Document:

EXHIBIT 10.1

 

SUBSCRIPTION AGREEMENT

 

This SUBSCRIPTION AGREEMENT
(this “Agreement”) is made as of the last date set forth on the signature page hereof between SpectraScience, Inc.,
a Minnesota corporation (the “Company”), and the undersigned (the “Subscriber”).

 

W I T N E S S E T H:

WHEREAS, the Company
is conducting a private offering (the “Offering”) for which Laidlaw & Company (UK) Ltd. is acting as placement
agent on a “best efforts” basis (the “Placement Agent”), consisting of a minimum of $250,000 (the “Minimum
Offering”) and up to a maximum of $1,500,000 (the “Maximum Offering”) of 5% original issue discount unsecured
convertible debentures (the “Debentures”), initially convertible into shares of the Company’s common stock par
value $0.01 per share (the “Common Stock”) at a conversion price equal to $0.099, subject to adjustment (the “Conversion
Price”), and

 

WHEREAS, the Company
and each Subscriber 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 “Securities Act”) and Rule 506 of Regulation D (“Regulation
D”) as promulgated by the United States Securities and Exchange Commission (the “SEC”) under the Securities Act;
and

 

WHEREAS, in connection
with the purchase of the Debentures, each Subscriber will receive a five-year warrant (the “Warrant”, and together
with the Debenture, the “Securities”) to purchase such number of shares of Common Stock of the Company equal to 50%
of the number of shares of Common Stock initially issuable upon conversion of the Debentures in this Offering at an exercise price
equal to $0.1287 per share, subject to adjustment thereunder (the “Exercise Price”); and

 

WHEREAS, the Subscriber
desires to purchase such amount of Debentures (together with the associated Warrants) as set forth on the signature page hereof
on the terms and conditions hereinafter set forth.

 

NOW, THEREFORE, in consideration
of the premises and the mutual representations and covenants hereinafter set forth, the parties hereto do hereby agree as follows:

 

		I.	SUBSCRIPTION FOR SECURITIES AND REPRESENTATIONS AND AGREEMENTS BY SUBSCRIBER

 

1.1     
Subject to the terms and conditions hereinafter set forth, the Subscriber hereby subscribes for and agrees to purchase from
the Company, and the Company subject to its rights to accept or reject this subscription, agrees to sell to the Subscriber, such
aggregate face amount of Debentures for the aggregate purchase price as is set forth on the signature page hereof. The purchase
price is payable by wire transfer, to be held in escrow until the Minimum Offering and the other conditions to closing are achieved,
to Signature Bank, the escrow agent (the “Escrow Agent”) as follows:

 

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Bank:Signature Bank

261 Madison Ave.

New York, NY 10016

ABA #:

Acct #:

Acct Name: Signature Bank, as Escrow Agent for SpectraScience,
Inc.

Swift Code:

 

1.2     
The Securities will be offered for sale until the earlier of (i) the closing on the Maximum Offering or (ii) September 7,
2012, subject to the right of the Company and the Placement Agent to mutually extend the Termination Date to October 22, 2012 without
notice to prospective investors (the “Termination Date”). The Offering is being conducted on a “best-efforts”
basis.

 

1.3     
The Company may hold an initial closing (“Initial Closing”) at any time after the receipt of accepted subscriptions
for the Minimum Offering. After the Initial Closing, subsequent closings with respect to additional Securities may take place at
any time prior to the Termination Date as determined by the Company, with respect to subscriptions accepted prior to the Termination
Date (each such closing, together with the Initial Closing, being referred to as a “Closing”). The last Closing of
the Offering, occurring on or prior to the Termination Date, shall be referred to as the “Final Closing”. Any subscription
documents or funds received after the Final Closing will be returned, without interest or deduction. In the event that the any
Closing does not occur prior to the Termination Date, all amounts paid by the Subscriber shall be returned to the Subscriber, without
interest or deduction. The Subscriber may revoke its subscription and obtain a return of the subscription amount paid to the Escrow
Agent at any time before the date of the Initial Closing by providing written notice to the Placement Agent, the Company and the
Escrow Agent as provided in Section 6.2 below. Upon receipt of a revocation notice from the Subscriber prior to the date of the
Initial Closing, all amounts paid by the Subscriber shall be returned to the Subscriber, without interest or deduction. The Subscriber
may not revoke this subscription or obtain a return of the subscription amount paid to the Escrow Agent on or after the date of
the Initial Closing. Any subscription received after the Initial Closing but prior to the Termination Date shall be irrevocable.

 

1.4     
The Subscriber recognizes that the purchase of the Securities involves a high degree of risk including, but not limited
to, the following: (a) the Company has a limited operating history and requires substantial funds in addition to the proceeds of
the Offering; (b) an investment in the Company is highly speculative, and only investors who can afford the loss of their entire
investment should consider investing in the Company and the Securities; (c) the Subscriber may not be able to liquidate its investment;
(d) transferability of the Securities is extremely limited; (e) in the event of a disposition, the Subscriber could sustain the
loss of its entire investment; (f) the Company has not paid any dividends since its inception and does not anticipate paying any
dividends; and (g) the other risks associated with the Company’s business, financial situation and the Offering set forth
on Exhibit A annexed hereto.

 

 

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1.5     
At the time such Subscriber was offered the Securities, it was, and as of the date hereof it is, and on each date on which
it converts the Debentures and/or exercises any Warrants, it will be an “accredited investor” as defined in Rule 501(a)
under the Securities Act, as indicated by the Subscriber’s responses to the questions contained in Section VII hereof, and
that the Subscriber is able to bear the economic risk of an investment in the Securities.

 

1.6     
The Subscriber hereby acknowledges and represents that (a) the Subscriber has knowledge and experience in business and financial
matters, prior investment experience, including investment in securities that are non-listed, unregistered and/or not traded on
a national securities exchange or the Subscriber has employed the services of a “purchaser representative” (as defined
in Rule 501 of Regulation D), attorney and/or accountant to read all of the documents furnished or made available by the Company
both to the Subscriber and to all other prospective investors in the Securities to evaluate the merits and risks of such an investment
on the Subscriber’s behalf; (b) the Subscriber recognizes the highly speculative nature of this investment; and (c) the Subscriber
is able to bear the economic risk that the Subscriber hereby assumes.

 

1.7     
The Subscriber hereby acknowledges receipt and careful review of this Agreement, the Debenture, the Warrant and all other
exhibits thereto (collectively referred to as the “Transaction Documents”) and has had access to the Company’s
Annual Report on Form 10-K and the exhibits thereto for the fiscal year ended December 31, 2011 (the “Form 10-K”),
the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012 (the “Form 10-Q”) and
all subsequent periodic and current reports filed with the SEC as publicly filed with and available at the website of the SEC which
can be accessed at www.sec.gov, and has received any additional information that the Subscriber has requested from the Company,
and has been afforded the opportunity to ask questions of and receive answers from duly authorized officers or other representatives
of the Company concerning the Company and the terms and conditions of the Offering; provided, however that no investigation performed
by or on behalf of the Subscriber shall limit or otherwise affect its right to rely on the representations and warranties of the
Company contained herein.

 

1.8     
(a)In making the decision to invest in the Securities the Subscriber has relied solely upon the information provided
by the Company in the Transaction Documents and upon the information set forth in the Form 10-K, the Form 10-Q and all subsequent
periodic and current reports filed with the SEC. To the extent necessary, the Subscriber has retained, at its own expense, and
relied upon appropriate professional advice regarding the investment, tax and legal merits and consequences of this Agreement and
the purchase of the Securities hereunder. The Subscriber disclaims reliance on any statements made or information provided by any
person or entity in the course of Subscriber’s consideration of an investment in the Securities other than the Transaction
Documents.

 

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(b)The
Subscriber represents that (i) the Subscriber was contacted regarding the sale of the Securities by the Placement Agent with whom
the Subscriber had a prior substantial pre-existing relationship and (ii) it did not learn of the offering of the Securities by
means of any form of general solicitation or general advertising, and in connection therewith, the Subscriber did not (A) receive
or review any advertisement, article, notice or other communication published in a newspaper or magazine or similar media or broadcast
over television or radio, whether closed circuit, or generally available; or (B) attend any seminar meeting or industry investor
conference whose attendees were invited by any general solicitation or general advertising.

 

1.9     
The Subscriber hereby acknowledges that the Offering has not been reviewed by the SEC nor any state regulatory authority
since the Offering is intended to be exempt from the registration requirements of Section 5 of the Securities Act, pursuant to
Section 4(2) of the Securities Act and Rule 506 of Regulation D. The Subscriber understands that the Securities have not been registered
under the Securities Act or under any state securities or “blue sky” laws and agrees not to sell, pledge, assign or
otherwise transfer or dispose of the Securities unless they are registered under the Securities Act and under any applicable state
securities or “blue sky” laws or unless an exemption from such registration is available.

 

1.10 
The Subscriber understands that the Securities have not been registered under the Securities Act by reason of a claimed
exemption under the provisions of the Securities Act that depends, in part, upon the Subscriber’s investment intention and
investment qualification. In this connection, the Subscriber hereby represents that the Subscriber is purchasing the Securities
for the Subscriber’s own account for investment and not with a view toward the resale or distribution to others; provided,
however, that nothing contained herein shall constitute an agreement by the Subscriber to hold the Securities for any particular
length of time and the Company acknowledges that the Subscriber shall at all times retain the right to dispose of its property
as it may determine in its sole discretion, subject to any restrictions imposed by applicable law. The Subscriber, if an entity,
further represents that it was not formed for the purpose of purchasing the Securities.

 

1.11 
The Subscriber consents to the placement of a legend on any certificate or other document evidencing the Securities and,
when issued, the shares of Common Stock issuable upon conversion of the Debentures (the “Conversion Shares”) and exercise
of the Warrant (the “Warrant Shares” and collectively with the Conversion Shares, the “Shares”) that such
securities have not been registered under the Securities Act or any state securities or “blue sky” laws and setting
forth or referring to the restrictions on transferability and sale thereof contained in this Agreement. The Subscriber is aware
that the Company will make a notation in its appropriate records with respect to the restrictions on the transferability of such
Securities or the Shares.

 

1.12 
The Subscriber hereby represents that the address of the Subscriber furnished by Subscriber on the signature page hereof
is the Subscriber’s principal residence if Subscriber is an individual or its principal business address if it is a corporation
or other entity.

 

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1.13 
Such Subscriber understands that the Securities are “restricted securities” and have not been registered under
the Securities Act or any applicable state securities law and is acquiring the Securities as principal for its own account and
not with a view to or for distributing or reselling such Securities or any part thereof in violation of the Securities Act or any
applicable state securities law, has no present intention of distributing any of such Securities in violation of the Securities
Act or any applicable state securities law and has no direct or indirect arrangement or understandings with any other persons to
distribute or regarding the distribution of such Securities in violation of the Securities Act or any applicable state securities
law. Furthermore, such Subscriber is not purchasing the Securities as a result of any advertisement, article, notice or other communication
regarding the Securities published in any newspaper, magazine or similar media or broadcast over television or radio or presented
at any seminar or any other general solicitation or general advertisement.

 

1.14 
The Subscriber represents that the Subscriber has full power and authority (corporate, statutory and otherwise) to execute
and deliver this Agreement and to purchase the Securities. This Agreement constitutes the legal, valid and binding obligation of
the Subscriber, enforceable against the Subscriber in accordance with its terms.

 

1.15 
If the Subscriber is a corporation, partnership, limited liability company, trust, employee benefit plan, individual retirement
account, Keogh Plan, or other tax-exempt entity, it is authorized and qualified to invest in the Company and the person signing
this Agreement on behalf of such entity has been duly authorized by such entity to do so.

 

1.16 
The Subscriber acknowledges that if he or she is a Registered Representative of a Financial Industry Regulatory Authority
(“FINRA”) member firm, he or she must give such firm the notice required by the FINRA’s Rules of Fair Practice,
receipt of which must be acknowledged by such firm in Section 7.4 below.

 

1.17 
To effectuate the terms and provisions hereof, the Subscriber hereby appoints the Placement
Agent as its attorney-in-fact (and the Placement Agent hereby accepts such appointment) for the purpose of carrying out the provisions
of the Escrow Agreement by and between the Company, the Placement Agent and Escrow Agent (the “Escrow Agreement”) including,
without limitation, taking any action on behalf of, or at the instruction of, the Subscriber and executing any release notices
required under the Escrow Agreement and taking any action and executing any instrument that the Placement Agent may deem necessary
or advisable (and lawful) to accomplish the purposes hereof. All acts done under the foregoing authorization are hereby ratified
and approved and neither the Placement Agent nor any designee nor agent thereof shall be liable for any acts of commission or omission,
for any error of judgment, for any mistake of fact or law except for acts of gross negligence or willful misconduct. This power
of attorney, being coupled with an interest, is irrevocable while the Escrow Agreement remains in effect. 

 

1.18 
The Subscriber agrees not to issue any public statement with respect to the Offering, Subscriber’s
investment or proposed investment in the Company or the terms of any agreement or covenant between them and the Company without
the Company’s prior written consent, except such disclosures as may be required under applicable law.

 

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1.19 
The Subscriber understands, acknowledges and agrees with the Company that this subscription
may be rejected, in whole or in part, by the Company, in the sole and absolute discretion of the Company, at any time before any
Closing notwithstanding prior receipt by the Subscriber of notice of acceptance of the Subscriber’s subscription.

 

1.20 
The Subscriber acknowledges that the information contained in the Transaction Documents
or otherwise made available to the Subscriber is confidential and non-public and agrees that all such information shall be kept
in confidence by the Subscriber and neither used by the Subscriber for the Subscriber’s personal benefit (other than in connection
with this subscription) nor disclosed to any third party for any reason, notwithstanding that a Subscriber’s subscription
may not be accepted by the Company; provided, however, that (a) the Subscriber may disclose such information to its affiliates
and advisors who may have a need for such information in connection with providing advice to the Subscriber with respect to its
investment in the Company so long as such affiliates and advisors have an obligation of confidentiality, and (b) this obligation
shall not apply to any such information that (i) is part of the public knowledge or literature and readily accessible at the date
hereof, (ii) becomes part of the public knowledge or literature and readily accessible by publication (except as a result of a
breach of this provision) or (iii) is received from third parties without an obligation of confidentiality (except third parties
who disclose such information in violation of any confidentiality agreements or obligations, including, without limitation, any
subscription or other similar agreement entered into with the Company).

 

1.21 
Other than with respect to the transactions contemplated herein and
other than with respect to any prior subscribers in the Company's offering of the Securities with a final closing date of March
15, 2012 and the Company’s subsequent offering of the Securities with a final closing date of March 30, 2012, since the time
that such Subscriber was first contacted by the Company, since the time that such
Subscriber was first contacted by the Company, the Placement Agent or any other person regarding the transactions contemplated
herein, neither the Subscriber nor any Affiliate of such Subscriber which (x) had knowledge of the transactions contemplated hereby,
(y) has or shares discretion relating to such Subscriber’s investments or trading or information concerning such Subscriber’s
investments, including in respect of the Securities, and (z) is subject to such Subscriber’s review or input concerning such
Affiliate’s investments or trading (collectively, “Trading Affiliates”) has directly or indirectly, nor has any
person acting on behalf of or pursuant to any understanding with such Subscriber or Trading Affiliate, effected or agreed to effect
any transactions in the securities of the Company (including, without limitation, any short sales involving the Company’s
securities). Notwithstanding the foregoing, in the case of a Subscriber and/or Trading Affiliate that is, individually or collectively,
a multi-managed investment vehicle whereby separate portfolio managers manage separate portions of such Subscriber’s or Trading
Affiliate’s assets and the portfolio managers have no direct knowledge of the investment decisions made by the portfolio
managers managing other portions of such Subscriber’s or Trading Affiliate’s assets, the representation set forth above
shall apply only with respect to the portion of assets managed by the portfolio managers that have knowledge about the financing
transaction contemplated by this Agreement. Other than to other persons party to this Agreement, such Subscriber has maintained
the confidentiality of all disclosures made to it in connection with this transaction (including the existence and terms of this
transaction).

 

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1.22 
Subscriber understands that the Securities 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 Subscriber’s compliance with, the representations, warranties, agreements, acknowledgements and understandings
of such Subscriber set forth herein in order to determine the availability of such exemptions and the eligibility of such Subscriber
to acquire the Securities.

 

1.23 
Each Subscriber hereunder acknowledges its primary responsibilities under the Securities Act and accordingly will not sell
any of the Securities or any interest therein without complying with the requirements of the Securities Act. In the event at any
time a registration statement covering the Securities remains effective, each Subscriber seeking to sell Securities thereunder
agrees to sell the Securities only in accordance with the plan of distribution contained in such registration statement and if
it does so it will comply therewith and with the related prospectus delivery requirements unless an exemption therefrom is available.

 

1.24 
The Subscriber will indemnify and hold harmless the Company and, where applicable, its directors, officers, employees, agents,
advisors, affiliates and shareholders, and each other person, if any, who controls any of the foregoing from and against any and
all loss, liability, claim, damage and expense whatsoever (including, but not limited to, any and all fees, costs and expenses
whatsoever reasonably incurred in investigating, preparing or defending against any claim, lawsuit, administrative proceeding or
investigation whether commenced or threatened) (a “Loss”) arising out of or based upon any representation or warranty
of the Subscriber contained herein or in any document furnished by the Subscriber to the Company in connection herewith being untrue
in any material respect or any breach or failure by the Subscriber to comply with any covenant or agreement made by the Subscriber
herein or therein; provided, however, that the Subscriber shall not be liable for any Loss
that in the aggregate exceeds the Subscriber’s aggregate purchase price tendered hereunder.

 

		II.	REPRESENTATIONS BY AND COVENANTS OF THE COMPANY

 

The Company hereby represents
and warrants to the Subscriber that:

 

2.1     
Organization, Good Standing and Qualification. The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Minnesota and has full corporate power and authority to own and use its properties
and its assets and conduct its business as currently conducted. Each of the Company’s subsidiaries identified on Schedule
2.1 hereto (the “Subsidiaries”) is an entity duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation with the requisite corporate power and authority to own and use its properties and assets
and to conduct its business as currently conducted. Neither the Company, nor any of its Subsidiaries is in violation of any of
the provisions of their respective articles of incorporation, by-laws or other organizational or charter documents, including,
but not limited to the Charter Documents (as defined below). Each of the Company and its Subsidiaries is duly qualified to conduct
business and is in good standing as a foreign corporation in each jurisdiction in which the nature of the business conducted or
property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the
case may be, would not result in a direct and/or indirect (i) material adverse effect on the legality, validity or enforceability
of any of the Securities and/or this Agreement, (ii) material adverse effect on the results of operations, assets, business,
condition (financial and other) or prospects of the Company and its Subsidiaries, taken as a whole, or (iii) material adverse effect
on the Company’s ability to perform in any material respect on a timely basis its obligations under the Transaction Documents
(any of (i), (ii) or (iii), a “Material Adverse Effect”).

 

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2.2     
Capitalization and Voting Rights. The authorized, issued and outstanding capital stock of the Company is as set forth
in Schedule 2.2 hereto and all issued and outstanding shares of capital stock of the Company are validly issued, fully paid
and nonassessable. Except as set forth in Schedule 2.2 hereto, (i) there are no outstanding securities of the Company or
any of its Subsidiaries which contain any preemptive, redemption or similar provisions, nor is any holder of securities of the
Company or any Subsidiary entitled to preemptive or similar rights arising out of any agreement or understanding with the Company
or any Subsidiary by virtue of any of the Transaction Documents, 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;
(ii) neither the Company nor any Subsidiary has any stock appreciation rights or "phantom stock" plans or agreements
or any similar plan or agreement; and (iii) except as set forth in Schedule 2.2 there are no outstanding options, warrants, agreements,
convertible securities, preemptive rights or other rights to subscribe for or to purchase or acquire, any shares of capital stock
of the Company or any Subsidiary or contracts, commitments, understandings, or arrangements by which the Company or any Subsidiary
is or may become bound to issue any shares of capital stock of the Company or any Subsidiary, or securities or rights convertible
or exchangeable into shares of capital stock of the Company or any Subsidiary. Except as set forth in Schedule 2.2 and as
otherwise required by law, there are no restrictions upon the voting or transfer of any of the shares of capital stock of the Company
pursuant to the Company’s Charter Documents (as defined below) or other governing documents or any agreement or other instruments
to which the Company is a party or by which the Company is bound. All of the issued and outstanding shares of capital stock of
the Subsidiaries are validly issued, fully paid and nonassessable and are owned by the Company, free and clear of any mortgages,
pledges, liens, claims, charges, encumbrances or other restrictions (collectively, “Encumbrances”). All of such outstanding
capital stock has been issued in compliance in all material respects with applicable federal and state securities laws. The issuance
and sale of the Securities and, upon issuance, the Shares, as contemplated hereby will not obligate the Company to issue shares
of Common Stock or other securities to any other person (other than the Subscriber) and except as set forth in Schedule 2.2 will
not result in the adjustment of the exercise, conversion, exchange or reset price of any outstanding security. The Company does
not have outstanding shareholder purchase rights or “poison pill” or any similar arrangement in effect giving any person
the right to purchase any equity interest in the Company upon the occurrence of certain events.

 

2.3     
Authorization; Enforceability. The Company has the requisite corporate right, power and authority to enter into,
execute and deliver this Agreement and each other agreement, document, instrument and certificate to be executed by the Company
in connection with the consummation of the transactions contemplated hereby, including, but not limited to Transaction Documents
and to perform fully its obligations hereunder and thereunder. All necessary corporate action on the part of the Company, its directors
and shareholders necessary for the (a) authorization execution, delivery and performance of this Agreement and the Transaction
Documents by the Company; and (b) authorization, sale, issuance and delivery of the Securities and upon issuance, the Shares contemplated
hereby and the performance of the Company’s obligations under this Agreement and the Transaction Documents has been taken.
This Agreement and the Transaction Documents have been duly executed and delivered by the Company and each constitutes a legal,
valid and binding obligation of the Company, enforceable against the Company in accordance with its respective terms, subject to
laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance,
injunctive relief or other equitable remedies, and to limitations of public policy. The Securities are duly authorized and, when
issued and paid for in accordance with the applicable Transaction Documents, will be duly and validly issued, fully paid and nonassessable,
free and clear of all Encumbrances other than restrictions on transfer provided for in the Transaction Documents. The Shares, when
issued and paid for in accordance with the terms of the Transaction Documents, will be validly issued, fully paid and nonassessable,
free and clear of all Encumbrances imposed by the Company other than restrictions on transfer provided for in the Transaction Documents.
The Company has reserved a sufficient number of Conversion Shares and Warrant Shares for issuance upon the conversion of the Debentures
and exercise of the Warrants, respectively, free and clear of all Encumbrances, except for restrictions on transfer set forth in
the Transaction Documents or imposed by applicable securities laws. Except as set forth on Schedule 2.3 hereto, the issuance
and sale of the Securities (including the Shares) contemplated hereby will not give rise to any preemptive rights or rights of
first refusal on behalf of any person other than the Subscribers.

 

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2.4     
No Conflict; Governmental Consents.

 

(a)               
The execution and delivery by the Company of this Agreement and the Transaction Documents, the issuance and sale of the
Securities (including, when issued, the Shares) and the consummation of the other transactions contemplated hereby or thereby do
not and will not (i) result in the violation of any law, statute, rule, regulation, order, writ, injunction, judgment or decree
of any court or governmental authority to or by which the Company is bound including without limitation all foreign, federal, state
and local laws applicable to its business and all such laws that affect the environment, except in each case as could not have
or reasonably be expected to result in a Material Adverse Effect, (ii) conflict with or violate any provision of the Company’s
Amended and Restated Articles of Incorporation, as amended (the “Articles”) or the Amended Bylaws, (and collectively
with the Articles, the “Charter Documents”) of the Company, and (iii) conflict with, or result in a material breach
or violation of, any of the terms or provisions of, or constitute (with or without due notice or lapse of time or both) a default
or give to others any rights of termination, amendment, acceleration or cancellation (with or without due notice, lapse of time
or both) under any agreement, credit facility, lease, loan agreement, mortgage, security agreement, trust indenture or other agreement
or instrument to which the Company or any Subsidiary is a party or by which any of them is bound or to which any of their respective
properties or assets is subject, nor result in the creation or imposition of any Encumbrances upon any of the properties or assets
of the Company or any Subsidiary.

 

 

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(b)              
No vote, approval or consent of any holder of capital stock of the Company or any other third parties is required to be
obtained by the Company in connection with the authorization, execution, delivery and performance of this Agreement and the other
Transaction Documents or in connection with the authorization, issue and sale of the Securities and, upon issuance, the Shares,
except as has been previously obtained.

 

(c)               
No consent, approval, authorization or other order of any governmental authority or any other person is required to be obtained
by the Company in connection with the authorization, execution, delivery and performance of this Agreement and the other Transaction
Documents or in connection with the authorization, issue and sale of the Securities and, upon issuance, the Shares, except such
post-sale filings as may be required to be made with the SEC, FINRA and with any state or foreign blue sky or securities regulatory
authority, all of which shall be made when required.

 

2.5     
Shell Company Status; SEC Reports; Financial Statements. The Company has never been an issuer subject to Rule 144(i)
under the Securities Act. The Company has filed all reports required to be filed by it under the Securities Act and Securities
Exchange Act of 1934, as amended (the “Exchange Act”), including pursuant to Section 13(a) or 15(d) thereof, for the
twenty-four (24) months preceding the date hereof (or such shorter period as the Company was required by law to file such reports)
(the foregoing materials being collectively referred to herein as the "SEC Reports" and, together with the Schedules
to this Agreement (if any), the "Disclosure Materials") on a timely basis or has timely filed a valid extension of such
time of filing and has filed any such SEC Reports prior to the expiration of any such extension. As of their respective dates,
the SEC Reports complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules
and regulations of the SEC promulgated thereunder, and none of the SEC Reports, when filed, 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 light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the
SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the SEC with
respect thereto as in effect at the time of filing. Such financial statements have been prepared in accordance with United States
generally accepted accounting principles (“GAAP”) applied on a consistent basis during the periods involved, except
as may be otherwise specified in such financial statements or the footnotes thereto, and fairly present in all material respects
the financial position of the Company and its consolidated Subsidiaries as of and for the dates thereof and the results of operations
and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit
adjustments.

 

2.6     
Licenses. Except as otherwise set forth in the SEC Reports, the Company and its Subsidiaries have sufficient licenses,
permits and other governmental authorizations currently required for the conduct of their respective businesses or ownership of
properties and is in all material respects in compliance therewith.

 

2.7     
Litigation. Except as set forth in the SEC Reports, the Company knows of no pending or threatened legal or governmental
proceedings against the Company or any Subsidiary which could reasonably be expected to have a Material Adverse Effect on the business,
property, financial condition or operations of the Company and its Subsidiaries, taken as a whole, or which materially and adversely
questions the validity of this Agreement or the other Transaction Documents or the right of the Company to enter into this Agreement
and the other Transaction Documents, or to perform its obligations hereunder and thereunder. Neither the Company nor any Subsidiary
is a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or
instrumentality which could reasonably be expected to have a Material Adverse Effect on the business, property, financial condition
or operations of the Company and its Subsidiaries taken as a whole. There is no action, suit, proceeding or investigation by the
Company or any Subsidiary currently pending in any court or before any arbitrator or that the Company or any Subsidiary intends
to initiate. Neither the Company nor any Subsidiary, nor any director or officer thereof, is or since the Form 10-K has been the
subject of any action involving (i) a claim of violation of or liability under federal or state securities laws or (ii) a claim
of breach of fiduciary duty. There has not been, and to the Company’s knowledge, there is not pending or contemplated, any
investigation by the SEC involving the Company or any current or former director or officer of the Company. For purposes of this
Agreement, the term “knowledge” when used with respect to the Company will mean the present, conscious awareness of
a particular fact or matter by the Company’s chief executive officer or chief financial officer.

 

 

    	10

    	 

    
 

2.8     
Compliance. Except as set forth in the SEC Reports or on Schedule 2.8, neither the Company nor any Subsidiary:
(i) is in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time
or both, would result in a default by the Company or any Subsidiary under), nor has the Company or any Subsidiary received notice
of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement
or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation
has been waived), (ii) is in violation of any judgment, decree or order of any court, arbitrator or other governmental authority
or (iii) is or has been in violation of any statute, rule, ordinance or regulation of any governmental authority, including without
limitation all foreign, federal, state and local laws relating to taxes, environmental protection, occupational health and safety,
product quality and safety and employment and labor matters, except in each case as could not have or reasonably be expected to
result in a Material Adverse Effect.

 

2.9     
Regulatory Permits. The Company and the Subsidiaries possess all certificates, authorizations and permits issued
by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses, except
where the failure to possess such permits could not reasonably be expected to result in a Material Adverse Effect (“Material
Permits”), and neither the Company nor any Subsidiary has received any notice of proceedings relating to the revocation or
modification of any Material Permit.

 

2.10 
Investment Company. The Company is not an “investment company” within the meaning of such term under
the Investment Company Act of 1940, as amended, and the rules and regulations of the SEC thereunder.

 

2.11 
Brokers. Except for the Placement Agent and as set forth on Schedule 2.11, neither the Company nor any of
the Company's officers, directors, employees or shareholders has employed or engaged any broker or finder in connection with the
transactions contemplated by this Agreement and no fee or other compensation is or will be due and owing to any broker, finder,
underwriter, placement agent or similar person other than the Placement Agent in connection with the transactions contemplated
by this Agreement. The Company is not party to any agreement, arrangement or understanding whereby any person other than the Placement
Agent has an exclusive right to raise funds and/or place or purchase any debt or equity securities for or on behalf of the Company.

 

    	11

    	 

    
 

 

2.12 
Intellectual Property; Employees.

 

(a)               
The Company owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses, information and other proprietary rights and processes necessary for its business as now conducted and
as presently proposed to be conducted, without any known infringement of the rights of others as described in the SEC Reports and
which the failure to so have could have a Material Adverse Effect (collectively, the “Intellectual Property Rights”).
Except as disclosed on Schedule 2.12 or the SEC Reports, there are no material outstanding options, licenses or agreements
of any kind relating to the Intellectual Property Rights, nor is the Company bound by or a party to any material options, licenses
or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses,
information and other proprietary rights and processes of any other person or entity other than such licenses or agreements arising
from the purchase of “off the shelf” or standard products. The Company has not received any written communications
alleging that the Company has violated or, by conducting its business as presently proposed to be conducted, would violate any
Intellectual Property Rights of any other person or entity. The Company and its Subsidiaries have taken reasonable security measures
to protect the secrecy, confidentiality and value of all of their intellectual properties, except where failure to do so could
not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect

 

(b)              
Except as disclosed in the SEC Reports, the Company is not aware that any of its employees is obligated under any contract
(including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would interfere with their duties to the Company or that would conflict with the Company’s
business as presently conducted.

 

(c)               
Neither the execution nor delivery of this Agreement, nor the carrying on of the Company’s business by the employees
of the Company, nor the conduct of the Company’s business as presently conducted, will, to the Company’s knowledge,
conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant
or instrument under which any employee is now obligated.

 

(d)              
To the Company’s knowledge, no employee of the Company, nor any consultant with whom the Company has contracted, is
in violation of any term of any employment contract, proprietary information agreement or any other agreement relating to the right
of any such individual to be employed by, or to contract with, the Company because of the nature of the business conducted by the
Company; and to the Company’s knowledge the continued employment by the Company of its present employees, and the performance
of the Company’s contracts with its independent contractors, will not result in any such violation. The Company has not received
any written notice alleging that any such violation has occurred. Except as described in SEC Reports, no employee of the Company
has been granted the right to continued employment by the Company or to any compensation following termination of employment with
the Company except for any of the same which would not have a Material Adverse Effect on the business of the Company. The Company
is not aware that any officer, key employee or group of employees intends to terminate his, her or their employment with the Company,
nor does the Company have a present intention to terminate the employment of any officer, key employee or group of employees.

 

    	12

    	 

    
 

 

2.13 
Title to Properties and Assets; Liens, Etc. Except as described in the SEC Reports, the Company has good and marketable
title to its properties and assets, including the properties and assets reflected in the most recent balance sheet included in
the Company’s financial statements, and good title to its leasehold estates, in each case subject to no Encumbrances, other
than (a) those resulting from taxes which have not yet become delinquent; and (b) Encumbrances which do not materially detract
from the value of the property subject thereto or materially impair the operations of the Company; and (c) those that have otherwise
arisen in the ordinary course of business, none of which are material. Except as set forth in Schedule 2.13, the Company
is in compliance with all material terms of each lease to which it is a party or is otherwise bound.

 

2.14 
Obligations to Related Parties. Except as described in the SEC Reports, there are no obligations of the Company to
officers, directors, shareholders who are known to the Company to beneficially own more than 5% of the Company’s Common Stock,
or employees of the Company other than (a) for payment of salary or other compensation for services rendered, (b) reimbursement
for reasonable expenses incurred on behalf of the Company and (c) for other standard employee benefits made generally available
to all employees (including stock option agreements outstanding under any stock option plan approved by the Board of Directors
of the Company). Except as disclosed in the SEC Reports, none of the officers or directors of the Company and, to the Company’s
knowledge, none of the employees of the Company is presently a party to any transaction with the Company or any Subsidiary (other
than as holders of stock options and/or warrants, and for services as employees, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property
to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the Company’s knowledge,
any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee
or partner.

 

2.15 
Material Changes. Except as set forth in Schedule 2.15, since the date of the latest audited financial statements
included within the SEC Reports, except as specifically disclosed in the subsequent SEC Reports, (i) there has been no event, occurrence
or development that has had or that could reasonably be expected to result in a Material Adverse Effect, (ii) the Company has not
incurred any liabilities (contingent or otherwise) other than (A) trade payables, accrued expenses and other liabilities incurred
in the ordinary course of business consistent with past practice and (B) liabilities not required to be reflected in the Company's
financial statements pursuant to GAAP or required to be disclosed in filings made with the SEC, (iii) the Company has not altered
its method of accounting or the identity of its auditors, (iv) the Company has not declared or made any dividend or distribution
of cash or other property to its shareholders or purchased, redeemed or made any agreements to purchase or redeem any shares of
its capital stock, and (v) the Company has not issued any equity securities to any officer, director or affiliate, except pursuant
to existing Company stock option plans. The Company does not have pending before the SEC any request for confidential treatment
of information.

 

    	13

    	 

    
 

 

2.16 
Sarbanes-Oxley. The Company is in compliance with all effective requirements of the Sarbanes-Oxley Act of 2002, as
amended, and the rules and regulations thereunder, that are applicable to it, except where such noncompliance could not reasonably
be expected to result in a Material Adverse Effect.

 

2.17 
No General Solicitation. None of the Company, its Subsidiaries, any of their affiliates, and any person acting
on the Company’s behalf and its direction, has engaged in any form of general solicitation or general advertising (within
the meaning of Regulation D under the Securities Act) in connection with the offer or sale of the Securities.

 

2.18 
No Integrated Offering. Assuming the accuracy of the Subscriber representations and warranties set forth in
Section I hereunder, none of the Company, its Subsidiaries, any of their affiliates, and any person acting on their behalf has,
directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances
that would require registration of any of the Securities under the Securities Act or that, other
than the Company's offering of the Securities with a final closing date of March 15, 2012 and the Company’s subsequent
financing of Securities with a final closing date of March 30, 2012, is likely to cause this offering of the Securities to be integrated
with prior offerings by the Company for purposes of the Securities 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. Except as disclosed in the SEC Reports, none of the Company, its Subsidiaries, their affiliates
and any person acting on their behalf, have taken any action or steps referred to in the preceding sentence that would require
registration of any of the Securities under the Securities Act or, except for prior actions or steps taken with respect to the
Company's offering of the Securities with a final closing date of March 15, 2012 and the Company’s subsequent financing
of Securities with a final closing date of March 30, 2012, cause the offering of the Securities to be integrated with other offerings.

 

2.19 
Application of Takeover Protections. The Company execution and delivery of the Transaction Documents and the consummation
of the transactions contemplated hereby and thereby will not impose any restriction on any Subscriber, or create in any party (including
any current shareholder of the Company) any rights, under any control share acquisition, business combination, poison pill (including
any distribution under a rights agreement), or other similar anti--takeover provisions under the Company’s Charter Documents
or the laws of its state of incorporation.

 

2.20 
Taxes. Each of the Company and its subsidiaries has filed all U.S. federal, state, local and foreign tax returns
which are required to be filed by each of them and all such returns are true and correct in all material respects, except for such
failures to file which could not reasonably be expected to have a Material Adverse Effect. The Company and each subsidiary has
paid all taxes pursuant to such returns or pursuant to any assessments received by any of them or by which any of them are obligated
to withhold from amounts owing to any employee, creditor or third party. The Company and each subsidiary has properly accrued all
taxes required to be accrued and/or paid, except where the failure to accrue would not have a Material Adverse Effect. To the knowledge
of the Company, the tax returns of the Company and its subsidiaries are not currently being audited by any state, local or federal
authorities. Neither the Company nor any subsidiary has waived any statute of limitations with respect to taxes or agreed to any
extension of time with respect to any tax assessment or deficiency. The Company has set aside on its books adequate provision for
the payment of any unpaid taxes.

 

    	14

    	 

    
 

 

2.21 
Registration Rights. Except as set forth on Schedule 2.21, no person has any right to cause the Company to
effect the registration under the Securities Act of any securities of the Company.

 

2.22 
Listing and Maintenance Requirements. The Common Stock is registered pursuant to Section 12(b) or 12(g) of the Exchange
Act, and the Company has taken no action designed to, or which to its knowledge is likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act nor has the Company received any notification that the SEC is contemplating
terminating such registration. The Company has not, in the 12 months preceding the date hereof, received notice from any trading
market on which the Common Stock is or has been listed or quoted to the effect that the Company is not in compliance with the listing
or maintenance requirements of such trading market. The Company is, and has no reason to believe that it will not in the foreseeable
future continue to be, in material compliance with all such listing and maintenance requirements

 

2.23 
Disclosure. All disclosure furnished by or on behalf of the Company to the Subscriber in the Transaction Documents
regarding the Company, its business and the transactions contemplated hereby, including the Disclosure Schedules to this Agreement,
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 light of the circumstances under which they were made, not misleading.

 

2.24 
Seniority. No indebtedness of the Company is senior to the Debentures in right of payment, whether with respect to
interest or upon liquidation or dissolution, or otherwise, other than indebtedness secured by purchase money security interests
(which is senior only as to underlying assets covered thereby) and capital lease obligations (which is senior only as to the property
covered thereby).

 

2.25 
Private Placement. Assuming the accuracy of the Subscribers’ representations and warranties set forth in Section
I, no registration under the Securities Act is required for the offer and sale of the Securities by the Company to the Subscriber
as contemplated hereby.

 

    	15

    	 

    
 

 

		III.	TERMS OF SUBSCRIPTION

 

3.1     
The minimum purchase that may be made by any prospective investor shall be $10,000. Subscriptions
for investment below the minimum investment may be accepted at the discretion of the Placement Agent and the Company. The Company
and the Placement Agent each reserve the right to reject any subscription made hereby, in whole or in part, in its sole discretion.
The Company’s agreement with each Subscriber is a separate agreement and the sale of the Securities to each Subscriber is
a separate sale. 

 

3.2     
All funds shall be deposited in the account identified in Section 1.1 hereof.

 

3.3     
Certificates representing the Debentures and the Warrants purchased by the Subscriber pursuant to this Agreement will be
prepared for delivery to the Subscriber as soon as practicable (but in no event more than seven (7) calendar days) following the
Closing at which such purchase takes place. The Subscriber hereby authorizes and directs the Company to deliver the certificates
representing the Debentures and the Warrants purchased by the Subscriber pursuant to this Agreement directly to the Placement Agent
unless otherwise indicated on the signature page hereto.

 

		IV.	CONDITIONS TO OBLIGATIONS OF THE SUBSCRIBER

 

4.1     
The Subscriber’s obligation to purchase the Securities at the Closing at which such purchase is to be consummated
is subject to the fulfillment on or prior to such Closing of the following conditions, which conditions may be waived at the option
of each Subscriber to the extent permitted by law:

 

(a)               
Representations and Warranties; Covenants. The representations and warranties made by the Company in Section 2 hereof
qualified as to materiality shall be true and correct as of the Initial Closing at all times prior to and on the Closing Date,
except (i) to the extent any such representation or warranty expressly speaks as of an earlier date, in which case such representation
or warranty shall be true and correct as of such earlier date, and, (ii) the representations and warranties made by the Company
in Section 2 hereof not qualified as to materiality shall be true and correct in all material respects at all times prior to and
on the Closing Date, except to the extent any such representation or warranty expressly speaks as of an earlier date, in which
case such representation or warranty shall be true and correct in all material respects as of such earlier date; provided
however, that notwithstanding the foregoing, the Company shall only be required to update the Disclosure Schedules by the
delivery to the Subscribers by the Company of an amended Disclosure Schedule with respect to any information that is of a material
nature as of such proposed Closing Date. All covenants, agreements and conditions contained in this Agreement to be performed by
the Company on or prior to the date of such Closing shall have been performed or complied with in all material respects.

 

(b)              
No Legal Order Pending. There shall not then be in effect any legal or other order enjoining or restraining the transactions
contemplated by this Agreement.

 

(c)               
No Law Prohibiting or Restricting Such Sale. There shall not be in effect any law, rule or regulation prohibiting
or restricting such sale or requiring any consent or approval of any person, which shall not have been obtained, to issue the Securities
(except as otherwise provided in this Agreement).

 

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(d)              
Required Consents. The Company shall have obtained any and all consents, permits, approvals, registrations and waivers
necessary or appropriate for consummation of the purchase and sale of the Securities and the consummation of the other transactions
contemplated by the Transaction Documents, all of which shall be in full force and effect.

 

(e)Adverse
Changes. Since the date of execution of this Agreement, no event or series of events shall have occurred that reasonably could
have or result in a Material Adverse Effect.

 

(f)No
Suspensions of Trading in Common Stock; Listing. Trading in the Common Stock shall not have been suspended by the SEC or any
trading market (except for any suspensions of trading of not more than one trading day solely to permit dissemination of material
information regarding the Company) at any time since the date of execution of this Agreement, and the Common Stock shall have been
at all times since such date listed for trading on a trading market.

 

(g)Blue
Sky. The Company shall have completed any necessary qualification for the Securities and the Shares under applicable Blue Sky
laws.

 

(h)Legal
Opinion. The Company’s corporate counsel shall have delivered a legal opinion addressed to the Subscribers in a form
reasonably acceptable to the Placement Agent.

 

(i)                
Disclosure Schedules. The Company shall have delivered to the Subscriber a copy of its Disclosure Schedules
(or amended Disclosure Schedules) qualifying any of the representations and warranties contained in Section II which original Disclosure
Schedules will speak only as Initial Closing.

 

 

		V.	COVENANTS OF THE PARTIES

 

5.1     
Transfer Restrictions.

 

(a)               
The Securities may only be disposed of in compliance with state and federal securities laws. In connection with any transfer
of Securities other than pursuant to an effective registration statement or Rule 144 promulgated under the Securities Act, to the
Company or to an affiliate of a Subscriber or in connection with, the Company may require the transferor thereof to provide to
the Company an opinion of counsel selected by the transferor and reasonably acceptable to the Company, the form and substance of
which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of
such transferred Securities under the Securities Act. As a condition of transfer, any such transferee shall agree in writing to
be bound by the terms of this Agreement, and shall have the rights of a Subscriber under this Agreement.

 

    	17

    	 

    
 

 

(b)              
The Subscriber agrees to the imprinting, so long as is required by this Section 5.1, of a legend on any of the Securities,
including the Shares, substantially in the following form:

 

[NEITHER] THIS SECURITY [NOR THE SECURITIES
INTO WHICH THIS SECURITY IS [EXERCISABLE] [CONVERTIBLE]] HAS [NOT] BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION
OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR
IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES
LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE
TO THE COMPANY.

 

 

(c)               
Certificates evidencing the Shares shall not be required to contain any legend (including the legend set forth in Section
5.1(b) hereof): (i) while a registration statement covering the resale of such security is effective under the Securities Act,
or (ii) following any sale of such Shares pursuant to Rule 144, or (iii) if such Shares are eligible for sale under Rule 144, without
the requirement for the Company to be in compliance with the current public information required under Rule 144 as to such Shares
and without volume or manner-of-sale restrictions. Upon request by a Subscriber in the event the foregoing permits removal of any
legend from certificates evidencing the Shares, the Company shall cause its counsel, at the Company’s expense, to issue a
legal opinion to the Company’s transfer agent promptly (but in no event later than the requisite share delivery date set
forth in the Debenture and the Warrant) if required by the Company’s transfer agent to effect the removal of the legend hereunder.

 

5.2     
Listing of Securities. The Company agrees, (i) if the Company applies to have the Common Stock traded on any other
trading market, it will include in such application the Shares, and will take such other action as is necessary or desirable to
cause the Shares to be listed on such other trading market as promptly as possible, and (ii) during the three-year period from
and after the Final Closing it will take all action reasonably necessary to continue the listing and trading of its Common Stock
on a Trading Market (as defined in the Debenture) and will comply in all material respects with the Company’s reporting,
filing and other obligations under the bylaws or rules of any such Trading Market (as defined in the Debenture).

 

5.3     
Reservation of Shares. The Company shall at all times while the Debenture and/or Warrants are outstanding maintain
a reserve from its duly authorized shares of Common Stock of a number of shares of Common Stock sufficient to allow for the issuance
of the Shares.

 

5.4     
Replacement of Securities. If any certificate or instrument evidencing any Securities or the Shares is mutilated,
lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation
thereof, or in lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction and customary and reasonable indemnity, if requested. The applicants
for a new certificate or instrument under such circumstances shall also pay any reasonable third-party costs associated with the
issuance of such replacement securities. If a replacement certificate or instrument evidencing any securities is requested due
to a mutilation thereof, the Company may require delivery of such mutilated certificate or instrument as a condition precedent
to any issuance of a replacement.

 

    	18

    	 

    
 

 

5.5     
Furnishing of Information. Until the three year anniversary of the Final Closing, the Company covenants to maintain
the registration of the Common Stock under Section 12(b) or 12(g) of the Exchange Act and to timely file (or obtain extensions
in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date
hereof pursuant to the Exchange Act. Until the three year anniversary of the Final Closing, if the Company is not required to file
reports pursuant to such laws, it will prepare and furnish to the Subscribers and make publicly available in accordance with Rule
144(c) such information as is required for the Subscribers to sell the Securities and/or the Shares under Rule 144. The Company
further covenants that it will take such further action as any holder of Securities and/or Shares may reasonably request, to the
extent required from time to time to enable such person to sell such Securities and/or Shares without registration under the Securities
Act within the requirements of the exemption provided by Rule 144.

 

5.6     
Securities Laws; Publicity. The Company shall, by 8:30 a.m. (New York City time) on the fourth (4th) trading
day immediately following a Closing hereunder, file a Current Report on Form 8-K disclosing the material terms of the transactions
contemplated hereby and including the Transaction Documents as exhibits thereto to the extent required by law. The Company shall
not publicly disclose the name of Subscriber, or include the name of any Subscriber in any filing with the SEC or any regulatory
agency or trading market, without the prior written consent of Subscriber, except: (a) as required by federal securities law in
connection with the filing of final Transaction Documents (including signature pages thereto) with the SEC and (b) to the extent
such disclosure is required by law, in which case the Company shall provide the Subscriber with prior notice of such disclosure
permitted under this clause (b).

 

5.7     
Form D; Blue Sky Filings. The Company agrees to timely file a Form D with respect to the Securities as required under
Regulation D promulgated under the Securities Act and to provide a copy thereof, promptly upon request of the Subscriber. The Company
shall 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 Subscriber at the Closing under applicable securities or “Blue Sky” laws of the states
of the United States, and shall provide evidence of such actions promptly upon request of any Subscriber.

 

5.8     
Equal Treatment of Subscribers. No consideration (including any modification of any Transaction Document) shall be
offered or paid to any person to amend or consent to a waiver or modification of any provision of any of the Transaction Documents
unless the same consideration is also offered to all of the parties to the Transaction Documents.

 

 

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5.9     
Indemnification. 

 

(a)       
The Company agrees to indemnify and hold harmless the Subscriber, its affiliates and their respective officers, directors,
employees, agents and controlling persons (collectively, the “Indemnified Parties”) from and against , any and all
loss, liability, damage or deficiency suffered or incurred by any Indemnified Party by reason of any misrepresentation or breach
of warranty by the Company or, after notice and a reasonable cure period, nonfulfillment of any
covenant or agreement to be performed or complied with by the Company under this Agreement or the Transaction Documents; and will
promptly reimburse the Indemnified Parties for all expenses (including reasonable fees and expenses of legal counsel) as incurred
in connection with the investigation of, preparation for or defense of any pending or threatened claim related to or arising in
any manner out of any of the foregoing, or any action or proceeding arising therefrom (collectively, “Proceedings”),
whether or not such Indemnified Party is a formal party to any such Proceeding.

 

(b)      
If for any reason (other than a final non-appealable judgment finding any Indemnified Party liable for losses, claims, damages,
liabilities or expenses for its gross negligence or willful misconduct) the foregoing indemnity is unavailable to an Indemnified
Party or insufficient to hold an Indemnified Party harmless, then the Company shall contribute to the amount paid or payable by
an Indemnified Party as a result of such loss, claim, damage, liability or expense in such proportion as is appropriate to reflect
not only the relative benefits received by the Company on the one hand and the Indemnified Party on the other, but also the relative
fault by the Company and the Indemnified Party, as well as any relevant equitable considerations.

 

5.10Non-Public
Information. Except with respect to the material terms and conditions of the transactions contemplated by the Transaction Documents,
the Company covenants and agrees that neither it, nor any other person acting on its behalf, will provide Subscriber or its agents
or counsel with any information that the Company believes constitutes material non-public information, unless prior thereto Subscriber
shall have executed a written agreement regarding the confidentiality and use of such information. The Company understands and
confirms that Subscriber shall be relying on the foregoing covenant in effecting transactions in securities of the Company.

 

5.11Use
of Proceeds. Except as set forth on Schedule 5.11 attached hereto, the Company shall use the net proceeds from the sale
of the Securities hereunder for working capital purposes and shall not use such proceeds for: (a) the satisfaction of any portion
of the Company’s debt (other than payment of trade payables in the ordinary course of the Company’s business and prior
practices), (b) the redemption of any Common Stock or Common Stock Equivalents (as defined in the Debenture and Warrant) or (c)
the settlement of any outstanding litigation. 

 

5.12Participation
in Future Financing.

 

(a)               
From the date hereof until the one year anniversary of the Final Closing, upon any issuance by the Company or any
of its Subsidiaries of Common Stock or Common Stock Equivalents (a “Subsequent Financing”), each Subscriber shall have
the right to participate in up to an amount of the Subsequent Financing equal to such Subscriber’s proportionate share of
the Subsequent Financing based on such Subscriber’s participation in this Offering (the “Participation Maximum”)
on the same terms, conditions and price provided for in the Subsequent Financing.

 

    	20

    	 

    
 

 

(b)              
At least 5 trading days prior to the closing of the Subsequent Financing, the Company shall deliver to each Subscriber
a written notice of its intention to effect a Subsequent Financing (“Pre-Notice”), which Pre-Notice shall ask such
Subscriber if it wants to review the details of such financing (such additional notice, a “Subsequent Financing Notice”).
Upon the request of a Subscriber, and only upon a request by such Subscriber, for a Subsequent Financing Notice, the Company shall
promptly, but no later than 1 trading day after such request, deliver a Subsequent Financing Notice to such Subscriber. The Subsequent
Financing Notice shall describe in reasonable detail the proposed terms of such Subsequent Financing, the amount of proceeds intended
to be raised thereunder and the person or persons through or with whom such Subsequent Financing is proposed to be effected and
shall include a term sheet or similar document relating thereto as an attachment.

 

(c)               
Any Subscriber desiring to participate in such Subsequent Financing must provide written notice to the Company by
not later than 5:30 p.m. (New York City time) on the 5th trading day after all of the Subscribers have received the
Pre-Notice that the Subscriber is willing to participate in the Subsequent Financing, the amount of the Subscriber’s participation,
and that the Subscriber has such funds ready, willing, and available for investment on the terms set forth in the Subsequent Financing
Notice. If the Company receives no notice from a Subscriber as of such 5th trading day, such Subscriber shall be deemed
to have notified the Company that it does not elect to participate.

 

(d)              
If by 5:30 p.m. (New York City time) on the 5th trading day after all of the Subscribers have received
the Pre-Notice, notifications by the Subscribers of their willingness to participate in the Subsequent Financing (or to cause their
designees to participate) is, in the aggregate, less than the total amount of the Subsequent Financing, then the Company may effect
the remaining portion of such Subsequent Financing on the terms and with the persons set forth in the Subsequent Financing Notice.

 

(e)   
If by 5:30 p.m. (New York City time) on the 5th trading day after all of the Subscribers have received
the Pre-Notice, the Company receives responses to a Subsequent Financing Notice from Subscribers seeking to purchase more than
the aggregate amount of the Participation Maximum, each such Subscriber shall have the right to purchase its Pro Rata Portion (as
defined below) of the Participation Maximum.  “Pro Rata Portion” means the ratio of (x) the Subscription
Amount of Securities purchased on the Closing Date by a Subscriber participating under this Section 5.12 and (y) the sum of the
aggregate Subscription Amounts of Securities purchased by all Subscribers participating under this Section 5.12.

 

(f)               
The Company must provide the Subscribers with a second Subsequent Financing Notice, and the Subscribers will again
have the right of participation set forth above in this Section 5.12, if the Subsequent Financing subject to the initial Subsequent
Financing Notice is not consummated for any reason on the terms set forth in such Subsequent Financing Notice within 30 trading
days after the date of the initial Subsequent Financing Notice.

 

    	21

    	 

    
 

 

(g)              
Notwithstanding the foregoing, this Section 5.12 shall not apply in respect of (i) an Exempt Issuance (as defined
in the Debentures), or (ii) an underwritten public offering of Common Stock.

 

5.13Most
Favored Nation Provision. For as long as the Debentures are outstanding (including any extension or modification thereto),
if the Company effects a Subsequent Financing, Subscriber may elect, in its sole discretion, to exchange all, but not less than
all, of the Securities (not including any Shares) then held by Subscriber for any securities issued in a Subsequent Financing on
a $1.00 for $1.00 basis based on the outstanding principal amount of the Debentures, along with any liquidated damages and other
amounts owing thereon, and the effective price at which such securities are to be sold in such Subsequent Financing; provided,
however, that this Section 5.13 shall not apply with respect to (i) an Exempt Issuance (as defined in the Debentures) or
(ii) an underwritten public offering of Common Stock.

 

 

		VI.	MISCELLANEOUS

 

6.1     
Fees and Expenses. The Company and the Subscribers shall each pay the fees and expenses of their respective advisers,
counsel, accountants and other experts, if any, and all other expenses incurred by such party in connection with the negotiation,
preparation, execution, delivery and performance of this Agreement. The Company shall pay its transfer agents’ fees, stamp
taxes and other taxes and duties levied in connection with the sale and issuance of the Securities to the Subscribers

 

6.2     
Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder
shall be in writing and shall be deemed given and effective on the earliest of: (a) the date of transmission, if such notice or
communication is delivered via facsimile or by electronic communication at or prior to 5:30 p.m. (New York City time) on a day
in which the New York Stock Exchange is open for trading (a “Trading Day”), (b) the next Trading Day after the date
of transmission, if such notice or communication is delivered via facsimile or electronic communication on a day that is not a
Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (c) the second (2nd) Trading Day following
the date of mailing, if sent by U.S. nationally recognized overnight courier service or (d) upon actual receipt by the party to
whom such notice is required to be given. The address for such notices and communications shall be addressed as follows:

 

if to the
Company, to it at:

SpectraScience, Inc.

11568 Sorrento Valley Rd., Suite
11

San Diego, California 92121

Attn: Michael P. Oliver, CEO

 

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

 

    	22

    	 

    
 

 

Fredrikson & Byron, P.A.

200 South Sixth Street, Suite 4000

Minneapolis, MN 55402-1425

Attn: Ryan C. Brauer, Esq.

Email: rbrauer@fredlaw.com

Fax: (612) 492-7077

 

if to the Subscriber, to the Subscriber’s
address indicated on the signature page of this Agreement.

 

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

 

Sichenzia Ross Friedman Ference LLP

61 Broadway, 32nd Floor

New York, NY 10006

Attn: Richard A. Friedman, Esq.

Fax: (212) 930-9725

 

if to the Escrow Agent, to it at:

 

Signature Bank

261 Madison Ave.

New York, NY 10016

Attn: Cliff Broder, Group
Director and Senior Vice President

Fax: 646-822-1359

 

6.3     
Amendments; Waivers. Except as otherwise provided herein, this Agreement shall not be changed, modified or amended
except by a writing signed by the parties to be charged, and this Agreement may not be discharged except by performance in accordance
with its terms or by a writing signed by the party to be charged. No waiver of any default with respect to any provision, condition
or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default
or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any
right hereunder in any manner impair the exercise of any such right.

 

6.4     
Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and to
their respective heirs, legal representatives, successors and assigns. The Company may not assign this Agreement or any rights
or obligations hereunder without the prior written consent of Subscriber (other than by merger). Subscriber may assign any or all
of its rights under this Agreement to any person to whom Subscriber assigns or transfers any Securities, provided that such transferee
agrees in writing to be bound, with respect to the transferred Securities, by the provisions of the Transaction Documents

 

6.5     
Entire Agreement. The Transaction Documents, together with the exhibits and schedules thereto, contain the entire
understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral
or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules.

    	23

    	 

    
 

 

6.6     
Company’s Right of Acceptance. Upon the execution and delivery of this Agreement by the Subscriber and the
Company, this Agreement shall become a binding obligation of the Subscriber with respect to the purchase of Securities as herein
provided, subject, however, to the right hereby reserved by the Company to enter into the same agreements with other Subscribers
and to reject any subscription, in whole or in part, provided the Company returns to Subscriber any funds paid by Subscriber with
respect to such rejected subscription or portion thereof, without interest or deduction.

 

6.7     
Governing Law. All questions concerning the construction, validity, enforcement and interpretation of the Transaction
Documents shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without
regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations,
enforcement and defense of the transactions contemplated by this Agreement and any other Transaction Documents (whether brought
against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced
exclusively in the state and federal courts sitting in the City 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 (including with respect
to the enforcement of any of the Transaction Documents), 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 improper or is an inconvenient venue for such proceeding.

 

6.8     
Attorneys’ Fees. Notwithstanding anything to the contrary in this Agreement, in order to discourage frivolous
claims the parties agree that unless a claimant in any proceeding arising out of this Agreement succeeds in establishing his claim
and recovering a judgment against another party (regardless of whether such claimant succeeds against one of the other parties
to the action), then the other party shall be entitled to recover from such claimant all of its/their reasonable legal costs and
expenses relating to such proceeding and/or incurred in preparation therefor.

 

6.9     
Severability. The holding of any provision of this Agreement to be invalid or unenforceable by a court of competent
jurisdiction shall not affect any other provision of this Agreement, which shall remain in full force and effect. If any provision
of this Agreement shall be declared by a court of competent jurisdiction to be invalid, illegal or incapable of being enforced
in whole or in part, such provision shall be interpreted so as to remain enforceable to the maximum extent permissible consistent
with applicable law and the remaining conditions and provisions or portions thereof shall nevertheless remain in full force and
effect and enforceable to the extent they are valid, legal and enforceable, and no provisions shall be deemed dependent upon any
other covenant or provision unless so expressed herein.

 

    	24

    	 

    
 

 

6.10 
Further Assurances. The Company and each Subscriber agrees to execute and deliver all such further documents, agreements
and instruments and take such other and further action as may be necessary or appropriate to carry out the purposes and intent
of this Agreement.

 

6.11 
Counterparts. This Agreement may be executed in two or more counterparts each of which shall be deemed an original,
but all of which shall together constitute one and the same instrument. In the event that any signature is delivered by facsimile
transmission or by e-mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation
of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or “.pdf”
signature page were an original thereof.

 

6.12 
No Third Party Beneficiaries. Nothing in this Agreement shall create or be deemed to create any rights in any person
or entity not a party to this Agreement.

 

6.13 
Injunctive Relief. In addition to being entitled to exercise all rights provided herein or granted by law, including
recovery of damages, the Subscriber and the Company will be entitled to specific performance under this Agreement. The parties
agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations described
in this Agreement and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy
at law would be adequate.

 

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

    	25

    	 

    
 

 

		VII.	CONFIDENTIAL INVESTOR QUESTIONNAIRE

 

7.1     
The Subscriber represents and warrants that he, she or it comes within one category marked below, and that for any category
marked, he, she or it has truthfully set forth, where applicable, the factual basis or reason the Subscriber comes within that
category. ALL INFORMATION IN RESPONSE TO THIS SECTION WILL BE KEPT STRICTLY CONFIDENTIAL. The undersigned agrees to furnish any
additional information which the Company deems necessary in order to verify the answers set forth below.

 

	Category A  __	The undersigned is an individual (not a partnership, corporation, etc.) whose individual net worth, or joint net worth with his or her spouse, presently exceeds $1,000,000. For purposes of calculating net worth under this paragraph, (i) the primary residence shall not be included as an asset, (ii) to the extent that the indebtedness that is secured by the primary residence is in excess of the fair market value of the primary residence, the excess amount shall be included as a liability, and (iii) if the amount of outstanding indebtedness that is secured by the primary residence exceeds the amount outstanding 60 days prior to the execution of this Subscription Agreement, other than as a result of the acquisition of the primary residence, the amount of such excess shall be included as a liability.
	 	 
	Category B __	The undersigned is an individual (not a partnership, corporation, etc.) who had an income in excess of $200,000 in each of the two most recent years, or joint income with his or her spouse in excess of $300,000 in each of those years (in each case including foreign income, tax exempt income and full amount of capital gains and losses but excluding any income of other family members and any unrealized capital appreciation) and has a reasonable expectation of reaching the same income level in the current year.
	 	 
	Category C __	The undersigned is a director or executive officer of the Company which is issuing and selling the Securities.
	 	 
	Category D __	The undersigned is a bank; a savings and loan association; insurance company; registered investment company; registered business development company; licensed small business investment company (“SBIC”); or employee benefit plan within the meaning of Title 1 of ERISA and (a) the investment decision is made by a plan fiduciary which is either a bank, savings and loan association, insurance company or registered investment advisor, or (b) the plan has total assets in excess of $5,000,000 or (c) is a self directed plan with investment decisions made solely by persons that are accredited investors. (describe entity)
	 	 
	 	 

 

    	26

    	 

    

 

 

	Category E __	The undersigned is a private business development company as defined in section 202(a)(22) of the Investment Advisors Act of 1940. (describe entity)
	 	 
	 	 
	 	
	 	 
	Category F __	The undersigned is either a corporation, partnership, Massachusetts business trust, or non-profit organization within the meaning of Section 501(c)(3) of the Internal Revenue Code, in each case not formed for the specific purpose of acquiring the Securities and with total assets in excess of $5,000,000. (describe entity)
	 	 
	 	 
	 	 
	 	 
	Category G __	The undersigned is a trust with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Securities, where the purchase is directed by a “sophisticated investor” as defined in Regulation 506(b)(2)(ii) under the Act.
	 	 
	Category H __ 	The undersigned is an entity (other than a trust) in which all of the equity owners are “accredited investors” within one or more of the above categories.  If relying upon this Category alone, each equity owner must complete a separate copy of this Agreement.  (describe entity)
	 	 
	 	 
	 	 
	 	 
	Category I __ 	The undersigned is not within any of the categories above and is therefore not an accredited investor.
	 	 
		The undersigned agrees that the undersigned will notify the Company at any time on or prior to the Closing in the event that the representations and warranties in this Agreement shall cease to be true, accurate and complete.

 

7.2     
SUITABILITY (please answer each question)

 

(a)For an individual
Subscriber, please describe your current employment, including the company by which you are employed and its principal business:

 

 

 

  

 

 

 

  

 

 

    	27

    	 

    
 

 

(b)For all Subscribers,
are you familiar with the risk aspects and the non-liquidity of investments such as the securities for which you seek to subscribe?

 

YES_______NO_______

 

(c) For all Subscribers,
do you understand that there is no guarantee of financial return on this investment and that you run the risk of losing your entire
investment?

 

YES_______NO_______

 

7.3     
MANNER IN WHICH TITLE IS TO BE HELD. (circle one)

 

		(a)	Individual Ownership

		(b)	Community Property

		(c)	Joint Tenant with Right of

Survivorship
(both parties

must
sign)

		(d)	Partnership*

		(e)	Tenants in Common

		(f)	Company*

		(g)	Trust*

		(h)	Other*

 

*If Securities are being
subscribed for by an entity, the attached Certificate of Signatory must also be completed.

 

7.4     
FINRA AFFILIATION.

 

Are you affiliated or associated with an
FINRA member firm (please check one):

Yes _________No __________

 

If Yes, please describe:

 

 

 

 

 

 

 

 

*If Subscriber is a Registered Representative
with an FINRA member firm, have the following acknowledgment signed by the appropriate party:

 

 

    	28

    	 

    

  

 

The undersigned FINRA member firm acknowledges
receipt of the notice required by Article 3, Sections 28(a) and (b) of the Rules of Fair Practice.

 

 

 

_________________________________

Name of FINRA Member Firm

 

By: ______________________________

Authorized Officer

 

Date: ____________________________

 

7.5     
The undersigned is informed of the significance to the Company of the foregoing representations and answers contained in
the Confidential Investor Questionnaire contained in this Section VII and such answers have been provided under the assumption
that the Company will rely on them.

 

 

 

 

[REMAINDER OF PAGE INTENTIONALLY
LEFT BLANK]

 

    	29

    	 

    
 

 

AGGREGATE PURCHASE PRICE OF THE DEBENTURE
= $_________ (the “Purchase Price”)

 

	 	 	 
	Signature	 	Signature (if purchasing jointly)
	 	 	 
	 	 	 
	Name Typed or Printed	 	Name Typed or Printed
	 	 	 
	 	 	 
	Title (if Subscriber is an Entity)	 	Title (if Subscriber is an Entity)
	 	 	 
	 	 	 
	Entity Name (if applicable)	 	Entity Name (if applicable
	 	 	 
	 	 	 
	 	 	 
	Address	 	Address
	 	 	 
	 	 	 
	City, State and Zip Code	 	City, State and Zip Code
	 	 	 
	 	 	 
	Telephone-Business	 	Telephone-Business
	 	 	 
	 	 	 
	Telephone-Residence	 	Telephone-Residence
	 	 	 
	 	 	 
	Facsimile-Business	 	Facsimile-Business
	 	 	 
	 	 	 
	Facsimile-Residence	 	Facsimile-Residence
	 	 	 
	 	 	 
	Tax ID # or Social Security #	 	Tax ID # or Social Security #
	 	 	 
	 	 	 
	E-Mail Address	 	E-Mail Address

Name in which securities should be issued:___________________________________

 

Delivery Address (if not to Placement Agent):
_________________________________________________

 

Dated: ___________________ , 2012

 

This Subscription Agreement
is agreed to and accepted as of ________________, 2012.

 

	 	SPECTRASCIENCE, INC.	 
	 	 	 	 
	 	By:	 	 
	 	Name:	
	 	Title:	 

 

    	30

    	 

    
 

CERTIFICATE OF SIGNATORY

 

(To be completed if Securities are

being subscribed for by an entity)

 

 

I, ____________________________, am the
____________________________ of __________________________________________ (the “Entity”).

 

I certify that I am empowered and duly
authorized by the Entity to execute and carry out the terms of the Subscription Agreement and to purchase and hold the Debentures
and Warrants (and, upon issuance, the Shares), and certify further that the Subscription Agreement has been duly and validly executed
on behalf of the Entity and constitutes a legal and binding obligation of the Entity.

 

IN WITNESS WHEREOF, I have set my hand
this ________ day of _________________, 20__

 

	 	 	 
	 	 	(Signature)

 

 

    	31

    	 

    

 

Exhibit A

 

Portions of the following Exhibit are
an excerpt of the information contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2011 as filed with the Securities and Exchange Commission (the “Form 10-K”). As such, this Exhibit is qualified in
its entirety by the more detailed information regarding the Company’s business and financial conditions as set forth in the
Form 10-K and subsequently filed Forms 10-Q and Forms 8-K. In addition, investors are advised that certain of the information in
this Exhibit has not been updated since the filing of the Form 10-K. Investors should review the Company’s financial statements
and other information set forth in the Form 10-K and other periodic reports, including Forms 10-Q and 8-K, filed with the Securities
and Exchange Commission, as well as the Disclosure Schedules to the Transaction Documents. You are encouraged to seek the advice
of your attorney, tax consultant, and business advisor with respect to the legal, tax, and business aspects of an investment in
the Securities.

 

RISK FACTORS 

 

An investment in the Securities involves
a high degree of risk and is subject to many uncertainties. These risks and uncertainties may adversely affect our business, operating
results and financial condition. In such an event, the trading price for our common stock could decline substantially, and you
could lose all or part of your investment. In order to attain an appreciation for these risks and uncertainties, you should read
these risk factors in their entirety and consider all of the information and advisements contained in the Transaction Documents,
including the following risk factors and uncertainties.

 

RISKS RELATED TO OUR BUSINESS

 

We have a limited operating history
with significant losses and expect losses to continue for the foreseeable future.

 

We have yet to establish any history of
profitable operations. We have incurred annual operating losses of approximately $4,768,000 and $4,098,000, respectively, during
the past two years of operations and an approximate $1,037,000 operating loss for the three-month period ended March 31, 2012.
As a result, at March 31, 2012, we had an accumulated deficit of approximately $32,686,000. We have incurred net losses from continuing
operations of approximately $4,762,000 and $4,098,000 for the fiscal years ending 2011 and 2010, respectively, and a net loss from
continuing operations of approximately $2,115,000. Our revenues have not been sufficient to sustain our operations and we expect
that they will be insufficient to sustain our operations for the foreseeable future. Our failure to generate meaningful revenues
and ultimately profits from the WavSTAT System and applications of our technology could and will likely require that we raise additional
capital which may not be available or available on acceptable terms. This could ultimately reduce or suspend our operations and
ultimately cause us to go out of business. Our profitability will require the successful commercialization of our imaging systems
and no assurances can be given when this will occur or if we will ever be profitable.

 

 

    	A-1

    	 

    

 

 

We will require additional financing
to sustain our operations and without it, we may not be able to continue operations.

 

At March 31, 2012, we had a working capital
deficit of approximately $934,000. We had an operating cash flow deficit of approximately $1,095,000 for the three-month period
ending March 31, 2012, $3,263,000 for the fiscal year ended December 31, 2011 and $2,328,000 in 2010. We may not have sufficient
financial resources to fund our operations and will likely require additional funds to continue our operations. 

 

We may face intense competition from
companies that have greater financial, personnel and research and development resources.

 

Competitive forces may impact our projected
growth and ability to generate revenues and profits, which would have a negative impact on our business and the price of our common
stock. Our competitors may be developing products that compete with the WavSTAT Systems. Our commercial opportunities would then
be reduced or eliminated should our competitors develop and market products for any of the diseases that we target that are more
effective or are less expensive than the products or product candidates we are developing.

 

Even if we are successful in developing
an effective WavSTAT System, and we obtain FDA and other regulatory approvals necessary for commercialization, our products may
not compete effectively with other successful products. Researchers are continually learning more about diseases, which may lead
to new technologies and tools for analysis.

 

Our competitors include fully integrated
medical device companies, universities and public and private research institutions. Many of the organizations competing with us
may have substantially greater capital resources, larger research and development staffs and facilities, greater experience in
product development and in obtaining regulatory approvals, and greater marketing capabilities than we do.

 

The market for medical devices is intensely
competitive. Many of our potential competitors have longer operating histories, greater name recognition, more employees, and significantly
greater financial, technical, marketing, public relations, and distribution resources than we have. This intense competitive environment
may require us to make changes in our products, pricing, licensing, services or marketing to develop, maintain and extend our current
technology. Price concessions or the emergence of other pricing or distribution strategies of competitors may diminish our revenues,
adversely impact our margins or lead to a reduction in our market share, any of which may harm our business.

 

Our WavSTAT System technology may
become obsolete.

 

Our WavSTAT System products may be made
unmarketable by new scientific or technological developments where new treatment modalities are introduced that are more efficacious
or more economical. Any one of our competitors could develop a more effective product which would render our technology obsolete.

 

    	A-2

    	 

    
 

 

Our inability to attract and retain
qualified personnel could impede our ability to generate revenues and profits and to otherwise implement our business plan and
growth strategies, which would have a negative impact on our business and could adversely affect the price of our common stock.
 

 

We currently have a staff of eight full
time employees, consisting of, among others, our Chief Executive Officer, Chief Financial Officer, Director of International Business
Development and Chief Engineer Director, as well as administrative employees and other personnel retained on a contract basis.
Although we believe that these employees, together with the consultants currently engaged by the Company, will be able to handle
most of our additional administrative, research and development and business development in the near term, we will nevertheless
be required over the longer-term to hire highly skilled managerial, scientific and administrative personnel to fully implement
our business plan and growth strategies. We cannot assure you that we will be able to engage the services of such qualified personnel
at competitive prices or at all, particularly given the risks of employment attributable to our limited financial resources and
lack of an established track record.

 

Our planned growth will place strains
on our management team and other company resources to both implement more sophisticated managerial, operational and financial systems,
procedures and controls and to train and manage the personnel necessary to perform those functions. Our inability to manage our
growth could impede our ability to generate revenues and profits and to otherwise implement our business plan and growth strategies,
which would have a negative impact on our business and the market value of the Company.

 

We will need to significantly expand our
operations to implement our longer-term business plan and growth strategies. We will also be required to manage multiple relationships
with various strategic partners, technology licensors, customers, manufacturers and suppliers, consultants and other third parties.
This expansion and these expanded relationships will require us to significantly improve or replace our existing managerial, operational
and financial systems, procedures and controls; to improve the coordination between our various corporate functions; and to manage,
train, motivate and maintain a growing employee base. The time and costs to effectuate these steps may place a significant strain
on our management personnel, systems and resources, particularly given the limited amount of financial resources and skilled employees
that may be available at the time. We cannot assure you that we will institute, in a timely manner or at all, the improvements
to our managerial, operational and financial systems, procedures and controls necessary to support our anticipated increased levels
of operations and to coordinate our various corporate functions, or that we will be able to properly manage, train, motivate and
retain the anticipated increased number of employees.

 

 

    	A-3

    	 

    
 

We may have difficulty in developing
and retaining an effective sales force or in obtaining effective distribution partners and may not be able to achieve sufficient
revenues to effect our business plan.

 

The market for skilled sales and marketing
personnel is highly competitive and specialized. If we are unable to hire and retain skilled and knowledgeable sales people it
may negatively impact our ability to introduce our products or generate revenue sufficient to affect our future business plans.
In addition, our inability to develop business relationships with key technical distributors may also negatively impact our ability
to successfully market our products.

 

We may have difficulty in attracting
and retaining management and outside independent members to our Board of Directors as a result of their concerns relating to their
increased personal exposure to lawsuits and shareholder claims by virtue of holding these positions in a publicly held company.

 

The directors and management of publicly
traded corporations are increasingly concerned with the extent of their personal exposure to lawsuits and shareholder claims, as
well as governmental and creditor claims which may be made against them, particularly in view of recent changes in securities laws
imposing additional duties, obligations and liabilities on management and directors. Due to these perceived risks, directors and
management are also becoming increasingly concerned with the availability of directors and officers liability insurance to pay
on a timely basis the costs incurred in defending such claims. We currently carry directors and officers liability insurance, but
such insurance is expensive and can be difficult to obtain. If we are unable to obtain directors and officers liability insurance
at affordable rates or at all in the future, it may become increasingly more difficult to attract and retain qualified outside
directors to serve on our board of directors. The fees of directors are also rising in response to their increased duties, obligations
and liabilities as well as increased exposure to such risks. As a company with a limited operating history and limited resources,
we will have a more difficult time attracting and retaining management and outside independent directors than a more established
company due to these enhanced duties, obligations and liabilities.  

 

If we fail to comply with extensive
regulations enforced by domestic and foreign regulatory authorities, the commercialization of our products could be prevented or
delayed.

 

Our WavSTAT Systems are subject to extensive
government regulations related to development, testing, manufacturing and commercialization in the United States and other countries.
The determination of when and whether a product is ready for large scale purchase and potential use will be made by the government
through consultation with a number of governmental agencies, including the FDA, the National Institutes of Health, and the Centers
for Disease Control and Prevention. Our products have not received required regulatory approval from the FDA for applications we
hope to commercially market. The process of obtaining and complying with the FDA and other governmental regulatory approvals and
regulations is costly, time consuming, uncertain and subject to unanticipated delays. Despite the time and expense incurred, regulatory
approval is never guaranteed. We also are subject to the following risks and obligations, among others:

 

    	A-4

    	 

    

 

	 	·	The FDA may refuse to approve an application if they believe that applicable regulatory criteria are not satisfied;
	 	·	The FDA may require additional testing for safety and effectiveness;
	 	·	The FDA may interpret data from pre-clinical testing and clinical trials in different ways than us;
	 	·	If regulatory approval of a product is granted, the approval may be limited to specific indications or limited with respect to its distribution; and
	 	·	The FDA may change their approval policies and/or adopt new regulations.

 

Failure to comply with these or other regulatory
requirements of the FDA may subject us to administrative or judicially imposed sanctions, including:

 

	 	·	Warning letters;
	 	·	Civil penalties;
	 	·	Criminal penalties;
	 	·	Injunctions;
	 	·	Product seizure or detention;
	 	·	Product recalls; and
	 	·	Total or partial suspension of production.

 

Delays in successfully completing
our clinical trials could jeopardize our ability to obtain regulatory approval or market our WavSTAT System candidates on a timely
basis.

 

Our business prospects will depend on our
ability to complete clinical trials, obtain satisfactory results, obtain required regulatory approvals and successfully commercialize
our WavSTAT System product candidates. Completion of our clinical trials, announcement of results of the trials and our ability
to obtain regulatory approvals could be delayed for a variety of reasons, including:

 

	 	·	Unsatisfactory results of any clinical trial;
	 	·	The failure of principal third-party investigators to perform clinical trials on our anticipated schedules; and
	 	·	Different interpretations of pre-clinical and clinical data, which could lead to inconclusive results.

 

Our development costs will increase
if we have material delays in any clinical trial or if we need to perform more or larger clinical trials than planned.  

 

If clinical trial delays are significant,
or if any of our WavSTAT System product candidates do not prove to be safe or effective or do not receive required regulatory approvals,
our financial results and the commercial prospects for our product candidates will be harmed. Furthermore, our inability to complete
our clinical trials in a timely manner could jeopardize our ability to obtain regulatory approval.

 

 

    	A-5

    	 

    

 

The independent clinical investigators
that we rely upon to conduct our clinical trials may not be diligent, careful or timely, and may make mistakes, in the conduct
of our clinical trials.

 

We depend on independent clinical investigators
to conduct our clinical trials. The investigators are not our employees, and we cannot control the amount or timing of resources
that they devote to our product development programs. If independent investigators fail to devote sufficient time and resources
to our product development programs, or if their performance is substandard, it may delay FDA approval of our products. These independent
investigators may also have relationships with other commercial entities, some of which may compete with us. If these independent
investigators assist our competitors at our expense, it could harm our competitive position.

 

Our product development efforts may
not yield marketable products due to results of studies or trials, failure to achieve regulatory approvals or market acceptance,
proprietary rights of others or manufacturing issues.

 

Our success depends on our ability to successfully
develop and obtain regulatory approval to market new products. We expect that a significant portion of the research that we will
conduct will involve new and unproven technologies. Development of a product requires substantial technical, financial and human
resources even if the product is not successfully completed.

 

Potential products may appear to be promising
at various stages of development yet fail to reach the market for a number of reasons, including the:

 

	 	·	Lack of adequate quality or sufficient prevention benefit, or unacceptable safety during pre-clinical studies or clinical trials;
	 	·	Failure to receive necessary regulatory approvals;
	 	·	Existence of proprietary rights of third parties; and/or
	 	·	Inability to develop manufacturing methods that are efficient, cost-effective and capable of meeting stringent regulatory standards.

  

Our inability to protect our intellectual
property rights could negatively impact our projected growth and ability to generate revenues and profits, which would have a negative
impact on our business and the value of your investment.

  

We rely on a combination of patent, patent
pending, copyright, trademark and trade secret laws, proprietary rights agreements and non-disclosure agreements to protect our
intellectual properties. These measures may not prove to be effective in protecting our intellectual properties.

 

In the case of patents, our existing patents
may be invalidated, any patents that we currently or prospectively apply may not be granted, or any of these patents may not ultimately
provide significant commercial benefits. Further, competing companies may circumvent any patents that we may hold by developing
products which closely emulate but do not infringe our patents. While we currently have and intend to seek patent protection for
our products in selected foreign countries, those patents may not receive the same degree of protection as they would in the United
States. We may not be able to successfully defend our patents and proprietary rights in any action we may file for patent infringement.
Similarly, we may be required to defend litigation involving the patents or proprietary rights of others, or we may be able to
obtain licenses for these rights. Legal and accounting costs relating to prosecuting or defending patent infringement litigation
may be substantial.

 

 

    	A-6

    	 

    

 

The WavSTAT System is protected by 41 issued
patents, in the United States and approximately 25 foreign patents, which we own, and one additional patent for which we own the
exclusive license. We also rely on proprietary designs, technologies, processes and know-how not eligible for patent protection.
Our competitors may independently develop the same or superior designs, technologies, processes and know-how.  

 

While we have and will continue to enter
into proprietary rights agreements with our employees and third parties giving us proprietary rights to certain technology developed
by those employees or parties while engaged by the Company, courts of competent jurisdiction may not enforce those agreements.

 

The patents we own comprise a large
portion of our assets, which could limit our financial viability.

 

Our patents comprise approximately 50%
of our assets at March 31, 2012. If our existing patents are invalidated or if they fail to provide significant commercial benefits,
it will severely hurt our financial condition, as a significant percentage of our assets would lose their value. Further, since
our patents are amortized over the course of their term until they expire, our assets comprised of patents will continually be
written down to zero.

 

Legislative actions and potential
new accounting pronouncements are likely to impact our future financial position and results of operations.

 

Compliance with publicly-traded company
regulations adversely impacts our resources. As a publicly-traded company, we are subject to rules and regulations that increase
our legal and financial compliance costs, make some activities more time-consuming and costly, and divert our management's attention
away from the operation of our business. We are obligated to file with the U.S. Securities and Exchange Commission, or the SEC,
annual and quarterly information and other reports that are specified in the Securities Exchange Act of 1934, or the Exchange Act,
and are also subject to other reporting and corporate governance requirements, including requirements of the Sarbanes-Oxley Act
of 2002, and the rules and regulations promulgated thereunder, which impose significant compliance and reporting obligations upon
us.  We may not be successful in complying with these obligations, and compliance with these obligations could be time
consuming and expensive. Failure to comply with the additional reporting and corporate governance requirements could lead to fines
imposed on us, deregistration under the Exchange Act and, in the most egregious cases, criminal sanctions could be imposed.

 

Our products may be subject to recall
or product liability claims.

 

Our WavSTAT System products may be used
in connection with medical procedures in which it is important that those products function with precision and accuracy. If our
products do not function as designed, or are designed improperly, we may be forced by regulatory agencies to withdraw such products
from the market. In addition, if medical personnel or their patients suffer injury as a result of any failure of our products to
function as designed, or due to an inappropriate design, we may be subject to lawsuits seeking significant compensatory and punitive
damages. Any product recall or lawsuit seeking significant monetary damages may have a material effect on our business and financial
condition.

 

 

    	A-7

    	 

    

 

RISKS RELATED TO OUR CAPITAL STOCK

 

The application of the “penny
stock” rules could adversely affect the market price of our Common Stock and increase your transaction costs to sell your
stock.

 

As long as the trading price of our Common
Stock is below $5 per share, the open-market trading of our Common Stock will be subject to the “penny stock” rules.
The “penny stock” rules impose additional sales practice requirements on broker-dealers who sell securities to persons
other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income
exceeding $200,000 or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make
a special suitability determination for the purchase of securities and have received the purchaser’s written consent to the
transaction before the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the broker-dealer must
deliver, before the transaction, a disclosure schedule prescribed by the SEC relating to the penny stock market. The broker-dealer
also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for
the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks.
These additional burdens imposed on broker-dealers may restrict the ability or decrease the willingness of broker-dealers to sell
our common stock, and may result in decreased liquidity for our common stock and increased transaction costs for sales and purchases
of our common stock as compared to other securities.

 

Our common stock is thinly traded,
so investors may be unable to sell at or near ask prices or at all.

 

Our common stock has historically been
sporadically or “thinly-traded”, meaning that the number of persons interested in purchasing our Common Stock at or
near ask prices at any given time may be relatively small or non-existent. As of July 13, 2012, our average trading volume per
day for the past three months was approximately 49,800 shares a day with a high of 304,400 shares traded and a low of 0 shares
traded per day. This situation is attributable to a number of factors, including the fact that we are a small company which is
relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate
or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be
reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we
became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares
is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will
generally support continuous sales without an adverse effect on share price. A broader or more active public trading market for
our common stock may not develop or be sustained, and current trading levels may not be sustained.

 

    	A-8

    	 

    
 

 

The market price for our common stock
is particularly volatile, given our status as a relatively unknown company with a small and thinly-traded public float, limited
operating history and lack of revenues which could lead to wide fluctuations in our share price.

 

The market for our Common Stock is characterized
by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more
volatile than a seasoned issuer for the foreseeable future. In fact, during the 90-day period ended July 13, 2012, the high and
low closing prices of a share of our Common Stock were $0.22 and $0.05, respectively. The volatility in our share price is attributable
to a number of factors. First, as noted above, our stock is sporadically and/or thinly-traded. As a consequence of this lack of
liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price
of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large
number of our shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb
those sales without adverse impact on its share price. Secondly, we are a speculative or “risky” investment due to
our limited operating history and lack of revenues or profits to date and uncertainty of future market acceptance for our potential
products. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their
investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly
and at greater discounts than would be the case with the stock of a seasoned issuer. The following factors may add to the volatility
in the price of our common stock: actual or anticipated variations in our quarterly or annual operating results; acceptance of
our proprietary technology; government regulations, announcements of significant acquisitions, strategic partnerships or joint
ventures; our capital commitments; and additions or departures of our key personnel. Many of these factors are beyond our control
and may decrease the market price of our common stock, regardless of our operating performance. We cannot make any predictions
or projections as to what the prevailing market price for our common stock will be at any time, including as to whether our common
stock will sustain its current market prices, or as to what effect that the sale of shares or the availability of common stock
for sale at any time will have on the prevailing market price.

 

The
market for penny stocks such as ours has been subject to fraud and abuse and may cause our stock price to be more volatile.

 

Shareholders should be aware that, according
to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns
include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
(2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler
room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive
and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities
by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse
of those prices and consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny
stock market. The occurrence of these patterns or practices could increase the volatility of our share price. In addition, potential
dilutive effects of future sales of shares of common stock by shareholders and by the Company, including in this offering, could
have an adverse effect on the market price of our shares.

 

    	A-9

    	 

    
 

 

Volatility in our common stock price
may subject us to securities litigation.

 

The market for our common stock is characterized
by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more
volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have sometimes initiated securities class action
litigation against a company following periods of volatility in the market price of its securities. We may in the future be the
target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s
attention and resources.

 

A large number of shares of common
stock are issuable upon exercise of outstanding options and the exercise of these securities could result in the substantial dilution
of the investment of other shareholders in terms of percentage ownership in the Company as well as the book value of the common
stock.

 

As of July 13, 2012, there are outstanding
common stock purchase options entitling the holders to purchase 16,320,000 shares of common stock at a weighted average exercise
price of $0.20 per share (8,624,894 of these shares are exercisable within 60 days of July 13, 2012). The exercise price for all
of the options may be less than the cost to acquire our common stock. In addition, the holders of the common stock purchase options
may sell common stock in tandem with their exercise of those options to finance that exercise, or may resell the shares purchased
in order to cover any income tax liabilities that may arise from their exercise of the options, which could substantially depress
the prevailing market price of our common stock.

 

Our issuance of additional common
stock, or options to purchase our common stock, would dilute the proportionate ownership and voting rights of shareholders.

 

We are entitled under our articles of incorporation
to issue up to 325,000,000 shares of capital stock which includes 275,000,000 shares of common stock, 3,585,000 shares of preferred
stock and 46,415,000 undesignated shares. Our undesignated shares may be designated as in a senior position to our common stock.
After taking into consideration our outstanding common stock at July 13, 2012, we will be entitled to issue up to 101,093,560 additional
shares of Common Stock (275,000,000 authorized less 108,041,084 common shares outstanding, 3,585,000 shares for issuance upon conversion
of Preferred Stock, 17,495,000 shares reserved for issuance of stock options, 53,396,441 shares reserved for issuance of Common
Stock purchase warrants, 41,021,402 shares for issuance of convertible debentures and 371,846 shares of Common Stock issued for
payment of cumulative preferred dividends) and up to 46,415,000 shares of undesignated capital stock. Our board of directors may
generally issue stock, or options or warrants to purchase that stock, without further approval by our shareholders based upon such
factors as our board of directors may deem relevant at that time. It is likely that we will be required to issue a large amount
of additional securities to raise capital to further our development. It is also likely that we will be required to issue a large
amount of additional securities to directors, officers, employees and consultants as compensatory grants in connection with their
services, both in the form of stand-alone grants or under our stock plans. We may not be able to issue additional shares of Common
Stock, or options or warrants to purchase those shares, under circumstances we may deem appropriate at the time.

 

    	A-10

    	 

    
 

 

The limitation of monetary liability
of our directors, officers and employees under our articles of incorporation and the indemnification rights of our directors, officers,
consultants and employees may result in substantial expenditures by us and may discourage lawsuits against our directors, officers,
consultants and employees.

 

Our amended and restated articles of incorporation,
as amended, contain provisions which eliminate the liability of our directors and officers for monetary damages to the Company
and shareholders. Our bylaws also require us to indemnify our officers and directors. We may also have contractual indemnification
obligations under our agreements with our directors, officers, consultants and employees. The foregoing indemnification obligations
could result in the Company incurring substantial expenditures to cover the cost of settlement or damage awards against directors,
officers, consultants and employees, which we may be unable to recoup. These provisions and resultant costs may also discourage
us from bringing a lawsuit against directors, officers, consultants and employees for breaches of their fiduciary duties, and may
similarly discourage the filing of derivative litigation by our shareholders against our directors, officers, consultants and employees
even though such actions, if successful, might otherwise benefit the Company and shareholders.

 

Anti-takeover provisions may impede
the acquisition of the Company.

 

Certain provisions of the Minnesota Business
Corporation Act and other Minnesota laws have anti-takeover effects and may inhibit a non-negotiated merger or other business combination.
These provisions are intended to encourage any person interested in acquiring us to negotiate with, and to obtain the approval
of, our board of directors in connection with such a transaction. However, certain of these provisions may discourage a future
acquisition of the Company, including an acquisition in which the shareholders might otherwise receive a premium for their shares.
As a result, shareholders who might desire to participate in such a transaction may not have the opportunity to do so.

 

RISKS RELATED TO THIS OFFERING

 

There will be restrictions on resale
of the securities and the shares and there is no assurance of the registration of the securities.

 

None of the Securities or Shares may be
sold unless, at the time of such intended sale, there is a current registration statement covering the resale of the Securities
and Shares or there exists an exemption from registration under the Securities Act, and such Securities and Shares have been registered,
qualified, or deemed to be exempt under applicable securities or “blue sky” laws in the state of residence of the seller
or in the state where sales are being effected. If no registration statement is filed and declared effective covering the resale
of any of the Securities or Shares sold pursuant to this Agreement, investors will be precluded from disposing of such securities
unless such securities may become eligible to be disposed of under the exemptions provided by Rule 144 under the Securities Act
without restriction. If the securities sold pursuant to this Offering are not registered for resale under the Securities Act, or
exempt therefrom, and registered or qualified under applicable securities or “blue sky” laws, or deemed exempt therefrom,
the value of the such securities will be greatly reduced.

 

    	A-11

    	 

    
 

 

We have significant discretion over
the use of certain of the net proceeds.

 

Assuming that all of the Securities offered
by this Agreement are sold, the proceeds to us from the sale of the Securities will be approximately $1,470,000 if the Maximum
Offering is sold. A significant portion of the net proceeds of this Offering will be applied to working capital and other general
corporate purposes. Accordingly, our management will have broad discretion as to the application of such proceeds. There can be
no assurance that management’s use of proceeds generated through this Offering will prove optimal or translate into revenue
or profitability for the Company. Investors are urged to consult with their attorneys, accountants and personal investment advisors
prior to making any decision to invest in the Company.

 

The offering price for the securities
has been arbitrarily determined by us.

 

The offering price of the Securities was
arbitrarily determined by us. The price of the Securities does not necessarily bear any relationship to established valuation criteria
such as earnings, book value or assets. Rather, the price of the Securities may be derived as a result of our negotiations with
the investors based upon various factors including prevailing market conditions, our future prospects and our capital structure.
These prices do not necessarily accurately reflect the actual value of the Securities or the price that may be realized upon disposition
of the Securities or the Shares.

 

An investment in our securities is
speculative and there can be no assurance of any return on any such investment.

 

An investment in the Securities is speculative
and there is no assurance that investors will obtain any return on their investment. Investors will be subject to substantial risks
involved in an investment in the Company, including the risk of losing their entire investment.

 

The Securities will be offered by
us on a “Best Efforts” basis, and we may not raise the Maximum Offering.

 

We are offering the Securities on a “best
efforts” basis. In a best efforts offering such as this one, there is no assurance that we will sell the Maximum Offering.
Accordingly, we may close upon amounts less than the Maximum Offering, which may not provide us with sufficient funds to fully
implement our business plan.

 

Investor funds will not accrue interest
while in escrow prior to closing. 

 

We anticipate that the funds that are delivered
in connection with subscriptions will be held in a non-interest bearing escrow account until the closing of the Offering, if any.
If we terminate the Offering prior to accepting an investor’s subscription, such amount will be returned, without interest
or deduction, to the investor. Investors may not have the use of such funds or receive interest thereon pending the completion
of the Offering.

 

    	A-12

    	 

    
 

 

If the Maximum Offering amount is
not raised, it may increase our long-term debt or the amount of additional equity we need to raise.

 

There is no assurance that the maximum
number of Securities offered in this Offering will be sold. If the Maximum Offering amount is not sold, we may need to incur additional
debt or raise additional equity in order to finance our operations. Increasing the amount of debt will increase our debt service
obligations and make less cash available for distribution to our shareholders. Increasing the amount of additional equity we are
required to raise will further dilute investors participating in this Offering.

 

Your ownership interest is subject
to dilution. 

 

If you purchase Securities in this Offering,
you will experience immediate dilution in the value of your Shares received upon conversion or exercise. In addition, each investor’s
proportionate ownership interest may be diluted when we issue additional shares of our common stock. We may raise additional capital
in the future through additional sales of shares of our common stock, and your percentage interest in our common stock would be
diluted if you do not participate in such additional sales.

 

FORWARD-LOOKING STATEMENTS

 

We have included in this Agreement, including
Exhibit A, certain forward-looking statements. Such statements can be identified by the use of forward-looking terminology such
as “believe,” “expect,” “may,” “should,” “seek,” “on-track,”
“plan,” “project,” “forecast,” “intend” or “anticipate,” or the negative
thereof or comparable terminology, or by discussions of vision, strategy or outlook, including statements related to revenues and
profitability, pricing and competition, the continued viability of our technology, our growth and expansion plans, including retaining
new employees, compliance with governmental regulations, our intellectual property protection strategies, payment of dividends,
the volatility of our common stock and the market for our common stock, dilution, trading restrictions, use of proceeds and the
need for additional debt or equity funding. You are cautioned that our business and operations are subject to a variety of risks
and uncertainties, many of which are beyond our control and, consequently, our actual results may differ materially from those
projected by any forward-looking statements. See the section titled “Risk Factors” on Exhibit A for information regarding
certain important factors that could cause our actual results to differ materially from those projected in our forward-looking
statements. Our forward-looking statements contained herein speak only as of the date of this Agreement. We make no commitment
to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statements
are made.

 

    	A-13PURCHASE AND SALE AGREEMENT

 

THIS PURCHASE AND SALE
AGREEMENT (“Agreement”) is made and entered into as of this 10th day of April, 2012 (the “Effective
Date”), by and among the following parties:

 

	SELLER:	Sheridan Care Center LLC, dba Sheridan Care Center;
	 	 
	 	Sheridan Properties LLC;
	 	 
	 	Fernhill Estates LLC, dba Fernhill Estates;
	 	 
	 	Fernhill Properties LLC;
	 	 
	and	Pacific Gardens Estates LLC, dba Pacific Health and Rehabilitation (“Pacific Gardens”).
	 	 
	BUYER:	Cornerstone Healthcare Real Estate Fund, Inc., a Maryland corporation, or its assigns.

 

RECITALS

 

		A.	By document dated January 31, 2012, Healthcare Retirement Solutions LLC as Buyer and Dover Management,
Inc., the representative and agent of Sellers, entered into a Letter of Intent.

 

		B.	This Purchase and Sale Agreement replaces the obligations of the parties, if any, provided in the
Letter of Intent.

 

		C.	It is understood that the actual Sellers will be Sheridan Care Center LLC, dba Sheridan Care Center
as the operational entity, and Sheridan Properties LLC as to the real property located in Sheridan, Oregon, and Fernhill Estates
LLC, dba Fernhill Estates as the operating entity and Fernhill Properties LLC as the property owner of the facility located in
Portland, Oregon, and Pacific Gardens as to the operating entity located in Tigard, Oregon (the “Tigard Facility”).

 

		D.	Pacific Gardens does not currently own the Tigard Facility, but Pacific Gardens has an option to
purchase the Tigard Facility (the “Tigard Option”) pursuant to that certain Option Agreement (the “Tigard
Option Agreement”), dated April 1, 2010, by and between Tigard Investment Group, LLC (the “Tigard Owner”),
as optionor, and Pacific Gardens, as optionee. At the Closing, Pacific Gardens will assign the Tigard Option to Buyer and will
obtain all consents required from the Tigard Owner in order to assign the Tigard Option to Buyer and allow Buyer to simultaneously
exercise and close on the Tigard Property upon such assignment. Provided Pacific Gardens satisfies the requirements in the prior
sentence, Buyer will immediately exercise the Tigard Option and acquire the Tigard Facility concurrently with the Closing under
this Agreement. The consideration to Seller for the acquisition of the Tigard Option is the difference between the appraised value
of the Tigard Facility and the $3,060,000 purchase price which Buyer will be obligated to pay the Tigard Owner for the Tigard Facility
pursuant to the terms of the Tigard Option Agreement. The $3,060,000 that Buyer is obligated to pay the Tigard Owner shall be deducted
from the Purchase Price that Buyer has to pay to Seller pursuant to this Agreement.

 

    	 

    	 

    

 

		E.	Operational Sellers in this Agreement are Sheridan Care Center LLC, dba Sheridan Care Center, Fernhill
Estates LLC, dba Fernhill Estates, and Pacific Gardens. Real property Sellers in this Agreement are Sheridan Properties LLC and
Fernhill Properties LLC.

 

		F.	The parties intend this Agreement to be the definitive agreement contemplated by the Letter of
Intent.

 

Therefore, in consideration
of the mutual representations, warranties and promises of the parties, the parties enter into the following:

 

AGREEMENT

 

1.           Purchase
and Sale. On the terms and conditions set forth herein, Seller shall sell, assign, transfer, convey and deliver to Buyer and
Buyer shall purchase from Seller its interest in the following, which are hereinafter referred to collectively as the “Property”:

 

(a)          The
improvements located on the Real Property, consisting of three (3) skilled nursing facilities as described in Schedule 1(a)
attached hereto (singularly a “Facility” and collectively, the “Facilities”), owned by Seller,
and all right, title and interest of Seller in and to the items described in this paragraph one (a) through (f) herein;

 

(b)          All
of the real estate on which each Facility is situated, together with all tenements, easements, appurtenances, privileges, rights
of way, and other rights incident thereto, all building and improvements and any parking lot to such Facility located thereon situated
in the State of Oregon, which is described in Exhibit A attached hereto and made a part hereof by this reference (collectively,
the “Real Property”);

 

(c)          All
of the tangible personal property, inventory, equipment, machinery, supplies including drugs and other supplies, spare parts, furniture,
furnishings, warranty claims, contracts, including but not limited to supply contracts, contracts rights, intellectual property
(except for trademarks and service marks of Dover Management or a related entity using the name “Dover”), including
but not limited to patents, trade secrets, and all rights and title to the names under which each Facility operates, mailing lists,
customer lists, vendor lists, resident files, books and records owned by the Seller, who may retain copies of same, and shall have
reasonable access to such books and records after the Closing as required for paying taxes and responding to legal inquiry, as
such personal property is described in Schedule 1(c) attached hereto (collectively, the “Personal Property”);

 

(d)          All
transferable licenses, permits, certifications, assignable guaranties and warranties in favor of Seller, approvals or authorizations
and all assignable intangible property not enumerated herein which is used by the Seller in connection with each Facility, and
all other assets whether tangible or intangible; provided, that Seller shall retain all licenses required to be retained by Seller
in order to operate the current business within each Facility;

 

    	2

    	 

    

 

(e)          All
trade names or other names commonly used to identify each Facility and all goodwill associated therewith, excluding any name containing
“Dover”, which shall remain the sole property of Seller. The intent of the parties is to transfer to Buyer only such
names and goodwill associated with each Facility itself and not with Seller or any affiliate of Seller, so as to avoid any interference
with the unrelated business activities of Seller;

 

(f)          All
telephone numbers used in connection with the operation of each Facility, and to the extent not described above, all goodwill of
Seller associated with each Facility (the items described in clauses (e) and (f) above are collectively referred to as “Intangibles”).

 

2.           Excluded
Assets. Seller’s cash, investment securities, bank account(s) and accounts receivable, and deposits attributable and
relating to the operation of each Facility, and Seller’s corporate minute books and corporate tax returns, partnership records,
and other corporate and partnership records shall be excluded from the Property sold by Seller to Buyer hereunder as well as Seller’s
real property not identified in Schedule 1(a) (the “Excluded Assets”).

 

3.           Purchase
Price; Deposits. The following shall apply with respect to the Purchase Price of the Property:

 

(a)          The
purchase price (the “Purchase Price”) payable by Buyer to Seller for the Property is Sixteen Million Eight Hundred
Thousand Dollars ($16,800,000).

 

(b)          The
Purchase Price as allocated to each Facility by Seller is set forth on Schedule 3 attached hereto and made a part hereof.

 

(c)          Within
three (3) business days after this Agreement is fully executed by the parties, Buyer shall deposit the sum of One Hundred Thousand
Dollars ($100,000) as an earnest money deposit (“Initial Deposit”) with Lawyers Title Company, 4100 Newport
Place Drive, Suite 120, Newport Beach, California 92660, Attention: Debi Calmelat (“Title Company” or “Escrow
Agent”), and Escrow Agent will deposit it into an interest-bearing account with the interest for the benefit of Buyer.
In addition, if Buyer has not terminated this Agreement on or before the expiration of the Due Diligence Period (defined below),
then Buyer shall deposit with Escrow Agent an additional non-refundable, except as otherwise expressly provided herein, One Hundred
Thousand Dollars ($100,000) (“Non-Refundable Additional Deposit”) within three (3) business days following the
expiration of the Due Diligence Period (the Initial Deposit, Non-Refundable Additional Deposit and (if applicable) the Non-Refundable
Extension Deposit (or applicable portion thereof), as defined below, are collectively referred to as the “Deposits”).
Interest earned on the Deposits shall be paid to the party entitled to such amount as provided in this Agreement.

 

(d)          At
Closing, the Deposits shall be credited against the Purchase Price and Buyer shall deposit the balance of the Purchase Price in
Cash to the Escrow Agent.

 

    	3

    	 

    

 

(e)          Buyer
shall not assume or pay, and Seller shall continue to be responsible for, any and all debts, obligations and liabilities of any
kind or nature, fixed or contingent, known or unknown, of Seller not expressly assumed by Buyer in this Agreement. Specifically,
without limiting the foregoing, Buyer shall not assume any obligation, liability, cost, expense, claim, action, suit or proceeding
pending as of the Closing, nor shall Buyer assume or be responsible for any subsequent claim, action, suit or proceeding arising
out of or relating to any such other event occurring, with respect to the manner in which Seller conducted its business at the
Facilities. In addition, Buyer shall not assume successor liability obligations to Medicare, Medicaid, HMO or any other third party
payer programs or be responsible for recoupment’s, fines, or penalties required to be paid to such parties as a result of
the operation of the Facilities by Seller or Seller’s operating entity (“Operator”).

 

(f)          Each
party shall have the right to allocate the Purchase Price in accordance with their own accounting standards, but neither party’s
allocation of the Purchase Price shall be binding on the other party to this Agreement. Buyer shall provide Seller with copies
of all final appraisals relating to the property purchased by Buyer pursuant to this Agreement. Such appraisals shall be provided
within five (5) days of receipt by Buyer.

 

4.           Closing.
The closing of the purchase and sale transactions pursuant to this Agreement (“Closing”) shall occur on or before
June 29, 2012 (“Closing Date”); provided, Buyer may unilaterally extend the Closing Date through and including
July 29, 2012 by making a non-refundable payment (subject to the provisions of Section 13(b)(ii) herein) to Escrow
Agent, of One Hundred Thousand Dollars ($100,000) (“Non-Refundable Extension Deposit”). The Non-Refundable Extension
Deposit shall be applicable to the Purchase Price or, if this transaction does not close on or before the Closing Date, as extended,
then the Non-Refundable Extension Deposit shall be applied as dictated by the terms of this Agreement regarding the Deposit. The
Closing shall take place through Seller’s delivery of one or more Warranty deeds in the form attached hereto marked Exhibit
4, and Buyer’s delivery of cash or immediately available funds through an escrow agreement (the “Escrow”)
to be established with the Escrow Agent pursuant to form escrow instructions which shall be modified to be consistent with the
terms and provisions of this Agreement, and which shall be mutually agreed upon by the parties hereto.

 

5.           Conveyance.
Title to each Facility shall be conveyed to Buyer by a Warranty Deed in substantially the same form as Exhibit 4 and bill of sale
in form agreed to by the parties prior to the end of the Due Diligence Period, as defined herein. Fee simple indefeasible title
to the Real Property, and marketable title to the Personal Property, shall be conveyed from Seller to Buyer or Buyer’s nominee
in “AS-IS, WHERE-IS” condition, free and clear of all liens, charges, easements and encumbrances of any kind, other
than:

 

(a)          Liens
for real estate taxes or assessments not yet due and payable;

 

(b)          The
standard printed exceptions included in the Title Commitments, as defined in Section 14(a) herein; unless objected
to in writing by Buyer during the Due Diligence Period;

 

(c)          Such
exceptions that appear in the Title Commitments and that are either waived or approved by Buyer in writing pursuant to Section 14(b)
herein;

 

    	4

    	 

    

 

(d)          Liens
or encumbrances caused by the actions of Buyer but not those caused by the actions of Seller; and

 

(e)          Those
matters identified as Permitted Exceptions on the attached Exhibit B.

 

The items described
in this Section 5 are sometimes collectively referred to as the “Permitted Exceptions.”

 

6.           Buyer’s
Due Diligence.

 

(a)          Buyer
shall have seventy-five (75) days from the period commencing from the date Buyer notifies Seller that it has received the requested
Due Diligence material required to complete Buyer’s Due Diligence (the “Due Diligence Period”)., Seller
shall permit the officers, employees, directors, agents, consultants, attorneys, accountants, lenders, appraisers, architects,
investors and engineers designated by Buyer and representatives of Buyer (collectively, the “Buyer’s Consultants”)
access to, and entry upon the Real Property and each Facility to perform its normal and customary due diligence, including, without
limitation, the following (collectively, the “Due Diligence Items”):

 

(i)          Review
of vendor contracts (“Contracts”) and leases (“Leases”) to which each Facility (or the Seller,
on behalf of such Facility) are a party, as set forth on Schedule 8.6 attached hereto;

 

(ii)         Obtain
an environmental investigation (including a Phase 1 Environmental Audit);

 

(iii)        Inspection
of the physical structure of each Facility;

 

(iv)        Review
of current Title Commitments, as defined in Section 14 herein, and underlying documents referenced therein;

 

(v)         Review
of ALTA Surveys, as defined in Section 14 herein, for each Facility;

 

(vi)        Inspection
of the books and records of each Facility and that portion of the Seller’s books and records which pertain to the Facilities;

 

(vii)       Review
of the Due Diligence Items, as described in Schedule 6(a)(vii) attached hereto, to be provided by Seller within five
(5) business days following the Effective Date;

 

(viii)      Complete
such other inspections or investigations as Buyer may reasonably require relating to the ownership, operation or maintenance of
the Facilities;

 

(ix)         View
resident files, agreements, and any other documentation regarding the residents of the Facilities, which review shall in all events
be subject to all applicable laws, rules and regulations concerning the review of medical records and other types of patient records;
and

 

    	5

    	 

    

 

(x)          Review
files maintained by the State of Oregon relating to the Facilities; and

 

(xi)         Review
all drawings, plans and specifications and all engineering reports for the Facilities in the possession of or readily available
to Seller; and

 

(xii)        Seller
will furnish copies of all environmental reports, property condition reports, appraisals, title reports and ALTA Surveys (or surveys)
that it currently has in its possession.

 

(xiii)       Review
copies of currently effective written employment manuals or written employment policies and/or procedures have been provided to
or for employees.

 

Notwithstanding the
foregoing provisions of this Subsection, in the event Seller fails to deliver all Due Diligence Items listed in Schedule 6(a)(vii)
on or before the time set forth in Subsection (a)(vii) above, then the Due Diligence Period shall be deemed extended
on a day-to-day basis until Seller completes such delivery of the Due Diligence Items to Buyer.

 

(b)          Buyer
agrees and acknowledges that: (i) Buyer will not disclose the Due Diligence Items and/or the contents thereof or any other materials
received from Seller pursuant to this Agreement (the “Property Information”) or any of the provisions, terms
or conditions thereof, or any information disclosed therein or thereby, to any party outside of Buyer’s organization, other
than Buyer’s Consultants; (ii) the Property Information is delivered to Buyer solely as an accommodation to Buyer; (iii)
Seller has not undertaken any independent investigation as to the truth, accuracy or completeness of any matters set out in or
disclosed by the Property Information; and(iv) except as expressly contained in this Agreement, Seller has not made and does not
make any warranties or representations of any kind or nature regarding the truth, accuracy or completeness of the information set
out in or disclosed by the Property Information.

 

(c)          All
due diligence activities of Buyer at the Facilities shall be scheduled with Seller upon two (2) business days prior notice. Reviews,
inspections and investigations at the Facilities shall be conducted by Buyer in such manner so as not to disrupt the operation
of the Facilities.

 

(d)          Buyer
may, at its sole cost, obtain third party engineering and physical condition reports and Phase I Environmental Audits covering
each Facility, certified to Buyer, prepared by an engineering and/or environmental consultants acceptable to Buyer; provided, no
inspection by Buyer’s Consultants shall involve the taking of samples or other physically invasive procedures (such as a
Phase II environmental audit) without the prior written consent of Seller, which consent shall not be unreasonably withheld or
delayed, and Buyer shall provide copies of all final reports (except for appraisals or attorney-client communications) received
from such third parties (the “Third Party Reports”) to Seller within ten (10) days of Buyer receiving the Third
Party Reports. Notwithstanding anything to the contrary contained in this Agreement, Buyer shall indemnify, defend (with counsel
acceptable to Seller) and hold Seller and its employees and agents, and each of them, harmless from and against any and all losses,
claims, damages and liabilities, without limitation, attorneys’ fees incurred in connection therewith) arising out of or
resulting from Buyer’s exercise of its right of inspection as provided for in this Section 6; provided, however,
such indemnification shall not extend to matters merely discovered by Buyer and/ or the acts or omissions of Seller or any third
party, except for the acts or omissions of Buyer’s Consultants. The indemnification obligation of Buyer under this Section 6
shall survive the Closing or earlier termination of this Agreement for a period of twelve (12) months. Following any audit or inspection
as provided for herein, Buyer shall return the Real Property and the Facilities to the condition in which they existed immediately
prior to such audit or inspection.

 

    	6

    	 

    

 

(e)          On
or before 5:00 p.m. (Pacific Time) on the last day of the Due Diligence Period, Buyer shall provide Seller with copies of all Third
Party Reports and provide Seller with notice that:

 

(i)          The
inspections and audits are not acceptable to Buyer in its sole and absolute discretion and Buyer terminates this Agreement, and
in such event, neither party shall have any further rights and obligations under this Agreement, except the obligations which expressly
survive the termination of this Agreement; or

 

(ii)         
Provide Seller with written notice that the inspections and audits are acceptable to Buyer in its sole and absolute discretion.

 

(f)          If
this Agreement is terminated prior to Closing, Buyer shall promptly return to Seller or destroy all copies of the Due Diligence
items.

 

7.           Prorations;
Closing Costs; Possession; Post Closing Assistance.

 

(a)          There
will be no prorations at the Closing since Seller shall remain responsible for all taxes, costs and expenses relating to the Facilities
following the Closing pursuant to the Post Closing Lease (as defined in Section 12(a)(v)).

 

(b)          Seller
shall pay any state, county and local transfer taxes arising out of the transfer of the Real Property.

 

(c)          Seller
shall pay the cost of the standard owner’s title insurance policy, as described in this Agreement (excluding any survey exception
or deletion of coverage). Buyer shall pay the cost of any lender’s policy for Buyer’s lender, any title endorsements
requested by Buyer and its lender and the cost of updating or obtaining new Surveys. Seller shall pay all fees of Escrow Agent.
All other costs associated with title and survey matters shall be paid in accordance with custom and practice of the County in
which each Facility is located.

 

(d)          Buyer
and Seller shall each pay their own attorney’s fees. Buyer shall pay for all costs of review of the Due Diligence Items and
its additional due diligence inspection costs including, without limitation, the cost of any environmental reports.

 

(e)          On
the Closing Date, Seller shall retain possession of the Facilities pursuant to the Post Closing Lease.

 

(f)          Buyer
shall bear all costs of financing its acquisition of the Real Property, except Seller shall be responsible for any repairs to the
Facilities or reserves for repairs to the Facilities required by Buyer’s lender or the United States Department of Housing
and Urban Development (“HUD”).

 

    	7

    	 

    

 

8.           Representations
and Warranties of Seller. Seller hereby represents and warrants to Buyer that:

 

(a)          Legality.

 

(i)          Organization,
Corporate Powers, Etc. Each Seller entity is duly organized, validly existing and in good standing under the laws of the State
of Oregon. Seller has full power, authority and legal right (A) to execute and deliver, and perform and observe the provisions
of this Agreement and each Transaction Document, as defined herein, to which it is a party, (B) to transfer good, indefeasible
title to the Property to Buyer free and clear of all liens, claims and encumbrances except for Permitted Exceptions (as defined
in Section 5 hereof), and (C) to carry out the transactions contemplated hereby and by such other instruments to be
carried out by such party.

 

(ii)         Due
Authorization, Etc. This Agreement and the Closing Documents (collectively the “Transaction Documents”)
have been, and each instrument provided for herein or therein to which Seller is a party will be, when executed and delivered as
contemplated hereby authorized, executed and delivered by Seller and the Transaction Documents constitute, and each such instrument
will constitute, when executed and delivered as contemplated hereby, legal, valid and binding obligations of Seller and enforceable
in accordance with their terms.

 

(iii)        Governmental
Approvals. To the best of Seller’s knowledge, no consent, approval or other authorization (other than corporate or other
organizational consents which have been obtained), or registration, declaration or filing with, any court or governmental agency
or commission is required for the due execution and delivery of any of the Transaction Documents to which Seller is a party or
for the validity or enforceability thereof against such party other than the recording or filing for recordation of the Oregon
form Warranty Deeds in substantially the same form as Exhibit 4 (collectively, the “Deed”) which recordings
shall be accomplished at Closing.

 

(iv)        Other
Rights. No right of first refusal, option or preferential purchase or other similar rights are held by any person with respect
to any portion of the Property.

 

(v)         No
Litigation. Except as set forth on Schedule 8(a)(v) attached hereto, neither Seller nor its registered agent for
service of process has been served with summons with respect to any actions or proceedings pending or, to Seller’s actual
knowledge, no such actions or proceedings are threatened, against Seller before or by any court, arbitrator, administrative agency
or other governmental authority, which (A) individually or in the aggregate, are expected, in the reasonable judgment of Seller,
to materially and adversely affect Seller’s ability to carry out any of the transactions contemplated by any of the Transaction
Documents or (B) otherwise involve any portion of the Property including, without limitation, the Facilities.

 

    	8

    	 

    

 

(vi)        No
Conflicts. Neither the execution and delivery of the Transaction Documents to which Seller is a party, compliance with the
provisions thereof, nor the carrying out of the transactions contemplated thereby to be carried out by such party will result in
(A) a breach or violation of (1) any material law or governmental rule or regulation applicable to Seller now in effect, (2) any
provision of any of Seller’s organizational documents, (3) any material judgment, settlement agreement, order or decree of
any court, arbitrator, administrative agency or other governmental authority binding upon Seller, or (4) any material agreement
or instrument to which Seller is a party or by which Seller or its respective properties are bound; (B) the acceleration of any
obligations of Seller; or (C) the creation of any lien, claim or encumbrance upon any properties or assets of Seller.

 

(b)          Property.

 

As of the Effective
Date and the Closing Date, except as set forth on Schedule 8(b):

 

(i)          Seller
has no actual knowledge of and has not received any notice of outstanding deficiencies or work orders of any authority having jurisdiction
over any portion of the Property;

 

(ii)         Seller
has no actual knowledge of and has not received any notice of any claim, requirement or demand of any licensing or certifying agency
supervising or having authority over any Facility to rework or redesign it in any material respect or to provide additional furniture,
fixtures, equipment or inventory so as to conform to or comply with any law which has not been fully satisfied;

 

(iii)        Seller
has not received any notice from any governmental authority of any material violation of any law applicable to any portion of the
Real Property or to the Facilities;

 

(c)          Condemnation.
There is no pending or, to the actual knowledge of Seller, threatened condemnation or similar proceeding or assessment affecting
the Real Property, nor, to the actual knowledge of Seller, is any such proceeding or assessment contemplated by any governmental
authority.

 

    	9

    	 

    

 

(d)          Hazardous
Substances. Except as disclosed on Schedule 8(d) (and as disclosed to Buyer during the Due Diligence Period), and
to Seller’s actual knowledge, there has been no production, storage, manufacture, voluntary or involuntary transmission,
use, generation, treatment, handling, transport, release, dumping, discharge, spillage, leakage or disposal at, on, in, under or
about the Real Property of any Hazardous Substances by Seller, or any affiliate or agent thereof, except in strict compliance with
all applicable Laws. To Seller’s actual knowledge there are no Hazardous Substances at, on, in, under or about the Real Property
in violation of any Law, and to Seller’s actual knowledge, there is no proceeding or inquiry by any federal, state or local
governmental agency with respect thereto. For purposes of this Agreement, “Hazardous Substances” shall mean
any hazardous or toxic substances, materials or wastes, including, without limitation, those substances, materials and wastes listed
in the United States Department of Transportation Table (49 CFR 172.1 01) or by the Environmental Protection Agency as hazardous
substances (40 CFR Part 302 and amendments thereto) or such substances, materials and wastes which are or become regulated under
any applicable local, state or federal law (collectively, “Laws”), including, without limitation, any material,
waste or substance which is (i) a hazardous waste as defined in the Resource Conservation and Recovery Act of 1976, as amended
(42 U.S.C. § 6901 et seq.); (ii) a pollutant or contaminant or hazardous substance as defined in the Comprehensive Environmental
Response. Compensation and Liability Act of 1980, as amended (42 U.S.C. § 9601 et seq.); (iii) a hazardous substance pursuant
to § 311 of the Clean Water Act (33 U.S.C. § 1251, et seq., 33 U.S.C. § 1321) or otherwise listed pursuant to §
307 of the Clean Water Act (33 U.S.C. § 1317); (iv) a hazardous waste pursuant to § 1004 of the Resource Conservation
and Recovery Act (42 U.S.C. § 6901 et seq.); (v) polychlorinated biphenyls (PCBs) as defined in the Federal Toxic Substance
Control Act, as amended (15 U.S.C. § 2501 et seq.); (vi) hydrocarbons, petroleum and petroleum products; (vii) asbestos; (viii)
formaldehyde or medical or biohazardous waste; (ix) radioactive substances; (x) flammables and explosives; (xi) any state statutory
counterparts to those federal statutes listed herein; or (vii) any other substance, waste or material which could presently or
at any time in the future require remediation at the behest of any governmental agency. Any reference in this definition to Laws
shall include all rules and regulations which have been promulgated with respect to such Laws.

 

(e)          Brokers.
Other than Lee Blake of JCH Consulting Group, Inc. located at 1777 NW Rimrock Road, Bend, Oregon 97701 (“Broker”),
neither Seller nor Buyer has dealt with any broker or finder in connection with the transactions contemplated hereby. Seller shall
be responsible for payment of a real estate brokerage commission to Broker pursuant to a separate agreement between the Seller
entities and/or Dover Management, Inc. and Broker. Each party represents and warrants to the other party that it has not dealt
with any other broker, salesman, finder or consultant with respect to this Agreement or the transactions contemplated hereby. Each
party agrees to indemnify, protect, defend, protect and hold the other party harmless from and against all claims, losses, damages,
liabilities, costs, expenses (including reasonable attorneys’ fees and disbursements) and charges resulting from such indemnifying
party’s breach of the foregoing representation. The provisions of this Section 8(e) shall survive the Closing
or earlier termination of this Agreement for a period of twelve (12) months.

 

(f)          Leases
and Contracts. Schedule 8(f) is a list of all Leases and Contracts relating to the Facilities to which Seller is
a party or by which Seller may be bound. Seller has made or will promptly make available to Buyer true, complete and accurate copies
of all Leases and Contracts including, without limitation, any modifications thereto. All of the Leases and Contracts are in full
force and effect without claim of material default there under, and, except as may be set forth on Schedule 8(f).

 

(g)          Financial
Statements. Schedule 8(g) contains (i) the unaudited balance sheets of the Operating entities for the last three
(3) fiscal years ending prior to the date of this Agreement and the unaudited balance sheets of the past three (3) fiscal quarters
completed prior to the date of this Agreement and (ii) the related consolidated statements of income, results of operations, changes
in members’ equity and changes in financial position with respect to each such period for each operating entity as compared
with the immediately prior period (collectively, the “Financial Statements”). The Financial Statements taken
as a whole (A) fairly present the financial condition and results of operation of the Operators for the periods indicated, (B)
are true, accurate, correct and complete in all material respects, and (C) except as stated in Schedule 8(g) (or in
the notes to the Financial Statements) have been prepared in accordance with the Operator’s tax basis reporting, as consistently
applied. Except as disclosed in Schedule 8(g), or otherwise disclosed in writing to Buyer, to Seller’s actual
knowledge neither Seller, as to any Facility, nor any Facility is obligated for or subject to any material liabilities, contingent
or absolute, and whether or not such liabilities would be disclosed in accordance with tax basis reporting, and Schedule 8(g)
sets forth all notes payable, other long term indebtedness and, to Seller’s actual knowledge, all other liabilities to which
the Facilities and the Real Property are or at Closing (and following Closing) will be subject, other than new indebtedness obtained
by Buyer in connection with its purchase of the Property. Seller has received no notice of default under any such instrument.

 

    	10

    	 

    

 

(h)          Interests
in Competitors, Suppliers and Customers. Other than the Operator entities and except as set forth on Schedule 8(h),
or in Schedule 1(a) as constituting a part of the Facilities, neither Seller nor any of its members has any interest
in any property used in the operation of, or holds an interest in, any competitor, supplier or customer of Seller or the Facilities
within a five (5) mile radius of the Seller entities as further provided in paragraph 24 of this Agreement.

 

(i)          No
Foreign Persons. Neither Seller nor its members is a foreign person within the meaning of Sections 897 or 1445 of the Code,
nor is Seller a U.S. Real Property Holding Company within the meaning of Section 897 of the Code.

 

(j)          Licensure.
As of the date hereof, except as set forth on Schedule 8(j) attached hereto, there is no action pending or, to the
actual knowledge of Seller, recommended by the appropriate state or federal agency to revoke, withdraw or suspend any license to
operate the Facilities, or certification of the Facilities, or any material action of any other type with regard to licensure or
certification. Each Facility is, to the actual knowledge of Seller, operating and functioning as a skilled nursing facility without
any waivers from a governmental agency affecting each Facility except as set forth in Schedule 8(j), and is fully licensed
for a skilled nursing facility, as applicable, by the State of Oregon for the number of beds and licensure category set forth in
Schedule 1(a) hereto. Schedule 8(j) attached hereto contains a complete and accurate list of all life safety
code waivers or other waivers affecting each Facility. Provided, however, that it is understood that the Sheridan Care Center LLC,
dba Sheridan Care Center and Sheridan Properties LLC is an intermediate care nursing facility.

 

(k)          Regulatory
Compliance.

 

(i)          To
Seller’s actual knowledge, Seller or the Operator has duly and timely filed all reports and other items required to be filed
(collectively, the “Reports”) with respect to any cost based or other form of reimbursement program or any other
third party payor (including without limitation, Medicare, Medicaid, medically indigent assistance, Blue Cross, Blue Shield, any
health maintenance, preferred provider, independent practice or other healthcare related organizations, peer review organizations,
or other healthcare providers or payors) (collectively, “Payors”) and have timely paid all amounts shown to
be due thereon. At the time of filing, to Seller’s actual knowledge, each Report was true, accurate and complete. To Seller’s
actual knowledge, all rights and obligations of the Facilities or Seller under such Reports are accurately reflected or provided
for in the Financial Statements.

 

    	11

    	 

    

 

(ii)         Except
as set forth in Schedule 8(k) attached hereto, (a) to Seller’s actual knowledge neither Seller nor, to Seller’s
actual knowledge, the Operator, is delinquent in the payment of any amount due under any of the Reports for the Facilities, (b)
except as to an Internal Revenue Service dispute relating to fiscal year 2005 there are no written or threatened proposals by any
Payors for collection of amounts for which Seller or any Facility could be liable, (c) there are no current or pending claims,
assessments, notice, proposal to assess or audits of Seller or Operator of any Facility with respect to any of the Reports, and,
to Seller’s actual knowledge, no such claims, assessments, notices, or proposals to assess or audit are threatened, and (d)
neither Seller nor Operator has executed any presently effective waiver or extension of the statute of limitations for the collection
or assessment of any amount due under or in connection with any of the Reports with respect to any Facility.

 

(iii)        Except
as set forth in Schedule 8(k) attached hereto, neither Seller nor the Operator has received an unsatisfied notice of
failure to comply with all applicable Laws, settlement agreements, and other agreements with any state or federal governmental
body relating to or regarding any Facility (including all applicable environmental, health and safety requirements), and Seller
or the Operator has and maintains all permits, licenses, authorizations, registrations, approvals and consents of governmental
authorities and all health facility licenses, accreditations, Medicaid, Medicare and other Payor certifications necessary for its
activities and business including the operation of each Facility as currently conducted. Provided, however, that Seller’s,
Sheridan Care Center LLC, dba Sheridan Care Center and Sheridan Properties LLC is not yet licensed for Medicare. An amendment and
modification to the Sheridan license to include such licensure for Medicare is currently pending but has not yet been approved.
Each health facility license, Medicaid and Medicare and other Payor certifications, Medicaid provider agreement and other agreements
with any Payors is in full force and effect without any waivers of any kind (except as disclosed in Schedule 8(k))
and has not been amended or otherwise modified, rescinded or revoked or assigned nor, to Seller’s actual knowledge, (a) is
there any threatened termination, modification, recession, revocation or assignment thereof, (b) no condition exists nor has any
event occurred which, in itself or with the giving of notice, lapse of time or both would result in the suspension, revocation,
termination, impairment, forfeiture, or non-renewal of any governmental consent applicable to Seller or to any Facility or of any
participation or eligibility to participate in any Medicare, Medicaid, or other Payor program and (c) there is no claim that any
such governmental consent, participation or contract is not in full force and effect.

 

(l)          Regulatory
Surveys. Seller has delivered to Buyer, in the manner required pursuant to the terms of this Agreement, complete and accurate
copies of the survey or inspection reports made by any governmental authority with respect to each Facility during the calendar
years 2009, 2010, 2011 and year-to-date 2012 which are in Seller’s possession. To the best of Seller’s knowledge, after
diligent investigation, and except as shown on Schedule 8(l), all exceptions, deficiencies, violations, plans of correction
or other indications of lack of compliance in such reports or have been fully corrected and there are no bans or limitations in
effect, pending or threatened with respect to admissions to any Facility nor any licensure curtailments in effect, pending or threatened
with respect to any Facility. Seller shall continue to deliver all such surveys, inspection reports as and when same are received
and/or filed as the case may be prior to the Closing.

 

    	12

    	 

    

 

(m)          Licensed
Bed/Current Rate Schedule. As of the Effective Date, Schedule 8(m) sets forth (i) the number of licensed beds
and the number of operating beds in each Facility, (ii) the current standard private rates charged by each Facility to all
of its residents, and (iii) the number of beds or units presently occupied in, and the occupancy percentage at, each Facility,
including the current rates charged by each Facility for each such occupied bed or unit. Neither Seller nor any Operator has any
life care arrangement in effect with any current or future resident (“life care arrangement” is defined as a
prepaid obligation to care for a person for the life of the person).

 

(n)          Operations.
Each Facility is reasonably and adequately equipped and each Facility includes sufficient and adequate numbers of furniture, furnishings,
equipment, consumable inventory, and supplies to operate such Facility as each is presently operated by Seller. Personal Property
used to operate each Facility and to be conveyed to Buyer is free and clear of liens, security interests, encumbrances, leases
and restrictions of every kind and description, except for Permitted Encumbrances and any liens, security interests and encumbrances
to be released at Closing.

 

(o)          No
Misstatements, Etc. To the best of Seller’s knowledge, neither the representations and warranties of Seller stated in
this Agreement, including the Exhibits and the Schedules attached hereto, nor the Due Diligence Items or any certificate or instrument
furnished or to be furnished to Buyer by Seller in connection with the transactions contemplated hereby, contains or will contain
any untrue or misleading statement of a material fact.

 

(p)          Supplementation
of Schedules; Change in Representations and Warranties. Seller shall have the continuing right and obligation to supplement
and amend the Schedules herein on a regular basis including, without limitation, Schedule 8(g), and Seller’s
warranties and representations required hereunder, as necessary or appropriate (i) in order to make any representation or warranty
not misleading due to events, circumstances or the passage of time or (ii) with respect to any matter hereafter arising or discovered
up to and including the Closing Date, but Buyer shall not be deemed to have approved such supplemental Schedules unless Buyer expressly
acknowledges approval of same in writing. In the event Seller amends any such Schedules, or Buyer or Seller gains actual knowledge
prior to the Closing that any representation or warranty made by the other party contained in this Section 8 is otherwise
untrue or inaccurate, such party shall, within five (5) days after gaining such actual knowledge but in any event prior to the
Closing, provide the other party with written notice of such inaccuracy, whereupon the noticed party shall promptly commence, and
use its best efforts to prosecute to completion, the cure of such matter, to the extent any such matter is curable. If any such
matter is not curable within reason and is material, in Buyer’s reasonable business judgment, Buyer shall have the right
to terminate this Agreement upon written notice to Seller within five (5) business days of receipt or delivery of such notice,
as applicable, on the same basis as set forth in Section 13(a) if during the Due Diligence Period and in Section 13(b)(i)(i)
herein if after expiration of the Due Diligence Period.

 

(q)          Survival
of Representations and Warranties; Updates. The representations and warranties of Seller in this Agreement shall not be merged
with the Deeds at the Closing and shall survive the Closing for the period of two (2) years (see paragraph 16(a) of this Agreement);
provided, Seller understands and agrees that the Post Closing Lease, shall provide for a lengthier period of survival with respect
to certain matters referenced therein.

 

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For purposes of this
Agreement, the phrase “to Seller’s actual knowledge” or words of similar import shall mean the actual knowledge
of Don R. Bybee, Kent Emry and the general partner or President, as applicable, of each entity comprising Seller, and any written
notice received by Seller relating to the matters set forth in the applicable representations and warranties.

 

9.           Representations
and Warranties of Buyer.

 

(a)          Buyer
hereby warrants and represents to Seller that: 

 

(i)          Organization,
Corporate Powers, Etc. Buyer is a limited liability company, validly existing and in good standing under the laws of the State
of Delaware and in each other state or jurisdiction in which the nature of its business requires the same except where a failure
to be so qualified does not have a material adverse effect on the business, properties, condition (financial or otherwise) or operations
of that person. Buyer has full power, authority and legal right (a) to execute and deliver, and perform and observe the provisions
of this Agreement and each Transaction Document to which it is a party, and (b) to carry out the transactions contemplated hereby
and by such other instruments to be carried out by Buyer pursuant to the Transaction Documents.

 

(ii)         Due
Authorization, Etc. The Transaction Documents have been, and each instrument provided for herein or therein to which Buyer
is a party will be, when executed and delivered as contemplated hereby, duly authorized, executed and delivered by Buyer and the
Transaction Documents constitute, and each such instrument will constitute, when executed and delivered as contemplated hereby,
legal, valid and binding obligations of the Buyer enforceable in accordance with their terms.

 

(iii)        Governmental
Approvals. To Buyer’s actual knowledge, no consent, approval or other authorization (other than corporate or other organizational
consents which have been obtained), or registration, declaration or filing with, any court or governmental agency or commission
is required for the due execution and delivery of any of the Transaction Documents to which Buyer is a party or for the validity
or enforceability thereof against such party.

 

(iv)        No
Litigation. Neither Buyer nor its registered agent for service of process has been served with summons with respect to any
actions or proceedings pending or, to Buyer’s actual knowledge, no such actions or proceedings are threatened, against Buyer
before or by any court, arbitrator, administrative agency or other governmental authority, which individually or in the aggregate,
are expected, in the reasonable judgment of Buyer, to materially and adversely affect Buyer’s ability to carry out any of
the transactions contemplated by any of the Transaction Documents.

 

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(v)         No
Conflicts. Neither the execution and delivery of the Transaction Documents to which Buyer is a party, compliance with the provisions
thereof, nor the carrying out of the transactions contemplated thereby to be carried out by such party will result in (a) a breach
or violation of (1) any material law or governmental rule or regulation applicable to Buyer now in effect, (2) any provision of
any Buyer’s organizational documents, (3) any material judgment, settlement agreement, order or decree of any court, arbitrator,
administrative agency or other governmental authority binding upon Buyer, or (4) any material agreement or instrument to which
Buyer is a party or by which Buyer or its respective properties are bound; (b) the acceleration of any obligations of Buyer; or
(c) the creation of any lien, claim or encumbrance upon any properties or assets of Buyer.

 

(vi)        No
Misstatements, Etc. To the best of Buyer’s knowledge, neither the representations and warranties of Buyer stated in this
Agreement, including the Exhibits and the Schedules attached hereto, nor any certificate or instrument furnished or to be furnished
to Seller by Buyer in connection with the transactions contemplated hereby, contains or will contain any untrue or misleading statement
of a material fact.

 

(vii)       Survival
of Representations and Warranties; Updates. The representations and warranties of Buyer in this Agreement shall not be merged
with the Deeds at the Closing and shall survive the Closing for the period of one (1) year.

 

(b)          No
Knowledge of Misrepresentation or Breach. Based upon Buyer’s due diligence review, Buyer has no actual knowledge of any
misrepresentation or breach of warranty by Seller, other than as set forth in writing by Buyer to Seller on or before the Closing
Date.

 

10.          Covenants
of Seller. Seller covenants with respect to the Facilities as follows: 

 

(a)          Pre-Closing.
Between the date of this Agreement and the Closing Date, except as contemplated by this Agreement or with the prior written consent
of Buyer, which shall not be unreasonably withheld, conditioned or delayed:

 

(i)          Seller
shall use its best efforts to cause the Operator to operate the Facilities diligently, in accordance with the Operator’s
obligations under its lease or other arrangement with Seller, and only in the ordinary course of business.

 

(ii)         Seller
shall use its best efforts to prevent the Operator from making any material change in the operation of any Facility, and shall
prevent the Operator from selling or agreeing to sell any items of machinery, equipment or other assets of any Facility, or otherwise
entering into any agreement affecting any Facility, except in the ordinary course of business;

 

(iii)        Seller
shall use its best efforts to prevent the Operator from entering into any Lease or Contract or commitment affecting any Facility,
except for Leases or Contracts entered into in the ordinary course of business;

 

(iv)        During
normal business hours and consistent with Section 6(b) herein, Seller shall provide Buyer or its designated representative
with access to the Facilities upon prior notification and coordination with Seller and the Operator; provided, Buyer shall not
materially interfere with the operation of any Facility. At such times Seller and the Operator shall permit Buyer to inspect the
books and records of each Facility;

 

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(v)         Within
five (5) business days following the execution of this Agreement by the parties, Seller has delivered to Buyer all of the due diligence
items described on the Due Diligence List attached hereto as Schedule 6(a)(vii) (the “Due Diligence Items”)
which are in Seller’s possession or control. All Due Diligence Items which have not previously been delivered are identified
as the Unavailable Items (“Unavailable Items”). If any of the Unavailable Items become available to Seller,
Seller shall within five (5) days of receiving such items, deliver such items to Buyer. If Buyer requests additional items not
included on Schedule 6(a)(vii), in writing delivered by Buyer to Seller, Seller shall use its best efforts to provide
such information within five (5) days of receipt of the request; and provided further, Seller shall continue to cause Operator
to deliver to Buyer following the expiration of the Due Diligence Period, financial reports showing among other things information
necessary to determine EBITDAR (defined below) for each of the facilities for the trailing twelve (12) month annualized operations
for the period ending February 28, 2012. The term “EBITDAR” means “earnings before interest, taxes, depreciation,
amortization and rent and reserves (reserves meaning additions to capital reserves).”

 

(vi)        Seller
shall use its best efforts to prevent the Operator from moving residents from any Facility, except (a) to any other Facility which
is owned by Seller and constitutes part of the Property as defined herein, (b) for health treatment purposes or otherwise at the
request of the resident, family member or other guardian or (c) upon court order or the request of any governmental authority having
jurisdiction over such Facility;

 

(vii)       Seller
shall use commercially reasonable efforts to cause the Operator to retain the services and goodwill of the employees of the Operator
until the Closing;

 

(viii)      Seller
shall maintain in force, or shall cause the Operator to maintain in force, the existing hazard and liability insurance policies,
or comparable coverage, for each Facility as are in effect as of the date of this Agreement;

 

(ix)         Seller
shall, and shall cause the Operator, to file all returns, reports and filings of any kind or nature, including but not limited
to, cost reports referred to in this Agreement, required to be filed by Seller or the Operator on a timely basis and shall timely
pay all taxes or other obligations and liabilities or recoupments which are due and payable with respect to each Facility in the
ordinary course of business with respect to the periods Seller or Operator operated each Facility;

 

(x)          Seller
shall cause the Operator (a) to maintain all required operating licenses in good standing, (b) to operate each Facility in accordance
with its current business practices and (c) to promptly notify Buyer in writing of any notices of material violations or investigations
received from any applicable governmental authority;

 

(xi)         Seller
shall use commercially reasonable efforts to cause the Operator to make all customary repairs, maintenance and replacements required
to maintain each Facility in substantially the same condition as on the date of Buyer’s inspection thereof, ordinary wear
and tear excepted;

 

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(xii)        Seller
shall promptly notify Buyer in writing of any Material Adverse Change, as defined herein, of which Seller becomes aware in the
condition or prospects of the Facilities including, without limitation, sending Buyer copies of all surveys and inspection reports
of all governmental agencies received after the date hereof and prior to Closing, promptly following receipt thereof by the Operator.
For purposes of this Agreement, a “Material Adverse Change” shall mean: (a) a decrease in the consolidated adjusted
rolling twelve (12) month EBITDAR of the facilities to less than Two Million One Hundred Ninety-Seven Thousand Dollars ($2,197,000)
or (b) loss of licensure, or (c) loss of Medicaid or Medicare (except Sheridan) participation, or (d) any adverse action by a governmental
agency which, with the passage of time, would reasonably be expected to materially affect in a negative manner licensure at any
Facility, or any adverse action in any Facility which would reasonably be expected to materially affect in a negative manner such
Facility’s participation or eligibility to participate in any Medicare, Medicaid, or other Payor program, unless appropriate
corrective action has been taken by the Operator, in the ordinary course of business, or (e) failure to settle with the appropriate
governmental authority, or to satisfy on or before the Closing (either directly with such governmental authority or by funds escrowed
by Seller for such purposes) all claims for reimbursements, recoupments, taxes, fines or penalties which may be due to any governmental
authority having jurisdiction over any Facility, or (f) the occurrence of a title or survey defect occurring after the date of
this Agreement which would reasonably be expected to adversely affect the ability of Buyer to operate the skilled nursing home/assisted
living facility at its respective Facility or to obtain financing for such Facility, or (g) the commencement of any third party
litigation which interferes with Seller’s ability to close the transactions contemplated by this Agreement, or (viii) any
damage, destruction or condemnation affecting any Facility in which the estimate of damage exceeds $100,000 per Facility and such
damage or destruction has not been repaired, or Buyer as not otherwise waived such condition prior to Closing. In the event of
any occurrence described in clause (d) above, Operator shall deliver a copy of the Plan of Correction or otherwise notify Buyer
in writing of the planned action, and such Plan of Correction or other corrective action which has been approved by the applicable
regulatory agency or agencies.

 

(xiii)       Seller
agrees to cause the Operator to remedy any compliance deficiency cited in any written notice from, or in any settlement agreement
or other Plan of Correction or other agreement with, any state or federal governmental body, or in the event of state or federal
proceedings against Operator or any Facility, or receipt by the Operator of such notice prior to the Closing Date, of any condition
which would affect the truth or accuracy of any representations or warranties set forth in this Agreement by Seller; provided,
however, in the event a physical plant deficiency is cited which Seller has insufficient time to remedy before the Closing Date,
in accordance with the approval of the appropriate state or federal agency, then the same shall be deemed remedied when the costs
of correcting said Seller identified deficiency (based upon reasonable estimates from established vendors selected by Seller and
Buyer and approved by Seller and by Buyer, in its sole and absolute discretion) shall be held back in the Escrow at the Closing
and not released to Seller until either the obligation to remedy the plan deficiency has been assumed by Seller as Lessee under
the leaseback agreement between Seller as Lessee and Buyer as Lessor or such deficiency has been corrected by Seller; and, provided
further, a non-physical plant deficiency which cannot be remedied prior to the Closing, in accordance with the approval of the
appropriate state or federal agency, will be deemed to be remedied for purposes of this Section if Operator develops a Plan of
Correction addressing the deficiency(ies) and such Plan of Correction is approved by the applicable State agency. Seller shall
use its best efforts to remedy any such deficiency subsequent to the Closing which is to be remedied as a result of a Plan of Correction
filed by Seller or Operator prior to the Closing or assumed by Seller as Lessee after Closing, and Buyer shall cooperate with such
efforts by Seller; provided, Seller shall bear all costs associated with such remedy. In the event any such Plan of Correction
agreed to by Seller and Operator prior to the Closing is not approved by the applicable State agency subsequent to Closing, Seller
shall promptly use its best efforts, and shall cause Operator to use its best efforts, to amend the Plan of Correction in such
a manner that is necessary to obtain acceptance by the State of the amended Plan of Correction as soon as practicable after submittal.
Notwithstanding any other provision of this Agreement, the obligation of Seller pursuant to this Subsection 10(a)(xiii)
shall survive the Closing for such period of time as is necessary to remedy such deficiency.

 

    	17

    	 

    

 

(xiv)      Seller
shall, at its cost and on or before Closing, obtain releases of financing statements and tax and judgment liens affecting or relating
to each Facility which have been filed or recorded with the Office of the Oregon Secretary of State and the appropriate County
Recorder’s Office.

 

(xv)       Seller
shall promptly comply with any notices of violations received relating to each Facility and shall deliver to Buyer a copy of any
such notice received and evidence of compliance with such notice.

 

(b)          Closing.
On or before the Closing Date, Seller shall deliver the following documents to Escrow Agent relating to the Facilities (“Closing
Documents”):

 

(i)          One
(1) original executed Warranty Deed in substantially the same form as Exhibit 4 for each Facility, in recordable form;

 

(ii)         Two
(2) original executed counterparts of the Post Closing Lease;

 

(iii)        Two
(2) original executed counterparts of the bill of sale for the Personal Property (“Bill of Sale”), an assignment
of Seller’s interest in the Contracts and Leases (“Assignment of Contracts and Leases”), and other instruments
of transfer and conveyance in form and substance to be agreed upon prior to the expiration of the Due Diligence Period transferring
and assigning to Buyer the Real Property, Personal Property and the Intangibles to be transferred as provided herein with respect
to the Facilities (“Instruments of Assignment”);

 

(iv)        One
(1) original executed certificate executed by Seller confirming that to Seller’s actual knowledge on the Closing Date Seller’s
representations and warranties continue to be true and correct in all material respects, or stating how such representations and
warranties are no longer true and correct (“Seller’s Confirmation”);

 

(v)         All
contractor’s and manufacturer’s guaranties and warranties, if any, in Seller’s possession relating to each Facility
(collectively, the “Warranties”), which delivery will be made by leaving such materials at such Facility; and

 

(vi)        Two
(2) original executed counterparts of each of the FIRPTA Certificate, escrow agreements and other documents required by the Title
Company in connection with the transactions contemplated by this Agreement (collectively, the “Title Company Documents”).

 

    	18

    	 

    

 

(c)          Pacific
Gardens Option. Seller and Buyer shall cooperate in good faith and use commercially reasonable efforts to cause the following
events to occur concurrently with the Closing: (i) the assignment of the Tigard Option to Buyer; (ii) the Tigard Owner’s
consent to such assignment of the Tigard Option; (iii) Buyer’s exercise of the Tigard Option, and (iv) the closing on
the Tigard Facility resulting in Buyer obtaining fee title to the Tigard Facility.

 

(i)          Seller
shall be responsible for obtaining all consents required from Tigard Owner in order to accomplish all of the events set forth in
Section 10(c).

 

(ii)         Except
for Buyer’s obligations under this Section 10(c), Seller hereby agrees to indemnify, protect, defend and hold harmless
Buyer and its officers, directors, members, shareholders and tenants harmless from and against any and all claims, demands, obligations,
losses, liabilities, damages, recoveries and deficiencies (including interest, penalties and reasonable attorneys’ fees,
costs and expenses) which any of them may suffer as a result of Buyer’s failure to perform any obligation under the Tigard
Option Agreement, Buyer’s default on any obligation under the Tigard Option Agreement or the assignment of the Tigard Option
to Buyer.

 

(iii)        At
the Closing, Seller and Buyer shall enter into an assignment of the Tigard Closing, including, but not limited to, the consent
for such assignment from the Tigard Owner, in such form reasonably approved by Seller, Buyer and Tigard Owner during the Due Diligence
Period.

 

(iv)        Buyer
shall exercise the Tigard Option concurrently with the Closing under this Agreement in order to facilitate the concurrent closing
under the Tigard Option Agreement in which the Tigard Owner shall deed fee title to the Tigard Property to Buyer.

 

(v)         Seller
and Buyer agree that all amounts that Buyer will be required to pay for the Tigard Property and other costs associated with the
closing on the Tigard Property (except for Buyer’s attorneys’ fees) pursuant to the Tigard Option Agreement will come
from the Purchase Price that Buyer pays pursuant to this Agreement and the parties agree to instruct Escrow Agent to transfer such
amount to the escrow for the closing under the Tigard Option Agreement.

 

(vi)        The
parties intend for Buyer to obtain fee title to the Tigard Property at the Closing under this Agreement without Buyer having to
pay any additional amount over and above what Buyer is required to pay under this Agreement for the Property. The parties acknowledge
that the difference between the appraised value for the Tigard Facility and the price Buyer has to pay for the Tigard Facility
pursuant to the terms of the Tigard Option Agreement shall be deemed consideration paid to Seller for the Tigard Option.

 

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11.          Covenants
of Buyer. Buyer hereby covenants as follows: 

 

(a)          Pre-Closing.
Between the date hereof and the Closing Date, except as contemplated by this Agreement or with the consent of Seller, Buyer agrees
that Buyer shall not take any action inconsistent with its obligations under this Agreement or which could hinder or delay the
consummation of the transaction contemplated by this Agreement. Between the date hereof and the Closing Date, Buyer agrees that
Buyer shall not (i) make any commitments to any governmental authority, (ii) enter into any agreement or contract with any governmental
authority or third parties, or (iii) alter, amend, terminate or purport to terminate in any way any governmental approval or permit
affecting the Real Property, Personal Property or any Facility, which would be binding upon Seller, any Real Property Owner, any
Facility or Personal Property after any termination of this Agreement.

 

(b)          Closing.
On or before the Closing Date, Buyer shall deposit the following with Escrow Agent:

 

(i)          The
Purchase Price in accordance with the requirements of this Agreement;

 

(ii)         Two
(2) original executed counterparts of the Post Closing Lease;

 

(iii)        Two
(2) original executed counterparts of each of the Instruments of Assignment requiring Buyer’s signature;

 

(iv)        One
(1) original executed certificate executed by Buyer confirming that Buyer’s representations and warranties continue to be
true and correct in all material respects, or stating how such representations and warranties are no longer true and correct (“Buyer’s
Confirmation”); and

 

(v)         Two
(2) original executed counterparts of each of the Title Company Documents requiring Buyer’s signature.

 

12.          Conditions
to Closing.

 

(a)          Conditions
to Buyer’s Obligations. All obligations of Buyer under this Agreement are subject to the reasonable satisfaction and
fulfillment, prior to the Closing Date, of each of the following conditions. Anyone or more of such conditions may be waived in
writing by Buyer.

 

(i)          Seller’s
Representations, Warranties and Covenants. Seller’s representations,
warranties and covenants contained in this Agreement or in any certificate or document delivered in connection with this Agreement
or the transactions contemplated herein, shall be true at the date hereof and as of the Closing Date as though such representations,
warranties and covenants were then again made, except to the extent that (a) Seller has provided to Buyer, prior to the Closing,
with supplemental Schedules in accordance with Section 8(q) herein or (b) Buyer has discovered, or has been provided
with written notice from Seller, that a representation is untrue or inaccurate, and Buyer nevertheless elects to close the transaction
in the manner provided in Section 8(q) herein despite such inaccuracy, whereupon it will have waived any right of
recourse or damages against Seller resulting from such inaccuracy.

 

    	20

    	 

    

 

(ii)         Seller’s
Performance. Seller shall have performed all of its obligations and covenants under this Agreement that are to be performed
prior to or at Closing.

 

(iii)        Damage
and Condemnation. Prior to the Closing Date, no portion of any Facility shall have been damaged or destroyed by fire or other
casualty where the estimate of damage to such Facility exceeds 20% of the Purchase Price allocated to such Facility, or proceedings
be commenced or threatened to take or condemn any material part of the Real Property or improvements comprising a Facility by any
public or quasi-public authority under the power of eminent domain. A proceeding shall be deemed to be “material” if
such condemnation or taking (a) relates to the material taking or closing of any right of access to any Real Property or Facility,
(b) cause the Real Property or Facility to become non-conforming with then current legal requirements governing such Real Property
or Facility, (c) results in the loss of parking that is material to the operation of such Facility, or (d) result in the loss of
value in excess of 20% of the Purchase Price allocated to such Facility, in Buyer’s reasonable judgment. If such Facility
shall have been so damaged or destroyed, Seller shall deliver prompt written notice of such condemnation, damage or destruction
to Buyer. In the event Buyer waives this condition, by written notice to Seller within fifteen (15) business days of receipt of
notice of such proceeding, and the Closing occurs, Seller shall assign to Buyer all its right to any insurance proceeds in connection
therewith. If proceedings shall be so commenced or threatened to take or condemn the Real Property or any Facility or portion thereof
prior to Closing, and if Buyer waives this condition and the Closing occurs, Seller shall pay or assign to Buyer all Seller’s
right to the proceeds of any condemnation award in connection thereof.

 

(iv)        Absence
of Litigation. No action or proceeding shall have been instituted,
threatened or, in the reasonable opinion of Buyer, is likely to be instituted before any court or governmental body or authority
the result of which could prevent or make illegal the acquisition by Buyer of any Facility, or the consummation of the transaction
contemplated hereby, or which could materially and adversely affect any Facility or the business or prospects of any Facility.

 

(v)         Form
of Post Closing Lease. Prior to the expiration of the Due Diligence Period, Seller and Buyer shall have agreed upon the form
of the post closing lease (the “Post Closing Lease”) between Buyer, as landlord, and Seller, as tenant, incorporating
in the business terms set forth in Exhibit D attached hereto.

 

(vi)        No
Material Adverse Change. No Material Adverse Change shall have occurred in any Facility.

 

(vii)       Removal
of Personal Property Liens. Seller shall have removed (or shall have sufficient payoff or other documents to remove such liens
at Closing) all personal property liens which are related to the Facilities and the Facilities at Closing shall be free and clear
of all liens, claims and encumbrances other than Permitted Exceptions.

 

    	21

    	 

    

 

(viii)      Title
Insurance Policies. Title Company shall be prepared to issue the (a) Owners Title Insurance Policy for each Facility as of
the Closing Date, with coverage in the amount of the allocable portion of the Purchase Price for such Facility, insuring Buyer
as owner of such Facility subject only to the Permitted Exceptions, and (b) ALTA Title Insurance Policy for each Facility as of
the Closing Date, with coverage in the amount of the allocable portion of Buyer’s loan from Buyer’s lender (“Lender”),
insuring Lender’s lien against each Facility subject only to such exceptions as may be approved by Lender, and with such
endorsements as may be required by Lender.

 

(b)          Conditions
to Seller’s Obligations. All obligations of Seller under this Agreement are subject to the fulfillment, prior to the
Closing Date, of each of the following conditions. Anyone or more of such conditions may be waived by Seller in writing.

 

(i)          Buyer’s
Representations, Warranties and Covenants. Buyer’s representations, warranties and covenants contained in this Agreement
or in any certificate or document delivered in connection with this Agreement or the transactions contemplated herein shall be
true at the date hereof and as of the Closing Date as though such representations, warranties and covenants were then again made.

 

(ii)         Buyer’s
Performance. Buyer shall have performed its obligations and covenants under this Agreement that are to be performed prior to
or at Closing.

 

(iii)        Absence
of Litigation. No action or proceeding shall have been instituted, threatened or, in the reasonable opinion of Seller, is likely
to be instituted before any court or governmental body or authority the result of which could prevent or make illegal the acquisition
by Buyer of any Facility, or the consummation of the transaction contemplated hereby, or which could materially and adversely affect
any Facility or the business or prospects of any Facility.

 

(iv)        No
Actions. There shall be no action pending or recommended by the appropriate state or federal agency to revoke, withdraw or
suspend any license to operate any Facility or the certification of any Facility, or any action of any other type with regard to
licensure or certification or with respect to Medicare and Medicaid provider billing agreements necessary to operate any Facility.

 

(v)         Form
of Post Closing Lease. Prior to the expiration of the Due Diligence Period, Seller and Buyer shall have agreed upon the form
of the Post Closing Lease.

 

13.          Termination;
Defaults.

 

(a)          Termination
For Failure of Condition. Either party may terminate this Agreement for non-satisfaction or failure of a condition to the obligation
of either party to consummate the transaction contemplated by this Agreement (including, without limitation, Buyer’s election
to disapprove the condition of the title or Surveys pursuant to Section 14 herein), unless such matter has been satisfied
or waived by the date specified in this Agreement or by the Closing Date (as same may be extended by the parties to allow the parties
to satisfy or waive conditions to close in the manner provided in this Agreement). In the event of such a termination, Escrow Agent
shall promptly return (i) to Buyer, all funds of Buyer in its possession (and Seller shall return to Buyer any portion of the Extension
Deposit that may have been released to Seller), including the Deposit and all interest accrued thereon, and (ii) to Seller and
Buyer, all documents deposited by them respectively, which are then held by Escrow Agent. Thereafter, neither party shall have
any continuing obligation or liability to the other party except for any such matters that expressly survive the Closing or termination
of this Agreement, as provided herein. The provisions of this Section 13(a) are intended to apply only in the event
of a failure of condition, as set forth herein, which is not the result of a default by either party, but which shall not apply
in the event the non-terminating party is in default of its obligations under this Agreement.

 

    	22

    	 

    

 

(b)          Termination
For Cause.

 

(i)          If
the Agreement is terminated by Seller because Buyer fails to consummate the Closing as a result of a default by Buyer under this
Agreement, Seller’s sole and exclusive remedy prior to the Closing Date shall be to terminate this Agreement by giving written
notice of termination to Buyer and Escrow Agent, whereupon (a) Escrow Agent shall promptly release to Seller the Deposit, and all
interest accrued thereon, (b) Escrow Agent shall return to Buyer and Seller all documents deposited by them respectively, which
are then held by Escrow Agent, (c) the parties shall be released and relieved of all obligations to each other under this Agreement,
except for provisions that expressly survive termination as provided herein, (d) Buyer shall return to Seller all documents
received by it during the course of its Due Diligence and (e) Buyer shall have no further right to purchase the Property or legal
or equitable claims against Seller (except for any breach by Seller of provisions that survive termination) and/or the Property.
Buyer shall have no liability to Seller under any circumstances for any speculative, consequential or punitive damages. Without
limiting the other provisions of this Agreement, Buyer acknowledges that the provisions of this Subsection are a material part
of the consideration being given to Seller for entering into this Agreement and that Seller would be unwilling to enter into this
Agreement in the absence of the provisions of this Subsection. The provisions of this Subsection shall survive any termination
of this Agreement. With respect to any action by Seller against Buyer or by Buyer against Seller commenced after the Closing Date,
Seller and Buyer expressly waive any right to any speculative, consequential, punitive or special damages including, without limitation,
lost profits. The parties acknowledge and agree that Seller’s actual damages as a result of Buyer’s default would be
difficult or impossible to ascertain and that the deliveries and payments provided for in clause (a) herein constitute reasonable
compensation for its actual damages. Promptly following Escrow Agent’s receipt of written notice from Seller that this Agreement
has been terminated because of a default by Buyer, Escrow Agent shall cancel the Escrow created for this transaction. Seller and
Buyer acknowledge that they have read and understand the provisions of this Section 13(b)(i) and by their initials
below agree to be bound by its terms.

 

	Seller’s Initials	 	Buyer’s Initials

 

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(ii)         If
this Agreement is terminated by Buyer because (i) Seller has defaulted in the performance of its obligations under this Agreement
or (ii) Seller otherwise refuses to consummate the Closing, after Buyer has (A) timely met, and continues to meet, all of Buyer’s
obligations under this Agreement and (B) waived or accepted all conditions of Buyer to the Closing, then unless Buyer has defaulted
in its obligations under this Agreement, Buyer’s sole and exclusive remedies prior to the Closing Date shall be either: (1)
to terminate this Agreement by giving written notice of termination to Seller and Escrow Agent and pursue any and all remedies
for Buyer’s out-of-pocket costs (including attorneys’ fees and court costs), attributable to the termination of this
Agreement, provided however, that Seller shall have no liability to Buyer under any circumstances for any speculative, consequential
or punitive damages, whereupon (a) Escrow Agent shall promptly return to Buyer the Deposit, and all interest accrued thereon, (b)
Escrow Agent shall return to Seller and Buyer all documents deposited by them respectively, which are then held by Escrow Agent,
(c) Buyer shall have no further right to purchase the Property or legal or equitable claims against Seller (except for any breach
by Seller of provisions that survive termination) and/or the Property; and (d) Buyer shall return to Seller all documents received
by it during the course of its Due Diligence, or (2) to pursue the remedy of specific performance of Seller’s obligation
to perform its obligations under this Agreement, provided, (a) any such suit for specific performance is filed within forty-five
(45) days after the then scheduled Closing Date, and (b) Buyer is ready, willing and able to consummate the Closing as required
herein. Seller shall have no liability to Buyer under any circumstances for any speculative, consequential or punitive damages.
Without limiting the other provisions of this Agreement, Seller acknowledges that the provisions of this Subsection are a material
part of the consideration being given to Buyer for entering into this Agreement and that Buyer would be unwilling to enter into
this Agreement in the absence of the provisions of this Subsection. The provisions of this Subsection shall survive any termination
of this Agreement. With respect to any action by Buyer against Seller or by Seller against Buyer commenced after the Closing Date,
Buyer and Seller expressly waive any right to any speculative, consequential, punitive or special damages including, without limitation,
lost profits. Seller and Buyer acknowledge that they have read and understand the provisions of this Section 13.2(b)
and by their initials below agree to be bound by its terms.

 

	Seller’s Initials	 	Buyer’s Initials

 

(c)          General.

 

(i)          Upon
any termination of this Agreement, Buyer shall return to Seller all of the Due Diligence Items received by Buyer from Seller including
all copies thereof prepared by Seller or Buyer; and

 

(ii)         In
the event a party elects to terminate this Agreement such party shall deliver a notice of termination to the other party.

 

14.         Surveys
and Title Commitments.

 

(a)          Seller
has previously ordered separate title commitments (“Title Commitments”) covering the Real Property and each
Facility dated prior to the date of this Agreement, together with legible copies of any and all instruments referred to in the
Title Commitments as constituting exceptions to title of the Real Property. Immediately upon execution and delivery of this Agreement,
Seller shall order updates of the Title Commitments, together with legible copies of any and all instruments (“Title Documents”)
referred to in the Title Commitments as constituting exceptions to title and shall deliver all such documents to Buyer along with
all other Due Diligence Items.

 

    	24

    	 

    

 

(b)          Seller
shall have delivered to Buyer a copy of the existing boundary line and/or as built surveys, if any, in Seller’s possession
for each Facility (“Surveys”) in accordance with Section 10(a)(v) herein. Buyer shall be responsible for
obtaining an update of the Surveys or new Surveys, at Buyer’s sole cost (“New Surveys”). On or before
ten (10) business days following receipt of the updated Title Commitments, Title Documents and Surveys, Buyer shall notify Seller
and the Title Company (“Buyer’s Title Notice”) of any objections which Buyer may have to the Title Commitments
and/or Surveys. If Buyer objects to any matters (other than the Permitted Exceptions, as defined herein) which, in Buyer’s
determination, might adversely affect the ability of Buyer to operate any of the Facilities, Seller shall use its reasonable business
efforts to cure same, but shall not be obligated to cure matters other than to obtain the release (at Closing) of the existing
mortgage and other monetary liens caused by Seller which may be released by payment of the mortgage payoff or lien amount from
Seller’s Closing proceeds (collectively, “Monetary Liens”). If Seller delivers written notice to Buyer
(“Seller’s Title Notice”), on or before ten (10) business days following receipt of the Buyer’s
Title Notice, that Seller is unable or unwilling to cure such objections, or if, for any reason, Seller is unable to convey title
in accordance with the requirements of this Agreement, Buyer shall have an additional period of three (3) business days following
its receipt of Seller’s Title Notice in which to deliver written notice to Seller (“Buyer’s Second Title Notice”)
either (i) to waive such objections (in which event the items objected to and uncured shall be deemed Permitted Exceptions) and
to accept such title in the condition that Seller is able to convey, or (ii) terminate this Agreement by written notice to Seller.
Failure of Buyer to deliver Buyer’s Second Title Notice shall be deemed to constitute Buyer’s disapproval of the state
of title hereunder, whereupon Escrow Agent shall promptly return (i) to Buyer, all funds of Buyer in its possession (and Seller
shall return to Buyer any portion of the Extension Deposit that may have been released to Seller), including the Deposit and all
interest accrued thereon, and (ii) to Seller and Buyer, all documents deposited by them, respectively, which are then held by Escrow
Agent. Thereafter, neither party shall have any continuing obligation nor liability to the other party except for any such matters
that expressly survive the Closing or termination of this Agreement, as provided herein. Buyer shall, promptly following the execution
of this Agreement, commence to use its best efforts to obtain the New Surveys as soon as practicable. Notwithstanding the foregoing
provisions of this Subsection (b), Buyer shall have the right to object, promptly upon learning of any such new matters
during the Due Diligence Period, to any matters raised in the New Surveys which were not addressed in the Surveys, and the parties
shall cooperate with the Title Company, during the Due Diligence Period and as promptly as possible following the delivery of Buyer’s
objections to such new matters in the New Surveys, to resolve any such matters to Buyer’s satisfaction. The Due Diligence
Period shall not be extended for resolution of any such matters in the New Surveys.

 

15.         Cooperation.
Following the execution of this Agreement, Buyer and Seller agree that if any event should occur, either within or without the
knowledge or control of Buyer or Seller, which would prevent fulfillment of the conditions to the obligations of any party hereto
to consummate the transaction contemplated by this Agreement, each such party shall use reasonably commercial efforts to cure or
to cause the cure of the same as expeditiously as possible. In addition, each party shall cooperate fully with each other in preparing,
filing, prosecuting, and taking any other actions with respect to, any applications, requests, or actions which are or may be reasonable
and necessary to obtain the consent of any governmental instrumentality or any third party or to accomplish the transaction contemplated
by this Agreement.

 

    	25

    	 

    

 

16.          Indemnification.

 

(a)          Indemnification
Provisions.

 

(i)          Subject
to the limitation on damages contained in Section 13.2(b) hereof, Seller hereby agrees to indemnify, protect, defend
and hold harmless Buyer and its officers, directors, members, shareholders, tenants, successors and assigns, harmless from and
against any and all claims, demands, obligations, losses, liabilities, damages, recoveries and deficiencies (including interest,
penalties and reasonable attorneys’ fees, costs and expenses) which any of them may suffer as a result of: (A) any breach
of or inaccuracy in the representations and warranties, or breach, non-fulfillment or default in the performance of any of the
conditions, covenants and agreements, of Seller contained in this Agreement or in any certificate or document delivered by Seller
pursuant to any of the provisions of this Agreement, unless Seller cures such matter in the manner provided in Section 8(p)
herein or (B) the failure to discharge any federal, state or local tax liability, or to pay any other assessments, recoupments,
claims, fines, penalties or other amounts or liabilities accrued or payable with respect to any activities of Seller prior to the
Closing Date (whether brought before or after the Closing Date), or (C) any obligation which is expressly the responsibility
of Seller under this Agreement, or (D) any amounts required to cure citation violations issued by any state or federal health
or human services authority on any Facility relating to any period prior to the Closing Date (whether brought before or after the
Closing Dates), or (E) any claim by any employee of Seller (whether brought before or after the Closing Date), or (F) the
existence against the Real Property of any mechanic’s or materialmen’s claims resulting from the action or inaction
of Seller or anyone acting under authority of Seller, or (G) any other cost, claim or liability arising out of or relating
to events (other than as a result of the actions of Buyer or Buyer’s Consultants) or Seller’s ownership, operation
or use of any Facility. Any amount due under the aforesaid indemnity shall be due and payable by Seller within 30 days after demand
thereof. Seller shall have the right to contest any such claims, liabilities or obligations as provided herein.

 

(ii)         Subject
to the limitation on damages contained in Section 13(b)(1) hereof, Buyer hereby agrees to indemnify, protect, defend
and hold harmless Seller and its officers, directors, members, shareholders and tenants harmless from and against any and all claims,
demands, obligations, losses, liabilities, damages, recoveries and deficiencies (including interest, penalties and reasonable attorneys’
fees, costs and expenses) which any of them may suffer as a result of: (A) any breach of or inaccuracy in the representations
and warranties, or breach, non-fulfillment or default in the performance of any of the conditions, covenants and agreements, of
Buyer contained in this Agreement or in any certificate or document delivered by Buyer pursuant to any of the provisions of this
Agreement, unless Buyer cures such matter in the manner provided in Section 8(p) herein, (B) the failure to discharge
any federal, state, or local tax liability, or to pay monetary liens or other assessments, recoupments, claims, fines, penalties,
or other amounts or liabilities accrued or payable with respect to any activities of Buyer following the Closing Date, or (C) the
existence against the Real Property of any mechanic’s or materialmen’s claims arising from actions of Buyer or Buyer’s
Consultants, or (D) any obligation which is expressly the responsibility of Buyer under this Agreement. Any amount due under
the aforesaid indemnity shall be due and payable by Buyer within thirty (30) days after demand therefor. Buyer shall have the right
to contest any such claims, liabilities or obligations as provided herein.

 

    	26

    	 

    

 

(iii)        The
parties intend that all indemnification claims be made as promptly as practicable by the party seeking indemnification (the “Indemnified
Party”). Whenever any claim shall arise for indemnification hereunder, the Indemnifying Party shall promptly notify the
party from whom indemnification is sought (the “Indemnitor”) of the claim, and the facts constituting the basis
for such claim (the “Indemnification Claim”). Failure to notify the Indemnitor will not relieve the Indemnitor
of any liability that it may have to the Indemnified Party, except to the extent the defense of such action is materially and irrevocably
prejudiced by the Indemnified Party’s failure to give such notice.

 

(iv)        An
Indemnitor shall have the right to defend against an Indemnification Claim, with counsel of its choice reasonably satisfactory
to the Indemnified Party, if (a) within fifteen (15) days following the receipt of notice of the Indemnification Claim the Indemnitor
notifies the Indemnified Party in writing that the Indemnitor will indemnify the Indemnified Party from and against the entirety
of any damages the Indemnified Party may suffer resulting from, relating to, arising out of, or attributable to the Indemnification
Claim, (b) the Indemnitor provides the Indemnified Party with evidence reasonably acceptable to the Indemnified Party that the
Indemnitor will have the financial resources to defend against the Indemnification Claim and pay, in cash, all damages the Indemnified
Party may suffer resulting from, relating to, arising out of, or attributable to the Indemnification Claim, (c) the Indemnification
Claim involves only money damages and does not seek an injunction or other equitable relief, (d) settlement of, or an adverse judgment
with respect to, the Indemnification Claim is not in the good faith judgment of the Indemnified Party likely to establish a precedential
custom or practice materially adverse to the continuing business interests of the Indemnified Party, and (e) the Indemnitor continuously
conducts the defense of the Indemnification Claim actively and diligently.

 

(v)         So
long as the Indemnitor is conducting the defense of the Indemnification Claim in accordance with Section 16(a)(iv),
then (a) the Indemnified Party may retain separate co-counsel at its sole cost and expense and participate in the defense of the
Indemnification Claim, (b) the Indemnified Party shall not consent to the entry of any order or finalization of any tentative settlement,
the only condition of which is the consent of the Indemnified Party thereto, with respect to the Indemnification Claim without
the prior written consent of the Indemnitor (not to be withheld unreasonably), and (c) the Indemnitor will not consent to the entry
of any order or finalization of any tentative settlement, the only condition of which is the consent of the Indemnified Party thereto,
with respect to the Indemnification Claim without the prior written consent of the Indemnified Party (not to be unreasonably withheld
or delayed, provided that it will not be deemed to be unreasonable for an Indemnified Party to withhold its consent with respect
to (1) any breach of any law, order or permit, (2) any violation of the rights of any person, or (3) any matter which Indemnified
Party believes could have a material adverse effect on any other actions to which the Indemnified Party or its Affiliates are party
or to which Indemnified Party has a good faith belief it may become party. Notwithstanding the foregoing provisions of this Subsection (v),
if Indemnified Party refuses its consent to any of the matters set forth in clauses (1) through (3) above, the indemnity amount
shall be determined as if such consent had been given and Indemnitor shall pay over to the Indemnified Party such amount and be
absolved from any further obligation as to that particular claim; Indemnified Party may then resolve the claim in the manner it
sees fit without further recourse against Indemnitor.

 

    	27

    	 

    

 

(vi)        Each
party hereby consents to the non-exclusive jurisdiction of any governmental body, arbitrator, or mediator in which an action is
brought against any Indemnified Party for purposes of any Indemnification Claim that an Indemnified Party may have under this Agreement
with respect to such action or the matters alleged therein, and agrees that process may be served on such party with respect to
such claim anywhere in the world, provided however, that any venue relating to any claim or proceeding arising out of this Agreement
or any other agreement between Sellers and Buyer shall be the State of Oregon and the laws of the State of Oregon shall apply.

 

(b)          Insurance
Proceeds. In determining the amount of damages for which either party is entitled to assert an Indemnification Claim, the amount
of any such claims or damages shall be determined after deducting therefrom the amount of any insurance coverage or proceeds or
other third party recoveries received by such other party in respect of such damages. If an indemnification payment is received
by the Indemnified Party in respect of any damages and the Indemnified Party later receives insurance proceeds or other third party
recoveries in respect of such damages, the Indemnified Party shall immediately pay to the Indemnifying Party a sum equal to the
lesser of the actual amount of net insurance proceeds or other third party recoveries (remaining after recovery costs and expenses)
or the actual amount of the indemnification payment previously paid by or on behalf of the Indemnified Party.

 

(c)          No
Incidental, Consequential and Certain Other Damages. An Indemnitor shall not be liable to an Indemnified Party for incidental,
consequential, enhanced, punitive or special damages unless such damages are included in a third-party claim and such Indemnified
Party is liable to the third party claimant for such damages.

 

(d)          Indemnification
if Negligence of Indemnity; No Waiver of Rights or Remedies.

 

UNLESS OTHERWISE
PROVIDED HEREIN, THE INDEMNIFICATION PROVIDED IN THIS SECTION 16 WILL BE APPLICABLE WHETHER OR NOT THE SOLE, JOINT, OR CONTRIBUTORY
NEGLIGENCE OF THE INDEMNIFIED PARTY IS ALLEGED OR PROVEN. THE PARTIES AGREE THE PRECEDING SENTENCE IS COMMERCIALLY CONSPICUOUS.
Each Indemnified Party’s rights and remedies set forth in this Agreement shall survive the Closing or other termination of
this Agreement, shall not be deemed waived by such Indemnified Party’s consummation of the Closing of the sale transactions
(unless the Indemnified Party has knowledge of the existence of an Indemnification Claim at Closing and decides to proceed with
Closing) and will be effective regardless of any inspection or investigation conducted by or on behalf of such Indemnified Party
or by its directors, officers, employees, or representatives or at any time (unless such inspection or investigation reveals the
existence of an Indemnified Claim and such party proceeds with Closing), whether before or after the Closing Date.

 

    	28

    	 

    

 

(e)          Other
Indemnification Provisions. A claim for any matter not involving a third party may be asserted by notice to the Party from
whom indemnification is sought.

 

17.          Dispute
Resolution. In any dispute arising out of this Agreement the parties shall proceed as follows:

 

(a)          Mandatory
Mediation. In the event there is any dispute between the parties to this Agreement relating in any way to this Agreement, the
parties must mediate such dispute before commencement of any legal action. No party to this Agreement can bring legal action against
another party to this Agreement without first participating in mediation, unless one party refuses to submit to mediation and legal
action is brought to specifically enforce this mandatory mediation provision of this Agreement. If the parties cannot agree upon
the person to act as the mediator, then the U.S. Arbitration and Mediation Service of Portland, Oregon shall select a person to
act as the mediator. The mediator’s charges and expenses shall be split by the parties on a 50/50 basis. The mediation fees
and costs do not include each party’s attorney fees and costs. Each party shall be responsible for his or her own attorney
fees and costs at mediation. Those costs may not be assessed against the other party if the other party is the prevailing party.
If the dispute cannot be resolved at mediation either party may then proceed to arbitration as provided in Section 17(b) of this
Agreement.

 

(b)          Arbitration.
In the event any disagreement, difference or controversy shall arise between or among the parties relating to or arising out of
or under this Agreement, including any tort claims, and the parties to the controversy cannot mutually agree upon the resolution
thereof, and the mediation provided for herein does not provide a resolution, then such disagreement, difference or controversy
shall be determined by arbitration under the rules of the U.S. Arbitration and Mediation Service of Portland, Oregon. Any award
made by the arbitrator shall be final, binding and conclusive upon the parties to the arbitration and those claiming under them.
The arbitrator shall have no power to make any award inconsistent with or contrary to the terms and provisions of this Agreement.
The cost and expenses of any arbitration shall be paid by the parties on a 50/50 basis. Any party to the arbitration may file any
final arbitrator award as a judgment in the Circuit Court of the State of Oregon for Marion County and in the appropriate court
in any other county of the State of Oregon or any other state where any party to the arbitration maintains such party’s residence,
principal place of business or real property.

 

18.          Notices.
Any notice, request for consent or approval, election or other communication provided for or required by this Agreement shall be
in writing and shall be delivered by hand, by air courier service, postage prepaid (certified with return receipt requested), fax
transmission or electronic transmission followed by delivery of the hard copy of such communication by air courier service or mail
as aforesaid, addressed to the person to whom such notice is intended to be given at such address as such person may have previously
furnished in writing to the such party’s last known address. Until receipt of written notice to the contrary, the parties’
addresses for notices shall be:

 

    	29

    	 

    

 

	To Buyer:	 
	 	Cornerstone Healthcare Real Estate Fund, Inc.
	 	1920 Main Street, Suite 400
	 	Irvine, CA  92614
	 	Attention:  Kent Eikanas
	 	Phone:  949-812-4335
	 	Email:  KEikanas@crefunds.com
	 	 
	With a Copy to:	 
	 	DLA Piper LLP (US)
	 	2000 University Avenue
	 	East Palo Alto, CA  94303
	 	Attention:  James E. Anderson, Esq.
	 	Phone:  650-833-2078
	 	Email:  Jim.Anderson@dlapiper.com
	 	 
	To Sellers:	 
	 	Sheridan Care Center LLC, dba Sheridan Care Center,

or Sheridan Properties LLC, or Fernhill Estates LLC,

dba Fernhill Estates, or Fernhill Properties LLC, or

Pacific Gardens Estates LLC,
	 	dba Pacific Health and Rehabilitation
	 	c/o Dover Management, Inc.
	 	850 Promontory Place SE
	 	Salem OR  97302
	 	Attention: Don Bybee and Kent Emry
	 	Phone: 503-585-0200
	 	Email: donbybee@gmail.com
	 	            kent@dovermgmt.com
	 	 
	With a Copy to:	Dakavia Management Corporation
	 	c/o Kent Emry
	 	4676 Commercial Street SE, #358
	 	Salem OR  97302-1902
	 	Phone:                                            
	 	E-mail: kent@dovermgmt.com
	 	 
	With a Copy to	Garrett Hemann Robertson P.C.
	Seller’s Counsel:	PO Box 749
	 	Salem OR  97308
	 	Phone: 503-581-1501
	 	Email: ejamieson@ghrlawyers.com

 

19.         Sole
Agreement. This Agreement constitutes the entire understanding between the parties with respect to the transactions contemplated
herein, and all prior or contemporaneous oral agreements, understandings representations and statement, and all prior written agreements,
understandings, letters of intent and proposals are merged into this Agreement. Neither this Agreement nor any provisions hereof
may be waived, modified, amended, discharged or terminated except by an instrument in writing signed by the party against which
the enforcement of such waiver, modification, amendment, discharge or termination is sought, and then only to the extent set forth
in such instrument.

 

    	30

    	 

    

 

20.         Assignment;
Successors. Neither party shall assign this Agreement without the prior written consent of the other; provided, however, Buyer
may assign all of its rights, title, liability, interest and obligation pursuant to this Agreement to one or more entities owned,
controlled by or under common control with Buyer. Subject to the limitations on assignment set forth above, all the terms of this
Agreement shall be binding upon and inure to the benefit of and be enforceable by and against the heirs, successors and assigns
of the parties hereto.

 

21.         Severability.
Should any one or more of the provisions of this Agreement be determined to be invalid, unlawful or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby
and each such provision shall be valid and remain in full force and effect.

 

22.         Risk
of Loss. Until the Closing Date, Seller shall bear the risk of loss for the Facilities. From and after the Closing Date, the
risk of loss of the Facilities shall be governed by the Post Closing Lease.

 

23.         Holidays.
If any date herein set forth for the performance of any obligations by Seller or Buyer or for the delivery of any instrument or
notice as herein provided should be on a Saturday, Sunday or legal holiday, the compliance with such obligations or delivery shall
be deemed acceptable on the next business day following such Saturday, Sunday or legal holiday. As used herein, the term “legal
holiday” means any state or federal holiday for which financial institutions or post offices are generally closed in the
State of Oregon for observance thereof.

 

24.         Counterparts.
This Agreement may be executed in any number of counterparts, each of which shall be an original, and all of which together shall
be deemed to constitute one and the same instrument. Facsimile signature pages or electronically transmitted signature pages shall
constitute original counterparts for all purposes.

 

25.         Covenant
Not to Compete; Non-Solicitation of Employees. For a period of three (3) years following the Closing Date, Seller, Don Bybee,
individually, and Kent Emry, individually, agree (a) not to own, manage, lease or operate a long term skilled nursing home facility
which is located within a five (5) mile radius of any Facility and (b) not to solicit the transfer of patients or residents of
any Facility to any long term care skilled nursing home facility or assisted living facility which is managed, leased or operated
by any entity owned and/or controlled by any of Seller or such individual within a five (5) mile radius of any Facility.

 

26.         Confidentiality.
The provisions of the Confidentiality Agreement attached hereto as Exhibit C and executed by the parties either prior
to the date of this Agreement are hereby incorporated by this reference and the parties hereto agree to comply with the terms thereof.

 

27.         Exhibits
and Schedules. To the extent that one or more Exhibits or Schedules are not attached to this Agreement at the time this Agreement
is executed, Seller and Buyer agree that this Agreement is not rendered unenforceable by reason of such fact. Seller shall provide
such exhibits to Buyer during the Due Diligence Period as promptly as possible in order to allow the parties to agree upon such
Exhibits and Schedules and to afford Buyer adequate time in which to complete its due diligence review prior to the expiration
of the Due Diligence Period.

 

    	31

    	 

    

 

28.         Prevailing
Party. Subject to the limitations as otherwise set forth in this Agreement, if an action shall be brought on account of any
breach of or to enforce or interpret any of the terms, covenants or conditions of this Agreement, the prevailing party shall be
entitled to recover from the other party, as part of the prevailing party’s costs, reasonable attorney’s fees, the
amount of which shall be fixed by the court and shall be made a part of any judgment rendered.

 

29.         Time
is of the Essence. Time is of the essence of this Agreement.

 

30.         Governing
Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Oregon.

 

31.         Seller’s
Tax Deferred Exchange. Seller may desire to effect a tax-deferred exchange with respect to its disposition of all or a portion
of the Property (“Seller’s Exchange”) pursuant to Section 1031 of the Internal Revenue Code. Seller’s
Exchange will be structured by Seller at its sole cost and expense and Buyer will have no obligation to acquire or enter into the
chain of title to any property other than the Property. Buyer’s sole obligation in connection with Seller’s Exchange
shall be to review and execute certain documentation necessary in order to effectuate Seller’s Exchange in accordance with
the foregoing and the applicable rules governing such exchanges. Buyer’s cooperation with Seller’s Exchange shall not
affect or diminish Buyer’s rights under this Agreement, delay the closing of this Agreement or be construed as Buyer’s
warranty that Seller’s Exchange in fact complies with Section 1031 of the Internal Revenue Code. Buyer shall have the
right to review and reasonably approve any documents to be executed by Buyer in connection with Seller’s Exchange. Acceptance
of title to the Property from Seller’s designated intermediary shall not modify Seller’s representations, warranties
and covenants to Buyer under this Agreement or the survival thereof pursuant to this Agreement. The Warranty Deed and all closing
documents shall run directly between Seller and Buyer. Seller shall indemnify and hold Buyer harmless from and against any and
all claims, liabilities, losses, damages, costs and expenses (including reasonable attorneys’ fees but excluding costs incurred
to review the exchange documents) arising from Seller’s Exchange (other than what would have been applicable under this Agreement
without Seller’s Exchange) which indemnification obligation shall survive the Close of Escrow. Seller is relying solely upon
the advice and counsel of professionals of Seller’s choice in structuring, executing and consummating Seller’s Exchange.

 

[Signatures on Following Pages]

 

    	32

    	 

    

 

IN WITNESS WHEREOF,
the undersigned have duly executed this Agreement by parties legally entitled to do so as of the day and year first set forth above.

 

	 	“SELLER”:
	 	 
	 	SHERIDAN CARE CENTER LLC, dba 
	 	SHERIDAN CARE CENTER
	 	 
	 	By:	/s/ Don Bybee	 
	 	 	  Don Bybee, Member Manager	(date)
	 	 
	 	By:	  /s/ Kent Emry	 
	 	 	  Kent Emry, Member Manager	(date)
	 	 
	 	SHERIDAN PROPERTIES LLC
	 	 
	 	By:	  /s/ Don Bybee	 
	 	 	  Don Bybee, Member Manager	(date)
	 	 
	 	By:	  /s/ Kent Embry	 
	 	 	  Kent Emry, Member Manager	(date)
	 	 
	 	FERNHILL ESTATES LLC, dba
	 	FERNHILL ESTATES
	 	 
	 	By:	  /s/ Don Bybee	 
	 	 	  Don Bybee, Member Manager	(date)
	 	 
	 	By:	  /s/ Kent Emry	 
	 	 	  Kent Emry, Member Manager	(date)
	 	 
	 	FERNHILL PROPERTIES LLC
	 	 
	 	By:	  /s/ Don Bybee	 
	 	 	  Don Bybee, Member Manager	(date)
	 	 
	 	By:	  /s/ Kent Emry	 
	 	 	  Kent Emry, Member Manager	(date)
	 	 
	 	PACIFIC GARDENS ESTATES LLC,
	 	dba PACIFIC HEALTH AND REHABILITATION
	 	 
	 	By:	  /s/ Don Bybee	 
	 	 	  Don Bybee, Member Manager	(date)

 

    	33

    	 

    

 

	 	By:	  /s/ Kent Emry	 
	 	 	  Kent Emry, Member Manager	(date)

 

	 	“BUYER”:	 
	 	 	 
	 	Cornerstone Healthcare Real Estate Fund, Inc., a Maryland corporation
	 	 	 
	 	By:	  Terry G. Roussel	 
	 	Its:	  Manager	 
	 	 	 

 

    	34

    	 

    

 

LIST OF EXHIBITS

 

	A.	Legal Descriptions of Real Property
	 	 
	B.	Permitted Exceptions
	 	 
	C.	Confidentiality Agreement
	 	 
	D.	Lease Terms

 

    	 

    	 

    

 

LIST OF SCHEDULES

 

	Schedule l(a)	List of Facility, Operator(s)
	 	 
	Schedule 1(c)	Personal Property
	 	 
	Schedule 1(g)	Capital Improvements
	 	 
	Schedule 3	Allocation of Purchase Price
	 	 
	Schedule 8(a)(v)	Claims, Litigation
	 	 
	Schedule 8(b)	Violations
	 	 
	Schedule 8(d)	Hazardous Substances
	 	 
	Schedule 8(f)	Leases and Contracts
	 	 
	Schedule 8(g)	Financial Reports
	 	 
	Schedule 8(h)	Interests in Suppliers, etc.
	 	 
	Schedule 8(j)	Matters relating to Licensure
	 	 
	Schedule 8(k)	Matters relating to Reports and Reimbursements
	 	 
	Schedule 8(l)	Surveys, Cost Reports, Private Rates, Census and Licensed Beds
	 	 
	Schedule 8(m)	Occupied Beds; Rates
	 	 
	Schedule 10(a)(v)	Due Diligence Items

 

    	 

    	 

    

 

EXHIBIT A

 

LEGAL DESCRIPTION

 

[To be Provided by Title Company]

 

    	 

    	 

    

 

EXHIBIT B

 

PERMITTED EXCEPTIONS

 

[To be Determined]

 

    	 

    	 

    

 

EXHIBIT C

 

CONFIDENTIALITY AGREEMENT

 

[To be Supplied by Parties]

 

    	 

    	 

    

 

EXHIBIT D

 

LEASE TERMS

 

[To be Supplied by Parties]

 

    	 

    	 

    

 

SCHEDULE 1 (a)

 

FACILITY; LICENSED BEDS

 

	Facility	 	Licensed Nursing Beds

 

    	 

    	 

    

 

SCHEDULE 10(a)(v)

 

DUE DILIGENCE MATERIALS

 

    	S-1

    	 

    

 

EXHIBIT 4

 

	After recording, return to	 
	 	 
	Grantee	 
	c/o James E. Anderson	 
	DLA Piper LLP	 
	2000 University Avenue	 
	East Palo Alto CA  94303	 
	 	 
	Until a change is requested, all tax statements shall be sent to the following address:	 
	____________________	 
	____________________	 
	________________	 

 

STATUTORY WARRANTY DEED

(ORS 93.850)

 

______________________________,
whose address is 850 Promontory Place SE, Salem, Oregon 97302, Grantor, conveys and warrants to _____________________________,
whose address is _______________________________, Grantee, the following described real property situated in _______________ County,
State of Oregon, free of encumbrances except as specifically set forth herein:

 

			See Exhibit A attached hereto and made a part hereof by this reference:

 

The true consideration
for this conveyance is $_________________.

 

SUBJECT TO:

 

1.          
Proceedings by a public agency which may result in taxes or assessments or notices of such proceedings, whether or not shown by
the records of such agency or by the public records.

 

2.          Easements,
liens, encumbrances, interests, or claims thereof which are not shown by the public records; any facts, rights, interest, or claims
which are not shown by the public records but which could be ascertained by an inspection of the land or by making inquiry of persons
in possession thereof.

 

3.          Discrepancies,
conflicts in boundary lines, shortage in area, encroachments, or any other facts which a correct survey would disclose and which
are not shown by the public records.

 

4.          The
rights of the public in and to that portion of the herein described property lying within the limits of public roads, streets,
highways, or right-of ways.

 

    	S-2

    	 

    

 

5.          Unpatented
mining claims; reservations or exceptions in patents or in acts authorizing the issuance thereof; water rights, claims or title
to water, whether or not shown by the public records.

 

BEFORE SIGNING OR ACCEPTING
THIS INSTRUMENT, THE PERSON TRANSFERRING FEE TITLE SHOULD INQUIRE ABOUT THE PERSON’S RIGHTS, IF ANY, UNDER ORS 195.300, 195.301
AND 195.305 TO 195.336 AND SECTIONS 5 TO 11, CHAPTER 424, OREGON LAWS 2007, SECTIONS 2 TO 9 AND 17, CHAPTER 855, OREGON LAWS 2009,
AND SECTIONS 2 TO 7, CHAPTER 8, OREGON LAWS 2010. THIS INSTRUMENT DOES NOT ALLOW USE OF THE PROPERTY DESCRIBED IN THIS INSTRUMENT
IN VIOLATION OF APPLICABLE LAND USE LAWS AND REGULATIONS. BEFORE SIGNING OR ACCEPTING THIS INSTRUMENT, THE PERSON ACQUIRING FEE
TITLE TO THE PROPERTY SHOULD CHECK WITH THE APPROPRIATE CITY OR COUNTY PLANNING DEPARTMENT TO VERIFY THAT THE UNIT OF LAND BEING
TRANSFERRED IS A LAWFULLY ESTABLISHED LOT OR PARCEL, AS DEFINED IN ORS 92.010 OR 215.010, TO VERIFY THE APPROVED USES OF THE LOT
OR PARCEL, TO DETERMINE ANY LIMITS ON LAWSUITS AGAINST FARMING OR FOREST PRACTICES, AS DEFINED IN ORS 30.930, AND TO INQUIRE ABOUT
THE RIGHTS OF NEIGHBORING PROPERTY OWNERS, IF ANY, UNDER ORS 195.300, 195.301 AND 195.305 TO 195.336 AND SECTIONS 5 TO 11, CHAPTER
424, OREGON LAWS 2007, SECTIONS 2 TO 9 AND 17, CHAPTER 855, OREGON LAWS 2009, AND SECTIONS 2 TO 7, CHAPTER 8, OREGON LAWS 2010.

 

DATED this ____ day
of _____________________, 2012.

 

	 	GRANTOR:
	 	 
	 	 
	 	 
	 	By:	 
	 	 	Don Bybee, Member Manager
	 	 	 
	 	By:	 
	 	 	Kent Emry, Member Manager

 

    	S-3

    	 

    

 

	STATE OF OREGON	)	 
	 	) ss.	 
	County of Marion	)	 

 

This instrument was acknowledged before
me on the           day of                                           ,
2012, by Donald Bybee as Member Manager of                                                                                       ,
on behalf of which this instrument was executed.

 

	 	 
	 	NOTARY PUBLIC FOR OREGON
	 	My Commission Expires:	 

 

	STATE OF OREGON	)	 
	 	) ss.	 
	County of Marion	)	 

 

This instrument was acknowledged before
me on the           day of                                           , 2012, by Kent Emry as Member Manager of                                                                                       ,
on behalf of which this instrument was executed.

 

	 	 
	 	NOTARY PUBLIC FOR OREGON
	 	My Commission Expires:	 

 

    	S-4

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