Document:

EXHIBIT 10.51

 

EXECUTION COPY

SECURITIES PURCHASE AGREEMENT

SECURITIES PURCHASE AGREEMENT
(this “Agreement”), dated
as of July 10, 2006, is by and between Earth Biofuels, Inc., a
Delaware corporation (the “Company”),
and each purchaser listed on Exhibit A
attached hereto (individually, a “Purchaser”
and, collectively, the “Purchasers”).

A.            On June 7,
2006, certain purchasers, including each Purchaser, acquired certain notes and
warrants (the “Bridge Warrants”) pursuant to that
certain Securities Purchase Agreement, dated as of June 7, 2006, by and
among the Company and the purchasers signatory thereto.

B.            Each
Purchaser wishes to purchase and the Company wishes to sell, upon the terms and
subject to the conditions stated in this Agreement, (i) an 8% Senior Note
in the form attached hereto as Exhibit B
(a “Note” and, collectively, the “Notes”) and (ii) a warrant in
the form of Exhibit C hereto (the “New Warrant”). The Notes will be
convertible under certain conditions into shares of the Company’s common stock,
par value $0.001 per share (the “Common
Stock”). The New Warrant issued to a Purchaser will entitle the
holder thereof to purchase a number of shares of Common Stock equal to the 150%
of the original principal amount of the Note purchased by such Purchaser
divided by ten dollars ($10.00).  As
additional consideration for the execution of this Agreement, each Purchaser
wishes to exchange, and the Company desires to exchange, the Bridge Warrants
for a warrant in the form of Exhibit C
hereto exercisable into such number of shares of Common Stock as are
exercisable under the Bridge Warrants of such Purchaser as of the Closing Date
(the “Replacement Warrant”, and
together with the New Warrant, the “Warrants”).

C.            The
shares of Common Stock into which the Notes are convertible are referred to
herein as the “Conversion Shares” and the
shares of Common Stock into which the Warrants are exercisable are referred to
herein as the “Warrant Shares”. The Notes,
the Conversion Shares, the Warrants and the Warrant Shares are collectively
referred to herein as the “Securities”.

D.            The
Company has agreed to effect the registration of the Conversion Shares and the
Warrant Shares under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to
a Registration Rights Agreement in the form attached hereto as Exhibit D (the “Registration Rights Agreement”).

E.             The sale of the Notes, the New
Warrants and the Warrant Shares to the Purchasers will be effected in reliance
upon the exemption from securities registration afforded by Section 4(2) of
the Securities Act and Rule 506 of Regulation D (“Regulation D”) and the exchange of the Bridge Warrant
for the Replacement Warrant will be effected in reliance upon the exemption
from securities registration afforded by Section 3(a)(9) of the
Securities Act, in each case, as promulgated by the Securities and Exchange
Commission (the “Commission”)
thereunder.

 

 

 

In consideration of the
mutual promises made herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and each
Purchaser hereby agree as follows:

1.             PURCHASE AND SALE
OF NOTES AND WARRANTS; DEFINITIONS.

1.1           Purchase of Notes and New Warrants; Exchange of Bridge
Warrant.  Upon the terms and subject
to the satisfaction or waiver of the conditions set forth herein, the Company
agrees to sell and each Purchaser agrees to purchase (i) a Note with a
principal amount equal to the amount set forth opposite such Purchaser’s name
on Exhibit A hereto and (ii) a
New Warrant.  The purchase price for the
Note and New Warrant being purchased by a Purchaser (the “Purchase
Price”) shall be equal to the principal amount of such
Note.  On the Closing Date, such
Purchaser and the Company shall exchange the Bridge Warrant of the Purchaser
for a Replacement Warrant.  The date on
which the closing of the purchase and sale of the Notes and Warrants occurs
(the “Closing”) is hereinafter
referred to as the “Closing Date”. The Closing
will be deemed to occur when (A) this Agreement and the other Transaction
Documents (as defined below) have been executed and delivered by the Company
and each Purchaser (which delivery may be effected by facsimile transmission), (B) each
of the conditions to the Closing described in Section 5 hereof has been
satisfied or waived as specified therein and (C) full payment of each
Purchaser’s Purchase Price has been made by such Purchaser to the Company by
wire transfer of immediately available funds against physical delivery by the
Company of duly executed instruments representing the Note and Warrants
purchased or exchanged by such Purchaser at the Closing.

1.2           Certain Definitions.  When used herein, the following terms shall
have the respective meanings indicated:

“Affiliate”
means, as to any Person (the “subject Person”),
any other Person (a) that directly or indirectly through one or more
intermediaries controls or is controlled by, or is under direct or indirect
common control with, the subject Person, (b) that directly or indirectly
beneficially owns or holds ten percent (10%) or more of any class of voting
equity of the subject Person, or (c) ten percent (10%) or more of the
voting equity of which is directly or indirectly beneficially owned or held by
the subject Person. For the purposes of this definition, “control”
when used with respect to any Person means the power to direct the management
and policies of such Person, directly or indirectly, whether through the
ownership of voting securities, through representation on such Person’s Board
of Directors or other management committee or group, by contract or otherwise.

“Approved
Stock Plan” means any employee benefit plan which has been
approved by the Board of Directors of the Company (including a majority of the
independent members of the Board), pursuant to which the Company’s securities
may be issued to any employee, officer, director or consultant for services
provided to the Company.

“Business
Day” means any day other than a Saturday, a Sunday or a day on
which the New York Stock Exchange is closed or on which banks are authorized by
law to close in New York, New York.

 

 

 

“Closing”
and “Closing Date” have the respective
meanings specified in Section 1.1 hereof.

“Common
Stock” means the common stock, par value $0.001 per share, of
the Company.

“Common
Stock Equivalent” means, collectively, Options and Convertible
Securities.

“Convertible Securities” means any stock or securities (other than
Options) of the Company convertible into or exercisable or exchangeable for
Common Stock.

“Conversion
Price” has the meaning specified in the Notes.

“Debt”
means, as to any Person at any time: (a) all indebtedness, liabilities and
obligations of such Person for borrowed money; (b) all indebtedness,
liabilities and obligations of such Person to pay the deferred purchase price
of Property or services, except trade accounts payable of such Person arising
in the ordinary course of business that are not past due by more than 90 days; (c) all
capital lease obligations of such Person; (d) all Debt of others
guaranteed by such Person; (e) all indebtedness, liabilities and
obligations secured by a Lien (other than a Permitted Lien) existing on
Property owned by such Person, whether or not the indebtedness, liabilities or
obligations secured thereby have been assumed by such Person or are non-recourse
to such Person; (f) all reimbursement obligations of such Person (whether
contingent or otherwise) in respect of letters of credit, bankers’ acceptances,
surety or other bonds and similar instruments; and (g) all liabilities and
obligations of such Person to redeem or retire shares of capital stock of such
Person (other than the Company’s obligation to redeem the Securities under the
circumstances specified therein).

“Disclosure
Documents” has the meaning specified in Section 3.11
hereof.

“EDGAR”
means the Commission’s Electronic Data Gathering, Analysis, and Retrieval
system

“Effective
Date” has the meaning set forth in the Registration Rights
Agreement.

“Environmental
Law” means all federal,
state, local or foreign laws relating to pollution or protection of human
health or the environment (including, without limitation, ambient air, surface
water, groundwater, land surface or subsurface strata), including, without
limitation, laws relating to emissions, discharges, releases or threatened
releases of chemicals, pollutants, contaminants, or toxic or hazardous
substances or wastes (collectively, “Hazardous
Materials”) into the environment, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials, as well as all authorizations,
codes, decrees, demands or demand letters, injunctions, judgments, licenses,
notices or notice letters, orders, permits, plans or regulations issued,
entered, promulgated or approved thereunder.

 

 

 

“ERISA”
means the Employee Retirement Income Security Act of 1974, as amended, and the
regulations and published interpretations thereunder.

“Event
of Default” has the meaning set forth in the Notes.

“Exchange
Act” means the Securities Exchange Act of 1934, as amended (or
any successor act), and the rules and regulations thereunder (or
respective successors thereto).

“Excluded Securities”
means Common Stock or Common Stock Equivalents issued or issuable: (i) in
connection with any Approved Stock Plan; (ii) upon exercise of any Options or
conversion of any Convertible Securities which are outstanding on the day
immediately preceding the Closing Date and are disclosed in a schedule to this
Agreement, provided that the terms of such Options or Convertible Securities
are not amended, modified or changed on or after the Closing Date; (iii)
pursuant to a bona fide firm commitment underwritten public offering with a
nationally-recognized investment banking firm which generates gross proceeds to
the Company in excess of $35,000,000 (other than an “at-the-market offering” as
defined in Rule 415(a)(4) under the Securities Act or an “equity line”
arrangement); (iv) in connection with any acquisition by the Company, whether
through an acquisition of stock or a merger of any business, assets or
technologies the primary purpose of which is not to raise equity capital in an
amount not to exceed, in the aggregate, 10% of the outstanding shares of Common
Stock in any calendar year; and (v) an anticipated issuance of no more than 10
million shares of Common Stock to an agricultural conglomerate.

“Exercise
Price” shall have the meaning specified in the Warrants.

“GAAP”
means generally accepted accounting principles, applied on a consistent basis,
as set forth in (i) opinions of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements of the
Financial Accounting Standards Board (iii) interpretations of the
Commission and the Staff of the Commission and each of their respective
successors and which are applicable in the circumstances as of the date in
question.  Accounting principles are
applied on a “consistent basis” when the accounting principles applied in a
current period are comparable in all material respects to those accounting
principles applied in a preceding period.

“Governing
Documents” means, as of any date, (i) in the case of a
corporation, its certificate of incorporation and by-laws, (ii) in the
case of a partnership, its certificate of partnership and partnership
agreement, (iii) in the case of a limited liability company, its
certificate of organization and limited liability company operating agreement,
and (iv) any similar governing document of any such entity, in each such
case as amended through such date.

“Governmental
Authority” means any nation or government, any state, provincial
or political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government, including without limitation any stock exchange, securities
market or self-regulatory organization.

 

 

 

“Governmental
Requirement” means any law, statute, code, ordinance, order,
rule, regulation, judgment, decree, injunction, franchise, license or other
directive or requirement of any federal, state, county, municipal, parish,
provincial or other Governmental Authority or any department, commission,
board, court, agency or any other instrumentality of any of them.

“Insolvent”
means, with respect to the Company, that (i) the Company is unable to pay
its debts and liabilities, subordinated, contingent or otherwise, as such debts
and liabilities become absolute and matured, (ii) the Company intends to
incur or believes that it will incur debts that would be beyond its ability to
pay as such debts mature or (iii) the Company has unreasonably small
capital with which to conduct the business in which it is engaged as such
business is now conducted or is about to be conducted

“Intellectual
Property” means any U.S. or foreign patents, patent rights,
patent applications, trademarks, trade names, service marks, brand names, logos
and other trade designations (including unregistered names and marks),
trademark and service mark registrations and applications, copyrights and
copyright registrations and applications, inventions, invention disclosures,
protected formulae, formulations, processes, methods, trade secrets, computer
software, computer programs and source codes, manufacturing research and
similar technical information, engineering know-how, customer and supplier
information, assembly and test data drawings or royalty rights.

“Lien”
means, with respect to any Property, any mortgage or mortgage, pledge,
hypothecation, assignment, deposit arrangement, security interest, tax lien,
financing statement, pledge, charge, or other lien, charge, easement,
encumbrance, preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever on or with respect to such
Property (including, without limitation, any conditional sale or other title
retention agreement having substantially the same economic effect as any of the
foregoing).

“Market Price”
means, as of a particular date, the lower of (i) the average of daily VWAP for
each of the five (5) consecutive Trading Days occurring immediately prior to
(but not including) such date and (ii) the daily VWAP on the Trading Day
occurring immediately prior to (but not including) such date.

“Material
Adverse Effect” means an effect that is material and adverse to (i) the
consolidated business, operations, properties, financial condition, prospects
or results of operations of the Company and its Subsidiaries taken as a whole
or (ii) the ability of the Company to perform its obligations under this
Agreement or the other Transaction Documents (as defined below).

“Material
Contracts” means, as to the Company, any agreement required
pursuant to Item 601 of Regulation S-B or Item 601 of Regulation S-K, as
applicable, promulgated under the Securities Act to be filed as an exhibit to
any report, schedule, registration statement or definitive proxy statement
filed or required to be filed by the Company with the Commission under the
Exchange Act or any rule or regulation promulgated thereunder, and any and
all amendments, modifications, supplements, renewals or restatements thereof.

 

 

 

“NASD”
means the National Association of Securities Dealers, Inc.

“Obligations”
means any and all indebtedness, liabilities and obligations of the Company
to the Purchaser evidenced by and/or arising pursuant to this Agreement or the
Notes, now existing or hereafter arising, whether direct, indirect, related,
unrelated, fixed, contingent, liquidated, unliquidated, joint, several or joint
and several, including, without limitation, the obligations of the Company to
repay principal of the Notes, to pay interest on the Notes (including, without
limitation, interest accruing after any bankruptcy, insolvency, reorganization
or other similar filing) and to pay all fees, indemnities, costs and expenses
(including attorneys’ fees) provided for in this Agreement or the Notes.

“Options” means any rights, warrants or options to
subscribe for, purchase or receive Common Stock or Convertible Securities.

“OTCBB”
means the OTC Bulletin Board quotation service operated by the Nasdaq Stock
Market, Inc (“Nasdaq”).

“Pension
Plan” means an employee benefit plan (as defined in ERISA)
maintained by the Company for employees of the Company or any of its
Affiliates.

“Permitted
Liens” means the following:

(a)        encumbrances consisting
of easements, rights-of-way, zoning restrictions or other restrictions on the
use of real Property or imperfections to title that do not (individually or in
the aggregate) materially impair the ability of the Company or any of its Subsidiaries
to use such Property in its businesses, and none of which is violated in any
material respect by existing or proposed structures or land use;

(b)       Liens for taxes,
assessments or other governmental charges (including without limitation in
connection with workers’ compensation and unemployment insurance) that are not
delinquent or which are being contested in good faith by appropriate
proceedings, which proceedings have the effect of preventing the forfeiture or
sale of the Property subject to such Liens, and for which adequate reserves (as
determined in accordance with GAAP) have been established;

(c)        Liens of mechanics,
materialmen, warehousemen, carriers, landlords or other similar statutory Liens
securing obligations that are not yet due and are incurred in the ordinary
course of business or which are being contested in good faith by appropriate
proceedings, which proceedings have the effect of preventing the forfeiture or
sale of the Property subject to such Liens, for which adequate reserves (as determined
in accordance with GAAP) have been established and which have been bonded over
and omitted from the Title Policy;

(d)       purchase money Liens to finance property or assets of the
Company or any Subsidiary of the Company acquired in the ordinary course of
business;

 

 

 

provided, however, that (i) the
related purchase money Debt shall not exceed the cost of such property or
assets (including the cost of design, development, improvement, production,
acquisition, construction, installation and integration) and shall not be
secured by any property or assets of the Company or any Subsidiary of the
Company other than the property and assets so acquired or constructed (and any
improvements thereto) and (ii) the Lien securing such Debt shall be
created within ten (10) days of such acquisition, construction or
improvement;

(e)        Liens upon specific items
of inventory or other goods and proceeds of any Person securing such Person’s
obligations in respect of bankers’ acceptances issued or created for the
account of such Person to facilitate the purchase, shipment or storage of such
inventory or other goods; and

(f)        Liens encumbering
deposits made to secure obligations arising from statutory, regulatory,
contractual, or warranty requirements of the Company or any of its
Subsidiaries, including rights of offset and set-off.

“Person”
means any individual, corporation, trust, association, company, partnership,
joint venture, limited liability company, joint stock company, Governmental
Authority or other entity.

“Property”
means property and/or assets of all kinds, whether real, personal or mixed,
tangible or intangible (including, without limitation, all rights relating
thereto).

“Principal
Market” means the principal exchange or market on which the
Common Stock is listed or traded.

“Purchase
Price” has the meaning specified in Section 1.1 hereof.

“Registrable
Securities” has the meaning set forth in the Registration Rights
Agreement.

“Restricted Payment” means (a) any
dividend or other distribution (whether in cash, Property or obligations),
direct or indirect, on account of (or the setting apart of money for a sinking
or other analogous fund for the benefit of) any shares of any class of capital
stock of the Company or any of its Subsidiaries now or hereafter outstanding, except
a dividend payable solely in shares of that class of stock to all of the
holders of that class; (b) any redemption, exchange, retirement, sinking
fund or similar payment, purchase or other acquisition for value, direct or
indirect, of any shares of any class of capital stock of the Company or any of
its Affiliates now or hereafter outstanding, except the Securities; (c) any
prepayment of principal of, premium, if any, or interest on, or any redemption,
conversion, exchange, purchase, retirement, sinking fund or defeasance of, any
Debt (whether upon acceleration of such Debt or otherwise) other than the
Securities; and (d) any loan, advance or payment to any officer, director
or stockholder of the Company or any of its Affiliates, exclusive of (i) reasonable
compensation and reimbursements paid to officers or directors in the ordinary
course of business

 

 

 

and (ii) the
scheduled repayment of principal and interest with respect to any loans made by
any such Affiliate to the Company and outstanding as of the date hereof and set
forth on Schedule 3.5 hereto; provided, however, that the following shall not be deemed to
constitute a Restricted Payment: (A) the issuance of securities upon
exercise or conversion of the Company’s Options or Convertible Securities under
an Approved Stock Plan, and (B) the issuance of equity securities to, or
making payments under license, joint venture or similar agreements with,
persons with whom the Company has a joint venture, strategic alliance or other
commercial relationship in connection with the operation of the Company’s
business, and not in connection with a transaction the purpose of which is to
raise equity capital.

“SEC
Documents” has the meaning specified in Section 3.11
hereof.

“Securities”
has the meaning specified in the preamble to this Agreement.

“Security Agreement”
has the meaning specified in the preamble to this Agreement.

“Subordinated
Debt” means Debt of the Company which meets each of the
following requirements:  (a) such
Debt is wholly unsecured or any Liens securing such Debt constitute Permitted
Liens; and (b) such Debt is contractually subordinated, as to payment and
liquidation, to the payment in full of the Notes and the Obligations on such
terms and pursuant to written agreements in such form and substance as are
reasonably satisfactory to Purchasers holding at least fifty percent (50%) of
the aggregate principal amount of the Notes outstanding on the date such Debt
is incurred (the “Subordinated Debt Documents”).

“Subsidiary”
means, with respect to any Person, any corporation or other entity of which at
least a majority of the outstanding shares of stock or other ownership
interests having by the terms thereof ordinary voting power to elect a majority
of the board of directors (or Persons performing similar functions) of such
corporation or entity (irrespective of whether or not at the time, in the case
of a corporation, stock of any other class or classes of such corporation shall
have or might have voting power by reason of the happening of any contingency)
is at the time directly or indirectly owned or controlled by such Person or one
or more of its Subsidiaries or by such Person and one or more of its
Subsidiaries.

“Termination Date”
means the first date on which there are no Notes or Obligations outstanding.

“Trading
Day” means any day on which the Common Stock is purchased and
sold on the Principal Market.

“Transaction
Documents” means (i) this Agreement, (ii) the Notes, (iii) the
Warrants, (iv) the Registration Rights Agreement, and (vii) all other
agreements, documents and other instruments executed and delivered by or on
behalf of the Company or its officers at the Closing.

“VWAP” on a Trading Day means the
volume weighted average price of the Common Stock for such Trading Day on the
Principal Market as reported by Bloomberg Financial Markets or, if Bloomberg
Financial

 

 

 

Markets
is not then reporting such prices, by a comparable reporting service of
national reputation selected by the Holders and reasonably satisfactory to the
Company.  If VWAP cannot be calculated
for the Common Stock on such Trading Day on any of the foregoing bases, then
the Company shall submit such calculation to an independent investment banking
firm of national reputation reasonably acceptable to the Purchasers, and shall cause
such investment banking firm to perform such determination and notify the
Company and the Purchasers of the results of determination no later than two (2) Business
Days from the time such calculation was submitted to it by the Company.  All such determinations shall be
appropriately adjusted for any stock dividend, stock split or other similar
transaction during such period.

1.3       Other Definitional Provisions.  All definitions contained in this Agreement
are equally applicable to the singular and plural forms of the terms
defined.  The words “hereof”,
“herein” and “hereunder”
and words of similar import referring to this Agreement refer to this Agreement
as a whole and not to any particular provision of this Agreement.

2.             PURCHASERS REPRESENTATIONS
AND WARRANTIES.

Each Purchaser represents and warrants to the Company,
with respect to itself only, and agrees with the Company, that:

2.1       No
Public Sale or Distribution. Such Purchaser is acquiring the Note and the
New Warrant being purchased by it in the ordinary course of business for its
own account and not with a view towards, or for resale in connection with, the
public sale or distribution thereof, except pursuant to sales that are
registered under the Securities Act or are exempt from the requirement to be
registered thereunder. Such Purchaser does not presently have any agreement,
arrangement or understanding, directly or indirectly, with any Person to
distribute or effect any distribution of any of the Securities (or any
securities which are derivatives thereof) to or through any person or entity; provided, however, that
in making such representations, such Purchaser does not agree to hold any of
the Securities for any minimum or other specific term and reserves the right to
dispose of the Securities at any time in accordance with or pursuant to an
effective registration statement or an exemption under the Securities Act.

2.2       Accredited
Purchaser Status. Such Purchaser is an “accredited Purchaser” as that term
is defined in Rule 501(a) of Regulation D.

2.3       Reliance
on Exemptions. Such Purchaser understands that the Securities are being
offered and sold to it in reliance on specific exemptions from the registration
requirements of United States federal and state securities laws and that the
Company is relying in part upon the truth and accuracy of, and such Purchaser’s
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of such Purchaser set forth herein in order to determine the
availability of such exemptions and the eligibility of such Purchaser to
acquire the Securities.

2.4       Information. Such Purchaser and
its advisors, if any, have been furnished with all materials relating to the
business, finances and operations of the Company and materials relating to the
offer and sale of the Securities which have been requested by such Purchaser.
Such Purchaser and its advisors, if any, have been afforded the opportunity to
ask questions of

 

 

 

the
Company. Neither such inquiries nor any other due diligence investigations conducted
by such Purchaser or its advisors, if any, or its representatives shall modify,
amend or affect such Purchaser’s right to rely on the Company’s representations
and warranties contained herein. Such Purchaser understands that its investment
in the Securities involves a high degree of risk and is able to afford a
complete loss of such investment. Such Purchaser has sought such accounting,
legal and tax advice as it has considered necessary to make an informed
investment decision with respect to its acquisition of the Securities.

2.5       No
Governmental Review. Such Purchaser understands that no United States
federal or state agency or any other government or governmental agency has
passed on or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.

2.6       Transfer or Resale. Such Purchaser understands that,
except as provided in the Registration Rights Agreement: (i) the
Securities have not been and are not being registered under the Securities Act
or any state securities laws, and may not be offered for sale, sold, assigned
or transferred unless (A) subsequently registered thereunder, (B) such
Purchaser shall have delivered to the Company an opinion of counsel, in a form
reasonably acceptable to the Company, to the effect that the Securities to be
sold, assigned or transferred may be sold, assigned or transferred pursuant to
an exemption from such registration, or (C) such Purchaser provides the
Company with reasonable assurance that such Securities can be sold, assigned or
transferred pursuant to Rule 144 promulgated under the Securities Act, as
amended (or a successor rule thereto) (“Rule 144”); (ii) any sale of the Securities
made in reliance on Rule 144 may be made only in accordance with the terms
of Rule 144 and, further, if Rule 144 is not applicable, any resale
of the Securities under circumstances in which the seller (or the Person
through which the sale is made) may be deemed to be an underwriter (as that
term is defined in the Securities Act) may require compliance with some other
exemption under the Securities Act or the rules and regulations of the
Commission thereunder; and (iii) neither the Company nor any other Person
is under any obligation to register the Securities under the Securities Act or
any state securities laws or to comply with the terms and conditions of any
exemption thereunder. Notwithstanding the foregoing, the Securities may be
pledged in connection with a bona fide margin account or other loan secured by
the Securities and such pledge of Securities shall not be deemed to be a
transfer, sale or assignment of the Securities hereunder, and no Purchaser
effecting a pledge of Securities shall be required to provide the Company with
an opinion of counsel otherwise make deliver any notice or document to the
Company pursuant to this Agreement or any other Transaction Document,
including, without limitation, this Section 2.6;
provided, that in order to make any
sale, transfer or assignment of Securities, such Purchaser and its pledgee must
make such disposition in accordance with or pursuant to a registration
statement or an exemption under the Securities Act.

2.7       Legends.
Such Purchaser understands that until the certificates or other instruments
representing the Securities have been registered under the Securities Act, the
stock certificates representing the Securities, except as set forth below,
shall bear any legend required by the “blue sky” laws of any state and a
restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of such stock certificates):

 

 

 

THE SECURITIES
REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT
BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
THE COMPANY, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID
ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES WITHOUT DELIVERY OF ANY SUCH OPINION.

The legend set forth above shall be removed and the
Company shall issue a certificate without such legend to the holder of the
Securities upon which it is stamped or issue to such holder by electronic
delivery at the applicable balance account at DTC, if (i) such Securities
are registered for resale under the Securities Act, (ii) in connection
with a sale, assignment or other transfer other than to an Affiliate or
partner, shareholder or member of such holder, such holder provides the Company
with an opinion of counsel reasonably satisfactory to the Company, in a
customary and acceptable form, to the effect that such sale, assignment or
transfer of the Securities may be made without registration under the
Securities Act, or (iii) such holder provides the Company with reasonable
assurance that the Securities can be sold, assigned or transferred pursuant to Rule 144.

If the Company shall fail for any reason to issue to
the holder of the Securities within a period of three (3) Business Days
after the occurrence of any of (i) through (iii) above (the “Delivery Period”), a certificate
without such legend or by electronic delivery at the applicable balance account
at DTC, and if on or after such Trading Day the holder purchases (in an open
market transaction or otherwise) shares of Common Stock to deliver in
satisfaction of a sale by the holder of such Securities that the holder
anticipated receiving without legend from the Company (a “Buy-In”), then the Company
shall, within three (3) Business Days after such Delivery Period, and at
the holder’s request and in the holder’s discretion, either (i) pay cash
to the holder in an amount equal to the holder’s total Purchase Price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased (the “Buy-In Price”),
at which point the Company’s obligation to deliver such unlegended Securities
shall terminate, or (ii) promptly honor its obligation to deliver to the
holder such unlegended Securities as provided above and pay cash to the holder
in an amount equal to the excess (if any) of the Buy-In Price over the product
of (A) the number of shares of Common Stock sold times (B) the
Market Price of the Common Stock on last day of the Delivery Period.

2.8       Validity; Enforcement. This
Agreement and the Registration Rights Agreement have been duly and validly
authorized, executed and delivered on behalf of such Purchaser and, when
executed by all of the parties thereto (including such Purchaser), shall
constitute the legal, valid and binding obligations of such Purchaser
enforceable against such Purchaser in accordance with their respective terms,
except as such enforceability may be limited

 

 

 

by
general principles of equity or to applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation and other similar laws relating to, or
affecting generally, the enforcement of applicable creditors’ rights and
remedies.

2.9       No
Conflicts. The execution, delivery and performance by such Purchaser of
this Agreement and the Registration Rights Agreement and the consummation by
such Purchaser of the transactions contemplated hereby and thereby will not (i) result
in a violation of the Governing Documents of such Purchaser or (ii) conflict
with, or constitute a default (or an event which with notice or lapse of time
or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which such Purchaser is a party, or (iii) result
in a violation of any law, rule, regulation, order, judgment or decree
(including federal and state securities laws) applicable to such Purchaser,
except, in the case of clauses (ii) and (iii) above, for such
conflicts, defaults, rights or violations which would not, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect.

2.10     Residency. Such Purchaser is a
resident of the jurisdiction specified below its address on Exhibit A.

2.11     Short
Sales; Trading Restriction. Neither such Purchaser nor any person trading
on its behalf or at its direction has sold, purchased or established a short
position in the Company’s securities (including through the purchase or sale of
derivative securities) at any time since the time such Purchaser was first
informed of the transactions contemplated hereby by the Company or any placement
agent acting on behalf of the Company. 
Until the Initial Maturity Date (as defined in the Notes) neither such
Purchaser nor any person trading on its behalf or at its direction will sell,
purchase or establish a short position in the Company’s securities.

3.             REPRESENTATIONS
AND WARRANTIES OF THE COMPANY.

The
Company represents and warrants to each Purchaser, and agrees with each
Purchaser, that:

3.1       Organization
and Qualification. Each of the Company and its Subsidiaries is a
corporation or other legal entity duly organized and validly existing in good
standing under the laws of the jurisdiction in which it is incorporated or
organized, and has the requisite power and authority (corporate or otherwise)
to own its properties and to carry on its business as now being conducted. Each
of the Company and its Subsidiaries is duly qualified as a foreign corporation
to do business and is in good standing in every jurisdiction in which its
ownership of property or the nature of the business conducted by it makes such
qualification necessary, except to the extent that the failure to be so
qualified or be in good standing would not have a Material Adverse Effect. The
Company has no Subsidiaries except as set forth on Schedule 3.1.

3.2       Authorization;
Enforcement; Validity. The Company has the requisite corporate power and
authority to enter into and perform its obligations under this Agreement and
the other Transaction Documents, including without limitation its obligation to
issue the Notes and Warrants in accordance with the terms hereof. The execution
and delivery of the Transaction Documents by the Company and the consummation
by the Company of the transactions

 

 

 

contemplated hereby and thereby, including without
limitation the issuance of the Notes and the Warrants and the reservation for
issuance and issuance of Conversion Shares and Warrant Shares, have been duly
authorized by the Company’s Board of Directors and no further consent or
authorization is required by the Company, its Board of Directors or its stockholders.
This Agreement and the other Transaction Documents have been duly executed and
delivered by the Company, and constitute the legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms, except as such enforceability may be limited by general
principles of equity or applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation or similar laws relating to, or affecting generally,
the enforcement of applicable creditors’ rights and remedies.

3.3       Issuance
of Securities. The Notes and the Warrants are duly authorized and, upon
issuance in accordance with the terms of this Agreement, will be validly issued
and free from all taxes, Liens and charges with respect to the issue thereof.
The Conversion Shares and the Warrant Shares are duly authorized and, upon
issuance in accordance with the terms of the Notes and the Warrants,
respectively, will be validly issued, fully paid and non-assessable and free
from all taxes, Liens and charges with respect to the issue thereof. The
issuance by the Company of the Securities is exempt from registration under the
Securities Act.

3.4       No
Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby (including, without limitation,
the issuance of the Notes and Warrants and the reservation for issuance and
issuance of the Conversion Shares or the Warrant Shares) will not (i) result
in a violation of the Governing Documents of the Company or any of its
Subsidiaries or (ii) conflict with, or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, any material agreement, indenture or instrument to which the
Company or any of its Subsidiaries is a party, or (iii) result in a
violation of any law, rule, regulation, order, judgment or decree (including
federal and state securities laws and regulations and the rules and
regulations of the Principal Market) applicable to the Company or any of its
Subsidiaries or by which any property or asset of the Company or any of its
Subsidiaries is bound or affected.

3.5       Consents. Except for filings and
approvals required by the Principal Market, the filing by the Company of a Form D
in accordance with Regulation D, and any filings to be made with state
securities regulatory authorities, the Company is not required to obtain any
consent, authorization or order of, or make any filing or registration with,
any court, governmental agency or any regulatory or self-regulatory agency or
any other Person in order for it to execute, deliver or perform any of its
obligations under or contemplated by the Transaction Documents, in each case in
accordance with the terms hereof or thereof. The Company and its Subsidiaries
are unaware of any facts or circumstances that might prevent the Company from
obtaining or effecting any of the registration, application or filings pursuant
to the preceding sentence. The Company is not in violation of the listing
requirements of the Principal Market and has no knowledge of any facts that
would reasonably lead to delisting or suspension of the Common Stock in the
foreseeable future.

 

 

 

3.6       Acknowledgment
Regarding Purchaser’s Purchase of Securities. The Company acknowledges and
agrees that each Purchaser is acting solely in the capacity of an arm’s length
Purchaser with respect to the Transaction Documents and the transactions
contemplated hereby and thereby and that no Purchaser is (i) an officer or
director of the Company, (ii) an Affiliate of the Company or (iii) to
the knowledge of the Company, a “beneficial owner” of more than 10% of the Common
Stock (as defined for purposes of Rule 13d-3 of the Exchange Act). The
Company further acknowledges that under no circumstances is any Purchaser
acting or to be deemed to be acting as a financial advisor or fiduciary of the
Company (or in any similar capacity) with respect to the Transaction Documents
and the transactions contemplated hereby and thereby, and has not received or
relied on any advice given by a Purchaser or any of its representatives or
agents in connection with the Transaction Documents and the transactions
contemplated hereby and thereby. The Company further represents to each
Purchaser that the Company’s decision to enter into the Transaction Documents
has been based solely on the independent evaluation by the Company and its
representatives.

3.7       No
General Solicitation; Placement Agent’s Fees. Neither the Company, nor any
of its Affiliates, nor any Person acting on its or their behalf, has engaged in
any form of general solicitation or general advertising (within the meaning of
Regulation D) in connection with the offer or sale of the Securities. The
Company shall be responsible for the payment of any placement agent’s fees,
financial advisory fees, or brokers’ commissions (other than for Persons
engaged by any Purchaser or its investment advisor, if any) relating to or
arising out of the transactions contemplated hereby. The Company shall pay, and
hold each Purchaser harmless against, any liability, loss or expense
(including, without limitation, attorney’s fees and out-of-pocket expenses)
arising in connection with any such claim. 
The Company acknowledges that it has engaged Cowen and Company as its
exclusive placement agent (the “Agent”)
in connection with the sale of the Securities.  Other than the Agent, the
Company has not engaged any placement agent or other agent in connection with
the sale of the Securities.

3.8       No
Integrated Offering. None of the Company, its Subsidiaries, any of their
respective Affiliates, or any Person acting on their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of any of
the Securities under the Securities Act or cause the offer and sale of the
Securities pursuant to this Agreement and the Transaction Documents to be
integrated with prior offerings by the Company for purposes of the Securities
Act in a manner that would make unavailable the exemption from registration
afforded by Section 4(2) of the Securities Act or Rule 506 of
Regulation D promulgated under the Securities Act, or any applicable
stockholder approval provisions, including, without limitation, under the rules and
regulations of any exchange or automated quotation system on which any of the
securities of the Company are listed or designated. None of the Company, its
Subsidiaries, their respective affiliates or any Person acting on their behalf
will take any action or steps referred to in the preceding sentence that would
require registration of any of the Securities under the Securities Act or cause
the offering of the Securities to be so integrated with other offerings.

3.9       Dilutive Effect. The Company
acknowledges that the issuance of Conversion Shares upon conversion of the
Notes and the issuance of Warrant Shares upon

 

 

 

exercise
of the Warrants may result in dilution of the outstanding shares of Common
Stock, which dilution may be substantial under certain market conditions. The
Company understands and acknowledges that its obligation to issue Conversion
Shares and Warrants Share is absolute and unconditional regardless of the
dilutive effect that any such issuance may have on the ownership interests of
other stockholders of the Company. The Company acknowledges and agrees that
such Purchaser may enter into short sales in the Company’s securities to the
extent permitted by this Agreement and applicable law, and that such
transactions may result in selling pressure on the outstanding shares of Common
Stock.

3.10     Application
of Takeover Protections; Rights Agreement. The Company and its Board of
Directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under its Governing Documents or the laws of the State
of Delaware which is or could become applicable to any Purchaser as a result of
the transactions contemplated by this Agreement, including, without limitation,
the Company’s issuance of the Securities and any Purchaser’s ownership of the
Securities. The Company has not adopted a shareholder rights plan or similar
arrangement relating to accumulations of beneficial ownership of Common Stock
or a change in control of the Company. Except as set forth on Schedule 3.10, the transactions
and obligations of the Company contemplated by the Transaction Documents,
including without limitation, the issuance and sale of the Securities, will not
trigger any preemptive or anti-dilution rights (including without limitation
pursuant to any “reset” or similar provisions) or rights of first refusal or
first offer, or any other rights that would allow or permit the holders of the
Company’s securities or other Persons to purchase shares of Common Stock or
other securities of the Company.

3.11     Commission Documents; Financial
Statements. The Company is subject to the reporting requirements of the
Exchange Act and, except as set forth on Schedule 3.11,
has filed with the Commission all reports, schedules, registration statements
and definitive proxy statements that the Company was required to file with the
Commission on and after October 7, 2005 (collectively, the “SEC Documents”).  The Company is not aware of any event
occurring or expected to occur on or prior to the Closing Date (other than the
transactions effected hereby) that would require the filing of, or with respect
to which the Company intends to file, a Form 8-K after the Closing. Each
SEC Document, as of the date of the filing thereof with the Commission, complied
in all material respects with the requirements of the Securities Act or
Exchange Act, as applicable, and the rules and regulations promulgated
thereunder and, as of the date of such filing (or if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such filing),
such SEC Document (including all exhibits and schedules thereto and documents
incorporated by reference therein) did not contain an untrue statement of
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. 
All documents required to be filed as exhibits to the SEC Documents have
been filed as required. Except as set forth in SEC Documents filed and
available to the public on EDGAR at least five (5) Business Days prior to
the date of this Agreement (the “Disclosure Documents”),
the Company has no liabilities, contingent or otherwise, other than liabilities
incurred in the ordinary course of business which, under GAAP, are not required
to be reflected in the financial statements included in the Disclosure
Documents and which, individually or in the aggregate, are

 

 

 

not
material to the consolidated business or financial condition of the Company and
its Subsidiaries taken as a whole.  As of
their respective dates, the financial statements of the Company included in the
SEC Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the
Commission with respect thereto. Such financial statements have been prepared
in accordance with GAAP consistently applied at the times and during the
periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto, or (ii) in the case of
unaudited interim statements, to the extent they may exclude footnotes or may
be condensed or summary statements) and fairly present in all material respects
the financial position of the Company as of the dates thereof and the results
of its operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end adjustments). No other
information provided by or on behalf of the Company to the Purchasers which is
not included in the Commission Documents, including, without limitation, the
information referred to in Section 2.4
of this Agreement, contains any untrue statement of a material fact or omits to
state any material fact necessary in order to make the statements therein, in
the light of the circumstance under which they are or were made, not
misleading.

3.12     Absence
of Certain Changes. Except as disclosed in Schedule 3.12,
since December 31, 2005, there has been no material adverse change or
development in the business, properties, operations, condition (financial or
otherwise), results of operations or prospects of the Company or its
Subsidiaries. Except as disclosed in Schedule 3.12,
since December 31, 2005, the Company has not (i) declared or paid any
dividends, (ii) sold any assets, individually or in the aggregate, in
excess of $100,000 outside of the ordinary course of business or (iii) effected
capital expenditures, individually or in the aggregate, in excess of $100,000.
The Company has not taken any steps to seek protection pursuant to any
bankruptcy law nor does the Company have any knowledge or reason to believe
that its creditors intend to initiate involuntary bankruptcy proceedings or any
actual knowledge of any fact which would reasonably lead a creditor to do so.
The Company is not, as of the date hereof, and will not be, after giving effect
to the transactions contemplated by this Agreement or the Transaction
Documents, Insolvent.

3.13     No
Undisclosed Events, Liabilities, Developments or Circumstances. No event,
liability, development or circumstance has occurred or exists with respect to
the Company or its Subsidiaries or their respective business, properties,
prospects, operations or financial condition, that would be required to have
been disclosed by the Company as of the date hereof under applicable securities
laws and which has not been publicly announced.

3.14     Conduct of Business; Regulatory Permits.
Neither the Company nor any of its Subsidiaries is in violation of any term of
or in default under its Governing Documents. To the best knowledge of the
Company, neither the Company nor any Subsidiary is in violation of any
judgment, decree or order or any statute, ordinance, rule or regulation
applicable to the Company or its Subsidiaries, and neither the Company nor any
of its Subsidiaries will conduct its business in violation of any of the
foregoing, except in each case for possible violations which would not,
individually or in the aggregate, have a Material Adverse Effect. The Company
and its Subsidiaries possess all certificates, authorizations and permits
issued by the appropriate federal, state or foreign regulatory authorities
necessary to conduct their respective businesses, except where the failure to
possess such certificates, authorizations or permits would not have,

 

 

 

individually
or in the aggregate, a Material Adverse Effect, and neither the Company nor any
such Subsidiary has received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization or permit.

3.15     Foreign
Corrupt Practices. Neither the Company, nor any of its Subsidiaries, nor
any director, officer, agent, employee or other Person acting on behalf of the
Company or any of its Subsidiaries has, in the course of its actions for, or on
behalf of, the Company (i) used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expenses relating to
political activity; (ii) made any direct or indirect unlawful payment to
any foreign or domestic government official or employee from corporate funds; (iii) violated
or is in violation of any provision of the U.S. Foreign Corrupt Practices Act
of 1977, as amended; or (iv) made any unlawful bribe, rebate, payoff,
influence payment, kickback or other unlawful payment to any foreign or
domestic government official or employee.

3.16     Sarbanes-Oxley
Act. The Company is in compliance with any and all requirements of the
Sarbanes-Oxley Act of 2002 that are effective as of the date hereof and applicable
to the Company, and any and all applicable rules and regulations
promulgated by the Commission thereunder that are effective as of the date
hereof, except where such noncompliance would not have, individually or in the
aggregate, a Material Adverse Effect.

3.17     Transactions
With Affiliates. Except as set forth in the Company’s Annual Report on Form 10-KSB
for the year ended December 31, 2005 or the Form 10-QSB for the
quarter ended March 31, 2006, none of the officers, directors or employees
of the Company is presently a party to any transaction with the Company or any
of its Subsidiaries (other than for ordinary course services as employees,
officers or directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental of real
or personal property to or from, or otherwise requiring payments to or from any
such officer, director or employee or, to the knowledge of the Company, any
corporation, partnership, trust or other entity in which any such officer,
director, or employee has a substantial interest or is an officer, director,
trustee or partner.

3.18     Equity Capitalization; Registration
Rights. As of the date hereof, the authorized capital stock of the Company
consists of (x) 250,000,000 shares of Common Stock, of which as of the date
hereof, 207,376,623 shares are issued and outstanding; 10,320,810 shares are
reserved (or to be reserved) for issuance pursuant to the Company’s employee
incentive plan and other options and warrants outstanding and other securities
exercisable or exchangeable for, or convertible into, shares of Common Stock
and (y) 15,000,000 shares of preferred stock, of which as of the date hereof,
no shares are issued and outstanding. All of such outstanding shares have been,
or upon issuance will be, validly issued and are fully paid and non-assessable.
Except as set forth on Schedule 3.18:
(i) no shares of the Company’s capital stock are subject to preemptive
rights or any other similar rights or any Liens suffered or permitted by the
Company; (ii) there are no outstanding options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, or exercisable or exchangeable for, any shares
of capital stock of the Company or any of its Subsidiaries, or contracts,
commitments, understandings or arrangements by which the Company or any of its
Subsidiaries is or may become bound to issue additional shares of capital stock
of the Company

 

 

 

or any
of its Subsidiaries or options, warrants, scrip, rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any shares of capital
stock of the Company or any of its Subsidiaries; (iii) there is no
outstanding Debt of the Company or any of its Subsidiaries or by which the
Company or any of its Subsidiaries is or may become bound; (iv) there are
no agreements or arrangements (except the Registration Rights Agreement) under
which the Company or any of its Subsidiaries is obligated to register the sale
of any of their securities under the Securities Act (including “piggy-back”
registration rights); (v) there are no outstanding securities or instruments
of the Company or any of its Subsidiaries which contain any redemption or
similar provisions, and there are no contracts, commitments, understandings or
arrangements by which the Company or any of its Subsidiaries is or may become
bound to redeem a security of the Company or any of its Subsidiaries; (vi) there
are no securities or instruments containing anti-dilution or similar provisions
that will be triggered by the issuance of the Securities; (vii) the
Company does not have any stock appreciation rights or “phantom stock” plans or
agreements or any similar plan or agreement; and (viii) the Company and
its Subsidiaries have no liabilities or obligations required to be disclosed in
the Disclosure Documents (as defined herein) but not so disclosed in the SEC
Documents. The Company has furnished or made available to each Purchaser upon
such Purchaser’s request, true, correct and complete copies of the Company’s
Certificate of Incorporation, as amended and as in effect on the date hereof,
and the Company’s Bylaws, as amended and as in effect on the date hereof, and
the terms of all securities convertible into, or exercisable or exchangeable
for, shares of Common Stock and the material rights of the holders thereof in
respect thereto. Schedule 3.18 sets forth
the shares of Common Stock owned beneficially or of record and Common Stock
Equivalents (as defined below) held by each director and executive officer of
the Company.

3.19     Debt
and Other Contracts. Except as disclosed in Schedule 3.19,
neither the Company nor any of its Subsidiaries (i)  has maintained a Lien
securing obligations in any material amounts, either singly or in the
aggregate; (ii) is a party to any contract, agreement or instrument, the
violation of which, or default under which, by the other parties to such
contract, agreement or instrument would result in a Material Adverse Effect, (iii) is
in violation of any term of or in default under any contract, agreement or
instrument relating to any Debt, except where such violations and defaults
would not result, individually or in the aggregate, in a Material Adverse
Effect, or (iv) is a party to any contract, agreement or instrument
relating to any Debt, the performance of which, in the judgment of the Company’s
officers, has or is reasonably expected to have a Material Adverse Effect.

3.20     Absence of Litigation. Except as set
forth on Schedule 3.20, there is
no action, suit, proceeding, inquiry or investigation before or by the
Principal Market, any court, public board, government agency, self-regulatory
organization or body pending or, to the knowledge of the Company, threatened
against or affecting the Company, the Common Stock or any of its Subsidiaries
or any of the Company’s or the Company’s Subsidiary’s officers or directors,
whether of a civil or criminal nature or otherwise. The matters set forth on Schedule 3.20, if determined adversely to the Company or any Subsidiary,
would not have a Material Adverse Effect.

 

 

3.21     Insurance.
The Company and each of its Subsidiaries are insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
management of the Company believes to be prudent and customary in the
businesses in which the Company and its Subsidiaries are engaged. Neither the
Company nor any Subsidiary has been refused any insurance coverage sought or
applied for. Neither the Company nor any Subsidiary has any reason to believe
that it will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers as
may be necessary to continue its business at a cost that would not have a
Material Adverse Effect.

3.22     Employee
Relations. (i) Neither the Company nor any of its Subsidiaries is a
party to any collective bargaining agreement or employs any member of a union.
The Company and its Subsidiaries believe that their relations with their
employees are good. No executive officer of the Company (as defined in Rule 501(f) of
the Securities Act) has notified the Company that such officer intends to leave
the Company or otherwise terminate such officer’s employment with the Company.
No executive officer of the Company, to the knowledge of the Company, is, or is
now expected to be, in violation of any material term of any employment
contract, confidentiality, disclosure or proprietary information agreement,
non-competition agreement, or any other contract or agreement or any
restrictive covenant, and the continued employment of each such executive
officer does not subject the Company or any of its Subsidiaries to any
liability with respect to any of the foregoing matters. The Company and its
Subsidiaries are in compliance with all federal, state, local and foreign laws
and regulations respecting labor, employment and employment practices and
benefits, terms and conditions of employment and wages and hours, except where
failure to be in compliance would not, either individually or in the aggregate,
reasonably be expected to result in a Material Adverse Effect.

3.23     Title.
The Company and its Subsidiaries have good and marketable title in fee simple
to all real property and good and marketable title to all personal property
owned by them which is material to the business of the Company and its
Subsidiaries, in each case free and clear of all Liens and defects except for
Permitted Liens and except as disclosed on Schedule 3.23.
Any real property and facilities held under lease by the Company and any of its
Subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company and its
Subsidiaries.

3.24     Intellectual Property Rights. The
Company and its Subsidiaries own or possess adequate rights or licenses to use
all trademarks, trade names, service marks, service mark registrations, service
names, patents, patent rights, copyrights, inventions, licenses, approvals,
governmental authorizations, trade secrets and other intellectual property
rights (“Intellectual Property Rights”)
necessary to conduct their respective businesses as now conducted. None of the
Company’s Intellectual Property Rights have expired or terminated, or are
expected to expire or terminate within three years from the date of this
Agreement. The Company does not have any knowledge of any infringement by the
Company or its Subsidiaries of Intellectual Property Rights of others. There is
no claim, action or proceeding being made or brought, or to the knowledge of
the Company, being threatened, against the Company or any of its Subsidiaries
regarding its Intellectual Property Rights. The Company is unaware of any facts

 

 

 

or
circumstances which might give rise to any of the foregoing infringements or
claims, actions or proceedings. The Company and its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and value
of all of their Intellectual Property Rights.

3.25     Environmental
Laws. The Company and its Subsidiaries (i) are in compliance with any
and all Environmental Laws, (ii) have received all permits, licenses or
other approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval where, in each of the
foregoing clauses (i), (ii) and (iii), the failure to so comply could be
reasonably expected to have, individually or in the aggregate, a Material
Adverse Effect.

3.26     Subsidiary
Rights. The Company or one of its Subsidiaries has the unrestricted right
to vote, and (subject to limitations imposed by applicable law) to receive
dividends and distributions on, all capital securities of its Subsidiaries as
owned by the Company or such Subsidiary.

3.27     Tax
Status. The Company and each of its Subsidiaries (i) has made or filed
all federal and state income and all other tax returns, reports and
declarations (or extensions thereof) required by any jurisdiction to which it
is subject, (ii) has paid all taxes and other governmental assessments and
charges that are material in amount, shown or determined to be due on such
returns, reports and declarations, except those being contested in good faith
and (iii) has set aside on its books provision reasonably adequate for the
payment of all taxes for periods subsequent to the periods to which such
returns, reports or declarations apply. There are no unpaid taxes in any
material amount claimed to be due by the taxing authority of any jurisdiction,
and the officers of the Company know of no basis for any such claim.

3.28     Internal Accounting and Disclosure
Controls. The Company and each of its Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that (i) transactions
are executed in accordance with management’s general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset and liability accountability, (iii) access
to assets or incurrence of liabilities is permitted only in accordance with
management’s general or specific authorization and (iv) the recorded
accountability for assets and liabilities is compared with the existing assets
and liabilities at reasonable intervals and appropriate action is taken with
respect to any difference. Other than as described in the Annual Report on Form 10-KSB
filed with the Commission for the fiscal year ended December 31, 2005, the
Company does not currently maintain disclosure controls and procedures (as such
term is defined in Rule 13a-14 under the Exchange Act) that are effective
in ensuring that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the rules and
forms of the Commission, including, without limitation, controls and procedures
designed in to ensure that information required to be disclosed by the Company
in the reports that it files or submits under the Exchange Act is accumulated
and communicated to the Company’s management, including its principal executive
officer or officers and its principal financial officer or officers, as
appropriate, to allow timely decisions

 

 

 

regarding
required disclosure. Specifically, the independent auditors for the Company
identified deficiencies in the Company’s controls related to valuation and
recording of fixed assets.

3.29     Off
Balance Sheet Arrangements. There is no transaction, arrangement, or other
relationship between the Company and an unconsolidated or other off balance
sheet entity that is required to be disclosed by the Company in its Exchange
Act filings and is not so disclosed or that otherwise would be reasonably
likely to have a Material Adverse Effect.

3.30     Manipulation
of Price. The Company has not, and to its knowledge no one acting on its
behalf has, (i) taken, directly or indirectly, any action designed to
cause or to result in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of any of the
Securities, (ii) sold, bid for, purchased, or paid any compensation for
soliciting purchases of, any of the Securities, or (iii) paid or agreed to
pay to any person any compensation for soliciting another to purchase any other
securities of the Company.

3.31     Transfer
Taxes. On the Closing Date, all stock transfer or other taxes (other than
income or similar taxes) which are required to be paid in connection with the
sale and transfer of the Securities to be sold to each Purchaser hereunder will
be, or will have been, fully paid or provided for by the Company, and all laws
imposing such taxes will be or will have been complied with.

3.32     Disclosure.
The Company confirms that neither it nor any other Person acting on its behalf
has provided any of the Purchasers or their respective agents or counsel with
any information that constitutes or could reasonably be expected to constitute
material, nonpublic information. The Company understands and confirms that each
of the Purchasers will rely on the foregoing representations in effecting
transactions in securities of the Company. All disclosure provided to the
Purchasers regarding the Company, its business and the transactions
contemplated hereby, including the schedules to this Agreement, furnished by or
on behalf of the Company are true and correct and do not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading. Each press release issued by the
Company since October 7, 2005 did not at the time of release contain any
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they are made, not misleading. No
event or circumstance has occurred or information exists with respect to the
Company or any Subsidiary or either of its or their respective business,
properties, prospects, operations or financial conditions, which, under applicable
law, rule or regulation, requires public disclosure or announcement by the
Company but which has not been so publicly announced or disclosed (assuming for
this purpose that the Company’s reports filed under the Exchange Act are being
incorporated into an effective registration statement filed by the Company
under the Securities Act). The Company acknowledges and agrees that no
Purchaser makes or has made any representations or warranties with respect to
the transactions contemplated hereby other than those specifically set forth in
Section 2.

3.33     Reporting Company; Listing. The
Company’s Common Stock is registered pursuant to Section 12(g) of the
Exchange Act and is eligible for trading on the

 

 

 

OTCBB.
Without limiting the generality of the foregoing, the Company is not in
violation of any of the rules, regulations or requirements of Nasdaq as they
relate to trading of the Common Stock on the OTCBB and has no knowledge of any
facts or circumstances that would reasonably be expected to result in a suspension
of the Common Stock from trading on the OTCBB in the foreseeable future. Since December 31,
2005, (i) the Common Stock has been eligible for quotation on the OTCBB, (ii) trading
in the Common Stock has not been suspended by the Commission or Nasdaq and (iii) the
Company has received no communication, written or oral, from the Commission or
Nasdaq that it does not satisfy such requirements or that such eligibility is
in any way threatened.

3.34     Form SB-2.
The Company is eligible to register the Conversion Shares and Warrant Shares
for resale in a secondary offering by each Purchaser on a registration
statement on Form SB-2 under the Securities Act. To the Company’s
knowledge, there exist no facts or circumstances (including without limitation
any required approvals or waivers of any circumstances that may delay or
prevent the obtaining of accountant’s consents) that could reasonably be
expected to prohibit or delay the preparation and filing of a registration
statement on Form SB-2 that will be available for the resale of all
Conversion Shares and Warrant Shares by each Purchaser.

3.35     Investment
Company Status. The Company is not, and immediately after receipt of
payment for the Notes and the Warrants issued under this Agreement will not be,
an “investment company” or an entity “controlled” by an “investment company” within the
meaning of the Investment Company Act of 1940, as amended (the “Investment Company Act”), and shall
conduct its business in a manner so that it will not become subject to the Investment
Company Act.

3.36     Customers
and Suppliers.  The Company and its
Subsidiaries maintain relationships with their material customers and suppliers
on commercially reasonable terms.  To the
Company’s knowledge, no customer or supplier of the Company or any of its
Subsidiaries has any plan or intention to terminate any agreement or
arrangement with the Company or such Subsidiary, which termination would
reasonably be expected to have a Material Adverse Effect.

3.37     No
Other Agreements.  The Company has not,
directly or indirectly, entered into any agreement with or granted any right to
any Purchaser relating to the terms or conditions of the transactions
contemplated by the Transaction Documents, except as expressly set forth in the
Transaction Documents.

4.             COVENANTS AND
ACKNOWLEDGEMENTS OF THE PARTIES.

4.1       Best Efforts. Each party shall use
its best efforts to satisfy timely the terms and conditions of this Agreement.

 

4.2       Form D and Blue Sky; Other
Filings and Consents. The Company agrees to file a Form D in respect
of the Securities as required under Regulation D and to provide a

 

 

 

copy
thereof to each Purchaser promptly after such filing. The Company, as promptly
as reasonably practicable after the date hereof, shall take such action as the
Company shall reasonably determine is necessary in order to obtain an exemption
for or to qualify the Securities for sale to the Purchasers at the Closing
pursuant to this Agreement under applicable securities or “Blue Sky” laws of
the states of the United States (or to obtain an exemption from such
qualification), and shall promptly thereafter provide evidence of any such
action so taken to the Purchasers. The Company shall make all filings and
reports relating to the offer and sale of the Securities required under applicable
securities or “Blue Sky” laws of the states of the United States following the
Closing Date. The Company undertakes as promptly as reasonably practicable
after the date hereof to (i) make such filings and apply for such
registrations, or (ii) use its reasonable best efforts to obtain, as
applicable, all such consents, authorizations and orders, in each such case,
which are required to be made or obtained by the Company pursuant to applicable
law, rule or regulation in order to consummate the transactions
contemplated by this Agreement and the other Transaction Documents.

4.3       Reporting
Status. Until the date on which the Holders (as defined in the Registration
Rights Agreement) have sold all Registrable Securities to the public pursuant
to an effective registration statement or Rule 144 (the “Reporting Period”), the Company
shall timely file all reports required to be filed with the Commission pursuant
to the Exchange Act, and the Company shall not terminate its status as an
issuer required to file reports under the Exchange Act even if the Exchange Act
or the rules and regulations thereunder would otherwise permit such
termination.

4.4       Use
of Proceeds. The Company will use the proceeds from the sale of the Notes
and the New Warrants as specified on Schedule 4.4  hereof.

4.5       Financial
Information. The Company agrees to send the following to each Purchaser
during the Reporting Period (i) unless the following are filed with the
Commission and are available to the public through EDGAR, within one (1) Business
Day after the filing thereof with the Commission, a copy of its Annual Reports
on Form 10-KSB or 10-K, its Quarterly Reports on Form 10-QSB or 10-Q,
any Current Reports on Form 8-K and any registration statements (other
than on Form S-8) or amendments filed pursuant to the Securities Act, (ii) on
the same day as the release thereof, facsimile copies of all press releases
issued by the Company or any of its Subsidiaries, and (iii) copies of any
notices and other information made available or given to the stockholders of
the Company generally, contemporaneously with the making available or giving
thereof to the stockholders.

4.6       Listing. The Company shall
promptly secure the listing of all of the Registrable Securities upon each
national securities exchange and automated quotation system, if any, upon which
shares of Common Stock are then listed (subject to official notice of issuance)
and shall maintain, so long as any other shares of Common Stock shall be so
listed, such listing of all Registrable Securities from time to time issuable
under the terms of the Transaction Documents. The Company shall maintain the
Common Stock’s authorization for listing on the Principal Market. Neither the
Company nor any of its Subsidiaries shall take any action which would be
reasonably expected to result in the delisting or suspension of the Common
Stock on

 

 

 

the
Principal Market. The Company shall pay all fees and expenses in connection
with satisfying its obligations under this Section 4.6.

4.7       Fees.
Subject to Section 8 below, at the
Closing, the Company shall reimburse the Purchasers for their legal and due
diligence expenses in connection with the preparation, execution and
performance of this Agreement and the transactions contemplated hereby up to a
maximum of $50,000, which amount (to the extent not already paid by the
Company) shall be withheld from the Purchase Price payable by the Purchasers at
the Closing. The Company shall be responsible for the payment of any placement
agent’s fees, financial advisory fees, or broker’s commissions (other than for
Persons engaged by any Purchaser) relating to or arising out of the
transactions contemplated hereby. The Company shall pay, and hold each
Purchaser harmless against, any liability, loss or expense (including, without limitation,
reasonable attorney’s fees and out-of-pocket expenses) arising in connection
with any claim relating to any such payment. Except as otherwise set forth in
the Transaction Documents, each party to this Agreement shall bear its own
expenses in connection with the sale of the Securities to the Purchasers.

4.8       Pledge
by Purchaser. The Company acknowledges and agrees that the Securities may
be pledged by a Purchaser in connection with a bona fide margin agreement or
other loan or financing arrangement that is secured by the Securities. The
pledge of Securities shall not be deemed to be a transfer, sale or assignment
of the Securities hereunder, and no Purchaser effecting a pledge of Securities
shall be required to provide the Company with any notice thereof or otherwise
make any delivery to the Company pursuant to this Agreement or any other
Transaction Document, including, without limitation, Section 2.6
of this Agreement; provided that a Purchaser and its pledgee shall be required
to comply with the provisions of Section 2.6
of this Agreement in order to effect a sale, transfer or assignment of
Securities to such pledgee. The Company hereby agrees to execute and deliver
such documentation as a pledgee of the Securities may reasonably request in
connection with a pledge of the Securities to such pledgee by a Purchaser.

4.9       Disclosure of Transactions and Other
Material Information. On or before 8:30 a.m., New York City Time, on
the first Business Day following the Closing Date, the Company shall file a Current
Report on Form 8-K describing the terms of the transactions contemplated
by the Transaction Documents in the form required by the Exchange Act, and
attaching the material Transaction Documents (including, without limitation,
this Agreement (and all schedules to this Agreement) and the Registration
Rights Agreement) as exhibits to such filing (including all attachments, the “8-K Filing”). The Company
acknowledges, agrees and represents that from and after the date of the 8-K
Filing, no Purchaser shall be in possession of any material, nonpublic
information received from the Company, any of its Subsidiaries or any of its
respective officers, directors, employees or agents, that is not disclosed in
the 8-K Filing. The Company shall not, and shall cause each of its Subsidiaries
and each of their respective officers, directors, employees and agents, not to,
provide any Purchaser with any material, nonpublic information regarding the
Company or any of its Subsidiaries from and after the date of the 8-K Filing without
the express written consent of such Purchaser. In the event of a breach of the
foregoing covenant by the Company, and provided that the Company shall have
failed (following proper written request therefor) to make an appropriate
public disclosure consistent

 

 

 

with
the requirements of Regulation FD under the Exchange Act, any Subsidiary, or
its each of respective officers, directors, employees and agents, in addition
to any other remedy provided herein or in the Transaction Documents, a
Purchaser shall have the right to make a public disclosure, in the form of a
press release, public advertisement or otherwise, of such material, nonpublic
information without the prior approval by the Company, its Subsidiaries, or any
of its or their respective officers, directors, employees or agents. No
Purchaser shall have any liability to the Company, its Subsidiaries, or any of
its or their respective officers, directors, employees, shareholders or agents
for any such disclosure. Subject to the foregoing, neither the Company nor any
Purchaser shall issue any press releases or any other public statements with
respect to the transactions contemplated hereby; provided, however, that the
Company shall be entitled, without the prior approval of any Purchaser, to make
any press release or other public disclosure with respect to such transactions (i) in
substantial conformity with the 8-K Filing and contemporaneously therewith and (ii) as
is required by applicable law and regulations, including the applicable rules and
regulations of the Principal Market (provided that in the case of clause (i) each
Purchaser shall be consulted by the Company in connection with any such press
release or other public disclosure prior to its release).

4.10     Intentionally Left Blank

4.11     Corporate
Existence. Until the date on which there are no Notes or Warrants
outstanding, the Company shall maintain its corporate existence and shall not
sell all or substantially all of the Company’s assets, except in the event of a
merger or consolidation or sale of all or substantially all of the Company’s
assets, where the surviving or successor entity in such transaction (i) assumes
the Company’s obligations hereunder and under the agreements and instruments
entered into in connection herewith and (ii) is a publicly traded
corporation whose common stock is quoted on or listed for trading on The Nasdaq
National Market, the New York Stock Exchange or the American Stock Exchange.

4.12     Reservation of Common Stock.  The Company shall, on or before the Closing
Date, authorize and reserve for issuance, free from any preemptive rights, a
number of shares of Common Stock (the “Reserved Amount”)
equal to no less than one hundred and fifty percent (150%) of the maximum
number of shares of Common Stock issuable upon (A) conversion of the
outstanding Notes in full at the Conversion Price then in effect and (B) exercise
of the outstanding Warrants in full at the Exercise Price then in effect, in
each such case without regard to any limitation or restriction on such conversion
or exercise that may be set forth in the Notes or the Warrants. In the event
that, as a result of an adjustment to the Conversion Price of the Notes or the
Exercise Price for the Warrants (pursuant to anti-dilution adjustments or
otherwise), the Reserved Amount is less than 125% of the number of shares of
Common Stock then issuable upon conversion of all of the Notes and exercise of
all of the Warrants then outstanding (without regard to any limitation or
restriction on such conversion or exercise that may be set forth in the Notes
or the Warrants), the Company shall take action (including without limitation
seeking stockholder approval for the authorization or reservation of additional
shares of Common Stock) as soon as practicable (but in no event later than the
tenth (10th)
business day or, in the event that stockholder approval is required, the
sixtieth (60th) day
following such date) to increase the Reserved Amount to no less than 150% of
the number of shares of Common Stock into which such outstanding Notes are then
convertible and such

 

 

 

outstanding
Warrants are exercisable. The Company shall not reduce the number of shares
reserved for issuance hereunder without obtaining the written consent of the
holders of two-thirds (2/3) of the Registrable Securities. The initial Reserved
Amount shall be allocated pro rata among
the Purchasers based on the principal amount of the Notes issued to each
Purchaser at the Closing.  Each increase
in the Reserved Amount shall be allocated pro rata among
the Holders based on the amount of Registrable Securities into which all of the
Notes and Warrants held by such Holder at the time of such increase are
convertible or exercisable (without regard to any limitation on such conversion
or exercise). In the event that a Holder shall sell or otherwise transfer any
of such Holder’s Notes, each transferee shall be allocated a pro rata portion of such transferor’s Reserved Amount. Any
portion of the Reserved Amount which remains allocated to any person or entity
which does not hold any Notes shall be reallocated to the remaining Holders pro rata based on the amount of Registrable Securities into
which all of the outstanding Notes and Warrants at the time of such increase
are convertible or exercisable (without regard to any limitation on such
conversion or exercise).

4.13     Opinion
of Counsel. The Company shall cause its outside counsel to deliver to each
Purchaser a written opinion, dated as of and delivered on the Closing Date, in
substantially the form of Exhibit E
attached hereto.

4.14     Limitation
on Debt, Liens. During the period beginning on the date of this Agreement
and ending on the Termination Date, the Company shall refrain, and shall ensure
that each of its Subsidiaries refrains, from (A) incurring any Debt
(including without limitation by issuing any Debt securities) or increasing the
amount of any existing line of credit or other Debt facility beyond the amount
outstanding on the date hereof or (B) granting, establishing or
maintaining any Lien on any of its assets, including without limitation any
pledge of securities owned or held by it (including without limitation any
securities issued by any such Subsidiary), other than Permitted Liens.  Notwithstanding the foregoing, the Company
and/or its Subsidiaries may incur Debt for purposes of effecting one or more
acquisitions (by means of purchase of all or substantially all of the assets of
another entity), provided that the aggregate
amount of such new Debt shall not exceed $3 million and provided
further, that such new Debt shall be unsecured Subordinated Debt.
and subject to the “most favored nation” provision in Section 4.21
(such Debt, the “Permitted Subordinated
Debt”).

4.15     Restricted
Payments.  During the period
beginning on the date of this Agreement and ending on the Termination Date, the
Company will not, nor will it permit any Subsidiary of the Company to, make any
Restricted Payments, except that:

(a)        the
Company may make regularly scheduled payments of principal and interest accrued
on any Subordinated Debt if and to the extent (but only if and to the extent)
permitted by the express terms of the documents governing such Subordinated
Debt; and

(b)       Subsidiaries
of the Company may make Restricted Payments to the Company;

provided,
however, that no Restricted Payment may
be made pursuant to clause (a) or (b) above if an Event of
Default (or an event or circumstance that, with the giving of notice or lapse
of time

 

 

 

or
both, would constitute an Event of Default) exists at the time or would exist
as a result of such Restricted Payment.

4.16     Disposition
of Property.  During the period
beginning on the date of this Agreement and ending on the Termination Date, the
Company will not, nor will it permit any Subsidiary of the Company to, sell,
lease, assign, transfer or otherwise dispose of any of its Property, except (i) dispositions
of inventory by the Company and its Subsidiaries in the ordinary course of
business and (ii) expenditures of money (including, without limitation,
money held in deposit accounts) made in the ordinary course of business or for
the purpose of making Restricted Payments expressly permitted in accordance
with this Agreement.

4.17     Certain
Transactions.  During the period
beginning on the date of this Agreement and ending on the Termination Date, and
except as may be expressly permitted or required by the Transaction Documents,
the Company will not, nor will it permit any Subsidiary of the Company to,
create or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of the Company or any
Subsidiary of the Company to (a) pay dividends or make any other
distribution to the Company or any Subsidiary of the Company in respect of
capital stock or with respect to any other interest or participation in, or
measured by, its profits, (b) pay any Debt owed to the Company or any
Subsidiary of the Company, (c) make any loan or advance or capital
contribution to the Company or any Subsidiary of the Company, (d) sell,
lease or transfer any of its Property, or (e) grant a Lien on any of its
Properties.

4.18     Modification
of Certain Agreements.  During the
period beginning on the date of this Agreement and ending on the Termination
Date, the Company will not, nor will it permit any of the Company Subsidiaries
to, consent to or implement any termination, amendment, modification,
supplement or waiver of (a) the certificate or articles of incorporation,
articles of organization, bylaws, regulations or other constituent documents of
the Company or any such Company Subsidiary or (b) any Material Contract to
which it is a party; provided, however, that any of such documents may be amended or
modified if and to the extent that such change or modification is necessary in
order to carry out the intent of any Transaction Document.

4.19     Intentionally Left Blank

4.20     Issuance
Limitation.  During the period
beginning on the date of this Agreement and ending on the Termination Date, the
Company shall not issue, sell or exchange, or agree or obligate itself to
issue, sell or exchange or reserve, agree to or set aside for issuance, sale or
exchange, (1) any Common Stock or Common Stock Equivalents, (2) any
other equity security of the Company, including without limitation shares of
preferred stock, (3) any other security of the Company which by its terms
is convertible into or exchangeable or exercisable for preferred stock or other
equity security; provided, however,
that the foregoing shall not apply to any Excluded Security.

4.21     Most Favored Nation.  The Company hereby represents and covenants
that none of the terms offered to any Person in a Subsequent Closing or
Permitted Subordinated Debt transaction will be more favorable than the terms
offered to the Purchasers under this Agreement

 

 

 

or any
of the other Transaction Documents, and in the event that any of the terms in a
Subsequent Closing or Permitted Subordinated Debt transaction are more
favorable than the terms contained in this Agreement or any of the other
Transaction Documents, the applicable terms of this Agreement and the other
Transaction Documents shall be, without any further action by the Purchasers or
the Company, deemed amended and modified in a manner that is economically and
legally equivalent to the more favorable terms contained in such Subsequent
Closing or Permitted Subordinated Debt transaction, as the case may be.  Notwithstanding the foregoing, the Company
agrees, at its expense, to take such other actions (such as entering into
amendments to the Transaction Documents) as the Purchasers may reasonably
request to further effectuate the foregoing.

5.             TRANSFER AGENT
INSTRUCTIONS.

On or prior to the Closing Date, the Company shall
execute and deliver irrevocable written instructions to the transfer agent for
its Common Stock (the “Transfer Agent”),
and provide each Purchaser with a copy thereof, directing the Transfer Agent (i) to
issue certificates representing Conversion Shares upon conversion of the Notes
and receipt of a valid Conversion Notice (as defined in the Notes) from a
Purchaser, in the amount specified in such Conversion Notice, in the name of
such Purchaser or its nominee, (ii) to issue certificates representing
Warrant Shares upon exercise of the Warrants and (iii) to deliver such
certificates to such Purchaser no later than the close of business on the third
(3rd) business day following the related Conversion Date (as defined in the
Notes) or Exercise Date (as defined in the Warrant), as the case may be.  Such certificates may bear legends pursuant
to applicable provisions of this Agreement or applicable law.  The Company shall instruct the transfer agent
that, in lieu of delivering physical certificates representing shares of Common
Stock to an Purchaser upon conversion of the Notes, or exercise of the Warrants,
and as long as the Transfer Agent is a participant in the Depository Trust
Company (“DTC”) Fast Automated
Securities Transfer program, and such Purchaser has not informed the Company
that it wishes to receive physical certificates therefor, and no restrictive
legend is required to appear on any physical certificate if issued, the
transfer agent may effect delivery of Conversion Shares or Warrant Shares, as
the case may be, by crediting the account of such Purchaser or its nominee at
DTC for the number of shares for which delivery is required hereunder within
the time frame specified above for delivery of certificates.  The Company represents to and agrees with
each Purchaser that it will not give any instruction to the Transfer Agent that
will conflict with the foregoing instruction or otherwise restrict such
Purchaser’s right to convert the Notes or to receive Conversion Shares in
accordance with the terms of the Notes or to exercise the Warrants or to
receive Warrant Shares upon exercise of the Warrants.  In the event that the Company’s relationship
with the Transfer Agent should be terminated for any reason, the Company shall
use its best efforts to cause the Transfer Agent to continue acting as transfer
agent pursuant to the terms hereof until such time that a successor transfer
agent is appointed by the Company and receives the instructions described
above.

6.             CONDITIONS TO THE COMPANY’S
OBLIGATION TO SELL.

The
obligation of the Company hereunder to issue and sell a Note and the New
Warrant to each Purchaser and to exchange the Bridge Warrant of each Purchaser
for the Replacement

 

 

 

Warrant
at the Closing is subject to the satisfaction, on or before the Closing Date,
of each of the following conditions, provided that these conditions are for the
Company’s sole benefit and may be waived by the Company at any time in its sole
discretion by providing each Purchaser with prior written notice thereof:

6.1       Such
Purchaser shall have executed and delivered to the Company this Agreement, the
Registration Rights Agreement, each other Transaction Document to which it is a
party.

6.2       Such
Purchaser shall have tendered to the Company the Purchase Price (less the
amounts withheld pursuant to Section 4.7)
for the Note and the New Warrant being purchased by such Purchaser at the
Closing by wire transfer of immediately available funds pursuant to wire
instructions provided by the Company prior to the Closing Date and such
Purchaser shall have delivered the Bridge Warrant to the Company or its
representatives.

6.3       The
representations and warranties of such Purchaser shall be true and correct in
all material respects as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date), and such Purchaser shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by such
Purchaser at or prior to the Closing Date.

7.             CONDITIONS TO EACH
PURCHASER’S OBLIGATION TO PURCHASE.

The obligation of each Purchaser hereunder to purchase
a Note and the New Warrant and to exchange the Bridge Warrant of each Purchaser
for the Replacement Warrant at the Closing is subject to the satisfaction, at
or before the Closing Date, of each of the following conditions, provided that
these conditions are for such Purchaser’s sole benefit and may be waived by
such Purchaser at any time in its sole discretion by providing the Company with
prior written notice thereof:

7.1       The
Company shall have executed and delivered to such Purchaser (i) this
Agreement, (ii) a Note, (iii) the Warrants, (iv) the
Registration Rights Agreement, and (v) each other Transaction Document.

7.2       The
Company shall have delivered to such Purchaser a copy of the Irrevocable
Transfer Agent Instructions, which instructions shall have been delivered to
and acknowledged in writing by the Company’s transfer agent.

7.3       The
Company shall have delivered to such Purchaser a certificate evidencing the
incorporation or organization and good standing of the Company and each of its
operating Subsidiaries in such entity’s state of incorporation or organization
issued by the Secretary of State of such state as of a date within ten (10) days
of the Closing Date.

7.4       The Common Stock (A) shall be listed
on the Principal Market and (B) shall not have been suspended, as of the
Closing Date, by the Commission or the Principal

 

 

 

Market
from trading on the Principal Market nor shall suspension by the Commission or
the Principal Market have been threatened, as of the Closing Date, either (x)
in writing by the Commission or the Principal Market or (y) by falling below
the minimum listing maintenance requirements of the Principal Market.

7.5       The
Company shall have delivered to such Purchaser a certificate, signed by the
Secretary or an Assistant Secretary of the Company, attaching (i) the
Certificate of Incorporation and By-Laws of the Company, and (ii) resolutions
passed by its Board of Directors, or a duly authorized committee thereof, to
authorize the transactions contemplated hereby and by the other Transaction
Documents, and certifying that such documents are true and complete copies of
the originals and that such resolutions have not been amended or superseded, it
being understood that such Purchaser may rely on such certificate as a
representation and warranty of the Company made herein.

7.6       The
representations and warranties of the Company shall be true and correct as of
the date when made and as of the Closing Date as though made at that time
(except for representations and warranties that speak as of a specific date)
and the Company shall have performed, satisfied and complied in all respects
with the covenants, agreements and conditions required by the Transaction
Documents to be performed, satisfied or complied with by the Company at or
prior to the Closing Date. Such Purchaser shall have received a certificate,
executed by the Chief Executive Officer of the Company, dated as of the Closing
Date, to the foregoing effect and as to such other matters as may be reasonably
requested by such Purchaser.

7.7       The
Company shall have delivered to such Purchaser a letter from the Company’s
transfer agent certifying the number of shares of Common Stock outstanding as
of a date within five days of the Closing Date.

7.8       The
Company shall have obtained all governmental, regulatory or third party
consents and approvals, if any, necessary for the sale of the Notes and the New
Warrants and the exchange of the Bridge Warrant of such Purchaser for the Replacement
Warrant.

7.9       The
Company shall have delivered to such Purchaser such other documents relating to
the transactions contemplated by this Agreement as such Purchaser or its
counsel may reasonably request.

8.             TERMINATION.

In the
event that the Closing shall not have occurred with respect to a Purchaser on
or before five (5) days from the date hereof due to the Company’s or such
Purchaser’s failure to satisfy the conditions set forth in Sections 6 and 7
above (and the non-breaching party’s failure to waive such unsatisfied
condition(s)), the non-breaching party shall have the option to terminate this
Agreement with respect to such breaching party at the close of business on such
date without liability of any party to any other party.

 

 

 

9.             MISCELLANEOUS.

9.1       Governing
Law; Jurisdiction; Jury Trial. All questions concerning the construction,
validity, enforcement and interpretation of this Agreement shall be governed by
the internal laws of the State of New York, without giving effect to any choice
of law or conflict of law provision or rule (whether of the State of New
York or any other jurisdictions) that would cause the application of the laws
of any jurisdictions other than the State of New York. Each party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in The City of New York, Borough of Manhattan for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address for such notices to it under this Agreement and agrees
that such service shall constitute good and sufficient service of process and
notice thereof. Nothing contained herein shall be deemed to limit in any way
any right to serve process in any manner permitted by law. EACH PARTY HEREBY
IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A
JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH
OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

9.2       Counterparts.
This Agreement may be executed in two or more identical counterparts, all of
which shall be considered one and the same agreement and shall become effective
when counterparts have been signed by each party and delivered to the other
party; provided, that any party may deliver an
executed copy of this Agreement to any other party by facsimile transmission,
in which case this Agreement as so delivered shall be deemed duly executed and
delivered and shall be binding upon the signatory thereto with the same force
and effect as if the signature were an original.

9.3       Headings.
The headings of this Agreement are for convenience of reference and shall not
form part of, or affect the interpretation of, this Agreement.

9.4       Severability.
If any provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or
the validity or enforceability of any provision of this Agreement in any other
jurisdiction.

9.5       Entire Agreement; Amendments. This
Agreement supersedes all other prior oral or written agreements between the
Purchasers, the Company, their affiliates and Persons acting on their behalf
with respect to the matters discussed herein, and this Agreement and the
instruments referenced herein contain the entire understanding of the parties
with respect to the matters covered herein and therein and, except as
specifically set forth herein or therein, neither the Company nor any Purchaser
makes any representation, warranty, covenant or undertaking with respect to
such matters. This Agreement and the other Transaction Documents

 

 

 

constitute
the entire agreement between the parties with regard to the subject matter
hereof and thereof, superseding all prior agreements or understandings, whether
written or oral, between or among the parties. 
Except as expressly provided herein, neither this Agreement nor any term
hereof may be amended or waived except pursuant to a written instrument
executed by the Company and the holders of at least two-thirds (2/3) of the
Registrable Securities into which all of the Notes and Warrants then
outstanding are convertible or exercisable (without regard to any limitation on
such conversion or exercise), and no provision hereof may be waived other than
by a written instrument signed by the holders of at least two-thirds (2/3) of
the Registrable Securities into which all of the Notes and Warrants then
outstanding are convertible or exercisable (without regard to any limitation on
such conversion or exercise).  Any waiver
or consent shall be effective only in the specific instance and for the
specific purpose for which given.

9.6       Notices.
Any notices, consents, waivers or other communications required or permitted to
be given under the terms of this Agreement must be in writing and will be
deemed to have been delivered: (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one Business Day after
deposit with an overnight courier service, in each case properly addressed to
the party to receive the same. The addresses and facsimile numbers for such
communications shall be:

 

	
  

  	
  if to the Company:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Earth Biofuels, Inc.

  
	
   

  	
   

  	
  3001 Knox Street, Suite 403,

  
	
   

  	
   

  	
  Dallas, Texas 75205

  
	
   

  	
   

  	
  Telephone:

  	
  214.389.9800

  
	
   

  	
   

  	
  Facsimile:

  	
  214.389.9806

  
	
   

  	
   

  	
  Attention:

  	
  Dennis McLaughlin

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  with a copy (for informational purposes only) to:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Scheef & Stone, LLP

  
	
   

  	
   

  	
  Telephone:

  	
  214.706.4200

  
	
   

  	
   

  	
  Facsimile:

  	
  214.706.4242

  
	
   

  	
   

  	
  Attention:

  	
  Roger A. Crabb, Esq.

  
						

 

and if
to a Purchaser, to its address and facsimile number set forth on Exhibit A, with copies to such
Purchaser’s representatives as set forth on Exhibit A,
or to such other address and/or facsimile number and/or to the attention of
such other Person as the recipient party has specified by written notice given
to each other party five (5) days prior to the effectiveness of such
change,

 

	
  

  	
  with a copy (for informational purposes only) to:

  
	
   

  	
   

  
	
   

  	
   

  	
  Schulte Roth & Zabel LLP

  
	
   

  	
   

  	
  919 Third Avenue

  
	
   

  	
   

  	
  New York, New York 10022

  

 

 

 

	
  

  	
   

  	
  Telephone:

  	
  (212) 756-2000

  
	
   

  	
   

  	
  Facsimile:

  	
  (212) 593-5955

  
	
   

  	
   

  	
  Attention:

  	
  Eleazer N. Klein, Esq.

  

 

Written
confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communication, (B) mechanically or electronically
generated by the sender’s facsimile machine containing the time, date,
recipient facsimile number and an image of the first page of such
transmission or (C) provided by an overnight courier service shall be
rebuttable evidence of personal service, receipt by facsimile or receipt from
an overnight courier service in accordance with clause (i), (ii) or (iii) above,
respectively.

9.7       Successors
and Assigns. This Agreement shall be binding upon and inure to the benefit
of the parties and their respective successors and assigns, including any
purchasers of Notes or Warrants. The Company shall not assign this Agreement or
any rights or obligations hereunder, including by merger or consolidation,
without the prior written consent of the Registrable Securities into which all
of the Notes and Warrants then outstanding are convertible or exercisable
(without regard to any limitation on such conversion or exercise). A Purchaser
may assign some or all of its rights hereunder without the consent of the
Company, in which event such assignee shall be deemed to be a Purchaser
hereunder in respect of such assigned rights.

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

9.9       Survival.
Unless this Agreement is terminated under Section 8, the representations
and warranties of the Company and the Purchasers contained in Sections 2 and 3,
the agreements and covenants set forth in Sections 4, 5 and 9 shall survive the
Closing and the delivery and exercise of Securities, as applicable. Each
Purchaser shall be responsible only for its own representations, warranties,
agreements and covenants hereunder.

9.10     Further
Assurances. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as any other
party may reasonably request in order to carry out the intent and accomplish
the purposes of this Agreement and the consummation of the transactions
contemplated hereby.

9.11     Indemnification.

(a)           In consideration of each Purchaser’s
execution and delivery of the Transaction Documents and acquiring the Securities
thereunder and in addition to all of the Company’s other obligations under the
Transaction Documents, the Company will indemnify and hold each Purchaser and
its directors, managers, officers, shareholders, members, partners, employees
and agents (each, an “Purchaser Party”)
harmless from any and all losses, liabilities, obligations, claims,
contingencies, damages, costs and expenses, including all judgments, amounts
paid in settlements, court costs and reasonable attorneys’ fees and costs of
investigation (collectively, “Losses”)
that any such Purchaser Party may suffer or incur as a result of or

 

 

 

relating
to (A) any breach of any of the representations, warranties, covenants or
agreements made by the Company in this Agreement or in the other Transaction
Documents or (B) any cause of action, suit or claim brought or made
against such Purchaser Party by a third party (including for these purposes a
derivative action brought on behalf of the Company) and arising out of or
resulting from (i) the execution, delivery, performance or enforcement of
the Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby, (ii) any transaction financed or to be
financed in whole or in part, directly or indirectly, with the proceeds of the
issuance of the Securities, or (iii) the status of such Purchaser or
holder of the Securities as a Purchaser. If any action shall be brought against
any Purchaser Party in respect of which indemnity may be sought pursuant to
this Agreement, such Purchaser Party shall promptly notify the Company in
writing, and the Company shall have the right to assume the defense thereof
with counsel of its own choosing.  Any
Purchaser Party shall have the right to employ separate counsel in any such
action and participate in the defense thereof, but the fees and expenses of
such counsel shall be at the expense of such Purchaser Party except to the
extent that (i) the employment thereof has been specifically authorized by
the Company in writing, (ii) the Company has failed after a reasonable
period of time following such Purchaser Party’s written request that it do so,
to assume such defense and to employ counsel or (iii) in such action there
is, in the reasonable opinion of such separate counsel, a material conflict on
any material issue between the position of the Company and the position of such
Purchaser Party.  The Company will not be
liable to any Purchaser Party under this Agreement (i) for any settlement
by an Purchaser Party effected without the Company’s prior written consent,
which shall not be unreasonably withheld or delayed; or (ii) to the
extent, but only to the extent that a loss, claim, damage or liability is
attributable to such Purchaser Party’s wrongful actions or omissions, or gross
negligence or to such Purchaser Party’s breach of any of the representations,
warranties, covenants or agreements made by such Purchaser in this Agreement or
in the other Transaction Documents.

(b)           If the indemnification provided for
in Section 9.11(a) is judicially determined to be unavailable to a
Purchaser Party in respect of any Losses incurred by them, then, in lieu of
indemnifying such Purchaser Party hereunder, the Person from whom
indemnification is sought hereunder shall contribute to the amount paid or payable
by such Purchaser Party as a result of such Losses (and expense relating
thereto): (A) in such proportion as is appropriate to reflect the relative
benefits to the applicable Purchaser Party, on the one hand, and the Person
providing indemnification hereunder, on the other hand, of transactions
contemplated by this Agreement or (B) if the allocation provided by clause
(A) above is not available, in such proportion as is appropriate to
reflect not only the relative benefits referred to in such clause (A) but
also the relative fault of each of the applicable Persons, as well as any other
relevant equitable considerations.

 

9.12     No
Strict Construction. The language used in this Agreement and the other
Transaction Documents will be deemed to be the language chosen by the parties
to express their mutual intent, and no rules of strict construction will
be applied against any party.

9.13     Remedies. The Company and each
Purchaser and its permitted successors and assigns shall have all rights and
remedies set forth in this Agreement and the Transaction Documents and all
rights and remedies which they may have under any law or in equity. The

 

 

 

Company
and each Purchaser and its permitted successors and assigns shall be entitled
to enforce such rights specifically, to recover damages by reason of any breach
of any provision of this Agreement or the Transaction Documents and to exercise
all other rights granted by law or in equity, if available. Furthermore, the
Company recognizes that in the event that it fails to perform, observe, or
discharge any or all of its obligations under the Transaction Documents, any
remedy at law may prove to be inadequate relief to the Purchasers. The Company
therefore agrees that the Purchasers shall be entitled to seek temporary and permanent
injunctive relief in any such case without the necessity of proving actual
damages and without posting a bond or other security.

9.14     Rescission
and Withdrawal Right. Notwithstanding anything to the contrary contained in
(and without limiting any similar provisions of) the Transaction Documents,
whenever any Purchaser exercises a right, election, demand or option under a
Transaction Document (including without limitation a Note) and the Company does
not timely perform its related obligations within the periods therein provided,
then such Purchaser may rescind or withdraw, in its sole discretion from time
to time upon written notice to the Company, any relevant notice, demand or
election in whole or in part without prejudice to its future actions and
rights.

9.15     Payment
Set Aside. To the extent that the Company makes a payment or payments to
the Purchasers hereunder or pursuant to any of the other Transaction Documents
or the Purchasers enforce or exercise their rights hereunder or thereunder, and
such payment or payments or the proceeds of such enforcement or exercise or any
part thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside, recovered from, disgorged by or are required to be
refunded, repaid or otherwise restored to the Company, a trustee, receiver or
any other Person under any law (including, without limitation, any bankruptcy
law, state or federal law, common law or equitable cause of action), then to
the extent of any such restoration the obligation or part thereof originally
intended to be satisfied shall be revived and continued in full force and
effect as if such payment had not been made or such enforcement or setoff had
not occurred.

9.16     Independent Nature of Purchasers’
Obligations and Rights. The obligations of each Purchaser under any
Transaction Document are several and not joint with the obligations of any
other Purchaser, and no Purchaser shall be responsible in any way for the
performance of the obligations of any other Purchaser under any Transaction
Document. Nothing contained herein or in any other Transaction Document, and no
action taken by any Purchaser pursuant hereto or thereto, shall be deemed to
constitute the Purchasers as a partnership, an association, a joint venture or
any other kind of entity, or create a presumption that the Purchasers are in
any way acting in concert or as a group with respect to such obligations or the
transactions contemplated by the Transaction Documents and the Company
acknowledges that the Purchasers are not acting in concert or as a group with
respect to such obligations or the transactions contemplated by the Transaction
Documents. Each Purchaser confirms that it has independently participated in
the negotiation of the transaction contemplated hereby with the advice of its
own counsel and advisors. Each Purchaser shall be entitled to independently
protect and enforce its rights, including, without limitation, the rights
arising out of this Agreement or

 

 

 

out of
any other Transaction Documents, and it shall not be necessary for any other
Purchaser to be joined as an additional party in any proceeding for such
purpose.

[Signature Page Follows]

 

 

 

IN WITNESS WHEREOF,
each Purchaser and the Company have caused this Securities Purchase Agreement
to be duly executed as of the date first written above.

 

	
  

  	
   

  	
  COMPANY:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  EARTH BIOFUELS, INC.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ dennis g.
  mclaughlin, iii

  
	
   

  	
   

  	
   

  	
  Name: Dennis G. McLaughlin, III

  
	
   

  	
   

  	
   

  	
  Title: Chief Executive Officer

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  PURCHASER:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  CASTLERIGG MASTER

  INVESTMENTS LTD.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Patrick T. Burke

  
	
   

  	
   

  	
   

  	
  Name: Patrick T. Burke

  
	
   

  	
   

  	
   

  	
  Title: Senior Managing DirectorEXHIBIT 10.52

EXECUTION COPY

REGISTRATION RIGHTS AGREEMENT

This REGISTRATION RIGHTS AGREEMENT (this “Agreement”), dated as of July 10,
2006, is by and between Earth Biofuels, Inc., a Delaware corporation (the “Company”), and each of the entities
whose names appear on the signature pages hereof. Such entities are each
referred to herein as “Purchaser”
and, collectively, as the “Purchasers”.

The Company has agreed, on the terms and subject to
the conditions set forth in the Securities Purchase Agreement, dated as of July
10, 2006 (the “Securities Purchase Agreement”),
to issue and sell to each Purchaser named therein (A) an 8% Senior Note in the
form attached to the Securities Purchase Agreement (each, a “Note” and, collectively, the “Notes”) and (B) a warrant in the
form attached to the Securities Purchase Agreement (each, a “New  Warrant”
and, collectively, the “New  Warrants”). As additional consideration for the
execution of the Securities Purchase Agreement, each Purchaser exchanged
certain warrants for replacement warrants in the form attached to the
Securities Purchase Agreement (each, a “Replacement  Warrant”, collectively, the “Replacement
Warrants”, and together with the New
Warrants, each a “Warrant” and collectively,
the “Warrants”)

The Notes are convertible, subject to the conditions
specified in the Securities Purchase Agreement, into shares (the “Conversion Shares”) of the Company’s
common stock, par value $0.001 per share (the “Common
Stock”). The Warrants are exercisable into shares of Common Stock
(the “Warrant Shares”) in
accordance with their terms.

In order to induce each Purchaser to enter into the
Securities Purchase Agreement, the Company has agreed to provide certain
registration rights under the Securities Act of 1933, as amended (the “Securities Act”), and under
applicable state securities laws.

In
consideration of each Purchaser entering into the Securities Purchase
Agreement, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:

1.             DEFINITIONS.

For purposes of this Agreement, the following terms
shall have the meanings specified:

“Business Day”
means any day other than a Saturday, a Sunday or a day on which the Commission
is closed or on which banks in the City of New York are authorized by law to be
closed.

 

“Commission”
means the Securities and Exchange Commission.

 

 

“Effective Date” means the date on
which the Registration Statement is declared effective by the Commission.

“Filing Deadline” means the date that
is the earliest of the following: (i) the date on which the Company files a
registration statement covering any of its securities issued on or after
January 1, 2006; (ii) the date on which the Company is contractually required
to file a registration statement covering any of its securities (other than the
Registrable Securities) issued after the Closing Date; and (iii) the date that
is the sixtieth (60th) calendar day following the Closing Date.

“Holder” means any person owning or
having the right to acquire, through conversion of the Notes or exercise of the
Warrants or otherwise, Registrable Securities, including initially each
Purchaser and thereafter any permitted assignee thereof.

“Registrable Securities” means the
Conversion Shares, the Warrant Shares, and any other shares of Common Stock
issuable pursuant to the terms of the Note or the Warrants, and any shares of
capital stock issued or issuable from time to time (with any adjustments) in
replacement of, in exchange for or otherwise in respect of the Conversion
Shares and the Warrant Shares.

“Registration Deadline” means the
earliest of (i) the one hundred and twentieth (120th) calendar day following the Closing
Date, (ii) the sixtieth (60th)
calendar day following the Filing Deadline, and (iii) the fifth (5th) Business Day after the Company learns
that no review of the Registration Statement will be made by the staff of the
Commission or that the staff of the Commission has no further comments on the
Registration Statement.

“Registration Period” has the meaning
set forth in Section 2(c) below.

“Registration Statement” means a
registration statement or statements prepared in compliance with the Securities
Act and pursuant to Rule 415 under the Securities Act (“Rule
415”) or any successor rule providing for the offering of
securities on a continuous or delayed basis.

Capitalized terms used herein and not otherwise
defined shall have the respective meanings specified in the Securities Purchase
Agreement.

2.             REGISTRATION.

(a)           Filing of Registration Statement.
On or before the Filing Deadline, the Company shall prepare and file with the
Commission a Registration Statement on Form SB-2 as a “shelf” registration
statement under Rule 415 covering the resale of a number of shares of
Registrable Securities equal to one hundred and fifty percent (150%) of the
number of shares of Common Stock issuable upon conversion of the Notes and
exercise of the Warrants (such number to be determined using the Conversion
Price (as defined in the Notes) and Exercise Price (as defined in the Warrants)
in effect on the date on which the Registration Statement is filed and without
regard to any restriction on such conversion or exercise). Such Registration
Statement shall state, to the extent 

 2
 

 

 

permitted
by Rule 416 under the Securities Act, that it also covers such indeterminate
number of additional shares of Common Stock as may become issuable upon the
conversion of the Notes and exercise of the Warrants in order to prevent
dilution resulting from stock splits, stock dividends or similar events. The
Company shall retain Akin, Gump, Strauss, Hauer & Feld LLP or a comparable
national law firm that is reasonably satisfactory to the Purchasers to handle
the preparation of the Registration Statement and the process of getting such
Registration Statement effective.

(b)           S-1/S-3
Registration Statement. Notwithstanding the foregoing Section
2(a), if at the Filing Deadline the Company does not meet the
eligibility requirements for filing a Registration Statement on Form SB-2, then
in each such case the Company shall instead prepare and file with the
Commission a Registration Statement meeting the foregoing requirements on Form
S-1. In the event that the Company files a Registration Statement on Form S-1
or Form SB-2, and thereafter meets the eligibility requirements to use Form S-3
for the resale of Registrable Securities by the Purchaser, the Company shall
re-file such Registration Statement, or file a new Registration Statement
covering at least the number of shares then registered on the existing
Registration Statement(s) (and not previously sold pursuant to an existing
Registration Statement or pursuant to Rule 144 under the Securities Act (“Rule 144”)), on Form S-3 as promptly
as practicable (but in no event later than thirty (30) days) after the Company
meets such requirements.

(c)           Effectiveness.
The Company shall use reasonable best efforts to cause the Registration
Statement to become effective as soon as practicable following the filing
thereof, but in no event later than the Registration Deadline. The Company
shall respond promptly to any and all comments made by the staff of the
Commission on with respect to a Registration Statement, and shall submit to the
Commission, within two (2) Business Days after the Company learns that no review
of such Registration Statement will be made by the staff of the Commission or
that the staff of the Commission has no further comments on such Registration
Statement, as the case may be, a request for acceleration of the effectiveness
of such Registration Statement to a time and date not later than two (2)
Business Days after the submission of such request. The Company will maintain
the effectiveness of each Registration Statement filed pursuant to this
Agreement until the earliest to occur of (i) the date on which all of the
Registrable Securities eligible for resale thereunder have been publicly sold
pursuant to either the Registration Statement or Rule 144, (ii) the date on
which all of the Registrable Securities remaining to be sold under such Registration
Statement (in the reasonable opinion of counsel to the Company) may be
immediately sold to the public under Rule 144(k) under the Securities Act (“Rule 144(k)”) or any successor
provision and (iii) the date that is the second (2nd) anniversary of the Effective Date (the
period beginning on the Closing Date and ending on the earliest to occur of
(i), (ii) or (iii) above being referred to herein as the “Registration
Period”).

(d)           Registration
Default. If (i) the Registration Statement is not filed on or before the
Filing Deadline or declared effective by the Commission on or before the
Registration Deadline, (ii) after a Registration Statement has been declared
effective by the Commission, sales of Registrable Securities (other than such
Registrable Securities as are then freely saleable pursuant to Rule 144(k))
cannot be made by a Holder under a Registration Statement for any reason not
within the exclusive control of such Holder, or (iii) an amendment or
supplement to a Registration Statement, or a new registration statement,
required to be filed pursuant to the terms of Section
3(j) below, is not filed on or before the date required by such
section (each of the foregoing clauses (i), 

 3
 

 

 

(ii) and (iii) being referred to herein as a “Registration Default”), the Company
shall make cash payments to each Holder equal to such Holder’s pro rata share (based on the aggregate number of Registrable
Securities then held by or issuable to such Holder as of the occurrence of the
Registration Deadline) equal to one percent (1%) of the aggregate Purchase
Price paid by such Holder for such Holder’s Note and Warrants for each thirty
(30) day period (pro rated for partial periods) in which a Registration Default
exists, up to a maximum of four percent (4%) of the aggregate Purchase Price
paid by such Holder for such Holder’s Note and Warrants; provided,
however, that such maximum shall be increased to six percent (6%) of
the aggregate Purchase Price paid by such Holder if the Registration Statement
is not filed on or before August 31, 2006. Notwithstanding any provision of
this Agreement to the contrary, the Company shall be permitted to suspend the
Registration Statement for one or more periods (provided that the aggregate
length of such suspension shall not exceed ten (10) consecutive Business Days
or an aggregate of twenty (20) Business Days in any 365 day period, with at
least thirty calendar days between each such suspension) the actions required
under Section 2(a) of this
Agreement to the extent that the Board of Directors of the Company concludes
reasonably and in good faith that the disclosure of information in the
prospectus is not in the best interest of the Company. Each such payment
required to be made under this Section 2(d)
shall be made within five (5) Business Days following the last day of each
calendar month in which a Registration Default exists. Any such payment shall
be in addition to any other remedies available to each Holder at law or in
equity, whether pursuant to the terms hereof, the Securities Purchase
Agreement, the Notes, or otherwise.

(e)           Allocation of Conversion Shares
and Warrant Shares. The initial number of Conversion Shares and Warrant
Shares included in any Registration Statement and each increase in the number
thereof included therein shall be allocated pro rata among
the Holders based on the aggregate number of Registrable Securities issuable to
each Holder at the time the Registration Statement covering such initial number
of Registrable Securities or increase thereof is declared effective by the
Commission (such number to be determined using the Conversion Price or Exercise
Price, as applicable, in effect at such time and without regard to any
restriction on the ability of a Holder to convert such Holder’s Note or
exercise such Holder’s Warrant as of such date). In the event that a Holder
sells or otherwise transfers any of such Holder’s Registrable Securities, each
transferee shall be allocated the portion of the then remaining number of
Registrable Securities included in such Registration Statement allocable to the
transferor.

(f)            Registration
of Other Securities. During the period beginning on the date hereof and
ending on the Effective Date, the Company shall refrain from filing any
registration statement (other than (i) a Registration Statement filed
hereunder, (ii) a registration statement on Form S-8 with respect to stock
option plans and agreements and stock plans currently in effect and disclosed
in the Securities Purchase Agreement or the schedules thereto, or (iii) a
registration statement on Form S-4 with respect to an acquisition or other
business combination involving the Company.

3.             OBLIGATIONS
OF THE COMPANY.

In
addition to performing its obligations hereunder, including without limitation
those pursuant to Section 2 above, the Company shall, with respect to each
Registration Statement:

 4
 

 

 

(a)           prepare
and file with the Commission such amendments and supplements to such
Registration Statement and the prospectus used in connection with such
Registration Statement as may be necessary to comply with the provisions of the
Securities Act or to maintain the effectiveness of such Registration Statement
during the Registration Period, or as may be reasonably requested by a Holder
in order to incorporate information concerning such Holder or such Holder’s
intended method of distribution;

(b)           at such time following the Closing
that the Company is eligible to do so, use commercially reasonable efforts to
secure the listing on the Principal Market of all Registrable Securities
issuable upon conversion of the Notes and exercise of the Warrants, and at any
Holder’s request, provide such Holder with reasonable evidence thereof;

(c)           so long as a Registration Statement
is effective covering the resale of the applicable Registrable Securities owned
by a Holder, furnish to each Holder such number of copies of the prospectus
included in such Registration Statement, including a preliminary prospectus, in
conformity with the requirements of the Securities Act, and such other
documents as such Holder may reasonably request in order to facilitate the
disposition of such Holder’s Registrable Securities;

(d)           use
commercially reasonable efforts to register or qualify the Registrable
Securities under the securities or “blue sky” laws of such jurisdictions within
the United States as shall be reasonably requested from time to time by a
Holder, and do any and all other acts or things which may reasonably be
necessary or advisable to enable such Holder to consummate the public sale or
other disposition of the Registrable Securities in such jurisdictions; provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such jurisdiction;

(e)           notify
each Holder immediately after becoming aware of the occurrence of any event
(but shall not, without the prior written consent of such Holder, disclose to
such Holder any facts or circumstances constituting material non-public
information) as a result of which the prospectus included in such Registration
Statement, as then in effect, contains an untrue statement of material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading, and as promptly as practicable prepare and file with
the Commission and furnish to each Holder a reasonable number of copies of a
supplement or an amendment to such prospectus as may be necessary so that such prospectus
does not contain an untrue statement of material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing;

(f)            use
commercially reasonable efforts to prevent the issuance of any stop order or
other order suspending the effectiveness of such Registration Statement and, if
such an order is issued, to use commercially reasonable efforts obtain the
withdrawal thereof at the earliest possible time and to notify each Holder in
writing of the issuance of such order and the resolution thereof;

(g)           furnish to each Holder, on the date
that such Registration Statement, or any successor registration statement,
becomes effective, a letter, dated such date, signed by an officer of 

 5
 

 

 

or counsel to the Company and addressed to such
Holder, confirming such effectiveness and, to the knowledge of such counsel,
the absence of any stop order;

(h)           provide to each Holder and its
representatives the reasonable opportunity to conduct a reasonable inquiry of
the Company’s financial and other records during normal business hours and make
available during normal business hours and with reasonable advance notice its
officers, directors and employees for questions regarding information which
such Holder may reasonably request in order to fulfill any due diligence
obligation on its part;

(i)            permit
counsel for each Holder to review such Registration Statement and all
amendments and supplements thereto, and any comments made by the staff of the
Commission concerning such Holder and/or the transactions contemplated by the
Transaction Documents and the Company’s responses thereto, within a reasonable
period of time prior to the filing thereof with the Commission (or, in the case
of comments made by the staff of the Commission, within a reasonable period of
time following the receipt thereof by the Company); and

(j)            in the event that, at any time, the
number of shares available under the Registration Statement is insufficient to
cover one hundred and twenty-five percent (125%) of the Registrable Securities
issuable under the Notes and Warrants (such number to be determined using the
Conversion Price or Exercise Price, as applicable, in effect at such time and
without regard to any restriction on the ability of any Holder to convert such
Holder’s Note or exercise such Holder’s Warrant) the Company shall promptly
amend such Registration Statement or file a new registration statement, in any
event as soon as practicable, but not later than the tenth (10th) day following notice from a
Holder of the occurrence of such event, so that such Registration Statement or
such new registration statement, or both, covers no less than one hundred and
fifty percent (150%) of the Registrable Securities eligible for resale
thereunder and issuable under the Notes and Warrants (such number to be
determined using the Conversion Price or Exercise Price, as applicable, in
effect at the time of such amendment or filing and without regard to any
restriction on the ability of any Holder to convert such Holder’s Note or
exercise such Holder’s Warrant). The Company shall use its best efforts to
cause such amendment and/or new Registration Statement to become effective as
soon as practicable following the filing thereof. Any Registration Statement
filed pursuant to this Section 3(j)
shall state that, to the extent permitted by Rule 416 under the Securities Act,
such Registration Statement also covers such indeterminate number of additional
shares of Common Stock as may become issuable upon conversion of the Note and
exercise of the Warrants in order to prevent dilution resulting from stock
splits, stock dividends or similar events. Unless and until such amendment or
new Registration Statement becomes effective, each Holder shall have the rights
described in Section 2(d) above.

4.             OBLIGATIONS
OF EACH HOLDER.

In connection with the registration of Registrable
Securities pursuant to a Registration Statement, each Holder shall:

(a)  timely furnish to the Company (i) a completed
Shareholder Questionnaire and (ii) such information in writing regarding itself
and the intended method of disposition of such 

 6
 

 

 

Registrable Securities as the Company shall reasonably
request in order to effect the registration thereof;

(b)  upon
receipt of any notice from the Company of the happening of any event of the
kind described in Sections 3(e) or 3(f), immediately discontinue any
sale or other disposition of such Registrable Securities pursuant to such
Registration Statement until the filing of an amendment or supplement as
described in Section 3(e) or withdrawal of
the stop order referred to in Section 3(f),
and use commercially reasonable efforts to maintain the confidentiality of such
notice and its contents;

(c)  to the
extent required by applicable law, deliver a prospectus to the purchaser of
such Registrable Securities;

(d)  notify the
Company when it has sold all of the Registrable Securities held by it; and

(e)  notify the Company in the event that any
information supplied by such Holder in writing for inclusion in such
Registration Statement or related prospectus is untrue or omits to state a
material fact required to be stated therein or necessary to make such
information not misleading in light of the circumstances then existing;
immediately discontinue any sale or other disposition of such Registrable
Securities pursuant to such Registration Statement until the filing of an
amendment or supplement to such prospectus as may be necessary so that such
prospectus does not contain an untrue statement of material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing;
and use commercially reasonable efforts to assist the Company as may be
appropriate to make such amendment or supplement effective for such purpose.

5.             INDEMNIFICATION.

In the event that any Registrable Securities are
included in a Registration Statement under this Agreement:

(a)           To the extent permitted by law, the
Company shall indemnify and hold harmless each Holder, the officers, directors,
employees, agents and representatives of such Holder, and each person, if any,
who controls such Holder within the meaning of the Securities Act or the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”), against any losses, claims, damages, liabilities or
reasonable out-of-pocket expenses (whether joint or several) (collectively,
including reasonable legal expenses or other expenses reasonably incurred in connection
with investigating or defending same, “Losses”),
insofar as any such Losses arise out of or are based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in such
Registration Statement under which such Registrable Securities were registered,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, or (ii) the omission or alleged omission
to state therein a material fact required to be stated therein, or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading. Subject to the provisions of Section
5(c) below, the Company will reimburse such Holder, and each
such officer, director, employee, agent, representative or controlling person,
for any reasonable legal expenses or other out-of-pocket expenses as reasonably

 7
 

 

 

incurred by any such entity or person in connection
with investigating or defending any Loss; provided, however,
that the foregoing indemnity shall not apply to amounts paid in settlement of
any Loss if such settlement is effected without the consent of the Company
(which consent shall not be unreasonably withheld), nor shall the Company be
obligated to indemnify any person for any Loss to the extent that such Loss
arises out of or is based upon (i) any disclosure or any omission or alleged
omission (to state a material fact required to be stated therein or necessary
to make statements therein not misleading) that is based upon or in conformity
with written information furnished (or not furnished, in the case of an
omission) by such person expressly for use in such Registration Statement or
(ii) a failure of such person to deliver or cause to be delivered the final
prospectus contained in the Registration Statement and made available by the
Company, if such delivery is required by applicable law.

(b)           To
the extent permitted by law, each Holder who is named in such Registration
Statement as a selling shareholder, acting severally and not jointly, shall
indemnify and hold harmless the Company, the officers, directors, employees,
agents and representatives of the Company, and each person, if any, who
controls the Company within the meaning of the Securities Act or the Exchange
Act, against any Losses to the extent (and only to the extent) that any such
Losses arise out of or are based upon (i) any disclosure or any omission or
alleged omission (to state a material fact required to be stated therein or
necessary to make statements therein not misleading) that is based upon or in
conformity with written information furnished (or not furnished, in the case of
an omission) by such person expressly for use in such Registration Statement,
or (ii) a failure of such Holder to deliver or cause to be delivered the final
prospectus contained in the Registration Statement and made available by the
Company, if such delivery is required under applicable law. Subject to the
provisions of Section 5(c) below, such
Holder will reimburse any legal or other expenses as reasonably incurred by the
Company and any such officer, director, employee, agent, representative, or
controlling person, in connection with investigating or defending any such
Loss; provided, however, that the foregoing
indemnity shall not apply to amounts paid in settlement of any such Loss if
such settlement is effected without the consent of such Holder (which consent
shall not be unreasonably withheld); and provided, further,
that, in no event shall any indemnity under this Section
5(b) exceed the net proceeds resulting from the sale of the
Registrable Securities sold by such Holder under such Registration Statement.

(c)           Promptly after receipt by an
indemnified party under this Section 5 of notice of the commencement of any
action (including any governmental action), such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party under
this Section 5, promptly deliver to the indemnifying party a written
notice of the commencement thereof and the indemnifying party shall have the
right to participate in and to assume the defense thereof with counsel selected
by the indemnifying party and reasonably acceptable to the indemnified party; provided, however, that an indemnified party shall have the
right to retain its own counsel, with the reasonably incurred fees and expenses
of one such counsel for all indemnified parties to be paid by the indemnifying
party, if representation of such indemnified party by the counsel retained by
the indemnifying party would be inappropriate under applicable standards of
professional conduct due to actual or potential conflicting interests between
such indemnified party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the delivery of notice of any such action, to the
extent prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any 

 8
 

 

 

liability to the indemnified party under this Section
5 with respect to such action, but the omission so to deliver written notice to
the indemnifying party will not relieve it of any liability that it may have to
any indemnified party otherwise than under this Section 5 or with respect to
any other action unless the indemnifying party is materially prejudiced as a
result of not receiving such notice.

(d)           In
the event that the indemnity provided in Sections 5(a) or
5(b) is unavailable or insufficient
to hold harmless an indemnified party for any reason, the Company and each
Holder agree, severally and not jointly, to contribute to the aggregate Losses
to which the Company or such Holder may be subject in such proportion as is
appropriate to reflect the relative fault of the Company and such Holder in
connection with the statements or omissions which resulted in such Losses; provided, however, that in no case shall such Holder be
responsible for any amount in excess of the net proceeds resulting from the
sale of the Registrable Securities sold by it under the Registration Statement.
Relative fault shall be determined by reference to whether any alleged untrue
statement or omission relates to information provided by the Company or by such
Holder. The Company and each Holder agree that it would not be just and
equitable if contribution were determined by pro
rata allocation or any other method of allocation which does not
take account of the equitable considerations referred to above. Notwithstanding
the provisions of this Section 5(d),
no person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who is not guilty of such fraudulent misrepresentation. For purposes of this
Section 5, each person who controls a Holder within the meaning of either the
Securities Act or the Exchange Act and each officer, director, employee, agent
or representative of such Holder shall have the same rights to contribution as
such Holder, and each person who controls the Company within the meaning of
either the Securities Act or the Exchange Act and each officer, director,
employee, agent or representative of the Company shall have the same rights to
contribution as the Company, subject in each case to the applicable terms and
conditions of this Section 5(d).

(e)           The
obligations of the Company and each Holder under this Section 5 shall
survive the conversion of the Note and exercise of the Warrants in full, the
completion of any offering or sale of Registrable Securities pursuant to a
Registration Statement under this Agreement, or otherwise.

6.             REPORTS.

With a view to making available to each Holder the
benefits of Rule 144 and any other similar rule or regulation of the Commission
that may at any time permit such Holder to sell securities of the Company to
the public without registration, the Company agrees to:

(a)           make
and keep public information available, as those terms are understood and
defined in Rule 144;

(b)           file
with the Commission in a timely manner all reports and other documents required
of the Company under the Exchange Act; and

(c)           furnish to such Holder, so long as
such Holder owns any Registrable Securities, promptly upon written request (i)
a written statement by the Company, if true, that it has 

 9
 

 

 

complied with the reporting requirements of Rule 144
and the Exchange Act, (ii) to the extent not publicly available through the
Commission’s EDGAR database, a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company with the Commission, and (iii) such other information as may be
reasonably requested by such Holder in connection with such Holder’s compliance
with any rule or regulation of the Commission which permits the selling of any
such securities without registration.

7.             MISCELLANEOUS.

(a)           Expenses
of Registration. Except as otherwise provided in the Securities Purchase
Agreement, all reasonable expenses, other than underwriting discounts and
commissions and fees and expenses of counsel and other advisors to each Holder,
incurred in connection with the registrations, filings or qualifications
described herein, including (without limitation) all registration, filing and
qualification fees, printers’ and accounting fees, the fees and disbursements
of counsel for the Company, and the fees and disbursements incurred in
connection with the opinion and letter described in Section
3(g) hereof, shall be borne by the Company.

(b)           Amendment;
Waiver. Except as expressly provided herein, neither this Agreement nor any
term hereof may be amended or waived except pursuant to a written instrument
executed by the Company and the Holders of at least two-thirds (2/3) of the
Registrable Securities into which all of the Note and Warrants then outstanding
are convertible or exercisable (without regard to any limitation on such
conversion or exercise). Any amendment or waiver effected in accordance with
this Section 6(b) shall be binding upon
each Holder, each future Holder and the Company. The failure of any party to
exercise any right or remedy under this Agreement or otherwise, or the delay by
any party in exercising such right or remedy, shall not operate as a waiver
thereof.

(c)           Notices. Any notices,
consents, waivers or other communications required or permitted to be given
under the terms of this Agreement must be in writing and will be deemed to have
been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt,
when sent by facsimile (provided confirmation of transmission is mechanically
or electronically generated and kept on file by the sending party); or (iii)
one Business Day after deposit with an overnight courier service, in each case
properly addressed to the party to receive the same. The addresses and
facsimile numbers for such communications shall be:

	
   

  	
  if to the Company:

  
	
   

  
	
   

  	
  Earth Biofuels,
  Inc.

  
	
   

  	
  3001 Knox
  Street, Suite 403,

  
	
   

  	
  Dallas, Texas
  75205

  
	
   

  	
  Telephone: 

  	
  214.389.9800

  
	
   

  	
  Facsimile: 

  	
  214.389.9806

  
	
   

  	
  Attention: 

  	
  Dennis
  McLaughlin

  
	
   

  
	
   

  	
  with a copy (for
  informational purposes only) to:

  
	
   

  
	
   

  	
  Scheef &
  Stone, LLP

  
				

 10
 

 

 

	
  

  	
  Telephone: 

  	
  214.706.4200

  
	
   

  	
  Facsimile: 

  	
  214.706.4242

  
	
   

  	
  Attention:

  	
   Roger A. Crabb, Esq.

  

 

and if to the
Holder, to the address and facsimile number as to which the Holder has notified
the Company in writing. Written confirmation of receipt (A) given by the
recipient of such notice, consent, waiver or other communication, (B)
mechanically or electronically generated by the sender’s facsimile machine
containing the time, date, recipient facsimile number and an image of the first
page of such transmission or (C) provided by an overnight courier service shall
be rebuttable evidence of personal service, receipt by facsimile or receipt
from an overnight courier service in accordance with clause (i), (ii) or (iii)
above, respectively.

(d)           Assignment.
Upon the transfer of any Note, Warrants or Registrable Securities by a Holder,
the rights of such Holder hereunder with respect to such securities so
transferred shall be assigned automatically to the transferee thereof, and such
transferee shall thereupon be deemed to be a “Holder” for purposes of this
Agreement, as long as: (i) the Company is, within a reasonable period of time
following such transfer, furnished with written notice of the name and address
of such transferee, (ii) the transferee agrees in writing with the Company to
be bound by all of the provisions hereof, and (iii) such transfer is made in
accordance with the applicable requirements of the Securities Purchase
Agreement, the Notes or the Warrants, as applicable.

(e)           Counterparts.
This Agreement may be executed in counterparts, each of which shall be deemed
an original, and all of which together shall be deemed one and the same
instrument. This Agreement, once executed by a party, may be delivered to any
other party hereto by facsimile transmission.

(f)            Governing
Law. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York applicable to contracts made and to be
performed entirely within the State of New York.

(g)           Holder of Record.
A person is deemed to be a Holder whenever such person owns or is deemed to own
of record such Registrable Securities. If the Company receives conflicting
instructions, notices or elections from two or more persons with respect to the
same Registrable Securities, the Company shall act upon the basis of
instructions, notice or election received from the record owner of such
Registrable Securities.

(h)           Entire Agreement.
This Agreement and the other Transaction Documents constitute the entire
agreement among the parties hereto with respect to the subject matter hereof
and thereof. There are no restrictions, promises, warranties or undertakings,
other than those set forth or referred to herein and therein. This Agreement
and the other Transaction Documents supersede all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof and thereof.

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

 11
 

 

 

(j)            Third Party
Beneficiaries. This Agreement is intended for the benefit of
the parties hereto and their respective permitted successors and assigns, and
is not for the benefit of, nor may any provision hereof be enforced by, any
other person.

[Signature Pages to Follow]

 12

 

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

	
  EARTH BIOFUELS, INC.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ DENNIS G. MCLAUGHLIN, III

  	
   

  	
   

  
	
   

  	
  Name: Dennis G. McLaughlin, III

  	
   

  
	
   

  	
  Title: Chief Executive Officer

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  CASTLERIGG MASTER INVESTMENTS LTD.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ PATRICK T. BURKE

  	
   

  	
   

  
	
   

  	
  Name: Patrick T. Burke

  	
   

  
	
   

  	
  Title: Senior Managing Director

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