Document:

Security Agreement

 Exhibit 10.13 
  
 SECURITY AGREEMENT 
  
 SECURITY AGREEMENT (this “Agreement”), dated as of October 14, 2005, by and among Basin Water, Inc., a California corporation
(“Basin Water”) Bion, a California corporation (“Bion” and together with Basin Water, the “Company”), and the secured parties signatory hereto and their respective endorsees, transferees and assigns
(collectively, the “Secured Party”). 
  
 W I T N E
S S E T H: 
  
 WHEREAS, pursuant to a Subordinated Note With
Warrants Purchase Agreement, dated the date hereof, between Company and the Secured Party (the “Purchase Agreement”), Company has agreed to issue to the Secured Party and the Secured Party has agreed to purchase from Company the
Senior Subordinated Notes in the aggregate original principal amount of $5,000,000 (the “Notes”). In connection therewith, Company shall issue the Secured Party and the Secured Party shall acquire certain Common Stock purchase warrants
(the “Warrants”); and 
  
 WHEREAS, in order to
induce the Secured Party to purchase the Notes and the Warrants, Company has agreed to execute and deliver to the Secured Party this Agreement for the benefit of the Secured Party and to grant to it a security interest in certain property of Company
to secure the prompt payment, performance and discharge in full of all of Company’s obligations under the Note and exercise and discharge in full of Company’s obligations under the Warrants. 
  
 NOW, THEREFORE, in consideration of the agreements herein contained and for
other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 
  
 1. Certain Definitions. As used in this Agreement, the following terms shall have the meanings set forth in this Section 1. Terms used but not
otherwise defined in this Agreement that are defined in Article 9 of the UCC shall have the respective meanings given such terms in Article 9 of the UCC. 
  
 (a) “Collateral” means the collateral in which the Secured Party is granted a security interest by this Agreement and which shall include
the following, whether presently owned or existing or hereafter acquired or coming into existence, and all additions and accessions thereto and all substitutions and replacements thereof, and all proceeds, products and accounts thereof, including,
without limitation, all proceeds from the sale or transfer of the Collateral and of insurance covering the same and of any tort claims in connection therewith: 
  

(i) All Goods of the Company, including, without limitations, all machinery, equipment, computers, motor vehicles, trucks, tanks,
boats, ships, appliances, furniture, special and general tools, fixtures, test and quality control devices and other equipment of every kind and nature and wherever situated, together with all documents of title and documents representing the same,
all additions and accessions thereto, replacements therefor, all parts therefor, and all substitutes for any of the foregoing and all other items used and useful in connection with the Company’s businesses and all improvements thereto; and

 (ii) All Inventory of the Company; and 
  
 (iii) All of the Company’s contract rights and general
intangibles, including, without limitation, all water contracts, partnership interests, stock or other securities, licenses, distribution and other agreements, computer software development rights, leases, franchises, customer lists, quality control
procedures, grants and rights, goodwill, trademarks, service marks, trade styles, trade names, patents, patent applications, copyrights, deposit accounts, and income tax refunds; and 
  
 (iv) All Accounts of the Company including all insurance proceeds, and rights to refunds or indemnification
whatsoever owing, together with all instruments, all documents of title representing any of the foregoing, all rights in any merchandising, goods, equipment, motor vehicles and trucks which any of the same may represent, and all right, title,
security and guaranties with respect to each Account, including any right of stoppage in transit; 
  
 (v) All of the Company’s documents, instruments, chattel paper, investment property, deposit accounts, letter-of-credit rights,
supporting obligations, files, records, books of account, business papers and computer programs and the products; and 
  
 (vi) To the extent not listed above, the proceeds of all of the foregoing Collateral set forth in clauses (i)-(v) above. 

 
 (b) “Company” means, collectively, Company and all of the
subsidiaries of Company, a list of which is contained in Exhibit A, attached hereto. 
  
 (c) “Financing Statements” shall have the meaning set forth in the Purchase Agreement. 
  
 (d) “Governmental Authority” shall have the meaning set forth in the Purchase Agreement. 
  
 (e) “Knowledge” shall have the meaning set forth in the
Purchase Agreement. 
  
 (f) “Subordination and
Intercreditor Agreement” means the Subordination and Intercreditor Agreement dated as of October 14, 2005, among the Secured Party and BWCA I, LLC and acknowledged by the Company (as heretofore amended, supplemented or otherwise
modified). 
  
 (g) “Liens” shall have the meaning
set forth in the Purchase Agreement. 
  
 (h) “Material
Adverse Effect” shall have the meaning set forth in the Purchase Agreement. 
  
 (i) “Obligations” means all of the Company’s obligations under this Agreement, the Purchase Agreement and the Notes, in each case, whether now or hereafter 
  

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 existing, voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or
not jointly owed with others, and whether or not from time to time decreased or extinguished and later decreased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such
payment is avoided or recovered directly or indirectly from the Secured Party as a preference, fraudulent transfer or otherwise as such obligations may be amended, supplemented, converted, extended or modified from time to time. 
  
 (j) “Permitted Liens” shall have the meaning set forth in
the Purchase Agreement. 
  
 (k) “Permitted Sales”
shall have the meaning set forth in the Purchase Agreement. 
  
 (1) “Person” shall have the meaning set forth in the Purchase Agreement. 
  
 (m) “UCC” means the Uniform Commercial Code, as currently in effect in the State of California. 
  
 2. Grant of Security Interest. As an inducement for the Secured Party
to purchase the Note and to secure the complete and timely payment, performance and discharge in full, as the case may be, of all of the Obligations, the Company hereby, pledges, grants and hypothecates to the Secured Party, a continuing security
interest in, a continuing lien upon, an unqualified right to possession and disposition of and a right of set-off against, in each case to the fullest extent permitted by law, all of the Company’s right, title and interest of whatsoever kind
and nature in and to the Collateral (the “Security Interest”). The Company shall take all such actions requested by the Secured Party so as to maintain the Security Interest as a valid and perfected second priority security interest
in the Collateral in accordance with the terms and conditions of this Agreement, subject only to the first priority security interest in the Collateral with respect to indebtedness of the Company to BWCA I, LLC pursuant to a Business Loan Agreement
dated as of July 1, 2003 and any other credit agreement with BWCA I, LLC, in each case, as the same may be amended, supplemented, modified, or restated from time to time (the “BWCA Security Interest”) and any Permitted Liens.

  
 3. Representations, Warranties, Covenants and Agreements of
the Company. The Company represents and warrants to, and covenants and agrees with, the Secured Party as follows: 
  
 (a) The Company represents and warrants that it has no place of business or offices where its respective books of account and records are kept (other than
temporarily at the offices of its attorneys or accountants) or places where Collateral is stored or located, except as set forth on Exhibit B attached hereto. 
  
 (b) The Company is the sole owner of the Collateral, free and clear from encumbrances, except Permitted Liens and is free
from any other Liens which would have a Material Adverse Effect and is fully authorized to grant the Security Interest in and to pledge the Collateral. Except for financing statements evidencing Permitted Liens and the Financing Statements filed
pursuant to this Agreement, to the Company’s Knowledge, there is not on file 
  

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 with any Governmental Authority an effective financing statement, security agreement, license or transfer or any notice
of any of the foregoing covering or affecting any of the Collateral. So long as this Agreement shall be in effect, the Company shall not execute and shall not knowingly permit to be on file in any such office or agency any such financing statement
or other document or instrument, except to the extent filed or recorded in favor of the Secured Party pursuant to the terms of this Agreement or filed or recorded in connection with the BWCA Security Interest and any Permitted Liens. 
  
 (c) No part of the Collateral has been judged invalid or unenforceable. No
written claim has been received that any Collateral or the Company’s use of any Collateral violates the rights of any third party. There has been no adverse decision to the Company’s claim of ownership rights in or exclusive rights to use
the Collateral in any jurisdiction or to the Company’s right to keep and maintain such Collateral in full force and effect, and there is no proceeding involving said rights pending or, to the Company’s Knowledge, threatened before any
court, judicial body, administrative or regulatory agency, arbitrator or other Governmental Authority. 
  
 (d) The Company shall at all times maintain its books of account and records relating to the Collateral at its principal place of business and its
Collateral at the locations set forth on Exhibit B attached hereto and may not relocate such books of account and records or tangible Collateral (except changes in the location of any Collateral pursuant to Permitted Sales) unless it delivers
to the Secured Party at least ten (10) days prior to such relocation, written notice of such relocation and the new location thereof (which must be within the United States). 
  
 (e) The Company shall notify the Secured Party at least ten (10) days in advance of any change in the state of
incorporation or formation or any change in the Company’s name(s) and the Company shall provide evidence that appropriate financing statements and other necessary documents have been filed and recorded and other steps have been taken to perfect
the Security Interest to create in favor of the Secured Party valid, perfected and continuing liens in the Collateral, to the extent the Security Interest in the Collateral can be perfected by making such filings. 
  
 (f) This Agreement creates in favor of the Secured Party a valid security
interest in the Collateral securing the payment and performance of the Obligations and, upon making the filings described in the immediately following sentence, a perfected security interest in such Collateral, to the extent the Security Interest in
the Collateral can be perfected by making such filings. Except for the filing of financing statements on Form UCC-1 under the UCC with the jurisdictions indicated on Exhibit C, attached hereto, no authorization or approval of or filing with
or notice to any Governmental Authority is required either (i) for the grant by the Company of, or the effectiveness of, the Security Interest granted hereby or for the execution, delivery and performance of this Agreement by the Company or
(ii) for the perfection of or exercise by the Secured Party of its rights and remedies hereunder to the extent such rights and remedies with respect to the Collateral can be perfected by making such filings. 
  
 (g) The Company shall take all such actions requested by the Secured Party so
as to maintain the liens and Security Interest provided for hereunder as valid and perfected liens and security interests in the Collateral in favor of the Secured Party until this Agreement and the 
  

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 Security Interest hereunder shall terminate pursuant to Section 11. The Company hereby agrees to defend the same
against any and all persons. The Company shall safeguard and protect all Collateral for the account of the Secured Party. At the request of the Secured Party, the Company will deliver to the Secured Party at any time or from time to time one or more
Financing Statements pursuant to the UCC (or any other applicable statute) in form reasonably satisfactory to the Secured Party and will pay the cost of filing the same in all public offices wherever filing is, or is deemed by the Secured Party to
be, necessary or desirable to effect the rights and obligations provided for herein. Without limiting the generality of the foregoing, the Company shall pay all fees, taxes and other amounts necessary to maintain the Collateral and the Security
Interest hereunder, and the Company shall obtain and furnish to the Secured Party from time to time, upon demand, such releases and/or subordinations of claims and liens which may be required to maintain the priority of the Security Interest
hereunder, except with respect to the Permitted Liens. 
  
 (h) The
Company hereby authorizes the Secured Party to file any UCC financing or continuation statement without the signature of the Company to the extent permitted by applicable law, including, but not limited to, a filing of a Form UCC-1 financing
statement with an “all assets” description for the Collateral description. The Company hereby ratifies any filing by the Secured Party of financing statements prior to the date hereof with respect to the Collateral. A carbon, photographic,
facsimile or any reproduction of this Security Agreement shall be sufficient as a financing statement for filing in any jurisdiction. 
  
 (i) The Company will not sell, lease, transfer, or otherwise dispose of any of the Collateral or create, incur, assume or suffer to exist any Lien upon
any of the Collateral, except for Permitted Liens, Permitted Sales and as otherwise permitted under the Purchase Agreement, without the prior written consent of the Secured Party. 
  
 (j) The Company shall keep and preserve its Goods, Inventory and other tangible Collateral in good working order and
condition in accordance with good business practices customary in the Company’s industry reasonable wear and tear excepted and shall not operate or locate any such Collateral (or cause to be operated or located) in any area excluded from
insurance coverage. 
  
 (k) The Company shall, within ten
(10) days of obtaining Knowledge thereof, advise the Secured Party promptly, in sufficient detail, of any substantial change in the Collateral, and of the occurrence of any event which would have a Material Adverse Effect on the value of the
Collateral or on the Secured Party’s security interest therein. 
  
 (l) The Company shall promptly execute and deliver to the Secured Party such further deeds, mortgages, assignments, security agreements, financing statements or other instruments, documents, certificates and assurances and take such further
action as the Secured Party may from time to time reasonably request and may in its sole discretion deem necessary to perfect, protect or enforce its security interest in the Collateral including, without limitation, the execution and delivery of a
separate security agreement with respect to the Company’s intellectual property (“Intellectual Property Security Agreement”) in which the Secured Party has been granted a security interest hereunder, substantially in a form
acceptable to the Secured Party, which Intellectual Property Security Agreement, other than as stated therein, shall be 
  

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 subject to all of the terms and conditions hereof. Where Collateral is in the possession of a third party, the Company
will join with the Secured Party in notifying the third party of the Secured Party’s security interest and obtaining an acknowledgement from the third party that it is holding the Collateral for the benefit of the Secured Party as may be
reasonably requested by the Secured Party. The Company will use reasonable efforts to cooperate with the Secured Party in obtaining control with respect to Collateral consisting of (i) deposit accounts; (ii) investment property;
(iii) letter-of-credit rights; and (iv) electronic chattel paper. 
  
 (m) The Company shall permit the Secured Party and its employees and agents to inspect the Collateral during regular business hours and upon at least twenty-four (24) hours prior written notice, and to make
copies of records pertaining to the Collateral, all in accordance with the Purchase Agreement. 
  
 (n) The Company will take all steps reasonably necessary to diligently pursue and seek to preserve, enforce and collect any rights, claims, causes of action and accounts receivable in respect of the Collateral.

  
 (o) The Company shall promptly, and in any case, in no less
than five (5) days, notify the Secured Party in sufficient detail upon becoming aware of any attachment, garnishment, execution or other legal process levied against any Collateral and of any other information received by the Company that may
have a Material Adverse Effect on the Collateral, the Security Interest or the rights and remedies of the Secured Party hereunder. 
  
 (p) All information heretofore, herein or hereafter supplied to the Secured Party by or on behalf of the Company with respect to the Collateral is
accurate and complete in all material respects as of the date furnished. 
  
 (q) Exhibit A attached hereto contains a list of all of the subsidiaries of Company. The Company shall notify the Secured Party as soon as practicable after acquiring or creating a new subsidiary, and cause
such new subsidiary which is a domestic subsidiary to execute and deliver to the Secured Party joinders to this Agreement, any Intellectual Property Security Agreement, and any other documents as may be reasonably requested by the Secured Party in
form and substance satisfactory to the Company to which such subsidiary shall grant a security interest to the Secured Party in its assets as additional Collateral for the Obligations. 
  
 4. Defaults. The following events shall be “Events of Default”: 
  
 (a) The occurrence of an Event of Default as defined in and under the
Purchase Agreement; 
  
 (b) Any representation or warranty of the
Company in this Agreement or in the Intellectual Property Security Agreement shall prove to have been incorrect and the subject of that breach of representation or warranty has a Material Adverse Effect (as defined in the Purchase Agreement) on or
as the date made or deemed made; and 
  
 (c) The failure by the
Company to observe or perform any of its obligations hereunder or in the Intellectual Property Security Agreement for fifteen (15) days after receipt by the Company of notice of such failure from the Secured Party. 
  

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 5. Duty To Hold In Trust. Upon the occurrence of any Event of Default and at any time thereafter,
the Company shall, upon receipt by it of any revenue, income or other sums subject to the Security Interest, whether payable pursuant to the Notes or otherwise, or of any check, draft, note, trade acceptance or other instrument evidencing an
obligation to pay any such sum, hold the same in trust for the Secured Party and shall forthwith endorse and transfer any such sums or instruments, or both, to the Secured Party for application to the satisfaction of the Obligations. 
  
 6. Rights and Remedies Upon Default. Upon occurrence of any Event of
Default and at any time thereafter, the Secured Party shall have the right to exercise all of the remedies conferred hereunder and under the Notes, and the Secured Party shall have all the rights and remedies of a secured party under the UCC and/or
any other applicable law (including the Uniform Commercial Code of any jurisdiction in which any Collateral is then located). Without limitation, the Secured Party shall have the following rights and powers: 
  
 (a) The Secured Party shall have the right to take possession of the
Collateral and, for that purpose, enter, with the aid and assistance of any person, any premises where the Collateral, or any part thereof, is or may be placed and remove the same, and the Company shall assemble the Collateral and make it available
to the Secured Party at places which the Secured Party shall reasonably select, whether at the Company’s premises or elsewhere, and make available to the Secured Party, without rent, all of the Company’s respective premises and facilities
for the purpose of the Secured Party taking possession of, removing or putting the Collateral in saleable or disposable form. 
  
 (b) The Secured Party shall have the right to operate the business of the Company using the Collateral and shall have the right to assign, sell, lease or
otherwise dispose of and deliver all or any part of the Collateral, at public or private sale or otherwise, either with or without special conditions or stipulations, for cash or on credit or for future delivery, in such parcel or parcels and at
such time or times and at such place or places, and upon such terms and conditions as the Secured Party may deem commercially reasonable, all without (except as shall be required by applicable statute and cannot be waived) advertisement or demand
upon or notice to the Company or right of redemption of the Company, which are hereby expressly waived. Upon each such sale, lease, assignment or other transfer of Collateral, the Secured Party may, unless prohibited by applicable law which cannot
be waived, purchase all or any part of the Collateral being sold, free from and discharged of all trusts, claims, right of redemption and equities of the Company, which are hereby waived and released. 
  
 7. Applications of Proceeds. The proceeds of any such sale, lease or
other disposition of the Collateral hereunder shall be applied first, to the expenses of retaking, holding, storing, processing and preparing for sale, selling, and the like (including, without limitation, any taxes, fees and other costs incurred in
connection therewith) of the Collateral, to the reasonable attorneys’ fees and expenses incurred by the Secured Party in enforcing its rights hereunder and in connection with collecting, storing and disposing of the Collateral, and then to
satisfaction of the Obligations, and to the payment of any other amounts required by applicable law, after which the Secured Party shall pay to the Company any surplus proceeds. If, upon the sale, license or other disposition of the Collateral, the
proceeds thereof are insufficient to pay all amounts to which the Secured Party is legally entitled, the Company will be liable for the deficiency, 
  

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 together with interest thereon, at the rate of 9% per annum (the “Default Rate”), and the
reasonable fees of any attorneys employed by the Secured Party to collect such deficiency. To the extent permitted by applicable law, the Company waives all claims, damages and demands against the Secured Party arising out of the repossession,
removal, retention or sale of the Collateral, unless due to the gross negligence or willful misconduct of the Secured Party. 
  
 8. Costs and Expenses. The Company agrees to pay all out-of-pocket fees, costs and expenses incurred in connection with any filing required
hereunder, including without limitation, any financing statements, continuation statements, partial releases and/or termination statements related thereto or any expenses of any searches reasonably required by the Secured Party. The Company shall
also pay all other claims and charges which in the reasonable opinion of the Secured Party might prejudice, imperil or otherwise affect the Collateral or the Security Interest therein. The Company will also, upon demand, pay to the Secured Party the
amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Secured Party may incur in connection with (i) the enforcement of this Agreement, (ii) the
custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, or (iii) the exercise or enforcement of any of the rights of the Secured Party under the Notes. Until so paid, any fees payable
hereunder shall be added to the principal amount of the Notes and shall bear interest at the Default Rate. 
  
 9. Responsibility for Collateral. The Company assumes all liabilities and responsibility in connection with all Collateral, and the obligations of
the Company hereunder or under the Notes and the Warrants shall in no way be affected or diminished by reason of the loss, destruction, damage or theft of any of the Collateral or its unavailability for any reason. 
  
 10. Security Interest Absolute. All rights of the Secured Party and
all Obligations of the Company hereunder, shall be absolute and unconditional, irrespective of: (a) any lack of validity or enforceability of this Agreement, the Purchase Agreement, the Notes, the Warrants or any agreement entered into in
connection with the foregoing, or any portion hereof or thereof; (b) any change in the time, manner or place of payment or performance of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any
consent to any departure from the Purchase Agreement, the Notes, the Warrants or any other agreement entered into in connection with the foregoing; (c) any exchange, release or nonperfection of any of the Collateral, or any release or amendment
or waiver of or consent to departure from any other collateral for, or any guaranty, or any other security, for all or any of the Obligations; (d) any action by the Secured Party to obtain, adjust, settle and cancel in its sole discretion any
insurance claims or matters made or arising in connection with the Collateral; or (e) any other circumstance which might otherwise constitute any legal or equitable defense available to the Company, or a discharge of all or any part of the
Security Interest granted hereby. Until the Obligations shall have been paid and performed in full, the rights of the Secured Party shall continue even if the Obligations are barred for any reason, including, without limitation, the running of the
statute of limitations or bankruptcy. The Company expressly waives presentment, protest, notice of protest, demand, notice of nonpayment and demand for performance. In the event that at any time any transfer of any Collateral or any payment received
by the Secured Party hereunder shall be deemed by final order of a court of competent jurisdiction to have been a voidable preference or fraudulent conveyance under the bankruptcy or insolvency laws of the United States, or shall be deemed to be
otherwise due to any party other than the Secured Party, then, in any such event, 
  

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 the Company’s obligations hereunder shall survive cancellation of this Agreement, and shall not be discharged or
satisfied by any prior payment thereof and/or cancellation of this Agreement, but shall remain a valid and binding obligation enforceable in accordance with the terms and provisions hereof. The Company waives all right to require the Secured Party
to proceed against any other person or to apply any Collateral which the Secured Party may hold at any time, or to marshal assets, or to pursue any other remedy. The Company waives any defense arising by reason of the application of the statute of
limitations to any obligation secured hereby. 
  
 11. Term of
Agreement. This Agreement and the Security Interest shall terminate on the date on which all payments under the Note have been made in full and all other Obligations have been paid or discharged. Upon such termination, the Secured Party, at the
request and at the expense of the Company, will join in executing any termination statement with respect to any financing statement executed and filed pursuant to this Agreement and taking any and all other actions reasonably requested by the
Company to terminate the Secured Party’s Security Interest and release any and all Collateral. 
  
 12. Power of Attorney; Further Assurances. 
  
 (a) The Company authorizes the Secured Party, and does hereby make, constitute and appoint it, and its respective officers, agents, successors or assigns
with full power of substitution, as the Company’s true and lawful attorney-in-fact, with power, in its own name or in the name of the Company, to, after the occurrence and during the continuance of an Event of Default, (i) endorse any
notes, checks, drafts, money orders, or other instruments of payment (including payments payable under or in respect of any policy of insurance) in respect of the Collateral that may come into possession of the Secured Party; (ii) to sign and
endorse any UCC financing statement or any invoice, freight or express bill, bill of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with accounts, and other documents relating to
the Collateral; (iii) to pay or discharge taxes, liens, security interests or other encumbrances at any time levied or placed on or threatened against the Collateral; (iv) to demand, collect, receipt for, compromise, settle and sue for
monies due in respect of the Collateral; and (v) generally, to do, at the option of the Secured Party, and at the Company’s expense, at any time, or from time to time, all acts and things which the Secured Party deems reasonably necessary
to protect, preserve and realize upon the Collateral and the Security Interest granted therein in order to effect the intent of this Agreement, the Purchase Agreement, the Notes and the Warrants, all as fully and effectually as the Company might or
could do; and the Company hereby ratifies all that said attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney is coupled with an interest and shall be irrevocable for the term of this Agreement and thereafter as
long as any of the Obligations shall be outstanding. 
  
 (b) On a
continuing basis, the Company will make, execute, acknowledge, deliver, file and record, as the case may be, in the proper filing and recording places in any jurisdiction, including, without limitation, the jurisdictions indicated on Exhibit
C, attached hereto, all such instruments, and take all such action as may reasonably be deemed necessary or advisable, or as reasonably requested by the Secured Party, to perfect the Security Interest granted hereunder and otherwise to carry out
the intent and purposes of this Agreement, or for assuring and confirming to the Secured Party the grant or perfection of a security interest in all the Collateral. 
  

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 (c) The Company hereby irrevocably appoints the Secured Party as the Company’s attorney-in-fact so
long as any of the Obligations shall be outstanding, with full authority in the place and stead of the Company and in the name of the Company, from time to time in the Secured Party’s discretion, to take any action and to execute any instrument
which the Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including the filing, in its sole discretion, of one or more financing or continuation statements and amendments thereto, relative to any of the
Collateral without the signature of the Company where permitted by law. 
  
 13. Notices. All notices, requests, demands to or upon the respective parties hereto to be effective shall be in writing, and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered
by hand, or, in the case of telecopy notice, when received, or, in the case of a nationally recognized courier service, one business day after delivery to such courier service, addressed as follows in the case of the Company and the Secured Party or
to such other address as may be hereafter notified by the respective parties hereto and any future Secured Parties: 
  
 If to the Company: 
  
 Basin Water, Inc. 
 8731 Prestige Court

 Rancho Cucamonga, CA 91730 
 Attention: Peter Jensen, Chief Executive Officer and President 
 Telephone: (619) 222-1493 
 Facsimile: (619) 222-3393 
  
 With a copy to (which copy shall not constitute notice to the Company) to: 
  
 Latham & Watkins LLP 
 12636 High Bluff Drive, Suite 400 
 San Diego, CA 92130 
 Attention: Faye H. Russell, Esquire 
 Telephone No.: (858) 523-5400 
 Facsimile No.: (858) 523-5450 
  
 If to the Secured Party: 
  

The Co-Investment 2000 Fund, L.P. 
 Five
Radnor Corporate Center, Suite 555 
 100 Matsonford Road 
 Radnor, PA 19087 
 Attention: Richard M. Fox, Managing Director 
 Telephone No.: (610) 995-2650 
  

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 Facsimile No.: (610) 971-2062 
  
 with a copy (which copy shall not constitute notice to the Secured Party) to: 
  
 Ballard Spahr Andrews & Ingersoll, LLP 
 1735 Market Street, 51st Floor 
 Philadelphia, PA 19103 
 Attention: Brian D. Doerner, Esquire 
 Telephone No.: (215) 864-8615 
 Facsimile No.: (215) 864-9043 
  
 14. Other Security. To the extent that the Obligations are now or hereafter secured by property other than the Collateral or by the guarantee,
endorsement or property of any other person, firm, corporation or other entity, then the Secured Party shall have the right, in its sole discretion, to pursue, relinquish, subordinate, modify or take any other action with respect thereto, without in
any way modifying or affecting any of the Secured Party’s rights and remedies hereunder. 
  
 15. Miscellaneous. 
  
 (a)
No course of dealing between the Company and the Secured Party, nor any failure to exercise, nor any delay in exercising, on the part of the Secured Party, any right, power or privilege hereunder or under the Note shall operate as a waiver thereof;
nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. 
  
 (b) All of the rights and remedies of the Secured Party with respect to the
Collateral, whether established hereby or by the Note or by any other agreements, instruments or documents or by law shall be cumulative and may be exercised singly or concurrently. 
  
 (c) This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and is intended
to supersede all prior negotiations, understandings and agreements with respect thereto. Except as specifically set forth in this Agreement, no provision of this Agreement may be modified or amended except by a written agreement specifically
referring to this Agreement and signed by the parties hereto. 
  
 (d) Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions
hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 
  

(e) No waiver of any breach or default or any right under this Agreement shall be considered valid unless in writing and signed by the party giving
such waiver, and no such waiver shall be deemed a waiver of any subsequent breach or default or right, whether of the same or similar nature or otherwise. 
  

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 (f) This Agreement shall be binding upon and inure to the benefit of each party hereto and its successors
and assigns; provided that, (i) the Company may without the Secured Party’s consent assign this Agreement in connection with a reincorporation of the Company in another jurisdiction and (ii) neither party may otherwise assign this
Agreement without prior written consent of the other party, such consent not to be unreasonably withheld. 
  
 (g) Each party shall take such further action and execute and deliver such further documents as may be necessary or appropriate in order to carry out the
provisions and purposes of this Agreement. 
  
 (h) THIS AGREEMENT
AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO ITS CONFLICTS OF LAWS PRINCIPLES EXCEPT TO THE
EXTENT THAT MANDATORY CHOICE OF LAW RULES UNDER THE UCC RESULTS IN THE APPLICATION OF CALIFORNIA LAW. 
  
 (i) This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts, and all of said counterparts
taken together shall be deemed to constitute one and the same instrument. 
  
 16. Subordination and Intercreditor Agreement. Notwithstanding anything to the contrary set forth herein, all of the Company’s obligations hereunder shall be subject to the terms of the Subordination and
Intercreditor Agreement and the Company shall not be required to take any action hereunder that is inconsistent with the terms of the Subordination and Intercreditor Agreement. 
  
 [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 
  

 12 

 IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed on the day
and year first above written. 
  

							
	BASIN WATER, INC.
		
	By:	 	 /S/    PETER L. JENSEN

	 	 	Peter Jensen
	 	 	Chief Executive Officer and President
	
	BION
		
	By:	 	 /S/    PETER L. JENSEN

	Name:	 	 	 	Peter Jensen
	Title:	 	 	 	President
	
	THE CO-INVESTMENT 2000 FUND, L.P.
	By:	 	Co-Invest Management, L.P., its general partner
	 	 	By:	 	Co-Invest Capital Partners, Inc., its general partner
				
	 	 	 	 	BY:	 	 /S/    RICHARD M. FOX

	 	 	 	 	 	 	 Richard M. Fox
 Executive Vice
President

	
	CROSS ATLANTIC TECHNOLOGY FUND, II, L.P.
	By:	 	XATF Management II, L.P., its general partner
	 	 	By:	 	Cross Atlantic Capital Partners II, Inc., its general partner
				
	 	 	 	 	By:	 	 /S/    RICHARD M. FOX

	 	 	 	 	 	 	 Richard M. Fox
 Vice President

	
	CATALYST BASIN WATER, LLC
	By:	 	Catalyst Capital Management, LLC, it manager
				
	 	 	 	 	By:	 	 /S/    MICHAEL MIKOLAJCZYK

	 	 	 	 	 	 	 Michael Mikolajczyk
 Manager

 EXHIBIT A 
 SUBSIDIARIES OF THE COMPANY 
  
 Bion 

 EXHIBIT B 
 COLLATERAL LOCATIONS 

 SCHEDULE B TO SECURITY AGREEMENT 
  

	1.	High Desert W.D.Yucca Valley - Sage Ave & Little league St. (intersection) 

	2.	Pomona Well #29 -1290 County Road, Pomona, CA, 

	3.	Well #2801- 3 Homestead St, Salinas Ca 

	4.	Well #1501-102 N. John St, Salinas CA 

	5.	Well #10801- 54 Bolivar St, Salinas CA 

	6.	Well #2101-1310 Dayton St, Salinas CA 

	7.	Well #0601-295 Giffin St, Salinas, CA 

	8.	Well # 2001- 731 Elton PI., Salinas CA 

	9.	Evergreen Well site- 550 Raymond St, Santa Maria CA 

	10.	Tanglewood Well site-3310 Willowood Dr, Santa Maria CA 

	11.	East Valley W.D., Cull Well, 7479 San Francisco St, Highland CA 

	12.	Baldy Mesa W.D. Bear Valley Rd at Shooting Star Dr (intersection) 

	13.	City of Avondale - 1960 North 99th Ave, Avondale AZ 

	14.	San Dimas, Unit #s 0300007 & 0300008 - 715 E. Foothill Blvd., San Dimas, Ca, 

	15.	City of Rialto, 2 Units - 780 W Rialto Ave, Rialto CA 

	16.	Victor Valley Water District - 11700 Amethest, Victorville CA 

	17.	City of Modesto, Grayson - 8469 Yamamoto Way, Patterson, CA 95363 

	18.	Modesto Well #100, 132 Olivera, Modesto CA 

	19.	Modesto Galas (Del Valley), corner of Ironside Dr & Girasol Way, Modesto CA 

	20.	Calif. Water Service, East LA division - 4852 Western Ave, Los Angeles CA 90040 

	21.	Campo Hill Water District - 1247 Sheridan Rd., Campo CA 91906 

	22.	Lockheed Martin - 1363 E. Pennsyvania Ave, Redlands CA 

	23.	Indian Wells WD Well #9A - 2031 West Ward Wt., Ridgecrest CA 93555 

	24.	Arizona Water / Rimrock #2 - 4241 E. Creek Way, Rimrock AZ 86335 

	25.	Arizona Water / Rimrock #3 - Montezuma Haven, 4105 E Goldmine Rd, Rimrock AZ 86335 

	26.	Arizona Water / Sedona Golf Resort #1 - 990 Crown Ridge Sedona AZ 86351 

	27.	Arizona Water / Sedona #10 Broken Arrow -1480 W. Hwy 179 Sedona AZ 86336 

	28.	Arizona Water / Rancho Rojo Well #1 - 166 Rojo Dr, Village of Oak Creek, Sedona AZ 86351 

	29.	Arizona Water / Wild Horse Mesa Well #1, 26 Wild Horse Mesa Dr, Village of Oak Creek, Sedona, AZ 86351 

	30.	Arizona Water / Rimrock Well #1 - 3375 E. Saddlebag Circle, Rimrock AZ 86335 

	31.	Arizona Water / Rimrock Well # 3 - 4732 N. Johnson Dr, Rimrock AZ 86335 

	32.	Arizona Water / Rimrock Well #4 – 200 feet south of Beaver Creek on Top O the Morning Dr., Rimrock AZ 86335 

	33.	Mission Springs WD Well# 26a - 55745 San Pierre Rd, White Water CA 92282 

	34.	Coachella Valley Water District Well 7802-1 - Located at 65-922 Tyler Street, Thermal, CA 92274, approximately 5 miles west of the town of Mecca in the southwest quadrant of
Section 9, Township 7 South, Range 8 East, SBBM, as shown on the USGS Valerie quadrangle. 

	35.	Well 6806-1 Located at 88-995 Avenue 60, Thermal, CA 92274, approximately 3.5 miles northwest of the town of Mecca in the northeast quadrant of Section 35, Township 6 south
Range 8 East, San Bernardino Base. 

	36.	Coachella Valley WD well #7991, 67050 Hammond Rd, Mecca, CA 92254 

	37.	8731 Prestige Court, Rancho Cucamonga CA 91730 

	38.	39 Fulton Ave., Pasadena CA 91107 

	39.	2222 S. Dobson Road, Mesa AZ 85202 

 EXHIBIT C 
 JURISDICTIONS FOR FILING OF FINANCING STATEMENTS 
  
 CaliforniaSubordinated Note with Warrants Purchase Agreement

 Exhibit 10.16 
  
  
 SUBORDINATED NOTE WITH 
 WARRANTS PURCHASE AGREEMENT 
  
  
 Dated as of February 10, 2006 
  
  
 between 
  
  
 Basin Water, Inc., as Issuer 
  
 - and - 
  
 Aqua America,
Inc. 

 TABLE OF CONTENTS 
  

							
	 	    	 	  	 	  	Page

	ARTICLE I DEFINITIONS	  	1
	 	    	1.01	  	Defined Terms	  	1
	 	    	1.02	  	Other Definitional Provisions.	  	7
		
	ARTICLE II PURCHASE OF THE NOTES	  	7
	 	    	2.01	  	The Notes.	  	7
	 	    	2.02	  	The Closing	  	7
	 	    	2.03	  	Security for the Note	  	8
	 	    	2.04	  	Subordination	  	8
	 	    	2.05	  	Registration, Transfer and Replacement of the Notes.	  	8
	 	    	2.06	  	Revival of Obligations	  	8
		
	ARTICLE III GRANT OF THE WARRANTS	  	9
	 	    	3.01	  	The Warrants.	  	9
		
	ARTICLE IV REPRESENTATIONS AND WARRANTIES	  	9
	 	    	4.01	  	Organization and Authority	  	9
	 	    	4.02	  	Organizational Information	  	9
	 	    	4.03	  	Transactions Legal and Authorized	  	10
	 	    	4.04	  	No Defaults, Restrictions	  	10
	 	    	4.05	  	Material Contracts	  	10
	 	    	4.06	  	Consents	  	11
	 	    	4.07	  	Compliance with Law	  	11
	 	    	4.08	  	Financial Statements.	  	11
	 	    	4.09	  	Pending Litigation	  	12
	 	    	4.10	  	Title to Properties	  	12
	 	    	4.11	  	Licenses and Permits	  	12
	 	    	4.12	  	Taxes	  	12
	 	    	4.13	  	Margin Securities	  	12
	 	    	4.14	  	No Investment Company	  	13
	 	    	4.15	  	Securities Laws	  	13
	 	    	4.16	  	Employee Relations	  	13
	 	    	4.17	  	Insurance	  	13
	 	    	4.18	  	Solvency.	  	13
	 	    	4.19	  	Intellectual Property	  	14
	 	    	4.20	  	No Payments Not in the Ordinary Course	  	15
	 	    	4.21	  	No Change	  	15
	 	    	4.22	  	ERISA	  	15
	 	    	4.23	  	Environmental Matters	  	16
	 	    	4.24	  	Registration Rights Agreements	  	18
	 	    	4.25	  	Other Rights of Aqua	  	18
	 	    	4.26	  	Actual Existence of Collateral; No Split Transaction	  	18
	 	    	4.27	  	Business Relations	  	18
	 	    	4.28	  	Relationships with Related Persons	  	19
	 	    	4.29	  	Full Disclosure	  	19

							
	ARTICLE V CONDITIONS TO CLOSING	  	19
	 	    	5.01	  	Purchase Documents	  	19
	 	    	5.02	  	Representations and Warranties True	  	20
	 	    	5.03	  	Compliance with this Agreement	  	20
	 	    	5.04	  	Payment of Fees	  	21
		
	ARTICLE VI AFFIRMATIVE COVENANTS	  	21
	 	    	6.01	  	Payment of the Note	  	21
	 	    	6.02	  	Maintenance of Existence	  	21
	 	    	6.03	  	Maintenance of Property	  	21
	 	    	6.04	  	Reporting Requirements	  	21
	 	    	6.05	  	Intellectual Property	  	22
	 	    	6.06	  	Litigation	  	22
	 	    	6.07	  	Financial Records	  	22
	 	    	6.08	  	Additional Information	  	22
	 	    	6.09	  	Insurance	  	22
	 	    	6.10	  	Material Contracts	  	22
	 	    	6.11	  	Taxes, Charges and Liens	  	23
	 	    	6.12	  	Performance	  	23
	 	    	6.13	  	Operations	  	23
	 	    	6.14	  	Inspection	  	23
	 	    	6.15	  	Observer Rights.	  	23
	 	    	6.16	  	Compliance Certificate	  	24
	 	    	6.17	  	Environmental Compliance and Reports	  	24
	 	    	6.18	  	Location of Collateral	  	24
	 	    	6.19	  	Further Assurances	  	24
	 	    	6.20	  	ERISA	  	25
	 	    	6.21	  	Use of Proceeds	  	25
	 	    	6.22	  	Subordination Agreement	  	25
		
	ARTICLE VII NEGATIVE COVENANTS	  	26
	 	    	7.01	  	Limitations on Merger, Consolidation, Sales of Assets, Etc.	  	26
	 	    	7.02	  	Limitations on Indebtedness	  	26
	 	    	7.03	  	Continuity of Operations	  	26
	 	    	7.04	  	Loans, Acquisitions and Guaranties	  	26
	 	    	7.05	  	Prepayments; Changes in Terms	  	26
	 	    	7.06	  	Limitation on Liens	  	26
	 	    	7.07	  	Restrictions on Ability to Satisfy Obligations	  	26
	 	    	7.08	  	Transactions with Affiliates	  	26
		
	ARTICLE VIII EVENTS OF DEFAULT	  	27
	 	    	8.01	  	Bankruptcy, etc.	  	27
	 	    	8.02	  	Other Events	  	27
	 	    	8.03	  	Notice of Defaults	  	28
	 	    	8.04	  	Other Remedies	  	28
	 	    	8.05	  	Waiver	  	28
		
	ARTICLE IX MISCELLANEOUS	  	28
	 	    	9.01	  	Amendments and Waivers	  	28
	 	    	9.02	  	Notices	  	28

					
	        9.03	  	No Waiver; Cumulative Remedies	  	29
	9.04	  	Survival of Representations and Warranties	  	29
	9.05	  	Payment of Expenses, Taxes and Brokers’ Fees	  	29
	9.06	  	Indemnification	  	30
	9.07	  	Aqua Representations	  	30
	9.08	  	Counterparts	  	31
	9.09	  	Severability	  	31
	9.10	  	Integration	  	31
	9.11	  	GOVERNING LAW	  	31
	9.12	  	Successors and Assigns	  	31
	9.13	  	Acknowledgements	  	31
	9.14	  	Original Issue Discount	  	31
	9.15	  	Confidentiality	  	32

 SUBORDINATED NOTE WITH 
 WARRANTS PURCHASE AGREEMENT 
  
 THIS SUBORDINATED NOTE WITH WARRANTS PURCHASE AGREEMENT (this “Agreement”), dated as of February 10, 2006, is by and among Basin Water, Inc., a California corporation with its principal place
of business at 8731 Prestige Court, Rancho Cucamonga, California 91730 (the “Issuer”) and Aqua America, Inc., a Pennsylvania corporation with its principal place of business at 762 West Lancaster Avenue, Bryn Mawr, Pennsylvania
19010-3489 (“Aqua”). Capitalized terms used in this Agreement and not otherwise defined have the meanings set forth in Article I. 
  
 Background: 
  
 A. The Issuer and Aqua are negotiating the terms of a strategic relationship in order to pursue opportunities in the area of water supply. The purpose of
this relationship is to identify and treat drinking water sources which have been deemed unusable due to high levels of contaminants such as nitrate. It is intended that contaminated groundwater systems will be acquired, and the parties will utilize
the Issuer’s proprietary treatment systems to treat the groundwater, thus providing a reliable source of drinking water in water-short areas of the United States. 
  
 B. In connection with such strategic relationship, the Issuer has agreed to sell the Note and to issue the Warrants to Aqua,
and Aqua has agreed to purchase the Note and to acquire the Warrants, on the terms and conditions set forth therein. 
  
 NOW, THEREFORE, in consideration of the foregoing and the covenants and promises set forth herein, the parties hereto, intending to be legally bound,
hereby agree as follows: 
  
 ARTICLE I 
 DEFINITIONS 
  
 1.01 Defined Terms 
  
 As used in this Agreement, the following terms shall have the following meanings: 
  
 “ADA” means the Americans with Disabilities Act of 1990, as amended, and the rules and regulations
promulgated thereunder. 
  
 “Affiliate” means (i)
any Person that, directly or indirectly, is in control of, is controlled by, or is under common control with a Related Party, including, without limitation, any joint venture of the Related Parties or (ii) any Person who is a director, officer,
member or partner of a Related Party or of any Person described in the preceding clause (i). For purposes of this definition, “control” of a Person means the power, directly or indirectly, either to (i) vote fifty percent (50%) or more of
the voting equity having ordinary voting power for the election of the management of such Person, or (ii) direct or cause the direction of the management and policies of such Person whether by contract or otherwise. 
  
 “Agreed Transfer” has the meaning set forth in Section
2.06. 
  
 “Board of Directors” means the
board of directors of the Issuer. 

 “Business Day” means a day other than a Saturday, Sunday or other day on which
commercial banks in New York, New York are authorized or required by law to close. 
  
 “Capital Lease” means any lease of property, real or personal by a Related Party, the obligations of which are required in accordance with GAAP to be capitalized on the balance sheet of the Issuer.

  
 “Capital Stock” means (i) any and all shares,
interests, participations or other equivalents (however designated) of the equity interests of any Person, (ii) any and all equivalent ownership interests in such Person and (iii) any and all warrants or options to purchase any of the foregoing.

  
 “Closing” has the meaning set forth in
Section 2.02. 
  
 “Closing Date” means the
date that is two (2) Business Days after the date on which all the conditions set forth in Article V shall first have been satisfied, or such other date agreed to by Aqua and Issuer. 
  
 “Code” means the Internal Revenue Code of 1986, as amended
from time to time. 
  
 “Collateral” has the
meaning set forth in Section 2.03. 
  
 “Commonly
Controlled Entity” means an entity, whether or not incorporated, that is under common control with the Issuer within the meaning of Section 4001 of ERISA or is part of a group which includes the Issuer and which is treated as a single
employer under Section 414 of the Code. 
  
 “Common
Stock” means the common stock of the Issuer, no par value. 
  
 “Copyrights” has the meaning set forth in Section 4.19(a). 
  
 “Default” means any of the events specified in Sections 8.01 or 8.02, hereof, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition,
has been satisfied. 
  
 “Default Rate” means nine
percent (9%) per annum, compounded semi-annually and computed on the basis of a 360-day year. 
  
 “Disclosure Schedule” has the meaning set forth in the introductory paragraph of Article IV. 
  
 “ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time. 
  
 “Event of Default” means any of the events specified in
Sections 8.01 or 8.02, provided that any applicable requirement for the giving of notice, the lapse of time, or both, or any other applicable condition, has been satisfied. 
  
 “Financing Statements” means all UCC financing statements (or comparable documents now or hereafter filed
in accordance with the UCC or comparable law) authorized by any Related Party to be filed in favor of Aqua in connection with the transactions contemplated hereby. 
  
 “GAAP” means generally accepted accounting principles in the United States of America in effect from time
to time. 
  

 Page 2 of 35 

 “Governmental Authority” means any nation or government, any state or other political
subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. 
  
 “Guarantee Obligation” means any obligation of the Issuer guaranteeing any indebtedness, leases, dividends or other obligations of any
other Person in any manner, whether directly or indirectly or otherwise to assure or hold harmless the owner of any primary obligation against loss in respect thereof. 
  
 “Indebtedness” means, as of the date of determination, (i) all indebtedness of the Related Parties for
borrowed money or for the deferred purchase price of property or services (other than current trade liabilities or accounts payable incurred in the ordinary course of business) or which is evidenced by a note, bond, debenture or similar instrument,
(ii) all obligations of the Related Parties under Capital Leases, (iii) all obligations of the Issuer as an account party in respect of letters of credit or acceptances issued or created for or for the account of the Issuer, (iv) all obligations of
the Issuer under currency exchange contracts or interest rate swap agreements and (v) all liabilities secured by any Lien on any property owned by the Related Parties whether or not the Related Parties have assumed or otherwise become liable for the
payment thereof. 
  
 “Indemnified Person” has the
meaning set forth in Section 9.06. 
  
 “Initial
Public Offering” means the date of the closing by the Issuer of an underwritten initial public offering of its Common Stock resulting in gross proceeds to the Issuer of at least Fifteen Million Dollars ($15,000,000) pursuant to an effective
registration statement under the Securities Act.  
  
 “Insolvent” means, with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA. 
  
 “Intellectual Property Assets” has the meaning set forth in Section 4.19(a). 
  
 “Issuer” has the meaning set forth in the preamble hereto.

  
 “Knowledge” means the actual knowledge, or
such knowledge as should have been obtained after reasonable inquiry with respect to the matter in question, of any Responsible Officer. 
  
 “Lien” means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), license, right
of first refusal or similar restriction, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any
Capital Lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the UCC or comparable law of any jurisdiction in respect of any of the foregoing). 
  
 “Marks” has the meaning set forth in Section 4.19(a).

  
 “Material Adverse Effect” means a material
adverse effect on (i) the business, operations, property, condition (financial or otherwise) or prospects of the Related Parties, taken as a whole, (ii) the ability of the Issuer to perform its material obligations under the Purchase Documents or
(iii) the validity or enforceability of the Purchase Documents or the rights or remedies of Aqua hereunder or thereunder that are material to Aqua; provided, however, that a material adverse effect with respect to the business,
operations, property, condition (financial or otherwise) or prospects of the Related 
  

 Page 3 of 35 

 Parties, taken as a whole, shall not include such effects resulting from any one or more of the following: (a) the effect
of any change in the United States or foreign economies or securities or financial markets in general, (b) the effect of any change that generally affects the industry in which the Related Parties operate, (c) the effect of any change arising in
connection with earthquakes, hostilities, acts of war, sabotage or terrorism or military actions or any escalation or material worsening of any such hostilities, acts of war, sabotage or terrorism or military actions existing or underway as of the
Closing Date or (d) the effect of any changes in applicable laws or accounting rules. 
  
 “Material Contract” has the meaning set forth in Section 4.05(a). 
  
 “Multiemployer Plan” means a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA and which is or has been
maintained or contributed to (or to which there is or has been an obligation to contribute to) by Issuer or a Commonly Controlled Entity. 
  
 “Net Names” has the meaning set forth in Section 4.19(a). 
  
 “Note” means, as of a particular time, the promissory note issued pursuant to this Agreement substantially
in the form of Exhibit 2.01 attached hereto and each Note delivered in substitution or exchange for any of such Notes, as applicable. 
  
 “Notice of Acceptance” has the meaning set forth in Section 9.17(b). 
  
 “Obligations” means the obligation of the Issuer to (a) pay the principal of and interest on the Notes in
accordance with the terms thereof, (b) reimburse Aqua for its fees and expenses as provided in Section 9.05 hereof and (c) provide the indemnification required by Section 9.06 hereof. 
  
 “Offer Period” has the meaning set forth in Section
9.17(a). 
  
 “Offered Securities” has the
meaning set forth in Section 9.17(a). 
  
 “Operating Lease” means any lease of property, real or personal, which is not a Capital Lease. 
  
 “Patents” has the meaning set forth in Section 4.19(a). 
  
 “PBGC” means the Pension Benefit Guaranty Corporation. 
  
 “Permitted Liens” means (i) Liens securing Indebtedness
permitted under Section 7.02(a), including Senior Debt, (ii) Liens in favor of Aqua, (iii) Liens securing Indebtedness permitted under Section 7.02(e) and 7.02(f), (iv) Liens for taxes, assessments or charges of any Governmental
Authority for claims not yet due or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect to such taxes, assessments or charges which are being contested are maintained on the books of the
Issuer, in conformity with GAAP, (v) carriers’, warehousemen’s, construction liens, repairmen’s or other like Liens arising in the ordinary course of business which are not overdue for a period of more than ninety (90) days or which
are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect to such underlying obligations which are being contested and maintained on the books of Issuer, in conformity with GAAP, (vi) pledges or
deposits (including, without limitation, surety bonds and appeal bonds) in connection with workers’ compensation, unemployment insurance and other social security legislation, (vii) deposits to secure the performance of bids, trade contracts

  

 Page 4 of 35 

 (other than for borrowed money), leases, statutory obligations and other obligations of a like nature incurred in the
ordinary course of business, (viii) Liens arising as a result of progress payments under government contracts, (ix) purchase money Liens in connection with the purchase by any Related Party of equipment in the ordinary course of business, (x) Liens
in respect of any writ of execution, attachment, garnishment, judgment or award in an amount less than $250,000, (xi) easements, reservations, exceptions, rights-of-way, covenants, conditions, restrictions and other similar encumbrances which, in
the aggregate, are not substantial in amount and which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of the Issuer and (xii) Liens set forth on
Section 4.10 of the Disclosure Schedule. 
  
 “Permitted Sales” means (i) the lease or sale of water treatment systems or other inventory of the Issuer in the ordinary course of business, including the license of Intellectual Property Assets in connection therewith and
(ii) the lease, sale, license or other transfer of the Intellectual Property Assets related to a proprietary process for biologically removing and destroying perchlorate load from used ion exchange resins and from perchlorate-laden ion exchange
resin regeneration brines. 
  
 “Person” means an
individual, partnership, corporation, business trust, joint stock company, limited liability company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature. 
  
 “Plan” means, as of the date of determination, any employee
pension benefit plan as defined in Section 3(2) of ERISA (other than a Multiemployer Plan) which is or has been maintained or contributed to (or to which there is or has been an obligation to contribute to) by the Issuer or a Commonly Controlled
Entity. 
  
 “Pro Rata Portion” has the meaning
set forth in Section 9.17(a). 
  
 “Purchase
Documents” means the documents in identified in Section 5.01(a) whose delivery is a condition to the effectiveness of this Agreement. 
  
 “Purchased Securities” has the meaning set forth in Section 9.17(b). 
  
 “Registration Rights Agreement” means the Registration Rights Agreement, dated as of the date hereof, by
and among the Issuer and the holders of the Warrants. 
  
 “Related Party” means the Issuer and each Subsidiary of the Issuer. 
  
 “Rights Offer” has the meaning set forth in Section 9.17(a). 
  
 “Reorganization” means, with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of
Section 4241 of ERISA. 
  
 “Reportable Event”
means any of the events set forth in Section 4043(c) of ERISA, other than those events as to which the thirty day notice period is waived under PBGC Reg. § 4043. 
  
 “Requirement of Law” means, as to any Person, its certificate or articles of incorporation, certificate of
formation, operating agreement, bylaws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or final and binding determination of an arbitrator or a court or other Governmental Authority, in each
case applicable to or binding upon such Person or any of its property or to which such Person or any of its material property is subject. 
  

 Page 5 of 35 

 “Responsible Officer” means the Chief Executive Officer, the President and/or the Chief
Financial Officer of the Issuer. 
  
 “Securities
Act” means the Securities Act of 1933, as amended. 
  
 “Security Documents” means (i) the Security Agreement between the Issuer and Aqua whereby the Issuer grants to Aqua a subordinated security interest in the Collateral substantially in the form attached as Exhibit
5.01(a)(iv), (ii) the Financing Statements and (iii) all other security agreements, patent and trademark assignments, lease assignments and other similar agreements necessary to create or perfect Aqua’s security interest in the Collateral
and all amendments, restatements, modifications or supplements thereof or thereto. 
  
 “Senior Credit Agreement” means the Business Loan Agreement dated as of July 1, 2003 between the Senior Secured Creditor and the Issuer, as the same may be amended from time to time. 
  
 “Senior Debt” means the obligations of the Issuer incurred
which are senior in priority to the Obligations, including, without limitation, obligations under the Senior Credit Agreement, any refinancing thereof or obligations under any senior debt agreement entered into after the date hereof;
provided, that, without the prior written consent of Aqua, the maximum aggregate principal amount of Senior Debt shall not exceed Eight Million Dollars ($8,000,000). 
  
 “Senior Secured Creditor” means BWCA I, LLC, a Delaware limited liability company, or any other party to
whom the Issuer owes Senior Debt. 
  
 “Subordination
Agreement” means the Subordination Agreement between the Senior Secured Creditor, the XACP Noteholders and Aqua as such agreement may be amended from time to time by such parties. 
  
 “Subsidiary” means, as to any Person, a corporation,
partnership or other entity of which more than fifty percent (50%) of the shares of stock, or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the
happening of a contingency) to elect the board of directors or other managers of such corporation, partnership or other entity, are at the time owned, directly or indirectly, through one or more intermediaries, or both, by such Person. 

 
 “Taxes” means any amounts payable by a Person to any
Governmental Authority, whether currently paid or accrued as a liability for future payment, that would be classified as taxes in accordance with GAAP (including, without limitation, deferred Taxes). 
  
 “Trade Secrets” has the meaning set forth in Section
4.19(a). 
  
 “UCC” means the Uniform
Commercial Code as from time to time in effect in the State of California. 
  
 “Unfunded Current Liability” means the amount, if any, by which the actuarial present value of accumulated benefits of any Plan subject to Title IV of ERISA as of the close of its most recent plan
year, determined using actuarial assumptions at such time consistent with those prescribed by Financial Accounting Standard No. 87, exceeds the fair market value of the assets allocable to such liabilities. 
  
 “Warrants” has the meaning set forth in Section
3.01(a). 
  

 Page 6 of 35 

 “Warrant Shares” means the shares of Common Stock issuable upon exercise of the
Warrants. 
  
 “XACP Notes” means the promissory
notes issued pursuant to the Subordinated Note with Warrants Purchase Agreement, dated as of October 14, 2005, among the Issuer and the purchasers named therein, and each note delivered in substitution or exchange for any of such notes, as
applicable. 
  
 “XACP Noteholders” means the
holders of the XACP Notes. 
  
 1.02 Other Definitional
Provisions. 
  
 (a) The words “hereof,
“herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, subsection, Schedule and Exhibit
references are to this Agreement unless otherwise specified. 
  
 (b) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. 
  
 ARTICLE II 
 PURCHASE OF THE NOTES

  
 2.01 The Note. 
  
 (a) Subject to the terms and conditions of this Agreement, the Issuer will
authorize for issuance to Aqua on the Closing Date, a Note with an aggregate original principal amount of Two Million Dollars ($2,000,000). The Note shall accrue interest from and after the Closing Date and shall have such other terms as set forth
in the form of Note attached hereto as Exhibit 2.01. The Issuer agrees to sell the Note to Aqua on the Closing Date, and Aqua agrees to purchase the Note from the Issuer, in each case on the terms and conditions set forth herein. 

 
 (b) Payment of principal and interest on the Note shall be made in
accordance with the terms of the Note as specified therein. 
  
 (c) Prepayment on the Note shall be made in accordance with the terms of the Note as specified therein. 
  
 (d) The Issuer will pay to Aqua in immediately available funds to the account designated by Aqua, all amounts payable to Aqua when due in respect of the
principal of, or interest on, the Note, without any presentation of the Note. 
  
 2.02 The Closing. 
  
 The closing of the purchase and sale of the Note and the Warrants shall take place on the Closing Date with the documents set forth in Section 5.01 to be delivered by the Issuer to Aqua by facsimile and/or e-mail transmission (with
originals to follow by overnight delivery to the addresses set forth in Section 9.02) and all payments to be made in connection with the Closing to be wired in immediately available funds to such accounts as the Issuer and Aqua may designate,
as applicable, or in such other manner as the parties hereto may otherwise agree (the “Closing”). 
  

 Page 7 of 35 

 2.03 Security for the Note. 
  
 Payment of all Obligations, including Indebtedness evidenced by the Note,
shall be secured by a second priority subordinated lien and security interest in and on all of the assets of the Issuer as described in the Security Documents (the “Collateral”). Aqua’s second priority lien on the Collateral
will be subject only to the security interest of the Senior Secured Creditor and Permitted Liens. 
  
 2.04 Subordination. Payment of all Obligations shall be subordinated to the rights of the Senior Secured Creditor to the extent
provided in the Subordination Agreement. 
  
 2.05
Registration, Transfer and Replacement of the Notes. 
  
 (a) Aqua may, at its option, in person or by delivery, surrender its Note for exchange at the principal office of the Issuer and, within a reasonable time thereafter and without expense for the issuance of replacement Note, receive in
exchange therefor one or more duly executed Notes, dated as of the date to which interest has been paid on the Note so surrendered, or if no interest has yet been so paid, then dated the date hereof, and registered in such name or names, all as may
be designated by Aqua, for the same aggregate principal amount as the then unpaid principal amount of the Note(s) so surrendered. The Issuer covenants and agrees to take and cause to be taken all action necessary to effect such exchanges; provided,
that, notwithstanding the foregoing, Issuer shall not be responsible for any federal, state or other transfer taxes and charges which may be payable in connection with the exchange or transfer of any Note. 
  
 (b) The Issuer shall keep at its principal executive office a register for
the registration of ownership and transfer of the Note or any portion thereof. The name and address of the holder of the Note, each transfer thereof and the name and address of each transferee of the Note shall be registered in such register. Any
such issuance of a new Note shall not be deemed to be the sale of new securities and shall in all respects be subject to compliance with applicable federal, state and other securities laws. Prior to due presentment for registration of transfer, the
Person in whose name any Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Issuer shall not be affected by any notice or knowledge to the contrary. The Issuer shall give to any
holder promptly upon request therefor, a complete and correct copy of the names and addresses of the registered holder of Note. 
  
 (c) Upon receipt by the Issuer of evidence satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of a Note and receipt of
an affidavit of such loss, theft, destruction or mutilation and customary indemnification including, without limitation, an indemnity bond from the holder of such Note, the Issuer, at its own expense, shall execute and deliver, in lieu thereof, a
new Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid
thereon. 
  
 2.06 Revival of Obligations. If the
incurring of any debt or the payments of money or transfers of property made to Aqua by or on behalf of the Issuer contemplated by the Note, this Agreement, the Security Documents or any document delivered hereby (collectively, an “Agreed
Transfer”) should for any reason subsequently be declared to be “voidable” or “avoidable” within the meaning of any state or federal law relating to creditor’s rights, including, without limitation, as fraudulent
conveyances, fraudulent transfers, preferences or otherwise voidable or recoverable payments of money or transfer of property, in whole or in part, for any reason under the United States Bankruptcy Code or any other federal or state law, and Aqua is
required to repay or restore 
  

 Page 8 of 35 

 any Agreed Transfer, or the amount of any portion thereof, then as to any such amount repaid or restored (including all
reasonable costs, expenses and attorneys’ fees of Aqua related thereto), the liability of the Issuer shall automatically be revived, reinstated, and restored and shall exist as though such Agreed Transfer had never been made, notwithstanding
the surrender of any Note or cancellation of any instrument or document relating to this Agreement. 
  
 ARTICLE III 
 GRANT OF THE WARRANTS 
  
 3.01 The Warrants. 
  
 (a) In consideration of the purchase of the Note by Aqua, the Issuer shall
issue to Aqua at the Closing (i) a warrant to purchase an aggregate of Three Hundred Thousand (300,000) shares of Common Stock at an exercise price of Six Dollars ($6.00) per share and (ii) a warrant to purchase an aggregate of up to One Hundred
Thousand (100,000) shares of Common Stock at an exercise price of Seven Dollars ($7.00) per share as more specifically set forth on Schedule I attached hereto (collectively, the “Warrants”), in substantially the forms
attached hereto as Exhibit 3.01. The Warrants shall entitle Aqua to purchase such number of shares of Common Stock as shall be set forth therein at the applicable exercise price at such time or times as shall be set forth therein, but the
number of such shares of Common Stock and the applicable exercise price shall be subject to adjustment as provided therein. 
  
 (b) The Issuer will keep or cause to be kept, at its principal office, books for the registration and transfer of the Warrants issued hereunder.

  
 ARTICLE IV 
 REPRESENTATIONS AND WARRANTIES 
  
 To induce Aqua to enter into this Agreement and to purchase the Note and to acquire the Warrants, the Issuer hereby represents and warrants to Aqua that,
on the date hereof, after giving effect to the transactions contemplated herein, except as set forth in the disclosure schedule delivered by the Issuer to Aqua on the date hereof (the “Disclosure Schedule”): 
  
 4.01 Organization and Authority. Each of the Related Parties
is duly and validly organized and an existing corporation in good standing under the laws of its jurisdiction of formation and is duly licensed or qualified and in good standing as a foreign corporation, as applicable, in all other jurisdictions
where the ownership or leasing of property or the nature of business transacted make such qualification necessary and where the failure to be so qualified and in good standing would, in the aggregate, reasonably be expected to have a Material
Adverse Effect. Each of the Related Parties has requisite corporate power and authority to own its properties and assets and to carry on its business, as, and in the places where, such properties and assets are now owned or operated or such business
is now conducted and presently proposed to be conducted.  
  
 4.02 Organizational Information. Section 4.02 of the Disclosure Schedule correctly sets forth (i) the state or other jurisdiction in which each of the Related Parties is incorporated or organized, (ii) the state or
states in which each of the Related Parties conducts its respective business, (iii) the authorized capital stock or other equity interests of each of the Related Parties and (iv) a list of each class of stock or membership interests of each of the
Related Parties showing in each case the number of shares of stock or membership interests of each class outstanding and the ownership of such shares or membership interests. The shares of stock and membership interests listed in 
  

 Page 9 of 35 

 Section 4.02 of the Disclosure Schedule have been duly issued and are fully paid and nonassessable, and are so
owned free and clear of any mortgage, lien, pledge, charge, security interest or other encumbrance except as otherwise disclosed on Section 4.02 of the Disclosure Schedule. There are no preemptive or similar rights on the part of any Person
with respect to the issuance of any securities or equity interests of any Related Party. There are no subscriptions, options, warrants or other similar securities or rights, agreements or commitments of any kind obligating any Related Party to issue
or sell, or to cause to be issued or sold, or to repurchase or otherwise acquire any of their own respective securities or equity interests or securities convertible into or exchangeable for, or any options, warrants or other similar rights relating
to any such securities or equity interests. 
  
 4.03
Transactions Legal and Authorized. The issuance and sale of the Note, the issuance and sale of the Warrants and the compliance by the Related Parties with all the provisions of the Purchase Documents (other than the Subordination
Agreement) are within the corporate powers of the Related Party executing the same. The Purchase Documents (other than the Subordination Agreement) have been duly authorized, executed and delivered and are the legal, valid and binding obligations of
the Related Party executing the same, enforceable in accordance with their respective terms, except as provided below. The foregoing representations in this Section 4.03 are subject to bankruptcy, insolvency, reorganization, moratorium or
other similar laws now or hereafter in effect relating to or affecting the rights and remedies of creditors generally and to general principles of equity (regardless of whether in equity or at law). 
  
 4.04 No Defaults, Restrictions. None of the execution and
delivery of this Agreement or the other Purchase Documents to which the Issuer is a party nor the consummation of the transactions contemplated hereby or thereby conflicts or results in breach of, or constitutes a default under, any of the terms,
obligations, covenants, conditions or provisions of any Material Contract, articles, by-laws, operating agreement or any other material agreement or instrument, including, after giving effect to the consents set forth in Section 4.06 of the
Disclosure Schedule, the Senior Credit Agreement, to which any Related Party is a party or by which its properties may be bound or affected, or violate any applicable statutes, rules, regulations, judgments, orders, writs, injunctions, decrees or
demands of any court, arbitrator, grand jury, or any governmental agency or, with the exception of the transactions contemplated hereby or thereby, result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon
any property or asset of any Related Party, other than such conflicts, breaches, defaults, violations, liens, charges or encumbrances would not reasonably be expected to have a Material Adverse Effect. 
  
 4.05 Material Contracts. 
  
 (a) As used in this Agreement, the term “Material Contract”
means any written agreement, contract, lease, consensual obligation, promise or undertaking (whether written or oral and whether express or implied) under which (i) a Related Party has or may acquire any rights or benefits; (ii) under which a
Related Party has or may become subject to any obligation or liability; (iii) by which a Related Party or any of the assets owned or used by a Related Party is or may become bound; or (iv) under which a Related Party is obligated to pay or is
entitled to receive payments, goods or services valued in excess of $150,000 on an annual basis, in each of cases (i) through (iii), which is material to the Related Parties taken as a whole. Section 4.05(a) of the Disclosure Schedule
contains an accurate and complete list of all Material Contracts. 
  
 (b) (i) Each Material Contract is in full force and effect and is valid and enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect
relating to or affecting the 
  

 Page 10 of 35 

 rights and remedies of creditors generally and to general principles of equity (regardless of whether in equity or at
law); and (ii) the completion or performance of any Material Contract would not reasonably be expected to have a Material Adverse Effect. 
  
 (c) Each of the Related Parties is, and at all times has been, in compliance with all applicable material terms and requirements of each Material Contract
to which it is a party. 
  
 (d) To the Issuer’s Knowledge,
each other Person that has or had any liability or other obligation under the Material Contracts is, and at all times has been, in material compliance with all applicable terms and requirements of such Material Contract. 
  
 (e) To the Issuer’s Knowledge, no event has occurred or circumstance
exists that (with or without notice or lapse of time), will contravene, conflict with or result in a breach of, or give the Issuer or any other Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or
performance of, or payment under, or to cancel, terminate or modify, a Material Contract. 
  
 (f) None of the Related Parties has given to or received, at any time, any notice or other communication regarding any actual, alleged, possible or potential violation or breach of, or default under, any Material
Contract to which such Related Party is a party. 
  
 4.06
Consents. No material consents, orders, permissions, approvals or authorizations, by or from any Governmental Authority or other Person, are required to be obtained, and no registrations with or declarations to any Governmental Authority
are required to be filed, in connection with the execution and delivery of any of the Purchase Documents to which any Related Party is a party and the consummation of the transactions contemplated thereby. 
  
 4.07 Compliance with Law. Each of the Related Parties has
complied with all applicable statutes, rules, regulations, orders and restrictions of any Governmental Authority having jurisdiction over the conduct of its business or the ownership of its properties, except where non-compliance therewith would not
reasonably be expected to have a Material Adverse Effect. 
  
 4.08 Financial Statements. 
  
 (a) The
balance sheets of the Issuer as of December 31, 2004, and the related statements of operations, shareholders’ equity and cash flows for the fiscal year then ended, copies of which are attached as part of Section 4.08 of the Disclosure
Schedule, have been prepared in conformity with GAAP consistently applied and fairly present, in all material respects, the financial position of the Issuer as of such date and their statement of operations, shareholders’ equity and cash flows
for such period. 
  
 (b) The unaudited balance sheet of the Issuer
as of September 30, 2005 and the related unaudited statement of operations, shareholders’ equity and cash flows for the nine (9) months then ended, copies of which are attached as part of Section 4.08 of the Disclosure Schedule, have
been prepared in conformity with GAAP on a basis consistent with the financial statements referred to in Section 4.08 of the Disclosure Schedule, and fairly present, in all material respects, the financial position of the Issuer as of such
date and their statement of operations, shareholders’ equity and cash flows for the nine (9) months then ended; provided, however, that the unaudited financials do not include footnotes and are subject to year-end adjustment. 
  

 Page 11 of 35 

 (c) The Related Parties have no Indebtedness other than Indebtedness permitted pursuant to Section
7.02 and have no Guarantee Obligations other than Guarantee Obligations permitted pursuant to Section 7.04 hereof. 
  
 4.09 Pending Litigation. There are no actions, suits, investigations or proceedings (whether or not purportedly on behalf of any Related
Party) pending or, to the Knowledge of the Issuer, threatened against any Related Party, or the business, operations or properties of any Related Party before or by any Governmental Authority, which, if adversely determined, would reasonably be
expected to have a Material Adverse Effect. No Related Party is in default with respect to any judgment, order, writ, injunction, decree, demand, rule or regulation of any court, arbitrator, grand jury or of any Governmental Authority, default under
which might have consequences which would reasonably be expected to have a Material Adverse Effect. 
  
 4.10 Title to Properties. Each Related Party has good and marketable title to all of its property and other assets that are material to the
conduct of its business, except Permitted Liens. No Related Party owns tangible assets with a fair market value in excess of $150,000 in any state except for those assets located at the locations specified on Exhibit A to the Security
Agreement and other assets in transit from time to time. All property and assets of any kind (real or personal, tangible or intangible) of the Related Parties is free from any encumbrance except Permitted Liens, and is free from any other Liens
which would reasonably be expected to have a Material Adverse Effect. Except for financing statements evidencing Permitted Liens and the Financing Statements filed pursuant to this Agreement, to Issuer’s Knowledge, no financing statement under
the UCC which names any Related Party as debtor has been filed and not terminated, and no Related Party has signed any security agreement authorizing any secured party thereunder to file any such financing statement which has not been terminated.
All of the leases under which any Related Party is operating are valid, subsisting and in full force and effect in all material respects and none of such leases is in material default, and no event has occurred which with the passage of time or the
giving of notice, or both, would constitute a default under any provision thereof except where such default would not reasonably be expected to have a Material Adverse Effect. 
  
 4.11 Licenses and Permits. Each Related Party has all federal, state and local licenses and permits required
to be maintained in connection with and material to the operation of its businesses, and all such licenses and permits are valid and fully effective, except where the failure to have such valid or effective license or permit would not reasonably be
expected, individually or in the aggregate, to have a Material Adverse Effect. 
  
 4.12 Taxes. Each Related Party has timely filed all federal, state and local Tax returns which are required to be filed and has timely paid, or made provision for the payment of, all material Taxes which
have become due pursuant to said returns or pursuant to any assessment received by any Related Party, including franchise taxes, except such Taxes, if any, as are being contested in good faith and for which adequate reserves have been provided.

  
 4.13 Margin Securities. The Issuer is not
engaged in the business of extending credit for the purpose of buying or carrying margin securities, and no part of the proceeds realized from the sale of the Note will be used to buy or carry any such margin securities or be used in a manner
inconsistent with the provisions of Regulation T, U or X of the Board of Governors of the Federal Reserve System. 
  

 Page 12 of 35 

 4.14 No Investment Company. The Issuer is not an “investment company,” or a
company “controlled” by an “investment company,” as such terms are defined in the Investment Company Act of 1940, as amended. 
  
 4.15 Securities Laws. The Issuer has not, either directly or through any agent, offered all or any part of the Note to be purchased and sold
hereunder, or any part of the Warrants to be granted hereunder, to, or solicited any offers to acquire any of the Note or Warrants from, or otherwise approached or negotiated or communicated in respect of any of the Note or Warrants with, any Person
other than Aqua. Neither the Issuer nor any agent on its behalf has offered or will offer to sell all or any of the Note or Warrants, or solicited any offers to acquire any of the Note or Warrants from, or otherwise approached or negotiated or
communicated in respect of any of the Note or Warrants with, any Person so as thereby to bring the delivery of the Note within the registration requirements of the Securities Act. 
  
 4.16 Employee Relations. Each Related Party has complied in all material respects with all applicable federal,
state and local laws, rules and regulations relating to employment, and all applicable laws, rules and regulations governing payment of minimum wages and overtime rates, and the withholding and payment of taxes from compensation of employees and the
payment of premiums and/or benefits under applicable workers’ compensation laws except any non-compliance which has not had and would not reasonably be expected to have a Material Adverse Effect. No employees of any Related Party are parties to
a collective bargaining agreement, nor is any union organizing activity pending or, to the Knowledge of Issuer, threatened. No Related Party has experienced any work stoppage or other material labor difficulty during the past five (5) years which
has had or would reasonably be expected to have a Material Adverse Effect. 
  
 4.17 Insurance. Each Related Party has been and is insured by financially sound and reputable insurers with respect to its property and the conduct of its business in such amounts and against such risks
as is customary for companies of similar size and nature as Issuer in its industry. All policies of insurance are currently in full force and effect, and no notice of cancellation or termination has been received by any Related Party with respect to
any such policies. All premiums due and payable on such policies have been paid or will be paid in accordance with the terms of such policies. Section 4.17 of the Disclosure Schedule correctly sets forth a complete list and description of all
material policies of insurance currently maintained by the Related Parties. 
  
 4.18 Solvency. 
  
 (a) The fair saleable value of the assets of the Related Parties on a consolidated basis will, immediately following the sale of the Note on the Closing Date and the other transactions contemplated in connection therewith, exceed the amount
of their existing debts and other liabilities (including contingent liabilities, other than payments required to be made pursuant to the rights of redemption of the Series A Preferred Shares and the Series B Preferred Shares). 
  
 (b) The Related Parties on a consolidated basis do not have, and will not
have, immediately following the sale of the Note and the other contemplated transactions on the Closing Date, unreasonably small working capital to carry out their business as conducted or as proposed to be conducted. 
  
 (c) The Related Parties on a consolidated basis have not incurred and do not
intend to incur debts beyond their ability to pay such debts as they mature. 
  

 Page 13 of 35 

 4.19 Intellectual Property. 
  
 (a) As used herein, the term “Intellectual Property Assets” means all intellectual property owned or
licensed (as licensor or licensee) by the Related Parties in which a Related Party has a proprietary interest, including each of the Related Parties’: 
  
 (i) name, all assumed fictional business names, trade names, registered and unregistered trademarks, service marks and applications
(collectively, “Marks”); 
  
 (ii) issued patents and pending patent applications (collectively, “Patents”); 
  
 (iii) registered and unregistered copyrights in both published works and unpublished works (collectively, “Copyrights”);

  
 (iv) inventions; 
  
 (v) know-how, trade secrets, confidential or proprietary
information, customer lists, customer marketing information, software, technical information, data, process technology, plans, drawings and blue prints (collectively, “Trade Secrets”); and 
  
 (vi) rights in internet web sites and internet domain names
(collectively, “Net Names”). 
  
 (b) Section
4.19(b) of the Disclosure Schedule contains a complete and accurate list, and the Issuer has delivered to Aqua accurate and complete copies, of all Material Contracts relating to the Intellectual Property Assets, except for any license implied
by the sale of a product and perpetual, paid-up licenses for commonly available software programs with a value of less than Five Hundred Dollars ($500.00) under which a Related Party is the licensee. There are no outstanding or, to the Issuer’s
Knowledge, threatened disputes or disagreements with respect to any such contract that, if adversely determined, would reasonably be expected to have a Material Adverse Effect. 
  
 (c) The Intellectual Property Assets are all those necessary for the operation of the Related Parties’ businesses as
currently conducted and as currently planned to be conducted. The Related Parties are the owners or licensees of all right, title and interest in and to each of the Intellectual Property Assets, free and clear of all Liens, other than Permitted
Liens, and have the right to use without payment to a third party all of the Intellectual Property Assets, other than in respect of licenses listed in Section 4.19(c) of the Disclosure Schedule. 
  
 (d) All former and current employees of the Related Parties have executed
written contracts with the applicable Related Party that assign to such Related Party all rights to any inventions, improvements, discoveries or information in the Issuer’s method of conducting its business. 
  
 (e) Section 4.19(e) of the Disclosure Schedule contains a complete and
accurate list of all Patents. 
  
 (i) All of the
issued Patents are currently in compliance with formal legal requirements (including payment of filing, examination and maintenance fees and proofs of working or use) and, to Issuer’s Knowledge, all of the issued Patents are valid and
enforceable. 
  

 Page 14 of 35 

 (ii) No Patent has been or is now involved in any interference, reissue, reexamination,
or opposition proceeding, and, to the Issuer’s Knowledge, there are no pending published United States patents owned by any other Person, which would limit the Patents. 
  
 (iii) To Issuer’s Knowledge, (A) no Patent is infringed or has been challenged or threatened in any way
and (B) none of the products manufactured or sold, nor any process or know-how used, by any of the Related Parties infringes or is alleged to infringe any patent or other proprietary right of any other Person. All products made, used or sold under
the Patents have been marked with the proper patent notice. 
  
 (f) Section 4.19(f) of the Disclosure Schedule contains a complete and accurate list of all Marks which are registered or for which an application to register is pending. To Issuer’s Knowledge, no Mark is infringed or has been
challenged in writing or, to the Issuer’s Knowledge, threatened in any way, (ii) none of the Marks used by any of the Related Parties infringes or is alleged to infringe any trade name, trademark or service mark of any other Person and (iii)
all of the Marks are valid and enforceable. 
  
 (g) Each of the
Related Parties, as applicable, has taken all reasonable precautions to protect the secrecy, confidentiality and value of all Trade Secrets (including the enforcement by such Related Party of a policy requiring each employee or contractor to execute
proprietary information and confidentiality agreements substantially in such Related Party’s standard form, and all current and former employees and contractors of the Related Parties have executed such an agreement). 
  
 (h) Section 4.19(h) of the Disclosure Schedule contains a complete and
accurate list of all Net Names. To the Issuer’s Knowledge, there is no domain name application pending of any other Person which would interfere with or infringe any Net Name. 
  
 4.20 No Payments Not in the Ordinary Course. Since December 30, 2004, the Issuer has not made any payment to
any Person other than in the ordinary course of its business or pursuant to Material Contracts, except for payments in the aggregate not exceeding $150,000. 
  
 4.21 No Change. Since December 31, 2004 there has been no development or event with respect to the business or affairs of any of the Related
Parties which has had or would reasonably be expected to have a Material Adverse Effect. 
  
 4.22 ERISA. Section 4.22 of the Disclosure Schedule sets forth, as of the Closing, each Plan and each Multiemployer Plan. 
  
 (a) Each Plan has complied in all material respects with its terms and the provisions of applicable law, including, without
limitation, ERISA and the Code and the Issuer has filed all reports required to be filed under ERISA and the Code with respect to each such Plan. Each Plan (and each related trust) which is intended to be qualified under Section 401(a) of the Code
has received a current determination opinion letter from the Internal Revenue Service to the effect that it meets the requirements of Sections 401(a) and 501(a) of the Code. 
  

 Page 15 of 35 

 (b) No Reportable Event has occurred or is occurring with respect to any Plan. No Plan which is subject
to Section 412 of the Code or Section 302 of ERISA has an accumulated funding deficiency, within the meaning of such sections of the Code or ERISA, or has applied for or received a waiver of an accumulated funding deficiency or an extension of any
amortization period, within the meaning of Section 412 of the Code or Section 303 or 304 of ERISA. All required contributions with respect to a Plan and a Multiemployer Plan have been made. 
  
 (c) No involuntary proceedings have been instituted to terminate or appoint a
trustee to administer any Plan which is subject to Title IV of ERISA. No Lien imposed under the Code or ERISA on the assets of the Issuer or any Commonly Controlled Entity exists, or to the Knowledge of Issuer or any Commonly Controlled Entity, is
likely to arise on account of any Plan or Multiemployer Plan. Neither Issuer nor any Commonly Controlled Entity has incurred any outstanding material liability (including any indirect, contingent or secondary liability) to or on account of a Plan or
a Multiemployer Plan pursuant to Section 409, 502(i), 502(l), 515, 4062, 4063, 4064, 4069, 4201, 4204, or 4212 of ERISA, or Section 401(a)(29), 4971, 4975 or 4980F of the Code, and to the Knowledge of Issuer or any Commonly Controlled Entity, no
condition exists which represents a material risk to Issuer or any Commonly Controlled Entity of incurring a material liability to or on account of a Plan or a Multiemployer Plan pursuant to the foregoing provisions of ERISA or the Code. No Plan has
an Unfunded Current Liability. 
  
 (d) No action, suit,
proceeding, hearing, audit or investigation with respect to the administration, operation or the investment of assets of any Plan (other than routine claims for benefits) is pending, expected or, to the Issuer’s Knowledge, threatened.

  
 (e) Each group health plan (as defined in Section 607(1) of
ERISA or Section 4980B(g)(2) of the Code) which covers or has covered employees or former employees of the Issuer or any Commonly Controlled Entity has at all times been operated in material compliance with the provisions of Part 6 of subtitle B of
Title I of ERISA and Section 4980B of the Code. 
  
 (f) Neither
the Issuer nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan, and neither the Issuer nor any Commonly Controlled Entity would become subject to any liability under ERISA if the Issuer or any such
Commonly Controlled Entity were to withdraw partially or completely from any Multiemployer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made. No such Multiemployer Plan is in
Reorganization or Insolvent. 
  
 4.23 Environmental
Matters. 
  
 (a) Each of the Related Parties is and has
been in compliance in all material respects with all applicable Environmental Laws and has obtained all Environmental Permits materially necessary to operate its business as currently operated. 
  
 (b) There has not been any Release or threatened Release of any Hazardous
Material, that has, or will require cleanup, at, in, on, or from any property owned, operated or leased by any of the Related Parties. 
  
 (c) No Environmental Claims have been made, or are pending or, to the Issuer’s Knowledge, have been threatened against any of the Related Parties
with respect to either any property owned, operated or leased by any of the Related Parties or such Related Parties’ operations thereon, including any Environmental Claims relating to any products made or sold by any of the Related Parties.

  

 Page 16 of 35 

 (d) There are no Hazardous Materials existing on or under any property of the Related Parties which
constitute a violation of any Environmental Law which would reasonably be expected to have a Material Adverse Effect. 
  
 (e) Issuer has no actual knowledge that any Related Party has received any written notice or complaint from any governmental entity or private party
related to environmental conditions or claims with respect to property owned, operated or leased by the Related Parties or products made or sold by any of the Related Parties, and Issuer has disclosed to or otherwise made available for inspection by
Aqua all written reports and material correspondence received prior to the date hereof from any environmental consultant or environmental contracting firm identifying or discussing actual or potential environmental conditions with respect to the
property owned, operated, or leased by the Related Parties. 
  
 (f) For purposes of this Agreement, the following terms shall have the meanings set forth below: 
  
 “Environmental Claims” means any and all administrative or judicial actions, sanctions, suits, orders, claims, liens, notices,
investigations, violations or proceedings related to any applicable Environmental Law or any Environmental Permit brought, issued or asserted by a Governmental Authority or any other person (other than Issuer, the Related Parties or their
affiliates) for compliance, damages, penalties, removal, response, Remediation or other action pursuant to any applicable Environmental Law or for personal injury or property damage (other than to Aqua or its affiliates) resulting from a Hazardous
Material at, to or from any facility or property owned operated or leased by any of the Related Parties or any facility or property at which any Related Party disposed or arranged for the disposal or treatment (with a transporter or otherwise) of
Hazardous Materials, including without limitation past, present or future employees of any Related Party seeking damages for exposure to Hazardous Materials; 
  
 “Environmental Laws” means all federal, state and local laws, statutes, ordinances, codes, rules and regulations related to the
environment, natural resources, safety or health or the handling, use, recycle, generation, treatment, storage, transportation or disposal of Hazardous Materials, and any common law cause of action relating to the environment, natural resources,
safety, health or the management of or exposure to Hazardous Materials including without limitation, Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. §§ 9601, et seq.); the Superfund
Amendments and Reauthorization Act (42 U.S.C. §§ 9601, et seq.); the Hazardous Materials Transportation Act, as amended (49 U.S.C. §§ 5101, et seq.); the Resource Conservation and Recovery Act, as amended, (42 U.S.C. §§
6901, et seq.); the Clean Water Act, as amended (33 U.S.C. §§ 1251, et seq.); the Clean Air Act, as amended (42 U.S.C. §§ 7401, et seq.); the Federal Insecticide, Fungicide and Rodenticide Act (7 U.S.C. §§ 136, et
seq.); the Toxic Substances Control Act (15 U.S.C. §§ 2601, et seq.); the Surface Mining Control and Reclamation Act of 1977 (30 U.S.C. §§ 1201, et seq.); Emergency Planning and Community Right to Know Act of 1986 (42 U.S.C.
§§ 11001, et seq.); the Occupational Safety and Health Act, as amended (29 U.S.C. §§ 651 et seq.); Solid Waste Disposal Act, (42 U.S.C. §§ 6941 et seq.); the Endangered Species Act (7 U.S.C. § 136;16 U.S.C. §
460, et seq. (1973)); the Oil Pollution Act of 1990 (33 U.S.C. §§ 2702 to 2761), all amendments to any of the foregoing statutes, and all regulations promulgated by any federal or state agencies, including the Environmental Protection
Agency, and similar regulations of any state department of natural resources or state environmental protection 
  

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 agency now or at any time hereafter in effect, including the Pennsylvania Solid Waste Management Act of July 7, 1980 (35
P.S. §§ 6018.101- 6018.1003); the Infectious and Chemotherapeutic Waste Act of July 13, 1988 (35 P.S. §§ 6019.1 et seq..); Municipal Waste Planning, Recycling and Waste Reduction Act of July 28, 1988 (53 P.S. §§
4000.100 et seq.); the Hazardous Sites Cleanup Act of October 18, 1988 (35 P.S. §§ 6020.101 et seq.); the Clean Streams Law of June 22, 1937 (35 P.S. §§691.1 - 691.1001); the Air Pollution Control Act of January 8, 1960 (35 P.S.
§§ 4001-4015); the Surface Mining Conservation & Reclamation Act of May 31, 1945 (52 P.S. §§ 1396.1-1396.31); the Noncoal Surface Mining Conservation & Reclamation Act (52 P.S. §§ 3301-3326); and the Dam Safety
and Encroachments Act of November 26, 1978 (32 P.S. §§ 693.1-693.27); and all rules and regulations implementing any of the foregoing. 
  
 “Environmental Permits” means all permits, licenses, approvals, authorizations or consents required by any Governmental Authority under
any applicable Environmental Law and includes any and all orders or consent orders issued or entered into by a Governmental Authority under any applicable Environmental Law. 
  
 “Hazardous Material” means any substance, material or waste that is listed, regulated or defined under any
Environmental Law and including, without limitation, any substance, matter or waste that is defined or designated a “hazardous substance,” “hazardous waste,” “regulated substance,” or “solid waste” under any
Environmental Laws, petroleum, petroleum-like products or wastes, asbestos, or polychlorinated biphenyls. 
  
 “Release” means any presence, spilling, migrating, seeping, leaking, pumping, pouring, emitting, emptying, discharging, injecting,
escaping, leaching, dumping or disposing of any Hazardous Material into the indoor or outdoor environment, including, without limitation, the abandonment or discarding of barrels, drums, containers, tanks and other receptacles containing or
previously containing any Hazardous Material. 
  
 “Remediation” means any investigation, clean-up, removal action, remedial action, restoration, repair, response action, corrective action, monitoring, sampling and analysis, installation, reclamation, closure, or
post-closure action in connection with any Hazardous Material. 
  
 4.24 Registration Rights Agreements. Except, following the Closing, pursuant to the Registration Rights Agreement, the Issuer is not a party to any agreement granting any registration rights to any Person. 

 
 4.25 Other Rights of Aqua. Neither the Issuer nor, to the
Knowledge of the Issuer, any purchaser of any Capital Stock of the Issuer, is a party to any agreement, arrangement or understanding (i) granting any tag-along rights, drag-along rights or similar rights with respect to any Capital Stock of the
Issuer, or (ii) with respect to the voting rights of the Capital Stock of the Issuer. 
  
 4.26 Actual Existence of Collateral; No Split Transaction. Each, every and all parts of the Collateral described in any Water Contract actually exists as so described, including the payments and other
consideration listed in such Water Contract and including the equipment described in such Water Contract. No Water Contract offered to Aqua to serve as part of the Collateral is or constitutes or is part of a “split transaction,” where the
Water Contract is merely part of a larger transaction between the Issuer and its customer, which has not been revealed to Aqua.  
  
 4.27 Business Relations. No (i) customers that accounted for five percent (5%) or more of the Related Parties’ aggregate revenues for
the fiscal year ended December 31, 2004 or nine 
  

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 months ended September 30, 2005 or (ii) material suppliers of the Related Parties has threatened (in writing) to cease to
do business with any of the Related Parties following the consummation of the transactions contemplated hereby or to modify such relationship in a manner which is materially less favorable to the Related Parties, and the Issuer has no Knowledge of
facts that would be reasonably likely to result in such a termination or modification. None of the Related Parties has experienced any difficulties in obtaining any inventory items necessary to the operation of its business, and to Issuer’s
Knowledge, no such shortage of supply of inventory items is threatened or pending, in each case which has had or would reasonably be expected to have a Material Adverse Effect. 
  
 4.28 Relationships with Related Persons. No Related Party, nor, to the Issuer’s Knowledge, any Affiliate
of any of them, (a) owns, directly or indirectly, an equity interest, or any other financial or profit interest, in any Person that has (i) had business dealings or a material financial interest in any transaction with any of the Related Parties or
(ii) engaged in competition with any of the Related Parties with respect to any line of the products or services of such Related Party(ies) except for ownership of less than one percent (1%) of the outstanding capital stock of any competing business
that is publicly traded on any recognized exchange or in the over-the-counter market or (b) is a party to any Material Contract with, or has any claim or right against, any of the Related Parties. 
  
 4.29 Full Disclosure. Neither this Agreement nor any of the
other Purchase Documents nor any Schedule hereto or thereto or closing certificate, in each case, furnished by any Related Party in connection with the transactions contemplated by this Agreement, taking into account documentation furnished to Aqua
on or prior to the Closing Date, contains any untrue statement of a material fact or omits a material fact necessary to make the statements contained herein or therein not misleading under the circumstances in which they were made at the time such
statements were made. There is no fact which the Issuer has not disclosed to Aqua in writing which would reasonably be expected to have a Material Adverse Effect. 
  
 ARTICLE V 
 CONDITIONS TO CLOSING 
  
 Aqua’s obligations
to purchase the Note shall, unless waived by Aqua in writing, be subject to the satisfaction, prior to or concurrently with Aqua’s purchase of its Note, of the following conditions: 
  
 5.01 Purchase Documents. 
  
 (a) Aqua shall have received the following documents duly executed and delivered by the parties thereto (other than Aqua):

  
 (i) this Agreement; 
  
 (ii) its Note (as set forth on Schedule I);

  
 (iii) the Security Documents; 
  
 (iv) its Warrants (as set forth on Schedule I); and

  
 (v) the Registration Rights Agreement.

  

 Page 19 of 35 

 (b) Aqua also shall have received the following documents: 
  
 (i) a copy of the resolutions, in form and substance
reasonably satisfactory to Aqua, of the Board of Directors authorizing (A) the execution, delivery and performance of this Agreement, the Note and any other Purchase Documents to which the Issuer is a party, and (B) the borrowings contemplated
hereunder certified by the Secretary of the Issuer, which certificate shall state that such resolutions have not been amended, modified, revoked or rescinded; 
  

(ii) a certificate of the Secretary of the Issuer dated as of the Closing Date, as to the incumbency and signatures of the officers
thereof executing the Purchase Documents to which the Issuer is a party, including this Agreement and the Note, together with evidence of the incumbency of such Secretary; 
  
 (iii) true and complete copies of the articles of incorporation and the by-laws of the Issuer, certified as
of the Closing Date as complete and correct copies thereof by the Secretary of the Issuer; 
  
 (iv) a good standing certificate for the Issuer from the Secretary of State of California issued no earlier than ten (10) Business Days
prior to the Closing Date; 
  
 (v) a certificate
dated the Closing Date, signed by a Responsible Officer in form and substance satisfactory to Aqua and its counsel certifying that the conditions specified in Sections 5.02 and 5.03 have been fulfilled and that no Default or Event of Default
hereunder has occurred as of such date; 
  
 (vi)
a written opinion of the law firm of Latham & Watkins LLP, legal counsel for the Issuer, dated as of the Closing Date and addressed to the Purchasers in form and substance reasonably satisfactory to Aqua and its legal counsel; 
  
 (vii) a copy of the Senior Credit Agreement certified by a
Responsible Officer; 
  
 (viii) copies of all
other documentation evidencing material Indebtedness of any Related Party certified by a Responsible Officer; 
  
 (ix) documents, in form reasonably acceptable to Aqua evidencing the obtaining of all releases, consents or approvals to the transaction
listed on Section 4.06 of the Disclosure Schedule; and 
  
 (x) such other instruments, documents, certificates and opinions and other evidence as Aqua may reasonably request, in form and substance satisfactory to it and its counsel, with respect to the transactions to be
consummated pursuant hereto. 
  
 5.02 Representations and
Warranties True. The representations and warranties contained in Article IV shall be true and correct on and as of the Closing Date. 
  
 5.03 Compliance with this Agreement. As of the Closing Date, the Issuer shall have performed and complied with all of its agreements and
conditions contained herein and in the other Purchase Documents to be performed or complied with by it prior to or at Closing and there shall exist no Default or Event of Default hereunder. 
  

 Page 20 of 35 

 5.04 Payment of Fees. Aqua shall have received on the Closing Date payment of those fees
referred to in Section 9.05 of this Agreement as have been evidenced by an invoice delivered to the Issuer no less than one (1) day prior to the Closing Date. 
  
 ARTICLE VI 
 AFFIRMATIVE COVENANTS 
  
 The Issuer covenants and
agrees with Aqua that, for so long as any amounts are outstanding under the Note, the Issuer will: 
  
 6.01 Payment of the Note. Punctually pay or cause to be paid the Obligations of Issuer at the times and places and in the manner specified
in the Purchase Documents. 
  
 6.02 Maintenance of
Existence. Continue to engage in business of the same general type as now conducted by it and preserve, renew and keep in full force and effect its corporate existence and take all reasonable action to maintain all rights, privileges and
franchises necessary or desirable in accordance with good business practices customary in Issuer’s industry. 
  
 6.03 Maintenance of Property. Keep all material property useful and necessary in its businesses in good working order and condition in
accordance with good business practices customary in Issuer’s industry, reasonable wear and tear excepted. 
  
 6.04 Reporting Requirements. Until the Initial Public Offering, and for so long as the aggregate amount outstanding under the Note equals or
exceeds One Million Dollars ($1,000,000), furnish to Aqua: 
  
 (a) as soon as available, but in any event within ninety (90) days after the end of each fiscal year of the Issuer, a copy of the audited balance sheet of the Issuer and its Subsidiaries as of the end of such year and audited statements of
operations, shareholder’s equity and cash flows of the Issuer and its Subsidiaries for such year, setting forth in each case in comparative form the figures for the previous year, reported on without a “going concern” or like
qualification or exception, by an independent public accounting firm; 
  
 (b) as soon as available, but in any event not later than forty-five (45) days after the end of each quarterly period of each fiscal year of the Issuer, the unaudited balance sheet of the Issuer and its Subsidiaries as of the end of such
quarter and the related unaudited statements of operations, shareholder’s equity and cash flows of the Issuer and its Subsidiaries for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case
in comparative form the figures for the previous year, certified by a Responsible Officer as fairly presenting in all material respects the financial condition of the Issuer; 
  
 (c) as soon as available, but in any event not later than thirty (30) days after the end of each month, the unaudited
balance sheet of the Issuer and its Subsidiaries as of the end of such month and the related unaudited statements of operations of the Issuer and its Subsidiaries for such month and the portion of the fiscal year through the end of such month; and

  
 (d) as soon as available, but in any event not later than
thirty (30) days prior to the start of each fiscal year, the Issuer’s annual operating plan, including, without limitation, capital and operating expense budgets, cash flow projections and income and loss projections for the Issuer and its
Subsidiaries in respect of such fiscal year, all itemized in reasonable detail and prepared on a monthly basis, and, promptly after preparation, any material revisions to any of the foregoing. 
  

 Page 21 of 35 

 All such financial statements are to be complete and correct in all material respects and are to be
prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods except for changes required or permitted by GAAP, and except that the unaudited financial statements will
not contain footnotes and will be subject to normal year-end adjustments. 
  
 6.05 Intellectual Property. Promptly (but in no event more than thirty days (30) after the Issuer obtains Knowledge thereof) notify Aqua of the acquisition by the Issuer or any Related Party of any
Patents, registered Copyrights or registered Marks. Issuer shall use its reasonable best efforts to preserve its rights under its Intellectual Property Assets (including Intellectual Property Assets acquired after the date of this Agreement) and to
prepare, file, prosecute and maintain such Intellectual Property Assets. 
  
 6.06 Litigation. Promptly inform Aqua in writing of (a) all material adverse changes in the Issuer’s financial condition, (b) all material developments with respect to litigation arising or existing
during such period, (c) all threatened litigation, when threatened in writing and (d), all claims, investigations, administrative proceedings or similar actions affecting the Issuer or any Related Party which would reasonably be expected to have a
Material Adverse Effect. 
  
 6.07 Financial Records.
Maintain its books and records in accordance with GAAP, applied on a consistent basis. 
  
 6.08 Additional Information. Furnish such additional information and statements, lists of assets and liabilities, ageings of receivables and payables, inventory schedules, budgets, forecasts, tax
returns, and other reports with respect to the Issuer’s financial condition and business operations as Aqua may reasonably request from time to time. 
  
 6.09 Insurance. 
  
 (a) Maintain fire and other risk insurance, public liability insurance, and such other insurance as is customary for companies of similar size and nature
as Issuer in Issuer’s industry with respect to the Issuer’s properties and operations, in form, amounts, coverages and with insurance companies reasonably acceptable to Aqua. The Issuer will deliver to Aqua from time to time copies of the
policies or certificates of insurance which have been delivered to the Senior Secured Creditor, and will deliver to Aqua written notice at least thirty (30) days prior to any cancellation or diminishment of the coverage under such insurance
policies. 
  
 (b) Furnish to Aqua, reports on each existing
insurance policy, including without limitation the following: (i) the name of the insurer, (ii) the risks insured, (iii) the amount of the policy, (iv) the properties insured, (v) the then current property values on the basis of which insurance has
been obtained, and the manner of determining those values and (vi) the expiration date of the policy. 
  
 6.10 Material Contracts. Comply in all material respects with all terms and conditions of all other agreements, whether now or hereafter
existing, between the Issuer and any other party and notify Aqua immediately in writing of any default in connection with Material Contracts. It is acknowledged by the parties hereto that the Issuer may from time to time be in default under terms of

  

 Page 22 of 35 

 a Water Contract (as defined in the Senior Credit Agreement) pledged as Collateral to secure the Loan (as defined in the
Senior Credit Agreement). Such default by the Issuer under a Water Contract will not be considered an Event of Default under this Agreement if such default does not constitute an event of default under the Senior Credit Agreement. 
  
 6.11 Taxes, Charges and Liens. Pay and discharge when due all
of its Indebtedness and obligations, including without limitation all assessment Taxes, governmental charges, levies and Liens, of every kind and nature, imposed upon the Issuer or its properties, income, or profits, prior to the date on which
penalties would attach, and all lawful claims that, if unpaid, might become a Lien or charge upon any of the Issuer’s properties, income, or profits; provided, however, the Issuer will not be required to pay and discharge any such
assessment, Tax, charge, levy, Lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings and (b) the Issuer shall have established on its books adequate reserves with respect to such contested
assessment, Tax, charge, levy, Lien, or claim in accordance with GAAP. The Issuer will furnish to the Aqua evidence of payment of the assessments, Taxes, charges, levies, Liens and clams and copies of any written statements of any assessment Taxes,
charges, levies, Liens and clams against the Issuer’s properties, income, or profits which have been delivered to the Senior Secured Creditor.  
  
 6.12 Performance. Perform and comply with all terms, conditions, and provisions set forth in this Agreement and in the other Purchase
Documents to which it is a party in a timely manner, and promptly notify Aqua if the Issuer learns of the occurrence of any event which constitutes an Event of Default under this Agreement. 
  
 6.13 Operations. 
  
 (a) Provide written notice to Aqua of any change of personnel who are
Responsible Officers; and 
  
 (b) Conduct its business affairs in
a reasonable and prudent manner and in compliance in all material respects with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without
limitation, compliance with the ADA and with all minimum funding standards and other requirements of ERISA and other laws applicable to the Issuer’s Plans. 
  

6.14 Inspection. Until an Initial Public Offering, permit employees or agents of Aqua during regular business hours and upon at least
twenty-four (24) hours’ prior written notice to inspect any and all Collateral for the Note and the Issuer’s other properties and to examine or audit the Issuer’s books, accounts, and records and to make copies and memoranda of the
Issuer’s books, accounts, and records. If the Issuer now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the
possession of a third party, the Issuer, upon request of Aqua, shall notify such party to permit Aqua free access to such records during regular business hours and upon at least twenty-four (24) hours prior written notice and to provide Aqua with
copies of any records it may reasonably request, all at the Issuer’s expense. The inspections in accordance with the preceding sentence shall be limited to no more than four (4) times each calendar year. 
  
 6.15 Observer Rights. 
  
 Permit one named designee of Aqua to attend any regular or special meeting
of the Board of Directors as an observer; provided, however, that nothing contained in this Section 6.15 shall confer 
  

 Page 23 of 35 

 upon such observer the right to vote on any matter coming before the Board of Directors or be deemed to create or impute
any liability whatsoever on the part of such observer or Aqua by virtue of the observer attending any such meeting in such capacity; provided, further, that such individual executes a board observer letter in form reasonably
satisfactory to Issuer and Aqua, and that Aqua may change the individual who will serve as observer only upon prior written notice to the Issuer. The Issuer shall give such observer copies of all notices, minutes, consents and other material that
the Issuer provides to its directors at the same time as it provides such materials to its directors. Upon reasonable notice and at a scheduled meeting of the Board of Directors or such other time, if any, as the Board of Directors may determine in
its sole discretion, such observer may address the Board regarding significant business issues facing Issuer. 
  
 6.16 Compliance Certificate. Unless waived in writing by Aqua, provide Aqua at least annually a certificate executed by a Responsible
Officer, certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. 
  
 6.17 Environmental Compliance and Reports. 
  
 (a) Comply in all material respects with all Environmental Laws applicable to the Issuer or its business; 
  
 (b) Not cause or permit to exist, as a result of an intentional or
unintentional action or omission on its part on property owned and/or occupied by the Issuer, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance in all material
respects with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; and 
  
 (c) Furnish to Aqua promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive,
letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on the Issuer’s part in connection with any environmental activity whether or not there is damage to
the environment and/or other natural resources. 
  
 6.18
Location of Collateral. Give Aqua not less than ten (10) days prior written notice of (a) any change in the Issuer’s chief executive office and principal place of business, (b) any new location of business or (c) any new location for
any of the Collateral that is material to Aqua, other than changes in the location of any Collateral pursuant to Permitted Sales. 
  
 6.19 Further Assurances. Execute any and all further documents, and take all further action which Aqua may reasonably request in order to
effectuate the transactions contemplated by the Purchase Documents to which the Issuer is a party. Without limiting the generality of the foregoing, such further documents and actions shall include the execution of agreements and instruments, and
filing UCC financing statements, in order to effectuate the transactions contemplated by this Agreement and in order to grant, preserve, protect and perfect the security interests created or intended to be created by the Purchase Documents, in all
cases subject to the rights of the Senior Secured Creditor pursuant to the Subordination Agreement. 
  

 Page 24 of 35 

 6.20 ERISA. Promptly (but in no event more than thirty (30) days after Issuer or any
Commonly Controlled Entity knows of any of the following events) notify the Aqua: 
  
 (a) a contributing sponsor (as defined in Section 4001(a)(13) of ERISA) is subject to the advance reporting requirement of PBGC Regulation Section 4043.61 (without regard to subparagraph (b)(1) thereof) and an event
described in subsection .62-.68 of PBGC Regulation Section 4043 is reasonably expected to occur with respect to a Plan within the following thirty (30) days; 
  
 (b) an accumulated funding deficiency, within the meaning of Section 412 of the Code or Section 302 of ERISA, has been incurred, or application has been,
or is reasonably expected to be, made for a waiver or modification of the minimum funding standard (including any required installment payments) or an extension of any amortization period under Section 412 of the Code or Section 303 or 304 of ERISA
with respect to a Plan; 
  
 (c) any contribution required to be
made with respect to a Plan or a Multiemployer Plan has not been made within sixty (60) days following the date such contribution was due; 
  
 (d) a Plan or Multiemployer Plan has been or will be involuntarily terminated, reorganized, partitioned or declared insolvent under Title IV of ERISA;

  
 (e) a Plan has an Unfunded Current Liability which, when added
to the aggregate amount of Unfunded Current Liabilities with respect to all other Plans as of such date, exceeds the aggregate amount of Unfunded Current Liability that existed at Closing by $10 million; 
  
 (f) involuntary proceedings have been or will be instituted to terminate or
appoint a trustee to administer a Plan which is subject to Title IV of ERISA, or to collect delinquent contributions to a Plan or a Multiemployer Plan pursuant to Section 515 of ERISA; or 
  
 (g) Issuer or any Commonly Controlled Entity incurs or is reasonably expected to incur any material liability (including any
indirect, contingent or secondary liability) to or on account of the termination of or withdrawal from a Plan or a Multiemployer Plan under Section 409, 502(i), 502(l), 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section 401(a)(29), 4971,
4975 or 4980F of the Code, or with respect to a group health plan (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) under Section 4980B of the Code. 
  
 6.21 Use of Proceeds. Use the proceeds from Aqua’s purchase of the Note for general corporate and working
capital purposes. Any material change to the use of proceeds set forth in the immediately preceding sentence must be unanimously approved by the Board of Directors. Notwithstanding the foregoing, the Issuer may not use the proceeds from Aqua’s
purchase of the Note to make any type of payment (including not limited to, payments of principal, interest or expenses) on Indebtedness. 
  
 6.22 Subordinated Agreement. Aqua and Senior Secured Creditor agree in good faith to enter into a Subordination and Intercreditor Agreement
within 10 business days after the closing of the issuance of the Note, which agreement shall be in a form substantially similar to that of the Subordination and Intercreditor Agreement entered into in connection with the subordinated notes issued on
October 14, 2005 and shall provide for the subordination of the Lien granted pursuant to the Purchase Documents to the Lien granted pursuant to the Senior Credit Agreement, except that the aggregate principal amount of the indebtedness under the
Senior Credit Agreement shall be no greater than $8,000,000. 
  

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 ARTICLE VII 
 NEGATIVE COVENANTS 
  
 The
Issuer covenants and agrees with Aqua that, for so long as any amounts are outstanding under the Note, the Issuer will not: 
  
 7.01 Limitations on Merger, Consolidation, Sales of Assets, Etc. Authorize or effect (a) any sale, lease, transfer or other disposition of
all or substantially all the assets of the Issuer (or of any Related Person) other than Permitted Sales, (b) any merger or consolidation or other 
 reorganization of the Issuer with or into another Person other than (i) mergers and consolidations of any Related Party with another Related Party and (ii) any such transactions consummated solely for the purposes of reincorporating any
Related Party in another jurisdiction, (c) the acquisition by the Issuer of another Person by means of a purchase of all or substantially all of the capital stock or assets of such Person or (d) a liquidation, winding up, dissolution or adoption of
any plan for the same.  
  
 7.02 Limitations on
Indebtedness. Create, incur, assume, or suffer to exist any Indebtedness except: (a) Senior Debt, (b) Indebtedness under the Note, (c) trade debt incurred in the normal course of business; (d) any Indebtedness referred to in clauses (iv)
through (xi) of the definition of Permitted Liens; (e) Indebtedness under the XACP Notes; and (f) other Indebtedness approved in writing by Aqua. 
  
 7.03 Continuity of Operations. (a) Engage in any business activities substantially different than those in which the Issuer is presently
engaged; provided, that, such restriction shall not prohibit any Permitted Sales, (b) cease operations, liquidate, change ownership of twenty-five percent (25%) or more of Capital Stock or change its name, (c) pay any dividends on the
Issuer’s Capital Stock (other than dividends payable in shares of its Capital Stock) or (d) purchase or retire any of the Issuer’s outstanding shares of Capital Stock, other than repurchases of Capital Stock from employees or consultants
upon their resignation or termination pursuant to the terms of the Issuer’s stock option or incentive plan. 
  
 7.04 Loans, Acquisitions and Guaranties. Incur any Guarantee Obligations other than in the ordinary course of business. 
  
 7.05 Prepayments; Changes in Terms. Except as set forth in
paragraph 2.m. of the Senior Credit Agreement: (a) accept, directly or indirectly, any prepayment as to any Collateral, including Water Contracts; or (b) alter, amend or modify any Water Contracts or other Collateral in any manner that would reduce
the amounts payable, shorten the term or otherwise materially increase the Issuer’s obligations or materially decrease customer’s obligations thereunder. 
  
 7.06 Limitation on Liens. Create, incur, assume or suffer to exist any Lien upon any of its property, assets
or revenues, whether now owned or hereafter acquired, except for Permitted Liens. 
  
 7.07 Restrictions on Ability to Satisfy Obligations. Enter into any transaction not in the ordinary course of business that expressly restricts the Issuer’s ability to satisfy the Obligations, other
than restrictions set forth in the XACP Notes and the Senior Credit Agreement. 
  
 7.08 Transactions with Affiliates. Enter into any transaction involving aggregate payments or property with a fair market value of over $60,000, including, without limitation, any purchase, sale,
lease or exchange of property or the rendering of any service, with any Affiliate, unless such transaction is in the ordinary course of, and pursuant to the reasonable requirements of, the Issuer’s business, is in good faith and is upon fair
and reasonable terms no less favorable to the Issuer than it would obtain in a comparable arm’s length transaction with a Person not an Affiliate; provided, that, the foregoing restriction shall not apply to (i) any transaction
between Related Parties, (ii) salary, bonus, employee stock option and other compensation and employment arrangements with directors, officers or consultants in the ordinary course of business, (iii) indemnification payments to officers or directors
of Related Parties and (iv) any transaction involving aggregate payments or property with a fair market value of over $60,000 that shall have been approved by the 
  

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 Board of Directors (with any interested party abstaining in any vote with respect to such transaction), such approval to
be evidenced by a board resolution stating that such transaction or series of related transactions complies with the provisions of this Section 7.08. 
  
 ARTICLE VIII 
 EVENTS OF DEFAULT

  
 8.01 Bankruptcy, etc. All amounts owing
under this Agreement and the Note shall immediately become due and payable without the need for any notice or other action by Aqua if any of the following events shall occur: 
  
 (a) a Related Party shall commence or be the subject of any case, proceeding or other action (i) under any existing or
future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it bankrupt or insolvent, or
seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (ii) seeking appointment of a receiver, trustee, custodian or other similar official for it or for
all or any substantial part of its assets, or a Related Party shall make a general assignment for the benefit of its creditors; or there shall be commenced against a Related Party any case, proceeding or other action of a nature referred to in
subsections 8.01(a)(i) or 8.01(a)(ii) which (x) results in the entry of an order for relief or any such adjudication or appointment, or (y) remains undismissed, undischarged or unbonded for a period of ninety (90) days; 
  
 (b) there shall be commenced against a Related Party any case, proceeding or
other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or substantially all of its assets which results in the entry of an order for any such relief which shall not have been vacated,
discharged, or stayed or bonded pending appeal within sixty (60) days from the entry thereof; or 
  
 (c) a Related Party shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in
subsections (a) or (b) above. 
  
 8.02 Other Events.
If any of the following events shall occur and be continuing: 
  
 (a) the Issuer shall fail to pay (i) any principal of a Note when due in accordance with the terms thereof, or (ii) interest on a Note or any fee or other amount payable hereunder within three (3) Business Days of when due in accordance
with the terms thereof or hereof; 
  
 (b) any representation or
warranty made by the Issuer herein or in any other Purchase Document or which is contained in any certificate, document or financial or other statement furnished at any time under or in connection with this Agreement or other Purchase Document to
which the Issuer is a party shall prove to have been incorrect and the subject of that breach of representation or warranty has a Material Adverse Effect on or as of the date made or deemed made; 
  
 (c) the Issuer shall default in the observance or performance of (i) any
covenant or other material agreement contained in Sections 7.01 through 7.07 of this Agreement, and if such default is capable of being remedied, such default shall continue unremedied for a period of fifteen (15) days and (ii) any
covenant or other material agreement contained in this Agreement (other than Sections 7.01 through 7.07), the Note and/or the Warrants (other than as provided in paragraphs (a) through (b) of this Section 8.02), and, if such
default is capable of being remedied, such default shall continue unremedied for a period of thirty (30) days; 
  

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 (d) there shall be an Event of Default (as defined in the Senior Credit Agreement); 
  
 (e) there shall be an event of default under the terms of any other
Indebtedness (other than the Senior Credit Agreement) and such event of default has a Material Adverse Effect; or 
  
 (f) Issuer shall incur or could reasonably be expected to incur any liability to the PBGC or any Plan or Multiemployer Plan under Title IV of ERISA, or
any event occurs with respect to any Plan or Multiemployer Plan that could reasonably be expected to result in a lien on the assets of the Issuer or in a Material Adverse Effect, 
  
 then, and in any such event, Aqua may by notice of default to the Issuer, declare the Note (with accrued interest thereon) and all other
amounts owing under this Agreement and the Note to be due and payable forthwith, whereupon the same shall immediately become due and payable. 
  
 8.03 Notice of Defaults. The Issuer shall undertake in good faith to notify Aqua of any event specified in Sections 8.01 and 8.02.

  
 8.04 Other Remedies. If an Event of Default has
occurred and is continuing, in addition to the acceleration provisions set forth in Section 8.01 and Section 8.02, the holder of any Note at the time outstanding may proceed to protect and enforce the rights of such holder by an action
at law, suit in equity or other appropriate proceeding. 
  
 8.05 Waiver. Except as expressly provided above in this Article VIII, presentment, demand, protest and all other notices of any kind are hereby expressly waived. 
  
 ARTICLE IX 
 MISCELLANEOUS 
  
 9.01 Amendments and
Waivers. No provision of this Agreement, the Note or the Purchase Documents, may be waived, modified or amended without the prior written agreement of Aqua and the Issuer. No such waiver, modification or amendment shall extend to or affect
any obligation not expressly waived, modified or amended. 
  
 9.02 Notices. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing, and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made
when delivered by hand, or, in the case of telecopy notice, when received, or, in the case of a nationally recognized courier service, one Business Day after delivery to such courier service, addressed as follows in the case of the Issuer and Aqua
or to such other address as may be hereafter notified by the respective parties hereto and any future purchasers of the Note: 
  
 If to the Issuer: 
  
 Basin Water, Inc. 
 8731 Prestige Court 
 Rancho Cucamonga, CA 91730 
 Attention: Peter Jensen, Chief Executive Officer 
 Telephone No.:    (619) 222-1493 
 Facsimile No.:     (619) 222-3393 
  

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 with a copy (which copy shall not constitute notice to the Issuer) to: 
  
 Latham & Watkins LLP 
 12636 High Bluff Drive, Suite 400 
 San Diego, CA 92130 
 Attention: Faye H. Russell, Esquire 
 Telephone No.:    (858) 523-5400 
 Facsimile No.:     (858) 523-5450 
  
 If to Aqua: 
  
 Aqua America, Inc. 
 762 West Lancaster Avenue 
 Bryn Mawr, PA 19010 
  
 Attention: General Counsel 
 Telephone No.: (610) 527-8000 
 Facsimile No.:  (610) 645-1061 
  
 with a copy (which copy shall not constitute notice to Aqua) to: 
  
 Morgan, Lewis & Bockius LLP 
 1701 Market Street 
 Philadelphia, Pennsylvania 19103 
 Fax: (215) 963-5001 
 Attn: Stephen A. Jannetta 
  
 9.03 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of Aqua, any right, remedy, power or
privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or
privilege. The rights, remedies, powers and privileges herein provided are cumulative and in addition to any rights, remedies, powers and privileges provided by law. 
  
 9.04 Survival of Representations and Warranties. All representations and warranties made hereunder or under
any other Purchase Document and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the Note, but shall only survive until all Obligations are
paid in full. 
  
 9.05 Payment of Expenses, Taxes and
Brokers’ Fees. The Issuer agrees that (i) at the Closing it shall pay or reimburse Aqua for its reasonable out-of-pocket legal fees and expenses incurred in connection with the preparation, negotiation and execution of this Agreement,
the Note and the other Purchase Documents and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby; provided, however, that such costs and expenses
to be paid at the Closing shall not exceed in the aggregate Fifty Thousand Dollars ($50,000), (ii) it shall pay or reimburse Aqua for all of its reasonable costs and expenses (including reasonable attorneys’ fees) incurred in connection with
the enforcement or 
  

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 preservation of any rights under this Agreement, the Note or the other Purchase Documents and (iii) it shall pay,
indemnify, and hold each Aqua harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, which may be payable or determined to be
payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement,
the Note or the other Purchase Documents, other than such fees or liabilities in connection with the transfer by Aqua of the Notes or any Warrant to any other Person. Commencing ninety (90) days after such payments are due, any fees, expenses or
other amounts payable hereunder shall be added to the principal amount of the Note and shall bear interest at the Default Rate. The agreements in this Section 9.05 shall survive repayment of the Note and all other amounts payable hereunder.

  
 9.06 Indemnification. The Issuer will defend,
indemnify, and hold harmless Aqua and each of their respective subsidiaries, shareholders, partners, employees, agents, attorneys, officers, and directors (each an “Indemnified Person”), from and against any and all claims, demands,
penalties, causes of action, fines, liabilities, settlements, damages, costs, or expenses of whatever kind or nature, known or unknown, foreseen or unforeseen, contingent or otherwise (including, without limitation, counsel and consultant fees and
expenses, investigation and laboratory fees and expenses, court costs, and litigation expenses) arising out of, or in any way related to the Collateral or the Notes (other than in connection with the transfer of the Note by Aqua), including, but not
limited to, violation or alleged violation of any Environmental Laws by the Issuer. The Issuer shall not, without the prior written consent of any Indemnified Person, effect any settlement of any pending or threatened proceeding, claim or action
against such Indemnified Person, in respect of which such Indemnified Person or its parent, subsidiaries, affiliates, employees, agents, officers or directors is a party or would be entitled to seek indemnification hereunder, unless such settlement
includes an unconditional release of such Indemnified Person and its parent, subsidiaries, affiliates, employees, agents, attorneys, officers or directors from all liability on claims that are the subject matter of such claim, action or other
proceeding or is otherwise acceptable to such Indemnified Person and its counsel, in their sole discretion. Notwithstanding the foregoing, that the Issuer shall have no obligation hereunder to an Indemnified Person with respect to indemnified
liabilities arising from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this subsection shall survive repayment of the Notes and all other amounts payable hereunder. 
  
 9.07 Aqua Representations. Aqua represents, severally and not
jointly, by accepting its Note, that it is an “accredited investor” as that term is defined in Rule 501 promulgated under the Securities Act and understands that its Note has not been registered for sale under Federal or state
securities laws or “Blue Sky” laws and is being offered and sold to Aqua pursuant to one or more exemptions from the registration requirements of such securities laws. Aqua further understands that the Note has not been qualified
under any state securities laws based on the belief that they have been issued in a transaction exempt from the qualification requirements of such securities laws, which exemption depends upon, among other things, Aqua’s representations made
herein. Aqua further represents to the Issuer, severally and not jointly, that it is acquiring its Note for its own account for investment and not with a view to, or for sale in connection with, any distribution thereof in violation of the
Securities Act, and agrees that its Note will not be sold or otherwise transferred unless (i) a registration statement with respect to such transfer is effective under the Securities Act and any applicable state securities laws or “Blue
Sky” laws or (ii) Aqua has delivered to the Issuer an opinion of counsel reasonably satisfactory to the Issuer, at Aqua’s expense, that such sale or transfer is made pursuant to one or more exemptions from the Securities Act. Aqua
recognizes that an investment in the Note involves a high degree of risk, including a risk of total loss of Aqua’s investment. Aqua 
  

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 represents, severally and not jointly, that it is able to bear the economic risk of holding its Note, for an indefinite
period, has knowledge and experience in the financial and business matters such that it is capable of evaluating the risks of the investment in the Note, has been furnished ample opportunity to request information regarding the Issuer and has been
afforded the opportunity to ask questions of and receive answers from officers or other representatives of the Issuer concerning the Issuer, and, assuming that the Issuer has been responsive to Aqua’s requests and questions, has received all
the information it has requested from the Issuer and considers necessary or appropriate for deciding whether to purchase its Note. 
  
 9.08 Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts,
and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 
  
 9.09 Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision
in any other jurisdiction. 
  
 9.10 Integration.
This Agreement and the other Purchase Documents represent the agreement of the Issuer and Aqua with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by Aqua relative to subject matter
hereof not expressly set forth or referred to herein or in the other Purchase Documents. 
  
 9.11 GOVERNING LAW. THE PURCHASE DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THE PURCHASE DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK WITHOUT GIVING EFFECT TO ITS CONFLICTS OF LAWS PRINCIPLES. 
  
 9.12 Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon each of the parties hereto and their respective successors and assigns; provided, however,
that, other than in connection with a reincorporation of the Issuer in another jurisdiction, the Issuer may not assign this Agreement or any of the other Purchase Documents without the prior written consent of Aqua. 
  
 9.13 Acknowledgements. The Issuer hereby acknowledges that:

  
 (a) it has been advised by counsel in the negotiation,
execution and delivery of the Purchase Documents; 
  
 (b) Aqua
does not have any fiduciary relationship to the Issuer, and the relationship between Aqua, on one hand, and the Issuer, on the other hand, is solely that of debtor and creditor; and 
  
 (c) no joint venture exists between Aqua and the Issuer. 
  
 9.14 Original Issue Discount. Together, the Note and the Warrants constitute an “investment unit”
for the purposes of Section 1273(c)(2)(A) of the Code. In accordance with Sections 1273(c)(2)(A) and 1273(b)(2) of the Code, the aggregate issue price of the investment units 
  

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 of the Aqua is the aggregate amount of the Note. Allocating that aggregate issue price between the Note and the Warrants
in proportion to their fair market value, as required by Section 1273(c)(2)(B) of the Code and Treasury Regulation 1.1273-2(h)(1), results in the Warrants having an aggregate issue price of $200,000 and the Notes having an aggregate issue price of
$1,800,000. Accordingly, the aggregate original issue discount that will accrue on the Notes is $200,000. None of the parties will take any position in its Tax returns that is inconsistent with the foregoing, the Issuer will provide Aqua with any
information necessary for them to report their income from this transaction properly. Each party agrees that it will not be entitled to reimbursement or indemnification from the other parties hereto for any penalties or other liabilities resulting
from taking such position in its Tax returns consistent with the foregoing.  
  
 9.15 Confidentiality. Aqua shall use its best efforts (equivalent to the efforts Aqua applies to maintain the confidentiality of its own confidential information) to maintain as confidential all
Confidential Information following receipt thereof. Notwithstanding the foregoing, Aqua may disclose such Confidential Information: (a) to persons employed or engaged by Aqua in connection with the transactions hereunder; (b) as required or
requested by any governmental authority or reasonably believed by Aqua to be compelled by any court decree, subpoena or legal or administrative order or process, or; (c) in connection with litigation, insolvency or any other disputes between the
parties hereto or their successors. For purposes of this Section 9.15, “Confidential Information” shall mean all information provided to Aqua by Issuer and designated as confidential following receipt thereof, other than (i) information
that is now or subsequently becomes generally available to the public through no fault or breach on the part of Aqua, (b) Aqua can demonstrate to have had rightfully in its possession prior to disclosure to Aqua by the Issuer, or (c) is
independently developed by Aqua without the use of any information that would otherwise constitute Confidential Information. 
  
 [SIGNATURES BEGIN ON FOLLOWING PAGE] 
  

 Page 32 of 35 

 IN WITNESS WHEREOF, the parties hereto have caused this Subordinated Note with Warrants Purchase
Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. 
  

			
	THE ISSUER:
	
	BASIN WATER, INC.
		
	 By:
	 	 /s/ Thomas C. Tekulve

	 	 	Thomas C. Tekulve
	 	 	Chief Financial Officer, Treasurer and Secretary
	
	AQUA AMERICA, INC.
		
	 By:
	 	 /s/ David P. Smeltzer

	 	 	David P. Smeltzer
	 	 	Chief Financial Officer and Senior Vice President—Finance

  

 Page 33 of 35 

 SCHEDULE I 
  

THE PURCHASERS 
  

					
	 PURCHASER

	 	     NOTE    

	 	 WARRANTS

	 Aqua America, Inc.
 762 West Lancaster Avenue
 Bryn Mawr, Pennsylvania
	 	$2,000,000	 	300,000 Warrants at $6.00 per share
	 Attention: General Counsel
	 	 	 	100,000 Warrants at $7.00 per share

 EXHIBIT 2.01 
  
 FORM OF NOTE 
  
 [SEE ATTACHED] 

 EXHIBIT 3.01 
  
 FORM OF WARRANT 
  
 [SEE ATTACHED] 

 EXHIBIT 5.01(a)(iv) 
  
 FORM OF SECURITY AGREEMENT 
  
 [SEE ATTACHED]

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