Document:

Exhibit 4.1

 

SECURITIES
PURCHASE AGREEMENT

 

This Securities Purchase Agreement (this “Agreement”) dated June 24, 2005, among
Valentis, Inc., a Delaware corporation (the “Company”), and the purchasers identified on the signature pages and
the Schedule of Purchasers attached hereto as Attachment A (each, a
“Purchaser” and collectively, the “Purchasers”).

 

WHEREAS, subject to the terms and conditions
set forth in this Agreement and pursuant to Section 4(2) of the
Securities Act (as defined below) and Rule 506 promulgated thereunder, the
Company desires to issue and sell to the Purchasers, and the Purchasers,
severally and not jointly, desire to purchase from the Company certain
securities of the Company, as more fully described in this Agreement.

 

NOW, THEREFORE, IN CONSIDERATION of the
mutual covenants contained in this Agreement, and for other good and valuable
consideration the receipt and adequacy of which are hereby acknowledged, the
Company and the Purchasers agree as follows:

 

ARTICLE I.

DEFINITIONS

 

1.1           Definitions. 
In addition to the terms defined elsewhere in this Agreement, for all
purposes of this Agreement, the following terms shall have the meanings
indicated in this Section 1.1:

 

“Action”
means any action, suit, inquiry, notice of violation, proceeding (including any
partial proceeding such as a deposition) or investigation pending or threatened
in writing against or affecting the Company, any Subsidiary or any of their
respective properties before or by any court, arbitrator, governmental or administrative
agency, regulatory authority (federal, state, county, local or foreign), stock
market, stock exchange or trading facility.

 

“Affiliate”
means any Person that, directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with a
Person, as such terms are used in and construed under Rule 144.

 

“Business Day”
means any day except Saturday, Sunday and any day which shall be a federal
legal holiday or a day on which banking institutions in the State of California
are authorized or required by law or other governmental action to close.

 

“Closing”
means the closing of the purchase and sale of the Securities pursuant to Article II.

 

“Commission”
means the Securities and Exchange Commission.

 

“Common Stock”
means the common stock of the Company, $.001 par value per share, and any
securities into which such common stock may hereafter be reclassified.

 

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“Common Stock Equivalents”
means any securities of the Company or any Subsidiary which entitle the holder
thereof to acquire Common Stock at any time, including without limitation, any
debt, preferred stock, rights, options, warrants or other instrument that is at
any time convertible into or exchangeable for, or otherwise entitles the holder
thereof to receive, Common Stock or other securities that entitle the holder to
receive, directly or indirectly, Common Stock.

 

“Disclosure Materials”
has the meaning set forth in Section 3.1(h).

 

“Effective Date”
means the date that the Registration Statement required by Section 2(a) of
the Registration Rights Agreement is first declared effective by the
Commission.

 

“Exchange Act”
means the Securities Exchange Act of 1934, as amended.

 

“Investment Amount”
means, with respect to each Purchaser, the investment amount indicated below
such Purchaser’s name on the signature page of this Agreement, as also
reflected on the Schedule of Purchasers attached hereto as Attachment A.

 

“Lien”
means any lien, charge, encumbrance, security interest, right of first refusal
or other restrictions of any kind.

 

“Per Unit Purchase
Price” means $2.50.

 

“Person”
means an individual or corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability company, joint
stock company, government (or an agency or subdivision thereof) or other entity
of any kind.

 

“Proceeding”
means an action, claim, suit, investigation or proceeding (including, without
limitation, an investigation or partial proceeding, such as a deposition),
whether commenced or threatened.

 

“Registration
Statement” means a registration statement meeting the
requirements set forth in the Registration Rights Agreement and covering the
resale by the Purchasers of the Registrable Securities (as defined in the
Registration Rights Agreement).

 

“Registration Rights
Agreement” means the Registration Rights Agreement,
dated as of the date of this Agreement, among the Company and the Purchasers,
in the form of Exhibit B.

 

“Rule 144”
means Rule 144 promulgated by the Commission pursuant to the Securities
Act, as such Rule may be amended from time to time, or any similar rule or
regulation hereafter adopted by the Commission having substantially the same
effect as such Rule.

 

“Securities”
means the Shares, the Warrants and the Warrant Shares.

 

“Securities Act”
means the Securities Act of 1933, as amended.

 

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“Shares”
means the shares of Common Stock issued to the Purchasers at the Closing.

 

“Strategic Transaction”
means a transaction or relationship in which the Company issues shares of
Common Stock or Common Stock Equivalents to a Person which is, itself or
through its subsidiaries, an operating company in a business synergistic with
the business of the Company and in which the Company receives material benefits
in addition to the investment of or lending of funds, but shall not include a
transaction in which the Company is issuing securities primarily for the
purpose of raising capital or to a Person whose primary business is investing
in securities.

 

“Subsidiary”
means any subsidiary of the Company that is required to be listed in Schedule 3.1(a).

 

“Trading Day”
means (i) a day on which the Common Stock is traded on a Trading Market,
or (ii) if the Common Stock is not listed on a Trading Market, a day on
which the Common Stock is traded in the over-the-counter market, as reported by
the OTC Bulletin Board or the National Quotation Bureau Incorporated, or (iii) if
the Common Stock is not quoted on the OTC Bulletin Board, a day on which the
Common Stock is quoted in the over-the-counter market as reported by the
National Quotation Bureau Incorporated (or any similar organization or agency
succeeding to its functions of reporting prices); provided, that in the event
that the Common Stock is not listed or quoted as set forth in (i), (ii) and
(iii) hereof, then Trading Day shall mean a Business Day.

 

“Trading Market”
means whichever of the New York Stock Exchange, the American Stock Exchange,
the NASDAQ National Market or the NASDAQ SmallCap Market, on which the Common
Stock is listed or quoted for trading on the date in question.

 

“Transaction
Documents” means this Agreement, the Warrants, the
Registration Rights Agreement, and any other documents or agreements executed
in connection with the transactions contemplated hereunder.

 

“Warrants”
means the Common Stock purchase warrants in the form of Exhibit A,
which are issuable to the Purchasers at the Closing.

 

“Warrant Shares”
means the shares of Common Stock issuable upon exercise of the Warrants.

 

ARTICLE II.

PURCHASE AND SALE

 

2.1           Closing. 
Subject to the terms and conditions set forth in this Agreement, at the
Closing the Company shall issue and sell to each Purchaser, and each Purchaser
shall, severally and not jointly, purchase from the Company, the Shares and the
Warrants representing such Purchaser’s Investment Amount.  The Closing
shall take place at the offices of Latham & 

 

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Watkins
LLP, 135 Commonwealth Drive, Menlo Park, California 94025-1105 or at such other
location as the parties may agree.

 

2.2           Closing Deliveries.  (a)  At the Closing, the Company shall issue,
deliver or cause to be delivered to each Purchaser the following:

 

(i)            a certificate evidencing the number of Shares and
the number of Warrants to purchase Warrant Shares as set forth opposite such
Purchaser’s name on Schedule of Purchasers attached hereto as Attachment
A (the Shares and Warrants referred to collectively herein as the “Units”)
for the Per Unit Purchase Price.  For each two (2) Shares purchased
by a Purchaser, such Purchaser shall receive a Warrant, registered in the name
of such Purchaser, pursuant to which such Purchaser shall have the right to
acquire one (1) Warrant Share at an exercise price of $3.51 per Warrant
Share in the form attached hereto as Exhibit A.  The Company shall deliver or cause to be
delivered to the Purchasers the stock certificates representing the Shares
issued and Warrants issued as promptly as practicable following the Closing;

 

(ii)           the legal opinion of Latham & Watkins LLP,
counsel to the Company, in agreed form, addressed to the Purchasers;

 

(iii)          the Registration Rights Agreement duly executed by
the Company.

 

(b)           At the Closing, each Purchaser shall deliver or cause to be delivered
to the Company the following:

 

(i)            the product of the Per Unit Purchase Price and the
number of Units as set forth opposite such Purchaser’s name on Schedule of
Purchasers attached hereto, in United States dollars and in immediately
available funds, by wire transfer to an account designated in writing by the
Company for such purpose; and

 

(ii)           the Registration Rights Agreement duly executed by
such Purchaser.

 

(iii)          a fully completed and duly executed Purchaser and
Selling Securityholder Questionnaire in the form attached hereto as Exhibit C.

 

ARTICLE III.

REPRESENTATIONS AND WARRANTIES

 

3.1           Representations and Warranties of the Company.  The Company hereby makes the
following representations and warranties to each Purchaser and to the Placement
Agent (as defined below):

 

(a)           Subsidiaries. 
The Company has no direct or indirect Subsidiaries other than those
listed in

Schedule 3.1(a).  The Company owns, directly or indirectly,
all of the capital stock of each Subsidiary free and clear of any and all
Liens, and all the issued and outstanding

 

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shares of
capital stock of each Subsidiary are validly issued and are fully paid,
non-assessable and free of preemptive and similar rights.

 

(b)           Organization and Qualification.  Each of the Company and each Subsidiary is an
entity duly incorporated or otherwise organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or
organization (as applicable), with the requisite power and authority to own and
use its properties and assets and to carry on its business as currently
conducted.  Neither the Company nor any Subsidiary is in violation of any
of the provisions of its respective certificate or articles of incorporation,
bylaws or other organizational or charter documents.  Each of the Company
and each Subsidiary is duly qualified to conduct business and is in good
standing as a foreign corporation or other entity in each jurisdiction in which
the nature of the business conducted or property owned by it makes such
qualification necessary or appropriate, except where the failure to be so
qualified or in good standing, as the case may be, could not, individually or
in the aggregate, have or reasonably be expected to result in (i) an adverse effect on the legality,
validity or enforceability of any Transaction Document, (ii) a material
and adverse effect on the results of operations, assets, prospects, business or
condition (financial or otherwise) of the Company and the Subsidiaries, taken
as a whole, or (iii) an adverse impairment to the Company’s ability to
perform on a timely basis its obligations under any Transaction Document (any
of (i), (ii) or (iii), a “Material
Adverse Effect”).

 

(c)           Authorization; Enforcement.  The Company has the requisite corporate power
and authority to enter into and to consummate the transactions contemplated by
each of the Transaction Documents and otherwise to carry out its obligations
thereunder.  The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all necessary corporate
action on the part of the Company and no further corporate action is required
by the Company or its stockholders in connection therewith.  Each
Transaction Document has been (or upon delivery will have been) duly executed
by the Company and, when delivered in accordance with the terms hereof, will
constitute the valid and binding obligation of the Company enforceable against
the Company in accordance with its terms, except as rights to indemnity and
contribution may be limited by state or federal securities laws or the public
policy underlying such laws, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors’ and contracting parties’ rights generally and except as
enforceability may be subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).

 

(d)           No Conflicts. 
The execution and delivery of the Transaction Documents by the Company
and the consummation and performance by the Company of the transactions
contemplated thereby do not and will not (i) conflict with or violate any
provision of the Company’s or any Subsidiary’s certificate or articles of
incorporation, bylaws or other organizational or charter documents, or (ii) conflict
with, or constitute a default (or an event that with notice or lapse of time or
both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation (with or without notice,
lapse of time or both) of, any agreement, credit facility, debt or other
instrument (evidencing a Company or Subsidiary debt or otherwise) or other
understanding to which the Company or any Subsidiary is

 

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a party
or by which any property or asset of the Company or any Subsidiary is bound or
affected, or (iii) result in a violation of any law, rule, regulation,
order, judgment, injunction, decree or other restriction of any court or
governmental authority to which the Company or a Subsidiary is subject
(including federal and state securities laws and regulations), or by which any
property or asset of the Company or a Subsidiary is bound or affected; except
in the case of each of clauses (ii) and (iii), such as could not,
individually or in the aggregate, have or reasonably be expected to result in a
Material Adverse Effect.

 

(e)           Filings, Consents and Approvals.  The Company is not required to obtain any
consent, waiver, authorization or order of, give any notice to, or make any
filing or registration with, any court or other federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Company of the Transaction Documents, other
than: (i) the filing with the Commission of one or more Registration
Statements in accordance with the requirements Registration Rights Agreement, (ii) the
filings required by federal and state securities laws, (iii) the filings
required in accordance with Sections 4.4 and 4.7, and (iv) those that have
been made or obtained prior to the date of this Agreement.

 

(f)            Issuance of the Securities.  The Securities shall have been duly authorized
and, when issued and paid for in accordance with the Transaction Documents,
will be duly and validly issued, fully paid and nonassessable, free and clear
of all Liens.  The Company shall have reserved from its duly authorized
capital stock the maximum number of shares of Common Stock issuable pursuant to
this Agreement and the Warrants in order to issue the Shares and the Warrant
Shares.

 

(g)           Capitalization.  The number of shares and type of all
authorized, issued and outstanding capital stock of the Company as of May 12,
2005 is as described in the Company’s Quarterly Report on Form 10-Q for
the Quarter ended March 31, 2005.  No securities of the Company are
entitled to preemptive or similar rights, and no Person has any right of first
refusal, preemptive right, right of participation, or any similar right to
participate in the transactions contemplated by the Transaction
Documents.  Except as a result of the purchase and sale of the Securities
and except as disclosed in Schedule 3.1(g), there are no
outstanding options, warrants, scrip rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities, rights or
obligations convertible into or exchangeable for, or giving any Person any
right to subscribe for or acquire, any shares of Common Stock, or contracts,
commitments, understandings or arrangements by which the Company or any
Subsidiary is or may become bound to issue additional shares of Common Stock,
or securities or rights convertible or exchangeable into shares of Common
Stock.  Except under the Transaction Documents, the issue and sale of the
Securities will not, immediately or with the passage of time, obligate the
Company to issue shares of Common Stock or other securities to any Person
(other than the Purchasers) and will not result in a right of any holder of
Company securities to adjust the exercise, conversion, exchange or reset price
under such securities.

 

(h)           SEC Reports; Financial Statements.  The Company has filed all reports required to
be filed by it under the Securities Act and the Exchange Act, including
pursuant to Section 13(a) or 15(d) thereof, for the twelve
months preceding the date hereof (or such shorter

 

6

 

period as
the Company was required by law to file such reports) (the foregoing materials
including all exhibits and schedules thereto, being collectively referred to
herein as the “SEC Reports” and, together with the Schedules to this Agreement,
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
Commission 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 Commission with respect
thereto as in effect at the time of filing.  Such financial statements
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved (“GAAP”), except as
may be otherwise specified in such financial statements or the notes 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 or as otherwise disclosed in the SEC Reports.

 

(i)            Changes.  Since the date of the latest audited financial
statements included within the SEC Reports, except as specifically disclosed in
the SEC Reports, (i) there has been no event, occurrence or development
that has had or is reasonably likely to result in a Material Adverse Effect, (ii) the
Company has not incurred any liabilities (contingent or otherwise) other than (A) trade
payables and accrued expenses 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 Commission, (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 stockholders 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 or stock purchase plans
disclosed in the SEC Reports.  Except as specified in the SEC Reports, the
Company does not have pending before the Commission any request for
confidential treatment of information.

 

(j)            Litigation.  Except as disclosed in the SEC Reports, there
is no Action which (i) adversely affects or challenges the legality,
validity or enforceability of any of the Transaction Documents or the
Securities or (ii) could, if there were an unfavorable decision,
individually or in the aggregate, have or reasonably be expected to result in a
Material Adverse Effect.  Neither the Company nor any Subsidiary, nor any
director or officer thereof, is or has been the subject of any material Action
involving a claim of violation of or liability under federal or state
securities laws or a claim of breach of fiduciary duty.  There has not
been, and to the knowledge of the Company, there is not pending or
contemplated, any material investigation by the Commission involving the
Company or any current or former director or officer of the

 

7

 

Company. 
The Commission has not issued any stop order or other order suspending the
effectiveness of any registration statement filed by the Company or any
Subsidiary under the Exchange Act or the Securities Act.

 

(k)           Labor Relations.  No material labor dispute exists or, to the
knowledge of the Company, is imminent with respect to any of the employees of
the Company.

 

(l)            Compliance. 
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 order of any court, arbitrator or governmental body, or (iii) is
or has been in violation of any statute, rule 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, labor matters and
gaming matters, except in each case as could not, individually or in the
aggregate, have or reasonably be expected to result in a Material Adverse
Effect.  The Company is in compliance with the applicable requirements of
the Sarbanes-Oxley Act of 2002 and the rules and regulations thereunder
promulgated by the Commission, except where such noncompliance could not have
or reasonably be expected to result in a Material Adverse Effect.

 

(m)          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 as described in the SEC Reports, except where the failure
to possess such permits would not, individually or in the aggregate, have or
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.

 

(n)           Title to Assets.  The Company and the Subsidiaries have good and
marketable title in all personal property owned by them that is material to
their respective businesses, in each case free and clear of all Liens, except
for Liens as do not materially affect the value of such property and do not
materially interfere with the use made and proposed to be made of such property
by the Company and the Subsidiaries.  Any real property and facilities
held under lease by the Company and the Subsidiaries are held by them under
valid, subsisting and, to the Company’s knowledge, enforceable leases of which
the Company and the Subsidiaries are in compliance, except as could not, individually
or in the aggregate, have or reasonably be expected to result in a Material
Adverse Effect.

 

(o)           Patents and Trademarks.  The Company and the Subsidiaries have, or have
rights to use, all patents, patent applications, trademarks, trademark applications,
service marks, trade names, copyrights, licenses and other similar rights that
are necessary or material for use in connection with their respective
businesses as described in the SEC Reports and which the

 

8

 

failure
to so have could, individually or in the aggregate, have or reasonably be
expected to result in a Material Adverse Effect (collectively, the “Intellectual
Property Rights”).  Except as set forth in
the SEC Reports, neither the Company nor any Subsidiary has received a written
notice that the Intellectual Property Rights used by the Company or any
Subsidiary violates or infringes upon the rights of any Person.  Except as
set forth in the SEC Reports, to the knowledge of the Company, all such
Intellectual Property Rights are enforceable and there is no existing
infringement by another Person of any of the Intellectual Property Rights.

 

(p)           Insurance.  The Company and the Subsidiaries are insured
by insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses in
which the Company and the Subsidiaries are engaged.  The Company does not
believe that it will be unable to renew its existing insurance coverage as
and when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business without a material
increase in cost.

 

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

 

(r)            Sarbanes-Oxley; Internal Accounting Controls.  The
Company is in material compliance with all provisions of the Sarbanes-Oxley Act
of 2002 which are applicable to it as of the Closing Date.  The Company and the Subsidiaries maintain a
system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management’s
general or specific authorizations, (ii) transactions are recorded as
necessary to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability, (iii) access
to assets is permitted only in accordance with management’s general or specific
authorization, and (iv) the recorded accountability for assets is compared
with the existing assets at reasonable intervals and appropriate action is
taken with respect to any differences. 
The Company has established disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
Company and designed such disclosure controls and procedures to ensure that material
information relating to the Company, including its Subsidiaries, required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the certifying officers by
others within those entities, particularly during the period in which the
Company’s most recently filed periodic report under the Exchange Act, as the
case may be, is being prepared.  The
Company’s certifying officers have evaluated the effectiveness of the Company’s
controls and procedures as of the end of the period covered by the most
recently filed periodic report under the Exchange Act (such date, the “Evaluation
Date”).  The Company presented in its
most recently filed periodic report under the Exchange Act the conclusions of
the certifying officers about the effectiveness of the disclosure controls

 

9

 

and
procedures based on their evaluations as of the Evaluation Date.  Since the Evaluation Date, there have been no
changes in the Company’s internal control over financial reporting (as such
term is defined in Item 307(b) of Regulation S-K under the Exchange Act)
that has materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.

 

(s)           Solvency. 
Based on the financial condition of the Company as of the Closing (and
assuming that the Closing shall have occurred), (i) the Company’s fair
saleable value of its assets exceeds the amount that will be required to be paid
on or in respect of the Company’s existing debts and other liabilities
(including known contingent liabilities) as they mature; (ii) the Company’s
assets do not constitute unreasonably small capital to carry on its business
for the current fiscal year as now conducted and as proposed to be conducted
including its capital needs taking into account the particular capital
requirements of the business conducted by the Company, and projected capital
requirements and capital availability thereof; and (iii) the current cash
flow of the Company, together with the proceeds the Company would receive, were
it to liquidate all of its assets, after taking into account all anticipated
uses of the cash, would be sufficient to pay all amounts on or in respect of
its debt when such amounts are required to be paid.  The Company does not
intend to incur debts beyond its ability to pay such debts as they mature
(taking into account the timing and amounts of cash to be payable on or in
respect of its debt).

 

(t)            Certain Fees.  Except for dealings with the Placement Agent
(defined below), no brokerage or finder’s fees or commissions are or will be
payable by the Company to any broker, financial advisor or consultant, finder,
placement agent, investment banker, bank or other Person with respect to the
transactions contemplated by the Transaction Documents.  The Purchasers
shall have no obligation with respect to any fees or with respect to any claims
(other than such fees or commissions owed by a Purchaser pursuant to written
agreements executed by such Purchaser which fees or commissions shall be the
sole responsibility of such Purchaser) made by or on behalf of other Persons
for fees of a type contemplated in this Section that may be due in
connection with the transactions contemplated by the Transaction Documents.

 

(u)           Certain Registration Matters.  Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.2(b) to (e), no
registration under the Securities Act is required for the offer and sale of the
Securities by the Company to the Purchasers under the Transaction
Documents.  The Company is eligible to register the resale of its Common
Stock for resale by the Purchasers under Form S-3 promulgated under the
Securities Act.  Except as set forth in Schedule 3.1(u), the
Company has not granted or agreed to grant to any Person any rights (including “piggy-back”
registration rights) to have any securities of the Company registered with the
Commission or any other governmental authority that have not been satisfied.

 

(v)           Listing and Maintenance Requirements.  Except as specified in the SEC Reports, the
Company has not, in the two years preceding the date hereof, received notice
from any Trading Market on which the Common Stock is or has been listed or quoted
for trading to the effect that the Company is not in compliance with the
listing or maintenance requirements thereof.  Except as specified in the
SEC Reports, the Company is, and has no reason to believe

 

10

 

that it
will not in the foreseeable future continue to be, in compliance with the
listing and maintenance requirements for continued listing of the Common Stock
on the NASDAQ SmallCap Market. The issuance and sale of the Securities under
the Transaction Documents does not contravene the rules and regulations of
the Trading Market on which the Common Stock is currently listed or quoted, and
no approval of the shareholders of the Company thereunder is required for the
Company to issue and deliver to the Purchasers the maximum number of Securities
contemplated by Transaction Documents, including such as may be required
pursuant to the Nasdaq Stock Market, Inc. Marketplace Rules and
NASDAQ Staff Interpretative Letters thereunder concerning shareholder approval
requirements with regard to discounted private placements equal to 20% or more
of the common stock or 20% or more of the voting power outstanding before such
issuance.

 

(w)          Investment Company.  The Company is not, and is not an Affiliate
of, an “investment company” within the meaning of the Investment Company Act of
1940, as amended.

 

(x)            Application of Takeover Protections.  The Company and its Board of Directors have
taken all necessary action, if any, in order to render inapplicable any control
share acquisition, business combination, poison pill (including any
distribution under a rights agreement) or other similar anti-takeover provision
under the Company’s Certificate of Incorporation (or similar charter documents)
or the laws of its state of incorporation that is or could reasonably be
expected to become applicable to the Purchasers as a result of the Purchasers
and the Company fulfilling their obligations or exercising their rights under
the Transaction Documents, including without limitation the Company’s issuance
of the Securities and the Purchasers’ ownership of the Securities.

 

(y)           No Additional Agreements.  The Company does not have any agreement or
understanding with any Purchaser with respect to the transactions contemplated
by the Transaction Documents other than as specified in the Transaction
Documents.

 

(z)            Foreign Corrupt Practices. 
Neither the Company nor, to the knowledge of the Company, any agent or
other person acting on behalf of the Company, has (i) directly or
indirectly, used any corporate funds for unlawful contributions, gifts,
entertainment or other unlawful expenses related to foreign or domestic
political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to any foreign or domestic political
parties or campaigns from corporate funds, (iii) failed to disclose fully
any contribution made by the Company (or made by any person acting on its
behalf of which the Company is aware) which is in violation of law, or (iv) violated
in any material respect any provision of the Foreign Corrupt Practices Act of
1977, as amended.

 

(aa)         Acknowledgment Regarding Purchasers’ Purchase of
Securities.  The Company acknowledges and agrees that each
of the Purchasers is acting solely in the capacity of an arm’s length purchaser
with respect to the Transaction Documents and the transactions contemplated
hereby.  The Company further acknowledges
that no Purchaser is acting as a financial advisor or fiduciary of the Company (or
in any similar capacity) with respect to this Agreement and the transactions
contemplated hereby and any advice given by any Purchaser or any of their
respective representatives or agents in connection with this Agreement and the

 

11

 

transactions
contemplated hereby is merely incidental to the Purchasers’ purchase of the
Securities.  The Company further
represents to each Purchaser that the Company’s decision to enter into this
Agreement has been based solely on the independent evaluation of the
transactions contemplated hereby by the Company and its representatives.

 

(bb)         Disclosure.  The Company confirms that neither it, nor to
its knowledge, any other Person acting on its behalf has provided any of the
Purchasers or their agents or counsel with any information that the Company
believes constitutes material, non-public information.  The Company
understands and confirms that the Purchasers will rely on the foregoing
representations and covenants in effecting transactions in securities of the
Company.  All disclosure provided to the Purchasers regarding the Company,
its business and the transactions contemplated hereby, furnished by or on
behalf of the Company (including the Company’s representations and warranties
set forth in this Agreement) are true and correct in all material respects and
do 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.

 

3.2           Representations and Warranties of the Purchasers.  Each Purchaser hereby, for
itself and for no other Purchaser, represents and warrants to the Company and
the Placement Agent as follows:

 

(a)           Organization; Authority.  Such Purchaser is an entity duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization with the requisite corporate or partnership power and authority to
enter into and to consummate the transactions contemplated by the applicable
Transaction Documents and otherwise to carry out its obligations thereunder.
The execution, delivery and performance by such Purchaser of the transactions
contemplated by this Agreement has been duly authorized by all necessary
corporate or, if such Purchaser is not a corporation, such partnership, limited
liability company or other applicable like action, on the part of such
Purchaser.  Each of this Agreement and the Registration Rights Agreement
has been duly executed by such Purchaser, and when delivered by such Purchaser
in accordance with terms hereof, will constitute the valid and legally binding
obligation of such Purchaser, enforceable against it in accordance with its
terms, except as rights to indemnity and contribution may be limited by state
or federal securities laws or the public policy underlying such laws, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors’ and contracting
parties’ rights generally and except as enforceability may be subject to
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).

 

(b)           Investment Intent.  Such Purchaser is acquiring the Securities as
principal for its own account for investment purposes only and not with a view
to or for distributing or reselling such Securities or any part thereof,
without prejudice, however, to such Purchaser’s right, subject to the
provisions of this Agreement and the Registration Rights Agreement, at all
times to sell or otherwise dispose of all or any part of such Securities
pursuant to an effective registration statement under the Securities Act or
under an exemption from such registration and in compliance with applicable
federal and state securities laws.  Subject to the immediately

 

12

 

preceding
sentence, nothing contained herein shall be deemed a representation or warranty
by such Purchaser to hold the Securities for any period of time.  Such
Purchaser is acquiring the Securities hereunder in the ordinary course of its
business.  Such Purchaser does not have any agreement, plan or
understanding, directly or indirectly, with any Person to distribute any of the
Securities.

 

(c)           Purchaser Status.  At the time such Purchaser was offered the
Securities, it was, and at the date hereof it is, and on each date on which it
exercises the Warrants it will be, an “accredited investor” as defined in Rule 501(a) under
the Securities Act.  Such Purchaser is not a registered broker-dealer
under Section 15 of the Exchange Act.

 

(d)           Experience of such Purchaser.  Such Purchaser, either alone or together with
its representatives, has such knowledge, sophistication and experience in
business and financial matters so as to be capable of evaluating the merits and
risks of the prospective investment in the Securities, and has so evaluated the
merits and risks of such investment.  Such Purchaser is able to bear the
economic risk of an investment in the Securities and, at the present time, is
able to afford a complete loss of such investment.

 

(e)           General Solicitation.  No Securities were offered or sold to such
Purchaser by means of any form of general solicitation or general advertising,
and in connection therewith such Purchaser 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.

 

(f)            Access to Information.  Such Purchaser acknowledges that it has
reviewed the Disclosure Materials and has been afforded (i) the
opportunity to ask such questions as it has deemed necessary of, and to receive
answers from, representatives of the Company concerning the terms and
conditions of the offering of the Securities and the merits and risks of
investing in the Securities; (ii) access to information about the Company
and the Subsidiaries and their respective financial condition, results of
operations, business, properties, management and prospects sufficient to enable
it to evaluate its investment; and (iii) the opportunity to obtain such
additional information that the Company possesses or can acquire without
unreasonable effort or expense that is necessary to make an informed investment
decision with respect to the investment.  Neither such inquiries nor any
other investigation conducted by or on behalf of such Purchaser or its
representatives or counsel shall modify, amend or affect such Purchaser’s right
to rely on the truth, accuracy and completeness of the Disclosure Materials and
the Company’s representations and warranties contained in the Transaction
Documents.

 

(g)           Reliance.  Such Purchaser understands and acknowledges
that: (i) the Securities are being offered and sold to it without
registration under the Securities Act in a private placement that is exempt
from the registration provisions of the Securities Act and (ii) the
availability of such exemption depends in part on, and the Company will rely
upon the accuracy and truthfulness of, the foregoing representations and such
Purchaser hereby consents to such reliance.

 

13

 

(h)           Residency. 
Such Purchaser has, if an entity, its principal place of business or, if
an individual, its primary residence in the jurisdiction set forth immediately
below such Purchaser’s name on the signature pages hereto.

 

(i)            Certain Trading Activities.  Such Purchaser has not, directly or
indirectly, nor has any Person acting on behalf of or pursuant to any
understanding with such Purchaser, engaged in (i) any Short Sales (defined
below) involving the Company’s securities during the 30 Trading Days
immediately preceding the date hereof or (ii) any transactions in any
securities of the Company following the date on which such Purchaser was aware
of this Transaction (other than this Transaction); provided, however, that the
restrictions contained in this Section 3.2(i) shall not apply after
the time that the transactions contemplated by this Agreement are first
publicly announced, as described in Section 4.4.  For purposes of
this Section, “Short Sales” include, without limitation, all types of direct
and indirect stock pledges, forward sale contracts, options, puts, calls, short
sales, swaps and similar arrangements (including on a total return basis), and
sales and other transactions through non-US broker dealers or foreign regulated
brokers having the effect of hedging the securities or investment made under
this Agreement.  Other than to other
Persons party to this Agreement, such Purchaser has maintained the confidentiality
of all disclosures made to it in connection with the transactions contemplated
by this Agreement (including the existence and terms of the transactions
contemplated by this Agreement).

 

(j)            Acknowledgements Regarding Placement Agent.  Such Purchaser acknowledges
that Reedland Capital Partners, an Institutional Division of Financial West
Group, broker-dealer and member NASD/SIPC. (the “Placement Agent”) is acting as the Company’s placement agent for the sale of the
securities being offered hereby and will be compensated solely by the Company
in such capacity.

 

The Company acknowledges and agrees that each Purchaser
does not make or has not made any representations or warranties with respect to
the transactions contemplated hereby other than those specifically set forth in
this Section 3.2.

 

ARTICLE IV.

OTHER AGREEMENTS OF THE PARTIES

 

4.1           (a)           Securities may only be disposed of pursuant to an effective
registration statement under the Securities Act, to the Company or pursuant to
an available exemption from or in a transaction not subject to the registration
requirements of the Securities Act, and in compliance with any applicable state
securities laws.  In connection with any transfer of the Securities other than
pursuant to an effective registration statement, to the Company, to an
Affiliate of a Purchaser or in connection with a pledge as contemplated in Section 4.1(b),
the Company may require the transferor thereof to provide to the Company an
opinion of counsel selected by the transferor, 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.

 

14

 

(b)           Certificates evidencing the Securities will contain the following
legend, so long as is required by this Section 4.1(b) or Section 4.1(c):

 

[NEITHER THESE
SECURITIES NOR THE SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES HAVE
BEEN REGISTERED] [THESE SECURITIES HAVE 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 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.  [THESE SECURITIES AND THE
SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES] [THESE SECURITIES] MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT SECURED BY SUCH
SECURITIES.

 

The Company acknowledges and agrees that a Purchaser
may from time to time pledge, and/or grant a security interest in some or all
of the Securities, in accordance with applicable securities laws, pursuant to a
bona fide margin agreement in connection with a bona fide margin account and,
if required under the terms of such agreement or account, such Purchaser may
transfer pledged or secured Securities to the pledgees or secured
parties.  Such a pledge or transfer would not be subject to approval or
consent of the Company and no legal opinion of legal counsel to the pledgee,
secured party or pledgor shall be required in connection with the pledge, but
such legal opinion may be required in connection with a subsequent transfer
following default by the Purchaser transferee of the pledge.  No notice
shall be required of such pledge.  At the appropriate Purchaser’s expense,
the Company will execute and deliver such reasonable documentation as a pledgee
or secured party of Securities may reasonably request in connection with a
pledge or transfer of the Securities including the preparation and filing of
any required prospectus supplement under Rule 424(b)(3) of the
Securities Act or other applicable provision of the Securities Act to
appropriately amend the list of Selling Stockholders thereunder.

 

(c)           Certificates evidencing the Shares and Warrant Shares shall not contain
any legend (including the legend set forth in Section 4.1(b)): (i) following
any sale of such Shares or Warrant Shares pursuant to a registration statement
(including the Registration Statement) covering the resale of such Shares and
Warrant Shares is effective under the Securities Act, or (ii) following
any sale of such Shares or Warrant Shares pursuant to Rule 144, or (iii) while
such Shares or Warrant Shares are eligible for sale under Rule 144(k), or (iv) if
such legend is not required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the Staff of
the Commission).  The

 

15

 

Company
shall cause its counsel to issue any legal opinion or instruction required by
the Company’s transfer agent to comply with the requirements set forth in this
Section.  If all or any portion of a Warrant is exercised at any time when
there is an effective registration statement to cover the resale of the Warrant
Shares, such Warrant Shares shall be issued free of all legends.  Following the occurrence of (i), (ii) or
(iii) or at such earlier time as a legend is no longer required for the
Shares and Warrant Shares under this Section 4.1(c), the Company will, no
later than three (3) Trading Days following the delivery by a Purchaser to
the Company or the Company’s transfer agent of a certificate representing
Shares or Warrant Shares containing a restrictive legend (such third Trading
Day, the “Legend Removal Date”), deliver or cause to be delivered to
such Purchaser or its transferee a certificate representing such Shares or
Warrant Shares that is free from all restrictive and other legends.  The
Company may not make any notation on its records or give instructions to any
transfer agent of the Company that enlarge the restrictions on transfer set
forth in this Section except as it may reasonably determine are necessary
or appropriate to comply or to ensure compliance with those applicable laws
that are enacted or modified after the Closing. 
Certificates for Securities subject to legend removal hereunder shall,
upon written request of the Purchaser, be transmitted by the transfer agent of
the Company to the Purchaser by crediting the account of the Purchaser’s prime
broker with the Depository Trust Company System.

 

(d)           In addition to such Purchaser’s other
available remedies, the Company shall pay to a Purchaser, in cash, as partial
liquidated damages and not as a penalty, for each $1,000 of Shares or Warrant
Shares (based on the Closing Price of the Common Stock on the date such
Securities are submitted to the Company’s transfer agent) delivered for removal
of the restrictive legend and subject to Section 4.1(c), $10 per Trading
Day for each Trading Day commencing two (2) Business Days after the Legend
Removal Date (increasing to $20 per Trading Day after the first five (5) Trading
Days for which such damages have begun to accrue) for each Trading Day after
the two (2) Business Days following the Legend Removal Date until such
certificate is delivered without a legend. Nothing herein shall limit such
Purchaser’s right to pursue actual damages for the Company’s failure to deliver
certificates representing any Securities as required by the Transaction
Documents, and such Purchaser shall have the right to pursue all remedies
available to it at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief.

 

(e)           Each Purchaser, severally and not jointly with the
other Purchasers, agrees that the removal of the restrictive legend from
certificates representing Securities as set forth in this Section 4.1 is
predicated upon the Company’s reliance that the Purchaser will sell any
Securities pursuant to either the registration requirements of the Securities
Act, including any applicable prospectus delivery requirements, or an exemption
therefrom.

 

4.2           Furnishing of Information.  As long as any Purchaser owns the Securities,
the Company covenants 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.  As
long as any Purchaser owns Securities, if the Company is not required to file
reports pursuant to such laws, it will prepare and furnish to the Purchasers
and make publicly available in accordance with Rule 144(c) such
information as is required for the Purchasers to sell the Shares and Warrant
Shares under Rule 144. The Company further

 

16

 

covenants
that it will take such further action as any holder of Securities may
reasonably request, all to the extent required from time to time to enable such
Person to sell such Shares and Warrant Shares without registration under the
Securities Act within the limitation of the exemptions provided by Rule 144.

 

4.3           Integration.  The Company shall not, and shall use its best
efforts to ensure that no Affiliate of the Company shall, sell, offer for sale
or solicit offers to buy or otherwise negotiate in respect of any security (as
defined in Section 2 of the Securities Act) that will be integrated with
the offer or sale of the Securities in a manner that would require the
registration under the Securities Act of the sale of the Securities to the Purchasers,
or that will be integrated with the offer or sale of the Securities for
purposes of the rules and regulations of any Trading Market.

 

4.4           Securities Laws Disclosure; Publicity.  By no later than 9:15 a.m. (New York
time) on the date of execution of this Agreement or 9:15 a.m. (New York
time) on the Trading Day following the execution of this Agreement, the Company
shall issue a press release disclosing the material terms of the transactions
contemplated hereby.  The Company shall
also file a Current Report on Form 8-K disclosing the consummation of the
transactions contemplated hereby as required by the Exchange Act.  In
addition, the Company will make such other filings and notices in the manner
and time required by the Commission and the Trading Market on which the Common
Stock is listed.  Notwithstanding the foregoing, the Company shall not
publicly disclose the name of any Purchaser, or include the name of any
Purchaser in any filing with the Commission (other than the Registration
Statement and any exhibits to filings made in respect of this transaction in
accordance with periodic filing requirements under the Exchange Act, including
the Report on Form 8-K above) or any regulatory agency or Trading Market,
without the prior written consent of such Purchaser, except to the extent such
disclosure is required by law or Trading Market regulations, in which case the
Company shall provide the Purchasers with prior notice of such disclosure.

 

4.5           Non-Public Information.  The Company covenants and agrees that neither
it nor any other Person acting on its behalf will provide any Purchaser or its
agents or counsel with any information that the Company believes constitutes
material non-public information, unless prior thereto such Purchaser shall have
executed a written agreement regarding the confidentiality and use of such
information.  The Company understands and confirms that each Purchaser
shall be relying on the foregoing representations in effecting transactions in
securities of the Company.

 

4.6           Use of Proceeds.  The Company shall use the net proceeds from
the sale of the Securities hereunder for working capital purposes and not for
the satisfaction of any portion of the Company’s debt (other than payment of
trade payables and accrued expenses in the ordinary course of the Company’s
business and prior practices), to redeem any capital stock of the Company or to
settle any outstanding Action.

 

4.6           Limitations on
Issuance of Future Priced Securities and Issuance of Securities.  During the one year following the Closing
Date, the Company shall not issue any “Future Priced Securities” as such term
is described by NASD IM-4350-1, other than issuances to the Purchasers pursuant
to the Transaction Documents.  From the
date hereof until ninety (90) days after the Effective Date, neither the
Company nor any Subsidiary shall, without the prior written

 

17

 

consent of the Purchasers
holding at least 75% of the Shares issued under this Agreement, issue shares of
Common Stock or Common Stock Equivalents, other than (i) the issuance of
the Securities, (ii) the issuance of securities upon the exercise or
conversion of any Common Stock or Common Stock Equivalents issued by the
Company prior to the date hereof (but will apply to any amendments,
modifications and reissuances thereof), (iii) the grant of options or
warrants, or the issuance of additional securities, under any duly authorized
Company stock option, restricted stock plan or stock purchase plan whether now
existing or approved by the Company and its stockholders in the future (but not
as to any amendments or other modifications to the number of Common Stock
issuable under such stock option, restricted stock plan or stock purchase plan,
the terms set forth therein, or the exercise price set forth therein, unless
such amendments or other modifications are approved by the Company’s
stockholders), (iv) the issuance of securities pursuant to one or more
Strategic Transactions and (v) the issuance of securities constituting less
than one percent of the number of shares of Common Stock outstanding on the
date hereof; provided, however, the ninety (90) day period following the
Effective Date set forth in this Section 4.6 shall be extended for the
number of Trading Days during such period in which (i) trading in the
Common Stock is suspended by any Trading Market, or (ii) following the
Effective Date, the Registration Statement is not effective or the prospectus
included in the Registration Statement may not be used by the Purchasers for
the resale of the Shares and Warrant Shares. 
For purposes of this Section 4.6, the number of shares of Common
Stock outstanding refers to the actual number of shares of Common Stock
outstanding and does not include outstanding securities convertible into or
exchangeable for Common Stock.

 

4.7           Listing of Securities.  The Company shall: (i) in the time and
manner required by each Trading Market on which the Common Stock is listed,
prepare and file with such Trading Market an additional shares listing
application covering the Shares and Warrant Shares, (ii) take all steps
necessary to cause such shares to be approved for listing on each Trading
Market on which the Common Stock is listed as soon as possible thereafter, (iii) provide
to each Purchaser evidence of such listing, and (iv) maintain the listing
of such shares on each such Trading Market or another eligible securities
market.

 

ARTICLE V.

 

MISCELLANEOUS

 

5.1           Fees and Expenses.  At the Closing, the Company shall reimburse
the Placement Agent up to $50,000 of reasonable fees and disbursements of Howard
Rice Nemerovski Canady Falk & Rabkin, a Professional Corporation, in
connection with the negotiation of the Transaction Documents, it being
understood that Howard Rice Nemerovski Canady Falk & Rabkin, a
Professional Corporation, has not rendered any legal advice to the Company in
connection with the transactions contemplated hereby and that the Company has
relied for such matters on the advice of its own counsel.  Except as
specified in the Registration Rights Agreement, each party shall pay the fees
and expenses of its advisers, counsel, accountants and other experts, if any,
and all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of the Transaction
Documents.  The Company shall pay all stamp and other taxes and duties
levied in connection with the sale of the Securities.

 

18

 

5.2           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.

 

5.3           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 at the
facsimile number specified in this Section prior to 5:00 p.m.
(California time) on a Business Day, (b) the next Business Day after the
date of transmission, if such notice or communication is delivered via
facsimile at the facsimile number specified in this Section on a day that
is not a Business Day or later than 5:00 p.m. (California time) on any
date and earlier than 11:59 p.m. (California time) on such date, (c) the
Business 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 as follows:

 

 

	
  If to the

  Company:

  	
   

  	
  Valentis, Inc.

  
	
   

  	
   

  	
  863A Mitten Road

  
	
   

  	
   

  	
  Burlingame, CA 94010

  
	
   

  	
   

  	
  Attn:  Benjamin F. McGraw III, Pharm. D.

  
	
   

  	
   

  	
   

  
	
  With a copy

  to:

  	
   

  	
  Patrick A. Pohlen

  
	
   

  	
   

  	
  Latham & Watkins LLP

  
	
   

  	
   

  	
  135 Commonwealth Drive

  
	
   

  	
   

  	
  Menlo Park, CA  94025

  
	
   

  	
   

  	
   

  
	
  If to a

  Purchaser:

  	
   

  	
  To the address set forth under such Purchaser’s name on the signature
  pages hereof;

  

 

or such other address as may be designated in writing hereafter, in the
same manner, by such Person.

 

5.4           Amendments; Waivers.  No provision of this Agreement may be waived
or amended except in a written instrument signed by the Company and Purchasers
holding no less than 75% of the Shares issued or issuable under this
Agreement.  The Company shall provide prior notice to all Purchasers of
any proposed waiver or amendment.  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 either party to exercise any right hereunder in any manner
impair the exercise of any such right.

 

19

 

5.5           Construction.  The headings herein are for convenience only,
do not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.  The language used in this Agreement
will be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any
party.  This Agreement shall be construed as if drafted jointly by the
parties, and no presumption or burden of proof shall arise favoring or disfavoring
any party by virtue of the authorship of any provisions of this Agreement or
any of the Transaction Documents.

 

5.6           Successors and Assigns.  This Agreement shall be binding upon and inure
to the benefit of the parties and their successors and permitted assigns. 
The Company may not assign this Agreement or any rights or obligations
hereunder without the prior written consent of the Purchasers holding no less
than two-thirds of the Shares issued or issuable under this Agreement. Any
Purchaser may assign any or all of its rights under this Agreement to any
Person to whom such Purchaser assigns or transfers any Securities, provided
such transferee agrees in writing to be bound, with respect to the transferred
Securities, by the provisions hereof that apply to the “Purchasers.”

 

5.7           No Third-Party Beneficiaries.  This Agreement is intended for the benefit of
the parties hereto and their respective successors and permitted assigns and is
not for the benefit of, nor may any provision hereof be enforced by, any other
Person.

 

5.8           Governing Law.  All questions concerning the construction,
validity, enforcement and interpretation of this Agreement shall be governed by
and construed and enforced in accordance with the internal laws of the State of
California, without regard to the principles of conflicts of law thereof. 
Each party agrees that all 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, employees or agents) may be commenced in the state and
federal courts sitting in the City of San Francisco (the “California Courts”). 
Each party hereto hereby irrevocably submits to the non-exclusive jurisdiction
of the California Courts 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 the any of the Transaction
Documents), and hereby irrevocably waives, and agrees not to assert in any
Proceeding, any claim that it is not personally subject to the jurisdiction of
any such California Court, or that such Proceeding has been commenced in an
improper or inconvenient forum.  Each party hereto hereby irrevocably
waives personal service of process and consents to process being served in any
such Proceeding by mailing a copy thereof via registered or certified mail or
overnight delivery (with evidence of delivery) to such party at the address in
effect for notices to it under this Agreement and agrees that such service
shall constitute good and sufficient service of process and notice
thereof.  Nothing contained herein shall be deemed to limit in any way any
right to serve process in any manner permitted by law.  Each party hereto
hereby irrevocably waives, to the fullest extent permitted by applicable law,
any and all right to trial by jury in any legal proceeding arising out of or
relating to this Agreement or the transactions contemplated hereby.  If
either party shall commence a Proceeding to enforce any provisions of a
Transaction Document, then the prevailing party in such Proceeding shall be
reimbursed by the other party for its reasonable

 

20

 

attorney’s
fees and other costs and expenses incurred with the investigation, preparation
and prosecution of such Proceeding.

 

5.9           Survival.  The representations, warranties, agreements
and covenants contained herein shall survive the Closing and the delivery of
the Shares and Warrants.

 

5.10         Execution. 
This Agreement may be executed in two or more counterparts, all of which
when taken together shall be considered one and the same agreement and shall
become effective when counterparts have been signed by each party and delivered
to the other party, it being understood that both parties need not sign the
same counterpart.  In the event that any signature is delivered by
facsimile transmission, 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 signature page were an original
thereof.

 

5.11         Severability.  If any provision of this Agreement is held to
be invalid or unenforceable in any respect, the validity and enforceability of
the remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.

 

5.12         Replacement of Securities.  If any certificate or instrument evidencing
any Securities 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.

 

5.13         Remedies.  In addition to being entitled to exercise all
rights provided herein or granted by law, including recovery of damages, each
of the Purchasers and the Company will be entitled to specific performance
under the Transaction Documents.  The parties agree that monetary damages
may not be adequate compensation for any loss incurred by reason of any breach
of obligations described in the foregoing sentence 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.

 

5.14         Payment Set Aside.  To the extent that the Company makes a
payment or payments to any Purchaser pursuant to any Transaction Document or a
Purchaser enforces or exercises its rights thereunder, and such payment or
payments or the proceeds of such enforcement or exercise or any part thereof
are subsequently invalidated, declared to be fraudulent or preferential, set
aside, recovered from, disgorged by or are required to be refunded, repaid or
otherwise restored to the Company, a trustee, receiver or any other person
under any law (including, without limitation, any bankruptcy law, state or
federal law, common law or

 

21

 

equitable
cause of action), then to the extent of any such restoration the obligation or
part thereof originally intended to be satisfied shall be revived and continued
in full force and effect as if such payment had not been made or such
enforcement or setoff had not occurred.

 

5.15         Independent Nature of Purchasers’ Obligations and Rights.  The obligations of each
Purchaser under any Transaction Document are several and not joint with the
obligations of any other Purchaser, and no Purchaser shall be responsible in
any way for the performance of the obligations of any other Purchaser under any
Transaction Document.  The decision of each Purchaser to purchase
Securities pursuant to the Transaction Documents has been made by such
Purchaser independently of any other Purchaser.  Nothing contained herein
or in any Transaction Document, and no action taken by any Purchaser pursuant
thereto, shall be deemed to constitute the Purchasers as a partnership, an
association, a joint venture or any other kind of entity, or create a
presumption that the Purchasers are in any way acting in concert or as a group
with respect to such obligations or the transactions contemplated by the
Transaction Document.  Each Purchaser acknowledges that no other Purchaser
has acted as agent for such Purchaser in connection with making its investment
hereunder and that no Purchaser will be acting as agent of such Purchaser in
connection with monitoring its investment in the Securities or enforcing its
rights under the Transaction Documents.  Each Purchaser shall be entitled
to independently protect and enforce its rights, including without limitation
the rights arising out of this Agreement or out of the other Transaction
Documents, and it shall not be necessary for any other Purchaser to be joined
as an additional party in any proceeding for such purpose.

 

[REMAINDER OF
PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGES FOLLOW]

 

22

 

IN WITNESS
WHEREOF, the parties hereto have caused this Securities Purchase Agreement to
be duly executed by their respective authorized signatories as of the date
first indicated above.

 

 

	
   

  	
  VALENTIS INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
  Benjamin F. McGraw, III, Pharm.D.

  
	
   

  	
  Title:

  	
  President and Chief Executive Officer

  
					

 

 

IN WITNESS WHEREOF, the parties have executed
this Securities Purchase Agreement as of the date first written above.

 

	
   

  	
  PURCHASER

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
  Address for Notice:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Facsimile

  
	
   

  	
    No.:

  	
   

  	
   

  
	
   

  	
  Attn.: 

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  With a copy

  to:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Facsimile No.: 

  	
   

  	
   

  
	
   

  	
  Attn:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Jurisdiction: 

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Investment

  
	
   

  	
  Amount:  $Exhibit 4.2

 

REGISTRATION
RIGHTS AGREEMENT

 

This
Registration Rights Agreement (this “Agreement”)
is made and entered into as of June 24, 2005, by and among Valentis, Inc.,
a Delaware corporation (the “Company”),
and the investors signatory hereto (each a “Purchaser”
and collectively, the “Purchasers”).

 

This Agreement
is made pursuant to the Securities Purchase Agreement, dated as of the date
hereof among the Company and the Purchasers (the “Purchase Agreement”).

 

NOW,
THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and the Purchasers agree
as follows:

 

1.             Definitions.  Capitalized terms used and not otherwise defined
herein that are defined in the Purchase Agreement shall have the meanings given
such terms in the Purchase Agreement.  As used in this Agreement, the
following terms shall have the respective meanings set forth in this Section 1:

 

“Effective
Date” means the date that the Registration Statement filed pursuant to Section 2(a) is
first declared effective by the Commission.

 

“Effectiveness
Date” means: (a) with respect to the initial Registration Statement
required to be filed to cover the resale by the Holders of the Registrable
Securities, the earlier of: (i) the 105th day following the Closing Date
and (ii) the fifth Trading Day following the date on which the Company is
notified by the Commission that the initial Registration Statement will not be
reviewed or is no longer subject to further review and comments, and (b) with
respect to any additional Registration Statements that may be required pursuant
to Section 2(a) hereof, the earlier of: (i) the 105th day
following the date on which the Company first knows, or reasonably should have
known, that such additional Registration Statement is required under such Section and
(ii) the fifth Trading Day following the date on which the Company is
notified by the Commission that such additional Registration Statement will not
be reviewed or is no longer subject to further review and comments.  “Effectiveness
Date” shall also have the meaning specified in Section 2(b).

 

“Effectiveness
Period” shall have the meaning set forth in Section 2(a).

 

“Exchange
Act” means the Securities Exchange Act of 1934, as amended.

 

“Filing
Date” means: (a) with respect to the initial Registration Statement
required to be filed to cover the resale by the Holders of the Registrable
Securities, the 30th day following the Closing Date, and (b) with respect
to any additional Registration Statements that may be required pursuant to Section 2(a) hereof,
the 30th day following the date on which the Company first knows, or reasonably
should have known, that such additional Registration Statement is required
under such Section.

 

1

 

“Holder”
or “Holders” means the holder or holders, as the case may be, from time
to time of Registrable Securities.

 

“Indemnified
Party” shall have the meaning set forth in Section 5(c).

 

“Indemnifying
Party” shall have the meaning set forth in Section 5(c).

 

“Losses”
shall have the meaning set forth in Section 5(a).

 

“Proceeding”
means an action, claim, suit, investigation or proceeding (including, without
limitation, an investigation or partial proceeding, such as a deposition),
whether commenced or threatened.

 

“Prospectus”
means the prospectus included in a Registration Statement (including, without
limitation, a prospectus that includes any information previously omitted from
a prospectus filed as part of an effective registration statement in reliance
upon Rule 430A promulgated under the Securities Act), as amended or
supplemented by any prospectus supplement, with respect to the terms of the
offering of any portion of the Registrable Securities covered by a Registration
Statement, and all other amendments and supplements to the Prospectus,
including post-effective amendments, and all material incorporated by reference
or deemed to be incorporated by reference in such Prospectus.

 

“Registrable
Securities” means the Shares issued pursuant to the Purchase Agreement and
the Warrant Shares, together with any securities issued or issuable upon any
stock split, dividend or other distribution, recapitalization or similar event,
or any conversion price adjustment with respect thereto.

 

“Registration
Statement” means each of the following:  (i) an initial
registration statement which is required to register the resale of the
Registrable Securities, and (ii) each additional registration statement,
if any, contemplated by Section 2(d), and including, in each case, the
Prospectus, amendments and supplements to each such registration statement or
Prospectus, including pre- and post-effective amendments, all exhibits thereto,
and all material incorporated by reference or deemed to be incorporated by
reference in such registration statement.

 

“Rule 144”
means Rule 144 promulgated by the Commission pursuant to the Securities
Act, as such Rule may be amended from time to time, or any similar rule or
regulation hereafter adopted by the Commission having substantially the same
effect as such Rule.

 

“Rule 415”
means Rule 415 promulgated by the Commission pursuant to the Securities
Act, as such Rule may be amended from time to time, or any similar rule or
regulation hereafter adopted by the Commission having substantially the same
effect as such Rule.

 

“Rule 424”
means Rule 424 promulgated by the Commission pursuant to the Securities
Act, as such Rule may be amended from time to time, or any similar rule or
regulation hereafter adopted by the Commission having substantially the same
effect as such Rule.

 

2

 

“Securities
Act” means the Securities Act of 1933, as amended.

 

“Shares”
shall have the meaning set forth in the Purchase Agreement.

 

“Warrant
Shares” shall have the meaning set forth in the Purchase Agreement.

 

2.             Registration.

 

(a)           On or prior to each Filing Date,
the Company shall prepare and file with the Commission a Registration Statement
covering the resale of all Registrable Securities not already covered by an
existing and effective Registration Statement for an offering to be made on a
continuous basis pursuant to Rule 415.  The Registration Statement
shall be on Form S-3 (except if the Company is not then eligible to
register for resale the Registrable Securities on Form S-3, in which
case such registration shall be on another appropriate form for such purpose)
and shall contain (except if otherwise required pursuant to written comments
received from the Commission upon a review of such Registration Statement) the “Plan
of Distribution” in substantially the form attached hereto as Annex A. 
The Company shall cause the Registration Statement to be declared effective
under the Securities Act as soon as possible but, in any event, no later than
the Effectiveness Date, and shall use its best efforts to keep the Registration
Statement continuously effective under the Securities Act until the date which
is two years after the date that the Registration Statement is declared
effective by the Commission or such earlier date when all Registrable
Securities covered by the Registration Statement have been sold or may be sold
without volume restrictions pursuant to Rule 144(k) as determined by the
counsel to the Company pursuant to a written opinion letter to such effect,
addressed and acceptable to the Company’s transfer agent and the affected
Holders (the “Effectiveness Period”). It is agreed and understood that
the Company shall, from time to time, be obligated to file an additional
Registration Statement to cover any Registrable Securities which are not
registered for resale pursuant to a pre-existing Registration Statement.

 

(b)           If for any reason the Commission
does not permit all of the Registrable Securities to be included in the
Registration Statement filed pursuant to Section 2(a), then the Company
shall prepare and file as soon as possible after the date on which the
Commission shall indicate as being the first date or time that such filing may
be made, but in any event by the 30th day following such date, an additional
Registration Statement covering the resale of all Registrable Securities not
already covered by an existing and effective Registration Statement for an
offering to be made on a continuous basis pursuant to Rule 415, on Form S-3
(except if the Company is not then eligible to register for resale the
Registrable Securities on Form S-3, in which case such registration
shall be on another appropriate form for such purpose).  Each such Registration
Statement shall contain (except if otherwise required pursuant to written
comments received from the Commission upon a review of such Registration
Statement) the “Plan of Distribution” in substantially the form attached hereto
as Annex A.  The Company shall cause each such Registration
Statement to be declared effective under the Securities Act as soon as possible
but, in any event, no later than the 90th day following the date on which the Company
becomes aware that such Registration Statement is required to be filed under
this Agreement (each such 90th day, the “Effectiveness Date”
for such Registration Statement), and shall use its

 

3

 

best efforts to keep such Registration Statement
continuously effective under the Securities Act during the entire Effectiveness
Period.

 

(c)           If: (i) a Registration
Statement is not filed on or prior to its Filing Date (if the Company files a
Registration Statement without affording the Holders the opportunity to review
and comment on the same as required by Section 3(a) hereof, the
Company shall not be deemed to have satisfied this clause (i)), (ii) a
Registration Statement is not declared effective by the Commission on or prior
to its required Effectiveness Date, (iii) the Company fails to file with the
Commission a request for acceleration in accordance with Rule 461 promulgated
under the Securities Act, within seven Trading Days of the date that the
Company is notified (orally or in writing, whichever is earlier) by the
Commission that a Registration Statement will not be “reviewed,” or not subject
to further review or (iv) after its Effective Date, such Registration
Statement ceases for any reason to be effective and available to the Holders as
to all Registrable Securities to which it is required to cover at any time
prior to the expiration of its Effectiveness Period for an aggregate of more
than 20 consecutive Trading Days or an aggregate of 40 Trading Days (which need
not be consecutive), (any such failure or breach being referred to as an “Event,” and for purposes of clauses (i) or (ii) the date on which
such Event occurs, and for purposes of clause (iii) the date which such 7
Trading Day period is exceeded, and for purposes of clause (iv) the date which
such 20 consecutive or 40 Trading Day-period (as applicable) is exceeded, being
referred to as “Event Date”), then,
in addition to any other rights available to the Holders: (x) on such Event
Date the Company shall pay to each Holder an amount in cash, as liquidated
damages and not as a penalty, equal to 1% of the aggregate purchase price paid
by such Holder pursuant to the Purchase Agreement; and (y) on each monthly
anniversary of each such Event Date thereof (if the applicable Event shall not
have been cured by such date) until the applicable Event is cured, the Company
shall pay to each Holder an amount in cash, as liquidated damages and not as a
penalty, equal to 1.5% of the aggregate purchase price paid by such Holder
pursuant to the Purchase Agreement, provided, that all periods shall be
tolled, with respect to a Holder, by the number of Trading Days in excess of
five (5) during which such Holder fails to provide the Company with
information regarding such Holder which was requested by the Company in order to
effect the registration of such Holder’s Registrable Securities. It shall be a
condition precedent to the obligations of the Company to pay any liquidated
damages pursuant to this Section 2 with respect to the Registrable
Securities of any Holder that such Holder shall furnish to the Company such
information regarding itself and the Registrable Securities held by it. If the
Company fails to pay any liquidated damages pursuant to this Section in
full within seven days after the date payable, the Company will pay interest
thereon at a rate of 12% per annum (or such lesser maximum amount that is
permitted to be paid by applicable law) to the Holder, accruing daily from the
date such liquidated damages are due until such amounts, plus all such interest
thereon, are paid in full.  The liquidated damages pursuant to the terms
hereof shall apply on a pro rata basis for any portion of a month prior to the
cure of an Event.

 

3.             Registration Procedures

 

In connection
with the Company’s registration obligations hereunder, the Company shall:

 

(a)           Not less than four Trading Days
prior to the filing of a Registration Statement or any related Prospectus or
any amendment or supplement thereto, the Company shall furnish to the Holders
copies of all such documents proposed to be filed which documents (other than
those incorporated by reference) will be subject to the review of such Holders.
The Company shall not file a Registration Statement or any such Prospectus or
any amendments or

 

4

 

supplements thereto to which the Holders of a
majority of the Registrable Securities shall reasonably object in good faith.

 

(b)           (i)  Prepare and file with
the Commission such amendments, including post-effective amendments, to each
Registration Statement and the Prospectus used in connection therewith as may
be necessary to keep such Registration Statement continuously effective as to
the applicable Registrable Securities for its Effectiveness Period and prepare
and file with the Commission such additional Registration Statements in order
to register for resale under the Securities Act all of the Registrable
Securities; (ii) cause the related Prospectus to be amended or
supplemented by any required Prospectus supplement, and as so supplemented or amended
to be filed pursuant to Rule 424; (iii) respond as promptly as
reasonably possible, and in any event within ten Trading Days, to any comments
received from the Commission with respect to each Registration Statement or any
amendment thereto and, as promptly as reasonably possible provide the Holders
true and complete copies of all correspondence from and to the Commission
relating to such Registration Statement that pertains to the Holders as Selling
Stockholders but not any comments that would result in the disclosure to the
Holders of material and non-public information concerning the Company; and (iv) comply
in all material respects with the provisions of the Securities Act and the
Exchange Act with respect to the Registration Statements and the disposition of
all Registrable Securities covered by each Registration Statement.

 

(c)           Notify the Holders as promptly as
reasonably possible (and, in the case of (i)(A) below, not less than three
Trading Days prior to such filing) and (if requested by any such Person)
confirm such notice in writing no later than one Trading Day following the day
(i)(A) when a Prospectus or any Prospectus supplement or post-effective
amendment to a Registration Statement is proposed to be filed; (B) when
the Commission notifies the Company whether there will be a “review” of such
Registration Statement and whenever the Commission comments in writing on such
Registration Statement (the Company shall provide true and complete copies
thereof and all written responses thereto to each of the Holders that pertain
to the Holders as a Selling Stockholder or to the Plan of Distribution, but not
information which the Company believes would constitute material and non-public
information); and (C) with respect to each Registration Statement or any
post-effective amendment, when the same has become effective; (ii) of any
request by the Commission or any other Federal or state governmental authority
for amendments or supplements to a Registration Statement or Prospectus or for
additional information that pertains to the Holders as Selling Stockholders or
the Plan of Distribution; (iii) of the issuance by the Commission of any
stop order suspending the effectiveness of a Registration Statement covering
any or all of the Registrable Securities or the initiation of any Proceedings
for that purpose; (iv) of the receipt by the Company of any notification
with respect to the suspension of the qualification or exemption from
qualification of any of the Registrable Securities for sale in any jurisdiction,
or the initiation or threatening of any Proceeding for such purpose; and (v) of
the occurrence of any event or passage of time that makes the financial
statements included in a Registration Statement ineligible for inclusion
therein or any statement made in such Registration Statement or Prospectus or
any document incorporated or deemed to be incorporated therein by reference
untrue in any material respect or that requires any revisions to such
Registration Statement, Prospectus or other documents so that, in the case of
such Registration Statement or the Prospectus, as the case may be, it will not
contain any untrue

 

5

 

statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.

 

(d)           Use its best efforts to avoid the
issuance of, or, if issued, obtain the withdrawal of (i) any order
suspending the effectiveness of a Registration Statement, or (ii) any
suspension of the qualification (or exemption from qualification) of any of the
Registrable Securities for sale in any jurisdiction, at the earliest
practicable moment.

 

(e)           Furnish to each Holder, without
charge, at least one conformed copy of each Registration Statement and each
amendment thereto and all exhibits to the extent requested by such Person
(including those previously furnished or incorporated by reference) promptly
after the filing of such documents with the Commission; provided, that the
Company shall have no obligation to provide any document pursuant to this
clause that is available on the EDGAR system.

 

(f)            Promptly deliver to each Holder,
without charge, as many copies of each Prospectus or Prospectuses (including
each form of prospectus) and each amendment or supplement thereto as such
Persons may reasonably request.  The Company hereby consents to the use of
such Prospectus and each amendment or supplement thereto by each of the selling
Holders in connection with the offering and sale of the Registrable Securities
covered by such Prospectus and any amendment or supplement thereto.

 

(g)           Prior to any public offering of
Registrable Securities, use its best efforts to register or qualify or cooperate
with the selling Holders in connection with the registration or qualification
(or exemption from such registration or qualification) of such Registrable
Securities for offer and sale under the securities or Blue Sky laws of those
jurisdictions within the United States set forth on Schedule 3(g) hereto
to keep each such registration or qualification (or exemption therefrom)
effective during the Effectiveness Period and to do any and all other acts or
things necessary or advisable to enable the disposition in such jurisdictions
of the Registrable Securities covered by the Registration Statements; provided,
that the Company shall not be required to qualify generally to do business in
any jurisdiction where it is not then so qualified or subject the Company to
any material tax in any such jurisdiction where it is not then so subject.

 

(h)           Cooperate with the Holders to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be delivered to a transferee pursuant to the
Registration Statements, which certificates shall be free, to the extent
permitted by the Purchase Agreement, of all restrictive legends, and to enable
such Registrable Securities to be in such denominations and registered in such
names as any such Holders may request.

 

(i)            Upon the occurrence of any event
contemplated by Section 3(c)(v), as promptly as reasonably possible,
prepare a supplement or amendment, including a post-effective amendment, to the
affected Registration Statements or a supplement to the related Prospectus or
any document incorporated or deemed to be incorporated therein by reference,
and file any other required document so that, as thereafter delivered, no
Registration Statement nor any Prospectus will contain an untrue statement of a
material fact or omit to state a material fact required to be

 

6

 

stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.

 

(j)            The Company may require each
selling Holder to furnish to the Company a certified statement as to the number
of shares of Common Stock beneficially owned by such Holder and any Affiliate
thereof.

 

(k)           The Company has read and
understands the exercise limitations contained in certain of the Warrants and,
except as may be required by applicable law or rules or regulations of the
Commission, will not take a position in any Registration Statement or other
filing with the Commission that a Holder whose Warrant contains such exercise
limitations is the beneficial owner of more than the percentage of Common Stock
permitted to be beneficially owned by such Holder absent an affirmative written
statement by such Holder to such effect.  It is understood and agreed
that current law, rules and regulations of the Commission do not require
the adoption of a position that a Holder whose Warrant contains such exercise
limitations is the beneficial owner of more than the percentage of Common Stock
permitted to be beneficially owned by such Holder pursuant to the exercise
limitations contained in the Warrants.

 

4.             Registration Expenses.  All fees and
expenses incident to the Company’s performance of its obligation under this
Agreement (excluding any underwriting discounts and selling commissions and all
legal fees and expenses of legal counsel for any Holder) shall be borne by the
Company whether or not any Registrable Securities are sold pursuant to a
Registration Statement.  The fees and expenses referred to in the foregoing
sentence shall include, without limitation, (i) all registration and
filing fees (including, without limitation, fees and expenses (A) with
respect to filings required to be made with the Trading Market on which the
Common Stock is then listed for trading, and (B) in compliance with
applicable state securities or Blue Sky laws), (ii) printing expenses
(including, without limitation, expenses of printing certificates for
Registrable Securities and of printing prospectuses if the printing of
prospectuses is reasonably requested by the holders of a majority of the
Registrable Securities included in the Registration Statement), (iii) messenger,
telephone and delivery expenses, (iv) fees and disbursements of counsel
for the Company, (v) Securities Act liability insurance, if the Company so
desires such insurance, and (vi) fees and expenses of all other Persons
retained by the Company in connection with the consummation of the transactions
contemplated by this Agreement.  In addition, the Company shall be
responsible for all of its internal expenses incurred in connection with the
consummation of the transactions contemplated by this Agreement (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit and the
fees and expenses incurred in connection with the listing of the Registrable
Securities on any securities exchange as required hereunder.

 

5.             Indemnification.

 

(a)           Indemnification
by the Company.  The Company shall, notwithstanding any termination of
this Agreement, indemnify and hold harmless each Holder, the officers,
directors, agents, investment advisors, partners, members, shareholders and
employees of each of them, each Person who controls any such Holder (within the
meaning of Section 15 of the

 

7

 

Securities Act or Section 20 of the
Exchange Act) and the officers, directors, agents and employees of each such
controlling Person, to the fullest extent permitted by applicable law, from and
against any and all losses, claims, damages, liabilities, costs (including,
without limitation, reasonable costs of preparation and reasonable attorneys’
fees) and expenses (collectively, “Losses”), as incurred, arising out of or relating
to any untrue or alleged untrue statement of a material fact contained in any
Registration Statement, any Prospectus or any form of prospectus or in any
amendment or supplement thereto (it being understood that the Holder has
approved Annex A hereto for this purpose) or in any preliminary prospectus, or
arising out of or relating to any omission or alleged omission of a material
fact required to be stated therein or necessary to make the statements therein
(in the case of any Prospectus or form of prospectus or supplement thereto, in
light of the circumstances under which they were made) not misleading, except
to the extent, but only to the extent, that (1) such untrue statements or
omissions are based solely upon information regarding such Holder furnished in
writing to the Company by such Holder expressly for use therein, or to the
extent that such information relates to such Holder or such Holder’s proposed
method of distribution of Registrable Securities and was reviewed and expressly
approved in writing by such Holder expressly for use in the Registration
Statement, such Prospectus or such form of Prospectus or in any amendment or
supplement thereto (it being understood that the Holder has approved Annex A
hereto for this purpose) or (2) in the case of an occurrence of an event
of the type specified in Section 3(c)(ii)-(v), the use by such Holder of
an outdated or defective Prospectus after the Company has notified such Holder
in writing that the Prospectus is outdated or defective and prior to the receipt
by such Holder of an Advice (as defined below) or an amended or supplemented
Prospectus, but only if and to the extent that following the receipt of the
Advice or the amended or supplemented Prospectus the misstatement or omission
giving rise to such Loss would have been corrected.  The Company shall
notify the Holders promptly of the institution, threat or assertion of any
Proceeding of which the Company is aware in connection with the transactions
contemplated by this Agreement.

 

(b)           Indemnification by Holders. Each Holder shall, notwithstanding any termination of this Agreement,
severally and not jointly, indemnify and hold harmless the Company, its
directors, officers, agents and employees, each Person who controls the Company
(within the meaning of Section 15 of the Securities Act and Section 20
of the Exchange Act), and the directors, officers, agents or employees of such
controlling Persons, to the fullest extent permitted by applicable law, from
and against all Losses, as incurred, arising solely out of or based solely
upon: (x) such Holder’s failure to comply with the prospectus delivery
requirements of the Securities Act or (y) any untrue statement of a material
fact contained in any Registration Statement, any Prospectus, or any form of
prospectus, or in any amendment or supplement thereto, or arising solely out of
or based solely upon any omission of a material fact required to be stated
therein or necessary to make the statements therein not misleading to the
extent, but only to the extent that, (1) such untrue statements or
omissions are based solely upon information regarding such Holder furnished in
writing to the Company by such Holder expressly for use therein, or to the
extent that such information relates to such Holder or such Holder’s proposed
method of distribution of Registrable Securities and was reviewed and expressly
approved in writing by such Holder expressly for use in the Registration
Statement (it being understood that the Holder has approved Annex A hereto for
this purpose), such Prospectus or such form of Prospectus or in any amendment
or supplement thereto or (2) in the case of an occurrence of an event of
the type specified in Section 3(c)(ii)-(v), the use by such Holder of an
outdated or

 

8

 

defective Prospectus after the Company has notified
such Holder in writing that the Prospectus is outdated or defective and prior
to the receipt by such Holder of an Advice or an amended or supplemented
Prospectus, but only if and to the extent that following the receipt of the
Advice or the amended or supplemented Prospectus the misstatement or omission
giving rise to such Loss would
have been corrected.  In no event shall the liability of any selling
Holder hereunder be greater in amount than the dollar amount of the net
proceeds received by such Holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation.

 

(c)           Conduct of Indemnification
Proceedings. If any Proceeding shall be
brought or asserted against any Person entitled to indemnity hereunder (an “Indemnified
Party”), such Indemnified Party shall promptly notify the
Person from whom indemnity is sought (the “Indemnifying Party”) in writing, and the Indemnifying Party shall assume the defense
thereof, including the employment of counsel reasonably satisfactory to the
Indemnified Party and the payment of all fees and expenses incurred in
connection with defense thereof; provided, that the failure of any Indemnified
Party to give such notice shall not relieve the Indemnifying Party of its
obligations or liabilities pursuant to this Agreement, except (and only) to the
extent that it shall be finally determined by a court of competent jurisdiction
(which determination is not subject to appeal or further review) that such
failure shall have proximately and materially adversely prejudiced the
Indemnifying Party.

 

An Indemnified
Party shall have the right to employ separate counsel in any such Proceeding
and to participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such Indemnified Party or Parties
unless:  (1) the Indemnifying Party has agreed in writing to pay such
fees and expenses; (2) the Indemnifying Party shall have failed promptly
to assume the defense of such Proceeding and to employ counsel reasonably
satisfactory to such Indemnified Party in any such Proceeding; or (3) the
named parties to any such Proceeding (including any impleaded parties) include
both such Indemnified Party and the Indemnifying Party, and such Indemnified
Party shall have been advised by counsel that a conflict of interest is likely
to exist if the same counsel were to represent such Indemnified Party and the
Indemnifying Party (in which case, if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel at the
expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party), provided, that the Indemnifying Party shall not
be liable for the fees and expenses of more than one separate firm of attorneys
at any time for all Indemnified Parties.  The Indemnifying Party shall not
be liable for any settlement of any such Proceeding effected without its
written consent, which consent shall not be unreasonably withheld.  No
Indemnifying Party shall, without the prior written consent of the Indemnified
Party, effect any settlement of any pending Proceeding in respect of which any Indemnified
Party is a party, unless such settlement includes an unconditional release of
such Indemnified Party from all liability on claims that are the subject matter
of such Proceeding.

 

All fees and
expenses of the Indemnified Party (including reasonable fees and expenses to
the extent incurred in connection with investigating or preparing to defend
such Proceeding in a manner not inconsistent with this Section) shall be paid
to the Indemnified Party, as incurred, within ten Trading Days of written notice
thereof to the Indemnifying Party (regardless of whether it is ultimately
determined that an Indemnified Party is not entitled to

 

9

 

indemnification hereunder; provided, that the
Indemnifying Party may require such Indemnified Party to undertake to reimburse
all such fees and expenses to the extent it is finally judicially determined
that such Indemnified Party is not entitled to indemnification hereunder).

 

(d)           Contribution.  If a claim for indemnification
under Section 5(a) or 5(b) is unavailable to an Indemnified
Party (by reason of public policy or otherwise), then each Indemnifying Party,
in lieu of indemnifying such Indemnified Party, shall contribute to the amount
paid or payable by such Indemnified Party as a result of such Losses, in such
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party and Indemnified Party in connection with the actions, statements or
omissions that resulted in such Losses as well as any other relevant equitable
considerations.  The relative fault of such Indemnifying Party and
Indemnified Party shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission of a material
fact, has been taken or made by, or relates to information supplied by, such
Indemnifying Party or Indemnified Party, and the parties’ relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission.  The amount paid or payable by a party as a
result of any Losses shall be deemed to include, subject to the limitations set
forth in Section 5(c), any reasonable attorneys’ or other reasonable fees
or expenses incurred by such party in connection with any Proceeding to the
extent such party would have been indemnified for such fees or expenses if the
indemnification provided for in this Section was available to such party
in accordance with its terms.

 

The parties
hereto agree that it would not be just and equitable if contribution pursuant
to this Section 5(d) were determined by pro rata allocation or by any
other method of allocation that does not take into account the equitable
considerations referred to in the immediately preceding paragraph. 
Notwithstanding the provisions of this Section 5(d), no Holder shall be
required to contribute, in the aggregate, any amount in excess of the amount by
which the proceeds actually received by such Holder from the sale of the
Registrable Securities subject to the Proceeding exceeds the amount of any
damages that such Holder has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission.

 

The indemnity
and contribution agreements contained in this Section are in addition to
any liability that the Indemnifying Parties may have to the Indemnified
Parties.

 

6.             Miscellaneous

 

(a)           Remedies.  In the event of a breach by
the Company or by a Holder, of any of their obligations under this Agreement,
each Holder or the Company, as the case may be, in addition to being entitled
to exercise all rights granted by law and under this Agreement, including
recovery of damages, will be entitled to specific performance of its rights
under this Agreement.  The Company and each Holder agree that monetary
damages would not provide adequate compensation for any losses incurred by
reason of a breach by it of any of the provisions of this Agreement and hereby
further agrees that, in the event of any action for specific performance in
respect of such breach, it shall waive the defense that a remedy at law would
be adequate.

 

10

 

(b)           Compliance.  Each Holder covenants and agrees that it will comply with the
prospectus delivery requirements of the Securities Act as applicable to it in
connection with sales of Registrable Securities pursuant to the Registration
Statement.

 

(c)           Discontinued Disposition.  Each Holder agrees by its acquisition of such Registrable
Securities that, upon receipt of a notice from the Company of the occurrence of
any event of the kind described in Section 3(c), such Holder will
forthwith discontinue disposition of such Registrable Securities under the
Registration Statement until such Holder’s receipt of the copies of the
supplemented Prospectus and/or amended Registration Statement or until it is
advised in writing (the “Advice”) by the
Company that the use of the applicable Prospectus may be resumed, and, in
either case, has received copies of any additional or supplemental filings that
are incorporated or deemed to be incorporated by reference in such Prospectus
or Registration Statement.  The Company may provide appropriate stop
orders to enforce the provisions of this paragraph.

 

(d)           Amendments and Waivers. No provision of this Agreement may be waived or amended except in a
written instrument signed by the Company and the Holder or Holders (as
applicable) of no less than 75% of the then outstanding Registrable Securities. 
The Company shall provide prior notice to all Holders of any proposed waiver or
amendment.  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 either party to exercise any right hereunder in any manner impair
the exercise of any such right.

 

(e)           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 (i) the
date of transmission, if such notice or communication is delivered via
facsimile at the facsimile number specified in this Section prior to 5:00 p.m.
(California time) on a Business Day, (ii) the Business Day after the date
of transmission, if such notice or communication is delivered via facsimile at
the facsimile telephone number specified in this Agreement later than 5:00 p.m.
(California time) on any date and earlier than 11:59 p.m. (California
time) on such date, (iii) the Business Day following the date of mailing,
if sent by nationally recognized overnight courier service, or (iv) upon
actual receipt by the party to whom such notice is required to be given. 
The address for such notices and communications shall be as follows:

 

	
  If to the Company:

  	
   

  	
  Valentis, Inc.

  
	
   

  	
   

  	
  863A Mitten Road

  
	
   

  	
   

  	
  Burlingame, CA 94010

  
	
   

  	
   

  	
  ATTN:  Benjamin F. McGraw III, Pharm.
  D.

  

 

11

 

	
  With a copy to:

  	
   

  	
  Patrick A. Pohlen

  
	
   

  	
   

  	
  Latham & Watkins LLP

  
	
   

  	
   

  	
  135 Commonwealth Drive

  
	
   

  	
   

  	
  Menlo Park, CA  94025

  

 

	
  If to a Purchaser:

  	
   

  	
  To the address set forth under such Purchaser’s
  name on the signature pages hereto.

  
	
   

  
	
  If to any other Person who is then the
  registered Holder:

  

 

	
   

  	
   

  	
  To the address of such Holder as it appears
  in the stock transfer books of the Company

  

 

or such other address as may be designated in
writing hereafter, in the same manner, by such Person.

 

(f)            Successors and Assigns.  This Agreement shall inure to
the benefit of and be binding upon the successors and permitted assigns of each
of the parties and shall inure to the benefit of each Holder.  The Company
may not assign its rights or obligations hereunder without the prior written
consent of the Holders of no less than two-thirds of the then outstanding
Registrable Securities.  Each Holder may assign their respective rights
hereunder in the manner and to the Persons as permitted under the Purchase
Agreement.

 

(g)           Execution and Counterparts.  This Agreement may be executed
in any number of counterparts, each of which when so executed shall be deemed
to be an original and, all of which taken together shall constitute one and the
same Agreement.  In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same with
the same force and effect as if such facsimile signature were the original
thereof.

 

(h)           Governing Law.  All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by and construed and enforced in accordance with the internal laws
of the State of California, without regard to the principles of conflicts of
law thereof.  Each party agrees that all Proceedings concerning the
interpretations, enforcement and defense of the transactions contemplated by
this Agreement (whether brought against a party hereto or its respective
Affiliates, employees or agents) may be commenced in the state and federal
courts sitting in the City of San Francisco (the “California Courts”).  Each party hereto hereby irrevocably submits to the
non-exclusive jurisdiction of the California Courts for the adjudication of any
dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and
agrees not to assert in any Proceeding, any claim that it is not personally
subject to the jurisdiction of any California Court, or that such Proceeding
has been commenced in an improper or inconvenient forum.  Each party
hereto hereby irrevocably waives personal service of process and consents to
process being served in any such Proceeding by mailing a copy

 

12

 

thereof via registered or certified mail or
overnight delivery (with evidence of delivery) to such party at the address in
effect for notices to it under this Agreement and agrees that such service
shall constitute good and sufficient service of process and notice
thereof.  Nothing contained herein shall be deemed to limit in any way any
right to serve process in any manner permitted by law.  Each party hereto
hereby irrevocably waives, to the fullest extent permitted by applicable law,
any and all right to trial by jury in any Proceeding arising out of or relating
to this Agreement or the transactions contemplated hereby.  If either
party shall commence a Proceeding to enforce any provisions of this Agreement,
then the prevailing party in such Proceeding shall be reimbursed by the other
party for its attorney’s fees and other costs and expenses incurred with the
investigation, preparation and prosecution of such Proceeding.

 

(i)            Cumulative Remedies.  The remedies provided herein
are cumulative and not exclusive of any remedies provided by law.

 

(j)            Severability. If any term, provision, covenant or restriction of this Agreement is
held by a court of competent jurisdiction to be invalid, illegal, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall
in no way be affected, impaired or invalidated, and the parties hereto shall
use their reasonable efforts to find and employ an alternative means to achieve
the same or substantially the same result as that contemplated by such term,
provision, covenant or restriction.  It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such
that may be hereafter declared invalid, illegal, void or unenforceable.

 

(k)           Headings.  The headings in this Agreement
are for convenience of reference only and shall not limit or otherwise affect
the meaning hereof.

 

(l)            Independent Nature of
Purchasers’ Obligations and Rights.  The obligations of each Purchaser hereunder
is several and not joint with the obligations of any other Purchaser hereunder,
and no Purchaser shall be responsible in any way for the performance of the
obligations of any other Purchaser hereunder.  The decision of each
Purchaser to purchase Securities pursuant to the Transaction Documents has been
made independently of any other Purchaser.  Nothing contained herein or in
any other agreement or document delivered at any closing, and no action taken
by any Purchaser pursuant hereto or thereto, shall be deemed to constitute the
Purchasers as a partnership, an association, a joint venture or any other kind
of entity, or create a presumption that the Purchasers are in any way acting in
concert with respect to such obligations or the transactions contemplated by this
Agreement.  Each Purchaser acknowledges that no other Purchaser has acted
as agent for such Purchaser in connection with making its investment hereunder
and that no Purchaser will be acting as agent of such Purchaser in connection
with monitoring its investment in the Securities or enforcing its rights under
the Transaction Documents.  Each Purchaser shall be entitled to protect
and enforce its rights, including without limitation the rights arising out of
this Agreement, and it shall not be necessary for any other Purchaser to be
joined as an additional party in any proceeding for such purpose.

 

13

 

IN WITNESS
WHEREOF, the parties have executed this Registration Rights Agreement as of the
date first written above.

 

 

	
   

  	
  VALENTIS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:  Benjamin F. McGraw, III,
  Pharm.D.

  
	
   

  	
  Title:    President and
  Chief Executive Officer

  

 

 

SIGNATURE PAGE TO VALENTIS,
INC.

REGISTRATION RIGHTS AGREEMENT

 

 

IN WITNESS
WHEREOF, the parties have executed this Registration Rights Agreement as of the
date first written above.

 

 

	
   

  	
  PURCHASER

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
  Address for Notice:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Facsimile No.:

  	
   

  	
   

  
	
   

  	
  Attn.: 

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  With a copy to:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Facsimile No.: 

  	
   

  	
   

  
	
   

  	
  Attn: 

  	
   

  	
   

  
												

 

 

SIGNATURE PAGE TO VALENTIS,
INC.

REGISTRATION RIGHTS AGREEMENT

 

 

ANNEX A

 

PLAN
OF DISTRIBUTION

 

The Selling
Stockholders and any of their pledgees, donees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions.  These sales may be at fixed
or negotiated prices.  The Selling Stockholders may use any one or more of
the following methods when selling shares:

 

•                  ordinary brokerage
transactions and transactions in which the broker-dealer solicits purchasers;

 

•                  block trades in
which the broker-dealer will attempt to sell the shares as agent but may
position and resell a portion of the block as principal to facilitate the transaction;

 

•                  purchases by a
broker-dealer as principal and resale by the broker-dealer for its account;

 

•                  an exchange
distribution in accordance with the rules of the applicable exchange;

 

•                  privately
negotiated transactions;

 

•                  short sales
entered into after the effective date of the registration statement of which
this prospectus is a part.

 

•                  broker-dealers
may agree with the Selling Stockholders to sell a specified number of such
shares at a stipulated price per share;

 

•                  a combination of
any such methods of sale; and

 

•                  any other method
permitted pursuant to applicable law.

 

The Selling
Stockholders may also sell shares under Rule 144 under the Securities Act,
if available, rather than under this prospectus.

 

Broker-dealers
engaged by the Selling Stockholders may arrange for other brokers-dealers to
participate in sales.  Broker-dealers may receive commissions or discounts
from the Selling Stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated.  The
Selling Stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved.

 

The Selling
Stockholders may from time to time pledge or grant a security interest in some
or all of the Shares owned by them and, if they default in the performance of
their secured obligations, the pledgees or secured parties may offer and sell
shares of Common Stock from time to time under this prospectus, or under an
amendment to this prospectus under Rule 424(b)(3) or other applicable
provision of the Securities Act of 1933 amending the list of selling

 

 

1

 

stockholders to include the pledgee,
transferee or other successors in interest as selling stockholders under this
prospectus.

 

Upon the
Company being notified in writing by a Selling Stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of Common
Stock through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, a supplement to
this prospectus will be filed, if required, pursuant to Rule 424(b) under
the Securities Act, disclosing (i) the name of each such Selling
Stockholder and of the participating broker-dealer(s), (ii) the number of
shares involved, (iii) the price at which such the shares of Common Stock
were sold, (iv) the commissions paid or discounts or concessions allowed
to such broker-dealer(s), where applicable, (v) that such broker-dealer(s)
did not conduct any investigation to verify the information set out or
incorporated by reference in this prospectus, and (vi) other facts
material to the transaction.  In addition, upon the Company being notified
in writing by a Selling Stockholder that a donee or pledge intends to sell more
than 500 shares of Common Stock, a supplement to this prospectus will be filed
if then required in accordance with applicable securities law.

 

The Selling
Stockholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this prospectus.

 

The Selling
Stockholders and any broker-dealers or agents that are involved in selling the
shares may be deemed to be “underwriters” within the meaning of the Securities
Act in connection with such sales.  In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.  Each Selling Stockholders has
represented and warranted to the Company that it does not have any agreement or
understanding, directly or indirectly, with any person to distribute the Common
Stock.

 

The Company
has advised the Selling Stockholders that they are required to comply with
Regulation M promulgated under the Securities and Exchange Act during such time
as they may be engaged in a distribution of the shares.  The foregoing may
affect the marketability of the common stock.

 

The Company is
required to pay all fees and expenses incident to the registration of the
shares.  The Company has agreed to indemnify the Selling Stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.

 

2

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