Document:

Commercial Security Agreement

 Exhibit 10.11 
  
 COMMERCIAL SECURITY AGREEMENT 
  

This Commercial Security Agreement, with reference date of July 1, 2003, is entered into by and between the following persons: 
  
 I. BWCA I, LLC, a Delaware limited liability company (“Lender”),
and; 
  
 II. Basin Water, Inc., a California corporation
(“Grantor”, “Borrower”, and “Debtor”). 
  
 1. GRANT
OF SECURITY INTEREST. For valuable consideration, Grantor grants to Lender a security interest in the Collateral to secure the Indebtedness and agrees that Lender shall have the rights stated in this Agreement with respect to the Collateral, in
addition to all other rights which Lender may have by law and which Lender may have under any other agreement(s) with Grantor, including, but not limited to, any Business Loan Agreement, including, but not limited to, that Business Loan Agreement
having a reference date of July 1, 2003. 
  
 2. COLLATERAL DESCRIPTION. 
  
 The word,
“Collateral” means the following described property, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located, in which Grantor is giving to Lender a security interest for the payment of the
Indebtedness and performance of all other obligations under the Note and this Agreement: 
  
 All personal property of Debtor of every kind, whether now owned or hereafter acquired, whether presently existing or hereafter created or acquired, and wherever located, including but not limited to: (a) all
accounts (including water services agreements, water contracts and health-care-insurance receivables and all rights to payment and other benefits thereunder), contract rights, chattel paper (including tangible and electronic chattel paper), deposit
accounts, documents (including negotiable documents), equipment (including all accessions and additions thereto), general intangibles (including payment intangibles and software), goods (including fixtures), instruments (including promissory notes),
inventory (including all goods held for sale or lease or to be furnished under a contract of service, and including returns and repossessions), investment property (including securities and securities entitlements), letter of credit rights, money,
cash and all of Debtor’s books and records with respect to any of the foregoing, and the computers and equipment containing said books and records; and (b) any and all cash proceeds and/or non-cash proceeds thereof, including, without
limitation, insurance proceeds, and all supporting obligations and the security therefor or for any right to payment. All terms above have the meanings given to them in the California Uniform Commercial Code, as amended or supplemented from time to
time, including revised Division 9 of the Uniform Commercial Code-Secured Transactions, added by Stats. 1999, c.991 (S.B. 45), Section 35, operative July 1, 2001. 
  

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 In addition, the word “Collateral” also includes all the following, whether now owned or hereafter acquired,
whether now existing or hereafter arising, and wherever located: 
  
 (1) All accessions, attachments, accessories, tools, parts, supplies, replacements of and additions to any of the Collateral described herein, whether added now or later. 
  
 (2) All proceeds, products and produce of any of the property described in this Collateral section. 
  
 (3) All accounts, general intangibles, instruments, rents, monies, payments,
and all other rights, arising out of a sale, lease, or other disposition of any of the property described in this Collateral section. 
  
 (4) All proceeds (including insurance proceeds) from the sale, destruction, loss, or other disposition of any of the property described in this Collateral
section, and sums due from a third party who has damaged or destroyed the Collateral or from that party’s insurer, whether due to judgment, settlement or other process. 
  
 (5) All records and data relating to any of the property described in this Collateral section, whether in the form of a
writing, photograph, microfilm, microfiche, or electronic media, together with all of Grantor’s right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic
media. 
  
 3. BORROWER’S WAIVERS AND RESPONSIBILITIES. Except as otherwise
required under this Agreement or by applicable law, (A) Borrower assumes the responsibility for being and keeping informed about the Collateral; and (B) Borrower waives any defenses that may arise because of any inaction of Lender,
including without limitation any failure of Lender to realize upon the Collateral or any delay by Lender in realizing upon the Collateral; and Borrower agrees to remain liable under the Note no matter what action Lender takes or fails to take under
this Agreement, subject to whatever defenses and enforceability that Borrower otherwise has except as otherwise provided by the terms hereof and of the Related Documents. 
  
 4. GRANTOR’S REPRESENTATIONS AND WARRANTIES. Grantor warrants that: (A) this Agreement is executed at Grantor ‘s request and
not at the request of Lender; (B) Grantor has the full right, power and authority to enter into this Agreement and to pledge the Collateral to Lender. 
  
 5. GRANTOR’S WAIVERS. Except as prohibited by applicable law, Grantor waives any right to require Lender to (A) make any presentment, protest, demand, or notice
of any kind; (B) proceed against any person before proceeding against Grantor; (C) proceed against any collateral for the Indebtedness, including Borrower’s collateral, before proceeding against Grantor; (D) apply any payments or
proceeds received against the Indebtedness in any order; (E) give notice of the terms, time, and place of any sale of any collateral pursuant to the Uniform Commercial Code or any other law governing such sale; (F) disclose any 

 

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 information about the Indebtedness, the Borrower, any collateral, or any other guarantor or surety, or about any action
or non-action of Lender; or (G) pursue any remedy or course of action in Lender’s power whatsoever. 
  
 Grantor also waives any and all rights or defenses arising by reason of (A) any disability or other defense of Borrower, any guarantor or surety or any other person; (B) the cessation from any cause
whatsoever, other than payment in full, of the Indebtedness; (C) any act of omission or commission by Lender which directly or indirectly results in or contributes to the discharge of Borrower or any other guarantor or surety, or the
Indebtedness, or the loss or release of any collateral by operation of law or otherwise; or (D) any modification or change in terms of the Indebtedness, whatsoever, including without limitation, the renewal, extension, acceleration, or other
change in the time payment of the Indebtedness is due and any change in the interest rate. 
  
 Grantor waives all rights and defenses arising out of an election of remedies by Lender even though that election of remedies, such as a non-judicial foreclosure with respect to security for a guaranteed obligation,
has destroyed Grantor’s rights of subrogation and reimbursement against Borrower by operation of Section 580d of the California Code of Civil Procedure or otherwise. 
  
 Grantor waives all rights and defenses that Grantor may have because Borrower’s obligation is secured by real property. This means
among other things: (1) Lender may collect from Grantor without first foreclosing on any real property collateral pledged by Borrower; and (2) If Lender forecloses on any real property collateral pledged by the Borrower : (A) The
amount of the Borrower’s obligation may be reduced only by the price for which the collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price; (B) The Lender may collect from the Grantor even if
the Lender, by foreclosing on the real property collateral, has destroyed any right the Grantor may have to collect from the borrower. This is an unconditional waiver of any rights and defenses the Grantor may have because the Borrower’s
obligation is secured by real property. These rights and defenses include, but are not limited to, any rights and defenses based upon Sections 580a, 580b, 580d, or 726 of the Code of Civil Procedure. 
  
 Grantor understands and agrees that the foregoing waivers are unconditional and irrevocable
waivers of substantive rights and defenses to which Grantor might otherwise be entitled under state and federal law. Grantor further understands and agrees that this Agreement is a separate and independent contract between Grantor and Lender, given
for full and ample consideration, and is enforceable on its own terms. Grantor acknowledges that Grantor has provided these waivers of rights and defenses with the intention that they be fully relied upon by Lender. Until all Indebtedness is paid in
full, Grantor waives any right to enforce any remedy Grantor may have against any guarantor, surety, or other person, and further, Grantor waives any right to participate in any Collateral for the Indebtedness now or hereafter held by Lender.

  

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 6. GRANTOR’S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL. With respect to the Collateral, Grantor
represents and promises to Lender that: 
  
 a. Organization;
Principal Place of Business; Corporate Existence. Grantor is a duly organized and existing California corporation in good standing which maintains its principal office at 8731 Prestige Court, Rancho Cucamonga, CA 91730. Unless Grantor has
designated otherwise, in writing, said principal office is the office at which Grantor keeps its books and records including all of its records concerning the Collateral. Grantor will notify Lender prior to any change in the location of
Grantor’s principal office address or any change in Grantor’s name. Grantor shall do all things reasonably necessary to preserve and keep in full force and effect its existence, rights and privileges, and shall comply in all material
respects with all regulations, rules, ordinances, statutes, orders and decrees of any governmental or quasi-governmental authority or court applicable to Grantor and Grantor’s business activities. 
  
 b. Authorization. Grantor’s execution, delivery, and performance
of this Agreement and all the Related Documents have been duly authorized by all necessary action by Grantor, do not require the consent or approval of any other person, regulatory authority, or governmental body, and do not conflict with, result in
a violation of, or constitute a default in any material respect under (1) any provision of any agreement or other instrument binding upon Grantor or (2) any law, governmental regulation, court decree, or order applicable to Grantor or to
Grantor’s properties. Grantor has the power and authority to enter into the Note and the Related Documents and to grant collateral as security for the Indebtedness. Grantor has the further power and authority to own and to hold all of
Grantor’s assets and properties, and to carry on Grantor’s business as presently conducted. 
  
 c. Perfection and Priority of Security Interest. Grantor upon request of Lender agrees to execute financing statements and to take whatever
other actions are requested by Lender to perfect and continue Lender’s security interest in the Collateral (except as to the Water Contract dated 7/25/01, by and between Borrower and Hi-Desert Water District (the “Hi-Desert Water
Contract”). Lender’s security interest in the Collateral shall at all times be the senior perfected security interest therein. Upon request of Lender, Grantor will deliver to Lender any and all of the documents, including all original
documents, evidencing or constituting the Collateral, and Grantor will note Lender’s interest upon any and all chattel paper if not delivered to Lender for possession by Lender. Grantor authorizes Lender at any time to file financing
statements, record documents and do any and all other things necessary to perfect and to obtain and maintain at all times first security position in the Collateral, except as to the Hi-Desert Water Contract. 
  
 d. Notices to Lender. Grantor will promptly notify Lender in
writing at Lender’s address set forth herein (or such other addresses as Lender may designate from time to time) prior to any (1) change in Grantor’s name; (2) change in Grantor’s business name(s); (3) change in the
authorized signer(s); (4) change in Grantor’s principal office address; (5) conversion of Grantor to a new or different type of business entity; or (6) change in any other aspect of Grantor that directly or indirectly relates to
any agreements between 
  

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 Grantor and Lender. As to Lender, no change in Grantor’s name or principal office address will take effect until
after Lender has received notice. Grantor represents and warrants to Lender that Grantor has provided Lender with Grantor’s correct Employer Identification Number. Grantor promptly shall notify Lender should Grantor apply for or obtain a new
Employer Identification Number. 
  
 e. No Violation. To
Grantor’s current and actual knowledge, the execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party. 
  
 f. Enforceability of Collateral. To the extent the Collateral consists of accounts, chattel paper, or general
intangibles, as defined by the California Uniform Commercial Code, the Collateral is enforceable in accordance with its terms, is genuine, and fully complies with all applicable laws and regulations concerning form, content and manner of preparation
and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. There shall be no setoffs or counterclaims against any of the
Collateral, and no agreement shall have been made under which any deductions, prepayments or discounts may be made or claimed concerning the Collateral except those disclosed to Lender in writing and as to which Lender has given its prior written
consent. Grantor shall not, without the prior written consent of Lender, which consent shall not be unreasonably withheld, alter, amend, modify, substitute or otherwise change all or part of the Collateral in any material respect, including, but not
limited to, Collateral consisting of accounts, chattel paper and/or general intangibles nor shall Grantor receive or participate in the making of any prepayment under any Collateral, except as permitted under the Business Loan Agreement. 

 
 g. Location of the Collateral. Grantor agrees to keep the
Collateral at Grantor’s address set forth herein or at such other location(s) as are acceptable to Lender. All Collateral consisting of accounts, chattel paper, and general intangibles, including any and all water contracts constituting as a
portion of the Collateral shall be physically delivered to Lender prior to any drawdown in connection therewith. Upon Lender’s request, Grantor will deliver to Lender in form satisfactory to Lender a schedule of real properties and Collateral
locations relating to Grantor’s operations, including without limitation the following: (1) all real property Grantor owns or is purchasing; (2) all real property Grantor is renting, using, leasing and/or has rights in; (3) all
storage facilities Grantor owns, rents, leases, or uses; and (4) all other properties where Collateral is or may be located. None of the Collateral will be kept in a field or public warehouse or with a bailee, and shall be kept only at
locations approved by Lender. Grantor will not permit any of the Collateral to be incorporated in or placed upon any real (immovable) property in such a way that it becomes immobilized under applicable California law. 
  
 h. Removal of the Collateral. Except in the ordinary course of
Grantor’s business, including the sales of inventory, Grantor shall not remove the Collateral from its existing location without Lender’s prior written consent, which consent shall not be unreasonably withheld. To the extent that the
Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates 
  

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 of title for the vehicles outside the State of California, without Lender’s prior written consent, which consent
shall not be unreasonably withheld. If Grantor moves from Grantor’s address shown above to another location within the same state, Grantor may move the Collateral to Grantor’s new address, but only if Grantor gives Lender the new address
in writing prior to Grantor’s moving. In any event, Grantor agrees to keep Lender informed at all times of Grantor’s current address. Grantor shall, whenever requested, advise Lender of the exact location of the Collateral. 
  
 i. Transactions Involving Collateral. Except for inventory (but
such inventory shall not include “Equipment” as defined in any Business Loan Agreement pertaining hereto) sold or accounts collected in the ordinary course of Grantor’s business, or as otherwise provided for in this Agreement, Grantor
shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a
buyer in the ordinary course of business. A sale in the ordinary course of Grantor’s business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise
permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender, except as set forth in the Business Loan
Agreement. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, except as otherwise set forth in the Business Loan Agreement, all proceeds from any disposition of
the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt,
Grantor shall immediately deliver any such proceeds to Lender except as otherwise set forth in the Business Loan Agreement. 
  
 j. Title. Grantor represents and warrants to Lender that Grantor holds good and marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement and except as to the Hi-Desert Water Contract. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by
this Agreement or to which Lender has specifically consented. Grantor shall defend Lender’s rights in the Collateral against the claims and demands of all other persons. Lender shall be entitled as a condition precedent to any drawdown to
confirm through searches of the appropriate records and otherwise its first priority security interest position in the Collateral except as to the Hi-Desert Water Contract. 
  
 k. Collateral Schedules and Locations. Insofar as the Collateral consists of inventory and equipment, upon
demand by Lender, Grantor shall deliver to Lender, as often as Lender shall reasonably require, such lists, descriptions, locations and designations of such Collateral as Lender may require to identify the nature, extent, and location of such
Collateral. Such information shall be submitted for Grantor and each of its subsidiaries or related companies. 
  

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 l. Repairs and Maintenance. Grantor agrees to keep and maintain, and to cause others to
keep and maintain, the Collateral in good order, repair and condition, reasonable wear and tear excepted,at all times while this Agreement remains in effect. Grantor further agrees to pay when due all claims for work done on, or services rendered or
material furnished in connection with the Collateral so that no lien or encumbrance may ever attach to or be filed against the Collateral. 
  
 m. Inspection of Collateral. Lender and Lender’s designated representatives and agents shall have the right at any reasonable timeto
examine and inspect the Collateral wherever located on reasonable notice and may enter onto and into any facility and property, real or personal, owned by or under the control of Grantor free of liability and Grantor waives any claim for damages and
other relief in connection therewith. 
  
 n. Taxes, Assessments
and Liens. Grantor will pay when due all taxes, assessments and liens upon the Collateral, its use or operation, upon this Agreement, upon any promissory note or notes evidencing the Indebtedness, or upon any of the other Related
Documents. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender’s interest in the Collateral is not
jeopardized in Lender’s sole opinion. If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security reasonably
satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, costs, reasonable attorneys’ fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest
Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. Grantor
further agrees to furnish Lender with evidence that such taxes, assessments, and governmental and other charges have been paid in full and in a timely manner. 
  

o. Repairs and Maintenance. Grantor shall keep and maintain and shall cause others to keep and maintain the Collateral in good order, repair and
merchantable condition, reasonable wear and tear excepted. Grantor shall further make and/or cause all reasonable and necessary repairs to be made to the Collateral, including the repair and restoration of any portion of the Collateral that may be
damaged, lost or destroyed. In addition, Grantor shall not, without the prior written consent of Lender, make or permit to be made any alterations to any of the Collateral that may reduce or impair the Collateral’s use, value or marketability.
Furthermore, Grantor shall not, nor shall, Grantor permit others to abandon, commit waste, or destroy the Collateral or any part or parts thereof. 
  
 p. Compliance with Governmental Requirements. Grantor shall comply promptly in all material respects with all laws, ordinances, rules and
regulations of all governmental authorities, now or hereafter in effect, applicable to the ownership, production, disposition, or use of the Collateral, including all laws or regulations relating to the undue erosion of highly-erodible land or
relating to the conversion of wetlands for the production of an agricultural product or commodity. Grantor may contest in good faith any such law, 
  

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 ordinance or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as
Lender’s interest in the Collateral, in Lender’s opinion, is not jeopardized. 
  
 q. Hazardous Substances. Grantor represents and warrants that, to Grantor’s current and actual knowledge,the Collateral never has been, and never will be so long as this Agreement remains a lien on the
Collateral, used in violation in any material respect of any Environmental Laws or for the generation, manufacture, storage, transportation, treatment, disposal, release or threatened release of any Hazardous Substance. The representations and
warranties contained herein are based on Grantor’s due diligence in investigating the Collateral for Hazardous Substances. Grantor hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event
Grantor becomes liable for cleanup or other costs under any Environmental Laws, and (2) agrees to indemnify and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This
obligation to indemnify shall survive the payment of the Indebtedness and the satisfaction of this Agreement. 
  
 r. Maintenance of Casualty Insurance. Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and
liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender.
Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least thirty
(30) days’ prior written notice to Lender and not including any disclaimer of the insurer’s liability for failure to give such a notice. Each insurance policy also shall include an endorsement providing that coverage in favor of
Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such
loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain at Grantor’s sole expense such
insurance as Lender deems appropriate, including if Lender so chooses “single interest insurance,” which will cover only Lender’s interest in the Collateral. 
  
 s. Application of Insurance Proceeds. Grantor shall promptly notify Lender of any loss or damage to the
Collateral. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, up to the amount of the Indebtedness then
outstanding shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds for
the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the Indebtedness, and shall pay the balance to Grantor. Any
proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the Indebtedness. 
  

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 t. Required Insurance. So long as this Agreement remains in effect, Grantor shall, at its
sole cost, keep and/or cause others, at their expense, to keep the Collateral constantly insured against loss by fire, by hazards included within the term “extended coverage,” and by such other hazards (including flood insurance where
applicable) as may be required by Lender. 
  
 u. Insurance
Proceeds. Lender shall have the right to directly receive the proceeds of all insurance protecting the Collateral. In the event that Grantor should receive any such insurance proceeds, Grantor agrees to immediately turn over and to pay
such proceeds directly to Lender. All insurance proceeds may be applied, at its sole option and discretion, and in such a manner as Lender may determine (after payment of all reasonable costs, expenses and reasonable attorneys’ fees necessarily
paid or fees necessarily paid or incurred by Lender in this connection), for the purpose of: (1) repairing or restoring the lost, damaged or destroyed Collateral; or (2) reducing the then outstanding balance of Grantor’s Indebtedness.

  
 Lender’s receipt of such insurance proceeds and the application of such
proceeds as provided herein shall not, however, affect the lien of this Agreement. Nothing under this section shall be deemed to excuse Grantor from its obligations under paragraph 6.o. Furthermore, unless otherwise confirmed by Lender in writing,
the application or release of any insurance proceeds by Lender shall not be deemed to cure or waive any Event of Default under this Agreement. Any proceeds which have not been disbursed within six (6) months after their receipt and which
Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the Indebtedness. 
  
 v. [This paragraph deliberately left blank.] 
  
 w. Insurance Reports. Grantor, immediately upon request of Lender, shall furnish to Lender reports on each existing policy of insurance showing
such information as Lender may reasonably request including the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the property insured; (5) the then current value on the basis
of which insurance has been obtained and the manner of determining that value; and (6) the expiration date of the policy. In addition, Grantor shall upon request by Lender (however not more often than annually) have an independent appraiser
satisfactory to Lender determine, as applicable, the cash value or replacement cost of the Collateral. 
  
 x. Prior Encumbrances. To the extent applicable, Grantor shall fully and timely perform any and all of Grantor’s obligations under any prior
Encumbrances affecting the Collateral. Without limiting the foregoing, Grantor shall not commit or permit to exist any material breach of or default under any such prior Encumbrances. Grantor shall further promptly notify Lender in writing upon the
occurrence of any event or circumstances that would, or that might, result in a material breach of or default under any such prior Encumbrance. Grantor shall further not modify or extend any of the terms of any prior 
  

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 Encumbrance or any indebtedness secured thereby, or, except as set forth in the Business Loan Agreement, request or
obtain any additional loans or other extensions of credit from any third party creditor or creditors whenever such additional loan advances or other extensions of credit may be directly or indirectly secured, whether by cross-collateralization or
otherwise, by the Collateral, or any part or parts thereof, with possible preference and priority over Lender’s security interest, without Lender’s prior written consent which shall not be unreasonably withheld. Grantor additionally agrees
to obtain, upon Lender’s request, and in form and substance as may then be reasonably satisfactory to Lender, appropriate waivers and subordinations of any lessor’s liens or privileges, vendor’s liens or privileges, purchase money
security interests, and any other Encumbrances that may affect the Collateral at any time. 
  
 y. Future Encumbrances. Except as set forth in the Business Loan Agreement, Grantor shall not, without the prior written consent of Lender, which consent which shall not be unreasonably withheld grant
any Encumbrance that may affect the Collateral, or any part or parts thereof, nor shall Grantor permit or consent to any Encumbrance attaching to or being filed against any of the Collateral in favor of anyone other than Lender. Grantor shall
further promptly pay when due all statements and charges of mechanics, materialmen, laborers and others incurred in connection with the alteration, improvement, repair and maintenance of the Collateral, or otherwise furnish appropriate security or
bond, so that no future Encumbrance may ever attach to or be filed against any Collateral. In the event that the Collateral or any part or parts thereof is and/or may be located in and/or on leased premises, Grantor shall promptly pay the full
amount of such rental or lease payments whenever the same shall be due so that no lessor’s lien or privilege may ever attach to or affect any of the Collateral with possible preference and priority over the lien of this Agreement. In the event
that any of the Collateral is purchased or otherwise acquired by Grantor on a credit or deferred payment sales basis, Grantor shall pay the full amount of the purchase or acquisition price, in accordance with its terms, of such Collateral so that no
vendor’s lien or privilege, or purchase money security interest, may ever attach to or be asserted against any of the Collateral with possible preference and priority over the lien of this Agreement. Grantor additionally agrees to obtain, upon
request by Lender, and in form and substance as may then be reasonably satisfactory to Lender, appropriate waivers and/or subordinations of any lessor’s liens or privileges, vendor’s liens or privileges, purchase money security interests,
and any other Encumbrances that may affect the Collateral at any time. 
  
 As long
as this Agreement remains in effect, Grantor will not permit any levy, attachment or restraint to be made affecting any of the Collateral, or permit any notice of lien to be filed with respect to the Collateral or any part or parts thereof, or
permit any receiver, trustee, custodian or assignee for the benefit of creditors to be appointed to take possession of any of the Collateral. Notwithstanding the foregoing, Grantor may, at its sole expense, contest in good faith by appropriate
proceedings the validity or amount of any levy, attachment, restraint or lien filed against or affecting the Collateral, or any part or parts thereof; provided that (1) Grantor notifies Lender in advance of Grantor’s intent to contest such
a levy, attachment, restraint or lien, and (2) Grantor provides additional security to Lender, in form and amount reasonably satisfactory to Lender. 
  

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 z. Notice of Encumbrances. Grantor shall immediately notify Lender in writing upon the
filing of any attachment, lien, judicial process, claim, or other Encumbrance. Grantor additionally agrees to notify Lender immediately in writing upon the occurrence of any default, or event that with the passage of time, failure to cure, or giving
of notice, might result in a default under any of Grantor’s obligations that may be secured by any presently existing or future Encumbrance, or that might result in an Encumbrance affecting the Collateral, or should any of the Collateral be
seized or attached or levied upon, or threatened by seizure or attachment or levy, by any person other than Lender. 
  
 aa. Books and Records. Grantor will keep proper books and records with regard to Grantor’s business activities and the Collateral in
which a security interest is granted hereunder, in accordance with the requirements of the Business Loan Agreement, which books and records shall be open to inspection and copying upon demand by Lender or Lender’s designated agents, and Lender
shall have the right to inspect Grantor’s books and records, and to discuss Grantor’s affairs and finances with Grantor’s officers and representatives, at such times and places as Lender may designate all in accordance with the
Business Loan Agreement. 
  
 bb. Financing Statements.
Grantor authorizes Lender to file any number of UCC-1 financing statements and/or copies of this Agreement to perfect Lender’s security interest. At Lender’s request, Grantor additionally agrees to sign all other documents that are
necessary to perfect, protect, and continue Lender’s security interest in the Collateral. Grantor will pay all filing fees, title transfer fees, and other fees and costs involved unless prohibited by law or unless Lender is required by law to
pay such fees and costs. Grantor irrevocably appoints Lender to execute and file, record and otherwise handle financing statements, amendments, fixture filings and any other documents, including documents of title, in Grantor’s name in order to
obtain and maintain a first position security interest in the Collateral (except for said Hi-Water Desert Contract) and to execute all documents necessary to transfer title if there is a default. Lender may file a copy of this Agreement as a
financing statement. If Grantor changes Grantor’s name or address, or the name or address of any person granting a security interest under this Agreement changes, Grantor will promptly notify Lender of such change. Grantor agrees that Lender
may file and record in its name or in any name such documents as Lender shall deem appropriate to reflect such changes in Grantor’s name and address as Lender may determine. 
  
 7. GRANTOR’S RIGHT TO POSSESSION. Until default, Grantor may have possession of the tangible personal property and beneficial
use of all the Collateral and may use it in any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor’s right to possession and beneficial use shall not apply to any Collateral where possession of
the Collateral by Lender is required by law to perfect Lender’s security interest in such Collateral. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised
reasonable care in the custody and preservation of the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender’s sole discretion, shall deem appropriate under the circumstances, but failure to
honor any request 
  

 11 

 by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to
take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the Indebtedness. 
  
 8. LENDER’S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender’s interest in the
Collateral or if Grantor fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Grantor’s failure to discharge or pay when due any amounts Grantor is required to discharge or pay under this
Agreement or any Related Documents, Lender on Grantor’s behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests,
encumbrances and other claims, at any time levied or placed on the Collateral and paying all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at
the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses will become a part of the Indebtedness and, at Lender’s option, will (A) be payable on demand; (B) be
added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be
treated as a balloon payment which will be due and payable at the Note’s maturity. The Agreement also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon
Default. 
  
 9. DEFAULT. Each of the following shall constitute an Event of
Default under this Agreement: 
  
 a. Default on
Indebtedness. Failure of Borrower or Grantor to make any payment within three (3) days of the due date thereof upon any of the Loans, the Notes and/or Indebtedness. 
  
 b. Other Defaults. Failure of Borrower or Grantor to comply with or to perform when due in any material
respect any term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents, or failure of Borrower to comply with or to perform in any material respect any term, obligation, covenant or condition contained in
any other agreement between Lender and Borrower, or if any condition hereof is not fulfilled as and when due. 
  
 c. Default in Favor of Third Parties. Should Borrower or Grantor default in any material respect under any loan, extension of credit,
security agreement, purchase or sales agreement, guaranty or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower’s or Grantor ‘s property or Borrower’s or Grantor ‘s ability to
repay the Loans or perform Borrower’s or Grantor ‘s obligations under this Agreement, or any of the Related Documents. 
  
 d. False Statements. Any warranty, representation or statement made or furnished to Lender by or on behalf of Borrower or Grantor under or
pertaining to this Agreement or the Related Documents is false or misleading in any material respect at the time made or furnished, or becomes false or, to Borrower’s knowledge, misleading at any time thereafter. 
  

 12 

 e. Defective Collateralization. This Agreement or any of the Related Documents ceases to be in
full force and effect (including failure of any Security Agreement to create a valid, senior and perfected Security Interest) at any time and for any reason. 
  
 f. Insolvency. The dissolution or termination of Borrower’s existence as a going business, the insolvency of Borrower, the appointment of a
receiver for any part of Borrower’s property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. 
  
 g. Creditor or Forfeiture Proceedings. Commencement of
foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower against any Collateral securing the Indebtedness, or by any governmental agency. However, this Event of
Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding, and if Borrower gives Lender written notice of the creditor or
forfeiture proceeding and furnishes reserves or a surety bond for the creditor or forfeiture proceeding satisfactory to Lender. 
  
 h. Change In Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. 
  
 i. Adverse Change. A material adverse change occurs in Borrower’s
financial condition, as a result of which Lender believes the prospect of payment or performance of the Indebtedness is impaired. 
  
 j. Insecurity. Lender, in good faith, deems itself insecure. 
  
 k. Change to Collateral; Prepayment. Without the prior written consent of Lender, any of the Collateral, including,
but not limited to, Collateral consisting of accounts, chattel paper, general intangibles, and/or water contracts, is altered, amended, modified, substituted or otherwise changed in any material respect, and/or, except as permitted in the Business
Loan Agreement, there is any prepayment of any of the Collateral, or any attempt is made to do any of these things. 
  
 l. Notice of Default and Opportunity to Cure as to Certain Defaults. As to those Events of Default set forth in sub-paragraphs 9. b., c., d. and
e., only, the following provision shall apply. If no notice of default has been provided to Borrower at any time during the twelve month period (or such lesser period if fewer than 12 months have elapsed between the Effective Date and the applicable
Event of Default) immediately preceding the subject default and such default is curable, then Lender shall give to Borrower notice in writing of such default and thirty (30) days opportunity to cure same. If such default is not so cured within
such thirty (30) day period, such uncured default shall constitute an Event of Default and shall have the same effect as set forth in paragraph 10 hereof the same as if no notice or opportunity to cure were required. 
  

 13 

 10. RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Agreement, at any time thereafter,
Lender shall have all the rights of a secured party under the California Uniform Commercial Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies: 
  
 a. Accelerate Indebtedness. Lender may declare the entire
Indebtedness, including any prepayment penalty which Borrower would be required to pay, immediately due and payable, with or without notice of any kind to Borrower or Grantor. 
  
 b. Assemble Collateral. Lender may require Grantor to deliver to Lender all or any portion of the Collateral
and any and all other documents and things relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender shall also have full power to enter upon the
property of Grantor and any premises whereat the Collateral is located to take possession of, remove and/or disable the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees
Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession if so required under the terms hereof and the Related Documents and applicable law. Anything Grantor is required to do
according to the terms hereof shall be at Grantor’s sole expense. 
  
 c. Sell or Dispose of the Collateral. Lender shall have full power to sell, dispose of, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in Lender’s own name or that of Grantor. Lender may sell
the Collateral at public or private sale. Unless the Collateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor, and other persons as required by law, reasonable notice of the
time and place of any public sale, or the time after which any private sale or any other disposition of the Collateral is to be made. However, no notice need be provided to any person who, after Event of Default occurs, enters into and authenticates
an agreement waiving that person’s right to notification of sale. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days before the time of the sale or disposition. All expenses relating to the
disposition of the Collateral, including without limitation the expenses of retaking, transporting, storing, refurbishing, holding, insuring, preparing for sale and selling the Collateral, shall become a part of the Indebtedness secured by this
Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. 
  
 d. Appoint Receiver. Lender shall have the right to have a receiver appointed to take possession of all or any part of the Collateral, with
the power to protect and preserve the Collateral, to operate the Collateral preceding foreclosure or sale, and to collect the Rents from the Collateral and apply the proceeds, over and above the cost of the receivership, against the Indebtedness.
The receiver may serve without bond if permitted by law. Lender’s right to the appointment of a receiver shall exist whether or not the apparent value of the Collateral exceeds the Indebtedness by a substantial amount. Employment by Lender
shall not disqualify a person from serving as a receiver. 
  
 e.
Collect Revenues, Apply Accounts. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may at any time in Lender’s discretion transfer any Collateral into
Lender’s own name or that of Lender’s nominee and receive the payments, rents, income, and revenues therefrom and hold the same as security for the 
  

 14 

 Indebtedness or apply it to payment of the Indebtedness in such order of preference as Lender may determine. Insofar as
the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, choses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on
the Collateral as Lender may determine, whether or not Indebtedness or Collateral is then due. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor; change any address to
which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender may notify account
debtors and obligors on any Collateral to make payments directly to Lender. 
  
 f. Obtain Deficiency. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Borrower for any deficiency remaining on the Indebtedness due to Lender after
application of all amounts received from the exercise of the rights provided in this Agreement. Borrower shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper. 
  
 g. Other, Rights and Remedies. Lender shall have all the rights
and remedies of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in
equity, or otherwise. 
  
 h. Election of Remedies. Except
as may be prohibited by applicable law, all of Lender’s rights and remedies, whether evidenced by this Agreement, the Related Documents, or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by
Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor’s failure to perform, shall not affect
Lender’s right to declare a default and exercise its remedies. 
  
 11.
JURY WAIVER. Borrower and Lender acknowledge that the right to trial by jury is a constitutional one, but that it may be waived. Each party, after consulting (or having had the opportunity to consult) with counsel of their choice, knowingly
and voluntarily, and for their mutual benefit, waives any right to trial by jury in the event of litigation regarding the performance or enforcement of, or in any way related to, this Agreement or the Indebtedness. 
  
 12. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this
Agreement: 
  
 a. Amendments. This Agreement, together
with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement and the Related Documents. No alteration of or amendment to this Agreement shall be effective unless given in
writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. 
  
 b. Attorneys’ Fees; Expenses. In the event any party hereto incurs any expenses, including without limitation attorneys’ fees, in
connection with the enforcement or defense of any term of this 
  

 15 

 Agreement the prevailing party shall be entitled to recover such party’s reasonable attorneys fees and court costs,
whether or not suit is commenced, including attorneys fees and costs incurred in any arbitration, mediation, alternative dispute resolution proceeding or similar proceeding, in the trial court and on appeal and any post-judgment collection efforts
and for bankruptcy proceedings including efforts to modify or vacate any automatic stay or injunction. Borrower shall pay in any event, when and as due, all costs, fees, taxes and liens pertaining to the Collateral, including any and all costs of
repossession, sale, repair, refurbishment, transportation and storage regarding the Collateral. 
  
 c. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the
provisions of this Agreement. 
  
 d. Applicable Law; Venue.
This Agreement and the Related Documents shall be interpreted according to the laws of the State of California. Borrower consents to personal jurisdiction of the courts of the State of California. Borrower consents to the exclusive jurisdiction
of the courts of the County of Los Angeles, State of California in the event of any legal action pertaining to this Agreement and/or the Related Documents. Borrower agrees that this Agreement and the Related Documents are entered into in the County
of Los Angeles, State of California and agrees and consents that proper and exclusive venue of any judicial proceeding pertaining thereto is in the Central District of the Superior Court of the County of Los Angeles, State of California. 

 
 e. Joint and Several Liability. All obligations of Borrower and
Grantor under this Agreement shall be joint and several, and all references to Grantor shall mean each and every Grantor, and all references to Borrower shall mean each and every Borrower. This means that each Borrower and Grantor signing below is
responsible for all obligations in this Agreement. 
  
 f.
Non-Liability of Lender. The relationship between Borrower and Grantor and Lender created by this Agreement is strictly a debtor and creditor relationship and not fiduciary in nature, nor is the relationship to be construed as creating any
partnership or joint venture between Lender and Borrower and Grantor. Borrower and Grantor are exercising Borrower’s and Grantor’s own judgment with respect to Borrower’s and Grantor’s business. All information supplied to Lender
is for Lender’s protection only and no other party is entitled to rely on such information. There is no duty for Lender to review, inspect, supervise or inform Borrower and Grantor of any matter with respect to Borrower’s and
Grantor’s business. Lender and Borrower and Grantor intend that Lender may reasonably rely on all information supplied by Borrower and Grantor to Lender, together with all representations and warranties given by Borrower and Grantor to Lender,
without investigation or confirmation by Lender and that any investigation or failure to investigate will not diminish Lender’s right to so rely. 
  
 g. Notice of Lender’s Breach. Grantor must notify Lender in writing of any breach of this Agreement or the Related Documents by Lender
and any other claim, cause of action or offset against Lender within a reasonable time not to exceed ninety (90) days after the occurrence of such breach or after the accrual of such claim, cause of action or offset. Grantor waives any claim,
cause of action or offset for which notice is not given in accordance with this paragraph. Lender is entitled to rely on any failure to give such notice. 
  

 16 

 h. Indemnification of Lender. Grantor agrees to indemnify, to defend and to save and hold
Lender harmless from any and all claims, suits, obligations, damages, losses, costs and expenses (including, without limitation, Lender’s reasonable attorneys’ fees), demands, liabilities, penalties, fines and forfeitures of any nature
whatsoever (collectively, the “Claims”) that may be asserted against or incurred by Lender, its officers, directors, employees, attorneys and agents arising out of, relating to, or in any manner occasioned by this Agreement and the
exercise of the rights and remedies granted Lender under this Agreement, as well as by: (1) the ownership, use, operation, construction, renovation, demolition, preservation, management, repair, condition, or maintenance of any part of the
Collateral; (2) the exercise of any of Grantor’s rights collaterally assigned and pledged to Lender hereunder; (3) any failure of Grantor to perform any of its obligations hereunder; and/or (4) any failure of Grantor to comply
with the environmental and ERISA obligations, representations and warranties set forth herein. The foregoing indemnity provisions shall survive the cancellation of this Agreement as to all matters arising or accruing prior to such cancellation and
the foregoing indemnity shall survive in the event that Lender elects to exercise any of the remedies as provided under this Agreement following default hereunder. Grantor’s indemnity obligations under this section shall not in any way be
affected by the presence or absence of covering insurance, or by the amount of such insurance or by the failure or refusal of any insurance carrier to perform any obligation on its part under any insurance policy or policies affecting the Collateral
and/or Grantor’s business activities. Should any claim, action or proceeding be made or brought against Lender by reason of any event as to which Grantor’s indemnification obligations apply, then, upon Lender’s demand, Grantor, at its
sole cost and expense, shall defend such claim, action or proceeding in Grantor’s name, if necessary, by the attorneys for Grantor’s insurance carrier (if such claim, action or proceeding is covered by insurance), or otherwise by such
attorneys as Lender shall approve. Lender may also engage its own attorneys at its reasonable discretion to defend Grantor and to assist in its defense and Grantor agrees to pay the fees and disbursements of such attorneys if Grantor fails to
defend. Grantor’s indemnification obligation shall not extend to claims arising from Lender’s gross neglect or willful misconduct, or Lender’s improper exercise of its rights or remedies under this Agreement except as otherwise
provided herein and/or in the Related Documents. 
  
 i.
Preference Payments. Any monies Lender pays because of an asserted preference claim in Borrower’s or Grantor’s bankruptcy will become a part of the Indebtedness and, at Lender’s option, shall be payable by Borrower and
Grantor as provided in this Agreement. 
  
 j. No Waiver by
Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of
such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender’s right otherwise to demand strict compliance with that provision or any other provision of this Agreement.
No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender’s rights or of any of Grantor’s obligations as to any future transactions. Whenever the consent of Lender is
required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the
reasonable discretion of Lender. 
  

 17 

 k. Notices. All notices required to be given under this Agreement shall be given in writing, shall
be effective when actually delivered, when delivered by a nationally recognized overnight courier, or three (3) days after being deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to
be given at the address shown below. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party’s address. To the
extent permitted by applicable law, if there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower will keep Lender informed at all times of Borrower’s current address(es). The
official addresses of the parties hereto for notice purposes and until changed as set forth herein are as follows: 
  

					
	 As to Lender:
  
 BWCA I, LLC
 c/o Oscar L. Tang
 Reich & Tang
 600 – 5th Avenue, 8th
Floor
 New York, New York 10020
  
                 -and to-
  
 RONALD R. COHN, ESQ.
 Horgan, Rosen, Beckham
& Coren, L.L.P.
 23975 Park Sorrento, Suite 200
 Calabasas,
CA 91302-4001
  
                 -and to-
  
 TOM O’CONNOR
 26091 Tono
 Mission Viejo, CA 92692
	  	 As to Borrower:
  
 Basin Water, Inc.
 8731 Prestige Court
 Rancho Cucamonga, CA 91730
 Attn: President
	  	 

  
 l. Power of
Attorney. Grantor hereby appoints Lender as Grantor’s irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect, amend, or to continue the security interest granted in this Agreement or to demand
termination of filings of other secured parties. Lender may at any time, and without further authorization from Grantor, file any financing statement, a carbon, photographic or other reproduction thereof or of this Agreement for use as a financing
statement. Grantor will reimburse Lender for all reasonable expenses for the perfection and the continuation of the perfection of Lender’s security interest in the Collateral. 
  
 m. Waiver of Co-Obligor’s Rights. If more than one person is obligated for the Indebtedness, Grantor
irrevocably waives, disclaims and relinquishes all claims against such other person which Grantor has or would otherwise have by virtue of payment of the Indebtedness or any part thereof, specifically including but not limited to all rights of
indemnity, contribution or exoneration. 
  

 18 

 n. Severability. If a court of competent jurisdiction finds any provision of this Agreement
to be illegal, invalid, or unenforceable as to any person or circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other person or circumstance. If feasible, the offending provision shall be
considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or
unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement. 
  
 o. Reasonable Discretion of Lender. Whenever Lender’s consent or approval is required under this Agreement, the decision as to whether
or not to consent or approve shall be in the reasonable discretion of Lender. 
  
 p. Successors and Assigns. Subject to any limitations stated in this Agreement on transfer of Grantor’s interest, this Agreement shall be binding upon and inure to the benefit of the parties, their
successors and assigns. If ownership of the Collateral becomes vested in a person other than Grantor, Lender, without notice to Grantor, may deal with Grantor’s successors with reference to this Agreement and the Indebtedness by way of
forbearance or extension without releasing Grantor from the obligations of this Agreement or liability under the Indebtedness. 
  
 q. Survival of Representations and Warranties. All representations, warranties, and agreements made by Grantor in this Agreement shall
survive the execution and delivery of this Agreement, shall be continuing in nature, and shall remain in full force and effect until such time as Borrower’s Indebtedness shall be paid in full. 
  
 r. Time Is of the Essence. Time is of the essence in the
performance of this Agreement. 
  
 13. DEFINITIONS. The following capitalized
words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in
the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the California Uniform
Commercial Code: 
  
 a. Agreement. The word
“Agreement” means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits, documents and schedules attached to this Commercial Security Agreement
from time to time. 
  
 b. Borrower. The word
“Borrower” means Basin Water, Inc., a California corporation. 
  
 c. Collateral. The word “Collateral” means all of Grantor’s right, title and interest in and to all the Collateral as described in the Collateral Description section of this Agreement. 
  
 d. Default. The word “Default” means the Default set forth
in this Agreement in the section titled “Default”. 
  

 19 

 e. Encumbrance. The word “Encumbrance” means any and all presently existing or future
mortgages, liens, privileges and other contractual and statutory security interests and rights, of every nature and kind, whether in admiralty, at law, or in equity, that now and/or in the future may affect the Collateral or any part or parts
thereof. 
  
 f. Environmental Laws. The words
“Environmental Laws” mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. (“CERCLA”), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 (“SARA”), the Hazardous Materials
Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et
seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto. 
  
 g. Event of Default. The words “Event of Default” mean individually, collectively, and interchangeably any of the events of
default set forth in this Agreement in the default section of this Agreement. 
  
 h. GAAP. The word “GAAP” means generally accepted accounting principles, consistently applied. 
  
 i. Grantor. The word “Grantor” means Basin Water, Inc., a California corporation. 
  
 j. Guarantor. The word “Guarantor” means any guarantor,
surety, or accommodation party of any or all of the Indebtedness, and, in each case, the successors, assigns, heirs, personal representatives, executors and administrators of any guarantor, surety, or accommodation party. 
  
 k. Guaranty. The word “Guaranty” means any guaranty from
Guarantor, or any other guarantor, endorser, surety, or accommodation party to Lender, including without limitation a guaranty of all or part of the Note. 
  
 l. Hazardous Substances. The words “Hazardous Substances” mean materials that, because of their quantity, concentration or
physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The
words “Hazardous Substances” are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term “Hazardous
Substances” also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos. 
  
 m. Indebtedness. The word “Indebtedness” means the indebtedness evidenced by the Note and/or described in the Related Documents,
including future advances and including all principal and interest together with all other indebtedness, loans, financial accommodations, extensions of credit, and costs and expenses for which Borrower is responsible under this Agreement and/or
under any of the Related Documents now and hereafter existing or arising. 
  

 20 

 n. Lender. The word “Lender” means BWCA I, LLC, a Delaware limited liability
company , its successors and assigns. 
  
 o. Note. The word
“Note” means each, every and all promissory notes by Borrower made in connection with the Indebtedness, at any time and from time to time, including those made in connection with future advances, whether now existing or hereafter created,
including any and all notes made in connection with this Commercial Security Agreement, any business loan agreement and/or the Related Documents, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and
substitutions of any or all thereof. 
  
 p. Related
Documents. The words “Related Documents” mean all promissory notes, credit agreements, loan agreements, including business loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust,
security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. 
  
 BORROWER AND GRANTOR HAVE READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT AND AGREE TO ITS TERMS.

  

					
	Dated: October 3, 2003	 	Basin Water, Inc., a California corporation
			
	 	 	By:	 	 /s/    PETER L. JENSEN

	 	 	 	 	President (Print Name legibly):
			
	 	 	By:	 	 /s/    KEITH R. SOLAR

	 	 	 	 	Secretary (Print Name legibly):
		
	Dated: October 3, 2003	 	BWCA I, LLC, a Delaware limited liability company
			
	 	 	By:	 	 /s/    OSCAR TANG

	 	 	 	 	Authorized Signatory (Print Name legibly):

  

 21Subordinated Note with Warrants Purchase Agreement

 Exhibit 10.12 
  
 SUBORDINATED NOTE WITH 
 WARRANTS PURCHASE AGREEMENT 
  
 Dated as of October 14, 2005 
  
 between

  
 Basin Water, Inc., as Issuer 
  
 - and - 
  
 The Co-Investment 2000 Fund, L.P. and 
 the other parties identified herein, as the Purchasers. 

 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	  	8
	                 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	  	9
		
	 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	  	10
	                 4.03
	  	Transactions Legal and Authorized	  	10
	                 4.04
	  	No Defaults, Restrictions	  	10
	                 4.05
	  	Material Contracts	  	11
	                 4.06
	  	Consents	  	11
	                 4.07
	  	Compliance with Law	  	11
	                 4.08
	  	Financial Statements	  	12
	                 4.09
	  	Pending Litigation	  	12
	                 4.10
	  	Title to Properties	  	12
	                 4.11
	  	Licenses and Permits	  	12
	                 4.12
	  	Taxes	  	13
	                 4.13
	  	Margin Securities	  	13
	                 4.14
	  	No Investment Company	  	13
	                 4.15
	  	Securities Laws	  	13
	                 4.16
	  	Employee Relations	  	13
	                 4.17
	  	Insurance	  	13
	                 4.18
	  	Solvency	  	14
	                 4.19
	  	Intellectual Property	  	14
	                 4.20
	  	No Payments Not in the Ordinary Course	  	16
	                 4.21
	  	No Change	  	16
	                 4.22
	  	ERISA	  	16
	                 4.23
	  	Environmental Matters	  	17
	                 4.24
	  	Registration Rights Agreements	  	19
	                 4.25
	  	Other Rights of Purchasers of Capital Stock	  	19
	                 4.26
	  	Actual Existence of Collateral; No Split Transaction	  	19
	                 4.27
	  	Business Relations	  	19
	                 4.28
	  	Relationships with Related Persons	  	19
	                 4.29
	  	Full Disclosure	  	19

					
	 ARTICLE V CONDITIONS TO CLOSING
	  	20
	                 5.01
	  	Purchase Documents	  	20
	                 5.02
	  	Representations and Warranties True	  	21
	                 5.03
	  	Compliance with this Agreement	  	21
	                 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	  	22
	                 6.04
	  	Reporting Requirements	  	22
	                 6.05
	  	Intellectual Property	  	22
	                 6.06
	  	Litigation	  	22
	                 6.07
	  	Financial Records	  	23
	                 6.08
	  	Additional Information	  	23
	                 6.09
	  	Insurance	  	23
	                 6.10
	  	Material Contracts	  	23
	                 6.11
	  	Taxes, Charges and Liens	  	23
	                 6.12
	  	Performance	  	23
	                 6.13
	  	Operations	  	24
	                 6.14
	  	Inspection	  	24
	                 6.15
	  	Board of Directors.	  	24
	                 6.16
	  	Compliance Certificate	  	25
	                 6.17
	  	Environmental Compliance and Reports	  	25
	                 6.18
	  	Location of Collateral	  	25
	                 6.19
	  	Further Assurances	  	25
	                 6.20
	  	ERISA	  	25
		
	 ARTICLE VII NEGATIVE COVENANTS
	  	26
	                 7.01
	  	Limitations on Merger, Consolidation, Sales of Assets, Etc.	  	26
	                 7.02
	  	Limitations on Indebtedness	  	27
	                 7.03
	  	Continuity of Operations	  	27
	                 7.04
	  	Loans, Acquisitions and Guaranties	  	27
	                 7.05
	  	Prepayments; Changes in Terms	  	27
	                 7.06
	  	Limitation on Liens	  	27
	                 7.07
	  	Restrictions on Ability to Satisfy Obligations	  	27
	                 7.08
	  	Transactions with Affiliates	  	27
		
	 ARTICLE VIII EVENTS OF DEFAULT
	  	28
	                 8.01
	  	Bankruptcy, etc.	  	28
	                 8.02
	  	Other Events	  	28
	                 8.03
	  	Other Remedies	  	29
	                 8.04
	  	Waiver	  	29
		
	 ARTICLE IX MISCELLANEOUS
	  	29
	                 9.01
	  	Amendments and Waivers	  	29
	                 9.02
	  	Notices	  	29
	                 9.03
	  	No Waiver; Cumulative Remedies	  	30
	                 9.04
	  	Survival of Representations and Warranties	  	30

					
	                 9.05
	  	Payment of Expenses, Taxes and Brokers’ Fees	  	30
	                 9.06
	  	Indemnification	  	31
	                 9.07
	  	Purchaser Representations	  	31
	                 9.08
	  	Counterparts	  	32
	                 9.09
	  	Severability	  	32
	                 9.10
	  	Integration	  	32
	                 9.11
	  	GOVERNING LAW	  	32
	                 9.12
	  	Successors and Assigns	  	32
	                 9.13
	  	Purchaser Agent	  	32
	                 9.14
	  	Acknowledgements	  	32
	                 9.15
	  	Original Issue Discount	  	33
	                 9.16
	  	Confidentiality	  	33
	                 9.17
	  	Preemptive Rights	  	33

 SUBORDINATED NOTE WITH 
 WARRANTS PURCHASE AGREEMENT 
  
 THIS SUBORDINATED NOTE WITH WARRANTS PURCHASE AGREEMENT (this “Agreement”), dated as of October 14, 2005, 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”), The Co-Investment 2000 Fund, L.P., a Delaware limited partnership with its principal place of business at Five Radnor Corporate Center, Suite 555,
100 Matsonford Road, Radnor, Pennsylvania 19087 (“Co-Investment 2000”), and the other parties identified on Schedule I attached hereto. Capitalized terms used in this Agreement and not otherwise defined have the meanings set
forth in Article I. 
  
 Background: 
  
 A. The Issuer has agreed to sell the Notes and to issue the Warrants to the
Purchasers on the terms and conditions set forth herein. 
  
 B.
The Purchasers have agreed to purchase the Notes 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. 
  
 “Code” means the Internal Revenue Code of 1986, as amended from time to time. 
  
 “Co-Investment 2000” has the meaning set forth in the
preamble hereto. 
  
 “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. 
  
 “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 the Purchaser 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. 
  
 “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. 
  

 Page 2 of 35 

 “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, of any Responsible Officer. 
  
 “Lien”
means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), 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 the Purchaser hereunder or thereunder that are
material to the Purchaser; provided, however, that a material adverse effect with respect to the business, operations, property, condition (financial or otherwise) or prospects of the Related 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 
  

 Page 3 of 35 

 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). 
  
 “Notes” means,
as of a particular time, the promissory notes 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 the Purchasers for their 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. 
  
 “Original
Purchasers” means Co-Investment 2000, Cross Atlantic Technology Fund II, L.P. and Catalyst Basin Water, LLC. 
  
 “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 the Senior Debt in favor of the Senior Secured Creditor pursuant to the Senior Credit Agreement, (ii) Liens in favor of the Purchasers, (iii) Liens securing Indebtedness permitted
under Section 7.02(e), (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, (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 (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 
  

 Page 4 of 35 

 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). 
  
 “Purchaser Agent” has the meaning set forth in
Section 9.13. 
  
 “Purchasers” means
the parties identified on Schedule I attached hereto and each of their respective successors and assigns. 
  
 “Purchaser Designee” has the meaning set forth in Section 6.15(a). 
  
 “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. 
  

 Page 5 of 35 

 “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. 
  
 “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 the Purchasers whereby the Issuer grants to the Purchasers 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 the Purchasers’ 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, and any refinancing thereof;
provided, that, without the prior written consent of the Purchaser, the maximum aggregate principal amount of such Senior Debt shall not exceed Eight Million Dollars ($8,000,000). 
  
 “Senior Secured Creditor” means BWCA I, LLC, a Delaware
limited liability company. 
  
 “Subordination
Agreement” means, collectively, the Subordination Agreement between the Senior Secured Creditor and the Purchasers and any future agreement(s) between the Senior Secured Creditor and any other Purchasers entered into from time to time.

  
 “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. 
  

 Page 6 of 35 

 “Warrants” has the meaning set forth in Section 3.01(a). 
  
 “Warrant Shares” means the shares of Common Stock issuable
upon exercise of the Warrants. 
  
 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 Notes. 
  
 (a) Subject to the terms and conditions of this Agreement, the Issuer will
authorize for issuance to the Purchasers on the Closing Date, Notes with an aggregate original principal amount of Five Million Dollars ($5,000,000) in the amounts and to the Purchasers set forth on Schedule I attached hereto. The Notes 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 Notes to the Purchasers on the Closing Date in the amounts and to
the Purchasers set forth on Schedule I attached hereto, and each of the Purchasers agrees to purchase its respective Note from the Issuer, in each case on the terms and conditions set forth herein. 
  
 (b) Payment of principal and interest on the Notes shall be made in
accordance with the terms of the Notes as specified therein. 
  
 (c) Prepayment on the Notes shall be made in accordance with the terms of the Notes as specified therein. 
  
 (d) The Issuer will pay to the Purchasers in immediately available funds to the accounts designated by the Purchasers, all amounts payable to such
Purchasers when due in respect of the principal of, or interest on, the Notes then held by the Purchasers, without any presentation of the Notes. 
  
 (e) The Issuer will not, without the unanimous approval of the Board of Directors, use the proceeds from the sale of the Notes to reduce the Senior Debt
or any other Indebtedness; provided, however, that for the purposes of this Section 2.01(e) only, use of the proceeds from the sale of the Notes for payments by the Related Parties of obligations under Capital Leases or
that constitute deferred purchase price of property or services, in each case, incurred in the ordinary course of business, shall be permitted. 
  

 Page 7 of 35 

 2.02 The Closing. 
  
 The closing of the purchase and sale of the Notes 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 the Purchasers 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 the Purchasers may designate, as applicable, or in such other manner as the parties hereto may otherwise agree (the
“Closing”). 
  
 2.03 Security for the
Note. 
  
 Payment of all Obligations, including
Indebtedness evidenced by the Notes, 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”). The
Purchasers’ 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) Each of the
Purchasers may, at its option, in person or by delivery, surrender its Note(s) for exchange at the principal office of the Issuer and, within a reasonable time thereafter and without expense for the issuance of replacement Note(s), 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 such Purchaser, 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 Notes. The name and address of each holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. Any such
issuance of new Notes 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 Notes 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 all registered holder of Notes. 
  
 (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, new
Notes, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note(s) or dated the date of such lost, stolen, destroyed or mutilated Note(s) if no interest shall have been paid
thereon. 
  

 Page 8 of 35 

 2.06 Revival of Obligations. If the incurring of any debt or the payments of money or
transfers of property made to the Purchasers by or on behalf of the Issuer contemplated by the Notes, 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 the Purchasers are required to repay or
restore 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 the Purchasers 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 Notes 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 Notes by the Purchasers, the Issuer shall issue to the Purchasers at the Closing (i) warrants to purchase an aggregate of up to Seven Hundred Fifty Thousand (750,000) shares of Common
Stock at an exercise price of Five Dollars and Fifty Cents ($5.50) per share in the amounts and to the Purchasers set forth on Schedule I attached hereto and (ii) warrants to purchase an aggregate of up to Two Hundred Fifty Thousand
(250,000) 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 the Purchasers thereof 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 the Purchasers to enter into this Agreement and to purchase the Notes and to acquire the Warrants, the Issuer hereby represents and warrants to
each of the Purchasers 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 Purchasers 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 
  

 Page 9 of 35 

 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 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 Notes, 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. 
  

 Page 10 of 35 

 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, and the Issuer has delivered to the Purchaser accurate and complete copies 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 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. 
  

 Page 11 of 35 

 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 June 30, 2005 and the related unaudited statement of operations,
shareholders’ equity and cash flows for the six (6) 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 six (6) months then ended; provided, however, that the unaudited financials do not include footnotes and are subject to year-end adjustment. 
  
 (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 
  

 Page 12 of 35 

 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 Notes 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. 
  
 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 Notes 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 Notes or Warrants from, or otherwise approached or negotiated or communicated in respect of any of the Notes or Warrants with, any
Person other than the Purchasers. Neither the Issuer nor any agent on its behalf has offered or will offer to sell all or any of the Notes or Warrants, or solicited any offers to acquire any of the Notes or Warrants from, or otherwise approached or
negotiated or communicated in respect of any of the Notes or Warrants with, any Person so as thereby to bring the delivery of the Notes 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. 
  

 Page 13 of 35 

 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.

  
 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 the Purchaser 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. 
  

 Page 14 of 35 

 (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. 
  
 (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. 
  

 Page 15 of 35 

 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.

  
 (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 
  

 Page 16 of 35 

 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. 
  
 (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 Purchaser 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 Purchaser 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 
  

 Page 17 of 35 

 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 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. 
  

 Page 18 of 35 

 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 Purchasers of Capital Stock. Except pursuant to the Purchase Documents, 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 the Purchasers 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 the Purchasers. 
  
 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 (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 Purchasers 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 the Purchasers in writing which would reasonably be expected to have a Material Adverse Effect. 
  

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 ARTICLE V 
 CONDITIONS TO CLOSING 
  
 Each of the Purchaser’s obligations to purchase its Note in the amount set forth on Schedule I attached hereto shall, unless waived by such Purchaser in writing, be subject to the satisfaction, prior to or concurrently with such
Purchaser’s purchase of its Note, of the following conditions: 
  
 5.01 Purchase Documents. 
  
 (a) Such
Purchaser shall have received the following documents duly executed and delivered by the parties thereto (other than such Purchaser): 
  
 (i) this Agreement; 
  
 (ii) its Note (as set forth on Schedule I); 
  
 (iii) the Subordination Agreement; 
  
 (iv) the Security Documents; 
  
 (v) its Warrants (as set forth on Schedule I); and 
  
 (vi) the Registration Rights Agreement. 
  
 (b) The Purchaser Agent also shall have received the following documents:

  
 (i) a copy of the resolutions, in form and
substance reasonably satisfactory to the Purchaser Agent, of the Board of Directors authorizing (A) the execution, delivery and performance of this Agreement, the Notes 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 the Purchaser Agent 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; 
  

 Page 20 of 35 

 (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 the Purchaser Agent 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) a lien and judgment search (at both state and county levels in each jurisdiction where any of the Related Parties owns material assets) dated no earlier than forty-five (45) days prior to the Closing Date,
confirming, except for Permitted Liens, the absence of any Liens encumbering any of the Related Parties’ property; 
  
 (x) documents, in form reasonably acceptable to the Purchaser Agent, evidencing the obtaining of all releases, consents or approvals to
the transactions listed on Section 4.06 of the Disclosure Schedule; 
  
 (xi) such other instruments, documents, certificates and opinions and other evidence as the Purchaser Agent 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 all of its agreements contained herein and there shall exist no Default or Event of Default hereunder. 
  
 5.04 Payment of Fees. The Purchasers shall have received on the Closing Date 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 the Purchasers that,
for so long as any amounts are outstanding under the Notes, the Issuer will: 
  
 6.01 Payment of the Note. Punctually pay or cause to be paid the principal of and interest on the Notes at the times and places and in the manner specified in the Notes. 
  
 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. 
  

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 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 Notes equals or exceeds One Million Dollars ($1,000,000), furnish to each of the Purchasers: 
  
 (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. 
  
 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
the Purchasers of the acquisition by the Issuer or any Related Party of any Patents, registered Copyrights or registered Marks. 
  
 6.06 Litigation. Promptly inform the Purchasers 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. 
  

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 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 the Purchasers 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 the Purchasers. The Issuer will deliver to the Purchasers 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 the Purchasers written notice at least thirty (30) days prior to any cancellation or diminishment of the coverage under such insurance policies. 
  
 (b) Furnish to the Purchasers, upon request of the Purchasers, 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 the Purchasers 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 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 Purchasers 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 the Purchasers if the Issuer learns of the occurrence of any event which constitutes an Event of Default under this Agreement. 
  

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 6.13 Operations. 
  
 (a) Provide written notice to the Purchasers 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 the Purchasers 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 the Purchasers, shall notify such party to permit the Purchasers free access to such records during regular business hours and upon at least twenty-four (24) hours prior written
notice and to provide the Purchasers with copies of any records it may reasonably request, all at the Issuer’s expense. The inspections in accordance with the preceding sentence, inclusive of inspections by the Senior Secured Creditor pursuant
to the Senior Credit Agreement, shall be limited to no more than four (4) times each calendar year. 
  
 6.15 Board of Directors. 
  
 (a) Ensure that the Board of Directors shall be comprised of no more than seven directors, with one director to be designated by the Purchasers (the
“Purchaser Designee”). The Purchaser Designee shall be elected at any annual or special meeting of shareholders or Board of Directors of the Issuer (or by written consent in lieu of a meeting of shareholders or Board of Directors)
and shall serve until his or her successor is elected and qualified or until his earlier resignation or removal, with the replacement for such Purchaser Designee to be designated by the Purchasers as set forth in this Section 6.15(a).
The Issuer shall take such actions as are required to cause the nomination of the Purchaser Designee for election to the Board of Directors and shall call such shareholders’ or Board of Directors’ meetings or distribute such notices and
requests for written consents to its shareholders or directors as may be necessary or requested by the Purchasers to effect such election. The Purchasers shall be entitled to remove and replace, at any time upon written notice to the Issuer, the
Purchaser Designee. For so long as a Purchaser Designee serves on the Board of Directors, the Issuer will maintain a Directors and Officers insurance policy with customary coverage for companies in circumstances similar to those of the Issuer
(including based on size and industry). The initial Purchaser Designee designated by the Purchasers hereunder shall be Richard M. Fox. 
  
 (b) Permit one named representative of the Purchasers 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(b) shall confer upon such observer the right to vote on any matter coming before 
  

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 the Board of Directors or be deemed to create or impute any liability whatsoever on the part of such observer or the
Purchasers 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 that Purchasers may change the
individual who will serve as observer only upon prior written notice to the Issuer. 
  
 (c) Notwithstanding anything in this Agreement to the contrary, the rights granted to the Purchasers pursuant to this Section 6.15 shall expire on the date that the Original Purchasers cease to hold,
either directly or through their Affiliates, at least a majority of the aggregate principal of the Notes outstanding at any time. On such date, the Purchasers shall cause the Purchaser Designee to resign from the Board of Directors. 
  
 6.16 Compliance Certificate. Unless waived in writing by the
Purchasers, provide the Purchasers 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 the Purchasers 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 the Purchasers 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 the Purchasers, 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 the Purchasers 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. 
  
 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 Purchasers that: 
  
 (a) a Reportable Event has occurred; 
  

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 (b) 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; 
  
 (c) 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; 
  
 (d) 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; 
  
 (e) a Plan or Multiemployer Plan has been or will be involuntarily terminated, reorganized, partitioned or declared insolvent under Title IV of ERISA; 
  

(f) 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; 
  
 (g) 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 
  
 (h) 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. 
  
 ARTICLE VII 
 NEGATIVE COVENANTS 
  
 The Issuer covenants and
agrees with the Purchasers that, for so long as any amounts are outstanding under the Notes, 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. 
  

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 7.02 Limitations on Indebtedness. Create, incur, assume, or suffer to exist any
Indebtedness except: (a) Senior Debt, (b) Indebtedness under the Notes, (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; and (e) other Indebtedness approved in writing by the Purchasers. 
  
 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
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 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. 
  

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 ARTICLE VIII 
 EVENTS OF DEFAULT 
  
 8.01 Bankruptcy, etc. All amounts owing under this Agreement and the Notes shall immediately become due and payable without the need for any notice or other action by the Purchasers 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 Notes 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; 
  
 (d) there shall be an Event of Default (as defined in the Senior Credit
Agreement); 
  

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 (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, the Purchasers may by notice of default to the Issuer, declare the Notes (with accrued interest thereon) and all other amounts owing under
this Agreement and the Notes to be due and payable forthwith, whereupon the same shall immediately become due and payable. 
  
 8.03 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. 
  
 8.04 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 Notes or the Purchase Documents, may be waived, modified or amended without the prior written agreement of Purchasers 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 the Purchasers 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 the Purchasers: 
  
 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 
 Facsimile No.: (610) 971-2062 
  
 with a copy (which copy shall not constitute notice to the Purchasers) 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 
  
 9.03 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of any Purchaser, 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 the Purchasers for their reasonable out-of-pocket legal fees and expenses incurred in connection with the preparation, negotiation and execution of
this Agreement, the Notes, 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 One Hundred Thousand Dollars ($100,000), (ii) it shall pay or reimburse the Purchasers for all of their reasonable costs and expenses incurred in connection with the
enforcement or preservation of any rights under this Agreement, the Note or the other Purchase Documents and (iii) it shall pay, indemnify, and hold each of the Purchasers harmless from, any and all recording and 
  

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 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 the Purchasers of the Notes or any Warrant to any other Person. 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 each of the Purchasers 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 Notes by the Purchasers), 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 Purchaser Representations. Each of the Purchasers represents, severally and not jointly, by accepting its respective 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 such Purchaser pursuant to one or more exemptions from the registration requirements of such securities laws. Each of the Purchasers further understands that the Notes have 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, the Purchasers’ representations made herein.
Each of the Purchasers 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) the Purchaser has delivered to the Issuer an opinion of counsel reasonably satisfactory to the Issuer, at Purchaser’s expense, that such sale or transfer is made pursuant to one or more exemptions from the
Securities Act. Each of the Purchasers recognizes that an investment in the Notes involves a high degree of risk, including a risk of total loss of the Purchaser’s investment. Each of the Purchasers 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 
  

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 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 the Purchasers’ 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 the Purchasers with respect to
the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Purchasers 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 the Purchasers. 
  
 9.13 Purchaser Agent. Wherever in this Agreement, the Note or other Purchase Documents, (i) the consent of the Purchasers is required
to authorize a particular action or (ii) an action (including the declaration of an Event of Default) is otherwise required to be taken by the Purchasers, such action(s) shall be properly authorized if approved in writing by the agent
designated in writing by Persons holding at least a majority of the aggregate principal of the Notes outstanding at such time (the “Purchaser Agent”). Whenever this Agreement or the other Purchase Documents require a notice,
information or documents to be delivered to the Purchasers, delivery of such notice to the Purchaser Agent shall satisfy such obligation to deliver such notice, information or documents. Whenever in this Agreement or the other Purchase Documents,
the Purchasers are entitled to exercise rights or remedies, take possession or control of Collateral or otherwise take action with respect to the Issuer or the Collateral, the Purchasers hereby designate the Purchaser Agent to exercise rights or
remedies, take possession of Collateral or otherwise take such action with respect to the Issuer or the Collateral. The initial Purchaser Agent shall be Co-Investment 2000. 
  
 9.14 Acknowledgements. The Issuer hereby acknowledges that: 
  
 (a) it has been advised by counsel in the negotiation, execution and
delivery of the Purchase Documents; 
  

 Page 32 of 35 

 (b) the Purchasers do not have any fiduciary relationship to the Issuer, and the relationship between the
Purchasers, on one hand, and the Issuer, on the other hand, is solely that of debtor and creditor; and 
  
 (c) no joint venture exists between the Purchasers and the Issuer. 
  
 9.15 Original Issue Discount. Together, the Notes 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 of the Purchasers is the aggregate amount of the Notes. Allocating
that aggregate issue price between the Notes 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 $500,000 and the Notes having an aggregate issue price of $4,500,000. Accordingly, the aggregate original issue discount that will accrue on the Notes is $500,000. None of the parties will take any position in its Tax returns that is
inconsistent with the foregoing, the Issuer will provide the Purchasers 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. 
  
 9.16 Confidentiality. Each Purchaser shall use its best efforts (equivalent to the efforts such Purchaser applies to maintain the
confidentiality of its own confidential information) to maintain as confidential all Confidential Information following receipt thereof. Notwithstanding the foregoing, each Purchaser may disclose such Confidential Information: (a) to persons
employed or engaged by such Purchaser in connection with the transactions hereunder; (b) as required or requested by any governmental authority or reasonably believed by Purchaser 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 9.16, “Confidential Information” shall mean all
information provided to Purchasers 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
any Purchaser, (b) a Purchaser can demonstrate to have had rightfully in its possession prior to disclosure to such Purchaser by the Issuer, or (c) is independently developed by a Purchaser without the use of any information that would
otherwise constitute Confidential Information. 
  
 9.17
Preemptive Rights. 
  
 (a) The Issuer covenants and
agrees with the Purchasers that, for so long as a Purchaser continues to hold any Warrant Shares, the Issuer shall not offer any equity securities, including, without limitation, any warrants, options, convertible debt or other convertible
securities to any person (the “Offered Securities”), unless the Issuer shall have first offered to sell to each such Purchaser its Pro Rata Portion (as defined below) of such Offered Securities at the price and on such other terms
as shall have been specified by the Issuer in a writing delivered to each such Purchaser (the “Rights Offer”), which Rights Offer by its terms shall remain open and irrevocable for a period of ten (10) days from the date the
notice of the Rights Offer is delivered by the Issuer to each such Purchaser (such period being hereinafter referred to as the “Offer Period”). “Pro Rata Portion” shall 
  

 Page 33 of 35 

 mean, with respect to each Purchaser, the ratio that the sum of the number of shares of Common Stock held by such
Purchaser immediately prior to the Rights Offer (after giving effect to the exercise of all outstanding options and warrants, and the conversion of all outstanding convertible securities, if any, held by such Purchaser) bears to the sum of
(i) the total number of shares of Common Stock then outstanding and (ii) the number of shares of Common Stock issuable upon exercise or conversion of any and all outstanding options, warrants, convertible securities or other rights to
acquire Common Stock. 
  
 (b) Notice of any Purchaser’s
intention to accept a Rights Offer made pursuant to Section 9.17(a) shall be evidenced by a writing signed by such Purchaser and delivered to the Issuer prior to the end of the Offer Period (the “Notice of Acceptance”)
setting forth such portion of the Offered Securities which such Purchaser elects to purchase (the “Purchased Securities”), which in any event, shall be no greater than such Purchaser’s Pro Rata Portion of such Offered
Securities. At the closing of the transactions contemplated by the Rights Offer and the Notice of Acceptance, such Purchaser shall pay to the Issuer the entire purchase price for the Purchased Securities at a time and place mutually acceptable to
the parties; provided that, such Purchaser shall enter into the purchase agreements, stockholders agreement and other applicable agreements and documents governing the issuance of the Offered Securities as executed by the other purchasers of such
Offered Securities. 
  
 (c) The rights of the Purchasers under
this Section 9.17 shall not apply to (i) issuances as described in Section 4.4(b)(i)-(vi) of the Warrants or (ii) Common Stock issued in connection with an Initial Public Offering or other public or registered
offering of securities by the Issuer. 
  
 [SIGNATURES BEGIN ON
FOLLOWING PAGE] 
  

 Page 34 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/    Peter L. Jensen

	 	 	Peter Jensen
	 	 	Chief Executive Officer
	
	THE PURCHASERS:
	
	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, its manager
			
	 	 	By:	 	 /s/    Michael Mikolajczyk

	 	 	 	 	Michael Mikolajczyk
	 	 	 	 	Manager

  

 Page 35 of 35 

 SCHEDULE I 
  

THE PURCHASERS 
  

						
	 PURCHASER

	  	NOTE

	  	 WARRANTS

	 The Co-Investment 2000 Fund, L.P.
 Five Radnor Corporate Center, Suite 555
 100 Matsonford Road
 Radnor, Pennsylvania 19087
	  	$	2,250,000	  	337,500 Warrants at $5.50 per share
	Attention: Richard Fox, Executive Vice President	  	 	 	  	112,500 Warrants at $7.00 per share
			
	 Cross Atlantic Technology Fund II, L.P.
 Five Radnor Corporate Center
 Suite 555
	  	$	2,250,000	  	337,500 Warrants at $5.50 per share
	 100 Matsonford Road
 Radnor, Pennsylvania 19087
 Attention: Richard Fox, Vice President
	  	 	 	  	112,500 Warrants at $7.00 per share
			
	 Catalyst Basin Water, LLC
 c/o Diamond Cluster International
 875 N. Michigan Avenue, Suite 3000
	  	$	500,000	  	75,000 Warrants at $5.50 per share
	 Chicago, Illinois 60611
 Attention: Michael Mikolajczyk
	  	 	 	  	25,000 Warrants at $7.00 per share
	 	  	
	
	  	 
	TOTAL:	  	$	5,000,000	  	750,000 Warrants at $5.50 per share
			
	 	  	 	 	  	250,000 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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