO

            	 	 
	 	 	 	 
	 	 	 	 
	
              THE
                LENDER:

               

              ADVANCED
                NANOTECH, INC., 

            	 	 
	 	 	 	 
	By: 	  
	 	 
	 	  
	 	 
	
              Address:
                600 Lexington Avenue

              New
                York, NY 10022

              Tel:
                (212) 583-0080

              Fax:
                (212) 583-0001

              Email:
                tom.finn@advanenanotech.com

              Atten:
                Thomas Finn, CFO

            	 	 


    

    

 

    
      
         

      

      
        15

        
          

        

      

      
         

      

    

    THE
      FIRST
      SCHEDULE 

    Condition
      Precedent Documents

     

    	(i)  	
            a
              copy, certified a true copy by a duly authorised officer of the Borrower,
              of its Memorandum and Articles of
              Association;

          


     

    	(ii)  	
            a
              copy, certified a true copy by a duly authorised officer of the Borrower,
              of a Board Resolution of the Borrower approving the execution, delivery
              and performance of this Agreement and the terms amid conditions hereof
              and
              authorizing a named person or persons to sign this Agreement and any
              documents to be delivered by the Borrower pursuant
              hereto;

          


     

    	(iii)  	
            a
              certificate of a duly authorised officer of the Borrower setting out
              the
              names and signatures of the persons authorised to sign, on behalf of
              the
              Borrower, this Agreement and any documents to be delivered by the Borrower
              pursuant hereto or thereto; and 

          


    
       

      	(iv)  	
              a
                Warrant to purchase 40,000 shares of the Borrower’s common stock (or such
                greater amount if the lowest per share price of the such sock sold
                in the
                Equity Financing is below $2.50 per share) at an exercise price of
                $1.50
                per share.

            


       

    

     

     

    
      
         

      

      
        16

        
          

        

      

      
         

      

    


    THE
      SECOND SCHEDULE

    Notice
      of
      Drawdown 

     

    From: Owlstone
      Nanotech, Inc. 

    To: Advance
      Nanotech, Inc.

     

    Dated:
       

     

    Dear
      Sirs,

     

    	1.  	
            We
              refer to the agreement (the “Facility Agreement”) dated _______, 2006 and
              made between ourselves as borrower and yourselves as lender. Terms
              defined
              in the Facility Agreement shall have the same meaning in this
              notice.

          


     

    	2.  	
            We
              hereby give you notice that, pursuant to the Facility Agreement and
              on
              [date of proposed advance], we wish to borrow an Advance in the following
              amount _____________, up to the Tranche B Commitment, upon the terms
              and
              subject to the conditions contained
              therein.

          


     

    	3.  	
            We
              confirm that, at the date hereof, the representations set out in Clause
              13
              of the Facility Agreement are true and no Event of Default of Potential
              Event of Default has occurred.

          


     

    	4.  	
            The
              proceeds of this drawdown should be credited to [insert account
              details].

          


     

    Yours
      faithfully,

     

     

     

      
        

      

    

    For
      an on
      behalf of Owlstone Nanotech, Inc. 

     

    


     

    
      
         

      

      
        17

        
          

        

      

      
         

      

    

    EXHIBIT
      A

     

    FORM
      OF SENIOR SECURED SUBORDINATED PROMISSORY GRID NOTE

     

    Up
      to
      $400,000

     

    New
      York,
      New York

    [__________],
      2006

     

    FOR
      VALUE
      RECEIVED, the undersigned, OWLSTONE NANOTECH, INC., a Delaware corporation
      (the
“Borrower”),
      hereby
      unconditionally promises to pay to the order of ADVANCE NANOTECH, INC. (the
      “Lender”)
      and its
      successors and assigns, the unpaid principal amount set forth on the attached
      Schedule A (the “Loan”). The Borrower further agrees to pay interest on the
      unpaid principal amount hereof from time to time outstanding at the rates and
      on
      the dates as set forth in the Credit Agreement. All such payments of principal
      and interest shall be made without offset, counterclaim or deduction of any
      kind
      in lawful money of the United States of America and in immediately available
      funds at such location in the United States of America as the Lender shall
      designate from time to time. 

     

    This
      Note
      is given in connection with the Facility Agreement, dated as of [August 11,
      2006], among the Borrower and the Lender (the “Facility Agreement”). This Note
      is one of the Notes referred to in the Facility Agreement and evidences Advances
      made by the Lender to the Borrower. Capitalized terms used in this Note and
      not
      otherwise defined shall have the respective meaning assigned to them in the
      Facility Agreement and the terms and conditions of the Facility Agreement are
      expressly incorporated herein and made a part hereof. 

     

    At
      any
      time the Lender may elect to convert any or all amounts due and unpaid under
      this Note, and all accrued by unpaid interest hereunder, into shares of common
      stock of Borrower at a conversion price of $2.50 per share, or such lower price
      to equal the lowest per share price of the Borrower’s common stock sold in the
      Equity Financing. 

     

    The
      holder of this Note is authorized (but nor required) to endorse on the schedules
      annexed hereto and made a part hereof the date and amount of each payment or
      prepayment of principal with respect to the Loan. Each such endorsement shall
      constitute prima facie
      evidence
      of the accuracy of the information endorsed. The failure to make any such
      endorsement or any error in any such endorsement shall not affect the
      obligations of the Borrowers in respect of such Loan.

     

    Upon
      the
      commencement by or against the Borrower of any case or other proceeding seeking
      liquidation, reorganization or other relief with respect to the Borrower or
      its
      debts under any bankruptcy, insolvency or other similar law now of hereafter
      in
      effect or seeking the appointment of a trustee, receiver, liquidator, custodian
      or other similar official of it or any substantial part of its property, the
      unpaid principal amount hereof shall become immediately due and payable without
      presentment, demand, protest or notice of any kind, all of which are hereby
      waived by the Borrower. 

     

    The
      Borrower hereby pledges, assigns and grants to the Lender a security interest
      in
      all of such Grantor’s right, title and interest, whether now owned or hereafter
      acquired, in and to the Collateral (as defined below) to secure the prompt
      and
      complete payment and performance of its obligations hereunder.

     

    
      
         

      

      
        18

        
          

        

      

      
         

      

    

    For
      the
      purposes of this Note, the term “Collateral” shall mean all Accounts (including
      all commissions), Chattel Paper, Commercial Tort Claims, Documents, Equipment,
      Goods, General Intangibles, Instruments, Inventory, Investment Property, Pledged
      Deposits, Supporting Obligations and Other Collateral, wherever located, in
      which any Grantor now has or hereafter acquires any right or interest, and
      the
      proceeds (including Stock Rights), insurance proceeds and products thereof,
      together with all books and records, customer lists, credit files, computer
      files, programs, printouts and other computer materials and records related
      thereto. Notwithstanding anything to the contrary contained in this definition,
      Collateral shall not include (i) Accounts, Chattel Paper, Documents, General
      Intangibles, Instruments or other contractual rights to the extent and for
      so
      long as the grant of a security interest herein would violate the terms of
      the
      agreement under which such Account, General Intangible or contractual rights
      arise or exist, or under such Chattel Paper, Document or Instrument, in each
      case to the extent such prohibition is enforceable under applicable law, (ii)
      rights under governmental licenses and authorizations to the extent and for
      so
      long as the grant of a security interest therein is prohibited by law, (iii)
      any
      intent-to-use trademark or service mark application prior to the filing of
      a
      statement of use or amendment to allege use, or any other intellectual property,
      to the extent that applicable law or regulation prohibits the creation of a
      security interest or would otherwise result in the loss of rights from the
      creation of such security interest or from the assignment of such rights upon
      the occurrence and continuance of an Event of Default, and (iv) Equipment that
      is subject to a Lien securing a purchase money obligation or capital lease
      obligation permitted to be incurred pursuant to the provisions of the Credit
      Agreement if the contract or other agreement in which such Lien is granted
      (or
      the documentation providing for such purchase money obligation or capital lease
      obligation) validly prohibits the creation of any other Lien on such
      Equipment.

     

    All
      parties now and hereafter liable with respect to this Note, whether maker,
      principal, surety, guarantor, endorser or otherwise, hereby waive presentment,
      demand, protest and all other notices of any kind with respect to matters
      relating to this Note.

     

    This
      Note
      is expressly subordinated in all rights, including, without limitation, the
      right of payment, to the prior payment in full of the Borrower’s obligations to
      the Lender under that certain Facility Agreement, dated as of May 28, 2004.
      

     

    [REMAINDER
      OF THIS PAGE INTENTIONALLY LEFT BLANK]

     

    
      
         

      

      
        19

        
          

        

      

      
         

      

    

    THIS
      TERM NOTE AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS TERM NOTE
      SHALL BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, AND GOVERNED BY, THE
      LAWS
      OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ITS PRINCIPLES OR RULES
      OF
      CONFLICTS OF LAWS TO THE EXTENT SUCH PRINCIPLES OR RULES WOULD REQUIRE THE
      APPLICATION OF THE LAWS OF ANOTHER JURISDICTION.

     

    
      	 	 	 
	 	OWLSTONE NANOTECH, INC.
	 
 	 
 	 
 
	 	By:  	 
	 	
              

              Name:

            
	 	Title 


    

     

     

    


    
      
         

      

      
        20

        
          

        

      

      
         

      

    

    Schedule
      A

    to
      Grid
      Note

     

    GRID
      SCHEDULE

    LOANS;
      REPAYMENT

     

    


     

    
      	
              Date

            	
              Amount
                of Loan

            	
              Amount

              of
                Principal

              Repaid

            	
              Notation

              Made
                By

            
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 


    

    


    


    
      
         

      

      
        21