Document:

Exhibit 10.33

 

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS NOTE MAY NOT
BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO IWT TESORO CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.

 

THIS NOTE IS
SUBJECT TO THE TERMS OF THE SENIOR SUBORDINATION AGREEMENT BETWEEN LAURUS
MASTER FUND, LTD. AND FLEET CAPITAL CORPORATION TO WHICH REFERENCE IS MADE FOR
THE TERMS OF SUBORDINATION AND FOR LIMITATIONS OF ENFORCEMENT OF THE PROVISIONS
HEREOF.

 

SECURED TERM NOTE

 

FOR VALUE RECEIVED, IWT TESORO CORPORATION, a Nevada
corporation (the “Company”),
promises to pay to LAURUS MASTER FUND, LTD., c/o M&C Corporate Services
Limited, P.O. Box 309 GT, Ugland House, South Church Street, George Town,
Grand Cayman, Cayman Islands, Fax: 345-949-8080 (the “Holder”)
or its registered assigns or successors in interest, the sum of Two Million
Dollars ($2,000,000), together with any accrued and unpaid interest hereon, on May 3,
2007 (the “Maturity Date”) if not sooner
paid.

 

Capitalized terms used herein without definition shall
have the meanings ascribed to such terms in that certain Securities Purchase
Agreement dated as of the date hereof by and between the Company and the Holder
(as amended, modified and/or supplemented from time to time, the “Purchase Agreement”).

 

The following terms shall
apply to this Secured Term Note (this “Note”):

 

ARTICLE I

CONTRACT RATE AND AMORTIZATION

 

1.1                                 Contract
Rate. Subject to Sections 4.2 and 5.10, interest payable on the outstanding
principal amount of this Note (the “Principal Amount”)
shall accrue at a rate per annum equal to fifteen percent (15.0%) (the “Contract Rate”). Interest shall be (i) calculated on
the basis of a 360 day year, and (ii) payable monthly, in arrears,
commencing on May 1, 2006, on the first business day of each consecutive
calendar month thereafter through and including the Maturity Date, and on the
Maturity Date, whether by acceleration or otherwise.

 

ARTICLE II

REDEMPTION

 

2.1                                 Optional
Redemption in Cash. The Company may prepay this Note (“Optional
Redemption”) by paying to the Holder a sum of money equal to one
hundred ten

 

 

percent (100%) of the Principal Amount outstanding at such time
together with accrued but unpaid interest thereon and any and all other sums
due, accrued or payable to the Holder arising under this Note, the Purchase
Agreement or any other Related Agreement (the “Redemption
Amount”) outstanding on the Redemption Payment Date (as defined
below). The Company shall deliver to the Holder a written notice of redemption
(the “Notice of Redemption”) specifying the
date for such Optional Redemption (the “Redemption Payment Date”),
which date shall be seven (7) business days after the date of the Notice
of Redemption (the “Redemption Period”).

 

2.2

 

ARTICLE III

EVENTS OF DEFAULT

 

3.1                                 Events
of Default. The occurrence of any of the following events set forth in this
Section 4.1 shall constitute an event of default (“Event of
Default”) hereunder:

 

(a)                                  Failure
to Pay. The Company fails to pay when due any installment of principal,
interest or other fees hereon in accordance herewith, or the Company fails to
pay any of the other Obligations (under and as defined in the Master Security
Agreement) when due, and, in any such case, such failure shall continue for a
period of three (3) days following the date upon which any such payment
was due.

 

(b)                                 Breach
of Covenant. The Company or any of its Subsidiaries breaches any covenant
or any other term or condition of this Note in any material respect and such
breach, if subject to cure, continues for a period of fifteen (15) days after the
occurrence thereof.

 

(c)                                  Breach
of Representations and Warranties. Any representation, warranty or
statement made or furnished by the Company or any of its Subsidiaries in this
Note, the Purchase Agreement or any other Related Agreement shall at any time
be false or misleading in any material respect on the date as of which made or
deemed made.

 

(d)                                 Default
Under Other Agreements. The occurrence of any default (or similar term) in
the observance or performance of any other agreement or condition relating to
any indebtedness or contingent obligation of the Company or any of its
Subsidiaries (including, without limitation, i. The indebtedness evidenced by
the Working Capital Lender Loan Documents (as such term is defined in the
Purchase Agreement) or that certain Security Agreement dated as of August 25,
2005 among the Company, International Wholesale Tile, Inc., The Tile Club, Inc.
and Import Flooring Group, Inc. in favor of the Holder (the “Security
Agreement” and ii. The indebtedness evidenced by the Secured Convertible Term
Note dated February 10, 2006) or the Ancillary Agreements (as such term is
defined in the Security Agreement) beyond the period of grace (if any), the
effect of which default is to cause, or permit the holder or holders of such
indebtedness or beneficiary or beneficiaries of such contingent obligation to
cause, such indebtedness to become due prior to its stated maturity or such
contingent obligation to become payable;

 

2

 

(e)                                  Material
Adverse Effect. Any change or the occurrence of any event which could
reasonably be expected to have a Material Adverse Effect;

 

(f)                                    Bankruptcy.
The Company or any of its Subsidiaries shall (i) apply for, consent to or
suffer to exist the appointment of, or the taking of possession by, a receiver,
custodian, trustee or liquidator of itself or of all or a substantial part of
its property, (ii) make a general assignment for the benefit of creditors,
(iii) commence a voluntary case under the federal bankruptcy laws (as now
or hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v) file
a petition seeking to take advantage of any other law providing for the relief
of debtors, (vi) acquiesce to, without challenge within ten (10) days
of the filing thereof, or failure to have dismissed, within thirty (30) days,
any petition filed against it in any involuntary case under such bankruptcy
laws, or (vii) take any action for the purpose of effecting any of the
foregoing;

 

(g)                                 Judgments.
Attachments or levies in excess of $250,000 in the aggregate are made upon the
Company or any of its Subsidiary’s assets or a judgment is rendered against the
Company’s property involving a liability of more than $250,000 which shall not
have been vacated, discharged, stayed or bonded within thirty (30) days from
the entry thereof;

 

(h)                                 Insolvency.
The Company or any of its Subsidiaries shall admit in writing its inability, or
be generally unable, to pay its debts as they become due or cease operations of
its present business;

 

(i)                                     Change
of Control. A Change of Control (as defined below) shall occur with respect
to the Company, unless Holder shall have expressly consented to such Change of
Control in writing. A “Change of Control” shall mean any event or circumstance
as a result of which (i) any “Person” or “group” (as such terms are
defined in Sections 13(d) and 14(d) of the Exchange Act, as in effect
on the date hereof), other than the Holder, is or becomes the “beneficial owner”
(as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange Act), directly
or indirectly, of 35% or more on a fully diluted basis of the then outstanding
voting equity interest of the Company (other than a “Person” or “group” that
beneficially owns 35% or more of such outstanding voting equity interests of
the Company on the date hereof), (ii) the Board of Directors of the
Company shall cease to consist of a majority of the Company’s board of
directors on the date hereof (or directors appointed by a majority of the board
of directors in effect immediately prior to such appointment or (iii) the
Company or any of its Subsidiaries merges or consolidates with, or sells all or
substantially all of its assets to, any other person or entity;);

 

(j)                                     Indictment;
Proceedings. The indictment or conviction of the Company or any of its
Subsidiaries or any executive officer of the Company or any of its Subsidiaries
under any criminal statute, or commencement or threatened commencement of
criminal or civil proceeding against the Company or any of its Subsidiaries or any
executive officer of the Company or any of its Subsidiaries pursuant to which
statute or proceeding penalties or remedies sought or available include
forfeiture of any of the property of the Company or any of its Subsidiaries;

 

3

 

(k)                                  The
Purchase Agreement and Related Agreements. (i) An Event of Default
shall occur under and as defined in the Purchase Agreement or any other Related
Agreement, (ii) the Company or any of its Subsidiaries shall breach any term
or provision of the Purchase Agreement or any other Related Agreement in any
material respect and such breach, is not cured within any applicable cure or
grace period provided in respect thereof (if any) (iii) the Company or any
of its Subsidiaries attempts to terminate, challenges the validity of, or its
liability under, the Purchase Agreement or any Related Agreement, (iv) any
proceeding shall be brought to challenge the validity, binding effect of the
Purchase Agreement or any Related Agreement or (v) the Purchase Agreement
or any Related Agreement ceases to be a valid, binding and enforceable
obligation of the Company or any of its Subsidiaries (to the extent such
persons or entities are a party thereto);

 

(l)                                     Stop
Trade. An SEC stop trade order or Principal Market trading suspension of
the Common Stock shall be in effect for five (5) consecutive days or five (5) days
during a period of ten (10) consecutive days, excluding in all cases a
suspension of all trading on a Principal Market, provided that the Company
shall not have been able to cure such trading suspension within thirty (30)
business days of the notice thereof or list the Common Stock on another
Principal Market within sixty (60) business days of such notice; or

 

3.2                                 Default
Payment. Following the occurrence and during the continuance of an Event of
Default, the Holder, at its option, may demand repayment in full of all
obligations and liabilities owing by Company to the Holder under this Note, the
Purchase Agreement and/or any other Related Agreement and/or may elect, in
addition to all rights and remedies of the Holder under the Purchase Agreement
and the other Related Agreements and all obligations and liabilities of the
Company under the Purchase Agreement and the other Related Agreements, to
require the Company to make a Default Payment (“Default
Payment”). The Default Payment shall be 130% of the outstanding
principal amount of the Note, plus accrued but unpaid interest, all other fees
then remaining unpaid, and all other amounts payable hereunder. The Default
Payment shall be applied first to any fees due and payable to the Holder
pursuant to this Note, the Purchase Agreement, and/or the other Related
Agreements, then to accrued and unpaid interest due on this Note and then to
the outstanding principal balance of this Note. The Default Payment shall be
due and payable immediately on the date that the Holder has exercised its
rights pursuant to this Section 4.3.

 

ARTICLE IV

MISCELLANEOUS

 

4.1                                 Cumulative
Remedies. The remedies under this Note shall be cumulative.

 

4.2                                 Failure
or Indulgence Not Waiver. No failure or delay on the part of the Holder
hereof in the exercise of any power, right or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such
power, right or privilege preclude other or further exercise thereof or of any
other right, power or privilege. All rights and remedies existing hereunder are
cumulative to, and not exclusive of, any rights or remedies otherwise
available.

 

4

 

4.3                                 Notices.
Any notice herein required or permitted to be given shall be in writing and
shall be deemed effectively given: (a) upon personal delivery to the party
notified, (b) when sent by confirmed telex or facsimile if sent during
normal business hours of the recipient, if not, then on the next business day, (c) five
days after having been sent by registered or certified mail, return receipt
requested, postage prepaid, or (d) one day after deposit with a nationally
recognized overnight courier, specifying next day delivery, with written
verification of receipt. All communications shall be sent to the Company at the
address provided in the Purchase Agreement executed in connection herewith, and
to the Holder at the address provided in the Purchase Agreement for such
Holder, with a copy to John E. Tucker, Esq., 825 Third Avenue, 14th
Floor, New York, New York 10022, facsimile number (212) 541-4434, or at such
other address as the Company or the Holder may designate by ten days advance
written notice to the other parties hereto.

 

4.4                                 Amendment
Provision. The term “Note” and all references thereto, as used throughout
this instrument, shall mean this instrument as originally executed, or if later
amended or supplemented, then as so amended or supplemented, and any successor
instrument as such successor instrument may be amended or supplemented.

 

4.5                                 Assignability.
This Note shall be binding upon the Company and its successors and assigns, and
shall inure to the benefit of the Holder and its successors and assigns, and
may be assigned by the Holder in accordance with the requirements of the
Purchase Agreement. The Company may not assign any of its obligations under
this Note without the prior written consent of the Holder, any such purported
assignment without such consent being null and void.

 

4.6                                 Cost
of Collection. In case of any Event of Default under this Note, the Company
shall pay the Holder reasonable costs of collection, including reasonable
attorneys’ fees.

 

4.7                                 Governing
Law, Jurisdiction and Waiver of Jury Trial.

 

(a)                                  THIS
NOTE SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAW.

 

(b)                                 THE
COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN
THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO
HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE COMPANY, ON THE ONE HAND,
AND THE HOLDER, ON THE OTHER HAND, PERTAINING TO THIS NOTE OR ANY OF THE OTHER
RELATED AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS NOTE OR
ANY OF THE RELATED AGREEMENTS; PROVIDED, THAT THE COMPANY ACKNOWLEDGES
THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED
OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHER  PROVIDED,
THAT NOTHING IN THIS NOTE SHALL BE DEEMED OR OPERATE TO PRECLUDE THE HOLDER
FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY

 

5

 

OTHER JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE
COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT
OR OTHER COURT ORDER IN FAVOR OF THE HOLDER. THE COMPANY EXPRESSLY SUBMITS AND
CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY
SUCH COURT, AND THE COMPANY HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE
BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON
CONVENIENS. THE COMPANY HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS,
COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT
SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY
REGISTERED OR CERTIFIED MAIL ADDRESSED TO THE COMPANY AT THE ADDRESS SET FORTH
IN THE PURCHASE AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED
UPON THE EARLIER OF THE COMPANY’S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS
AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID.

 

(c)                                  THE
COMPANY DESIRES THAT ITS DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH
APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF
THE JUDICIAL SYSTEM AND OF ARBITRATION, THE COMPANY HERETO WAIVES ALL RIGHTS TO
TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY
DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN THE HOLDER AND
THE COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS NOTE, ANY OTHER
RELATED AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR THERETO.

 

4.8                                 Severability.
In the event that any provision of this Note is invalid or unenforceable under
any applicable statute or rule of law, then such provision shall be deemed
inoperative to the extent that it may conflict therewith and shall be deemed
modified to conform with such statute or rule of law. Any such provision
which may prove invalid or unenforceable under any law shall not affect the
validity or enforceability of any other provision of this Note.

 

4.9                                 Maximum
Payments. Nothing contained herein shall be deemed to establish or require
the payment of a rate of interest or other charges in excess of the maximum
permitted by applicable law. In the event that the rate of interest required to
be paid or other charges hereunder exceed the maximum rate permitted by such
law, any payments in excess of such maximum rate shall be credited against
amounts owed by the Company to the Holder and thus refunded to the Company.

 

4.10                           Security
Interest and Guarantee. The Holder has been granted a security interest (i) in
certain assets of the Company and its Subsidiaries as more fully described in
the Master Security Agreement dated as of the date hereof and (ii) in the
equity interests of the Companies’ Subsidiaries pursuant to the Stock Pledge
Agreement dated as of the date hereof. The obligations of the Company under
this Note are guaranteed by certain Subsidiaries of the Company pursuant to the
Subsidiary Guaranty dated as of the date hereof.

 

6

 

4.11                           Construction.
Each party acknowledges that its legal counsel participated in the preparation
of this Note and, therefore, stipulates that the rule of construction that
ambiguities are to be resolved against the drafting party shall not be applied
in the interpretation of this Note to favor any party against the other.

 

5.13                           Registered
Obligation. This Note is intended to be a registered obligation within the
meaning of Treasury Regulation Section 1.871-14(c)(1)(i) and the
Company (or its agent) shall register this Note (and thereafter shall maintain
such registration) as to both principal and any stated interest. Notwithstanding
any document, instrument or agreement relating to this Note to the contrary,
transfer of this Note (or the right to any payments of principal or stated
interest thereunder) may only be effected by (i) surrender of this Note
and either the reissuance by the Company of this Note to the new holder or the
issuance by the Company of a new instrument to the new holder, or (ii) transfer
through a book entry system maintained by the Company (or its agent), within
the meaning of Treasury Regulation Section 1.871-14(c)(1)(i)(B).

 

[Balance of page intentionally left blank;
signature page follows]

 

7

 

IN WITNESS
WHEREOF, the Company has caused this Secured Term Note
to be signed in its name effective as of this      day of May,
2006.

 

	
   

  	
  IWT TESORO CORPORATION

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

WITNESS:

 

	
   

  

 

8Exhibit 10.34

 

THIS WARRANT
AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS. THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF
THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO IWT TESORO CORPORATION THAT SUCH REGISTRATION IS NOT
REQUIRED.

 

Right to Purchase up to 333,333 Shares of Common Stock
of

IWT Tesoro Corporation 

(subject to adjustment as provided herein)

 

COMMON STOCK
PURCHASE WARRANT

 

	
  No.

  	
                                       

  	
   

  	
  Issue Date:May 3, 2006 

  

 

IWT
Tesoro Corporation, a Nevada corporation (the “Company”), hereby certifies
that, for value received, LAURUS MASTER FUND, LTD., or assigns (the “Holder”),
is entitled, subject to the terms set forth below, to purchase from the Company
(as defined herein) from and after the Issue Date of this Warrant and at any
time or from time to time before 5:00 p.m., New York time, through the
close of business May 3, 2013 (the “Expiration Date”), up to 333,333 fully
paid and nonassessable shares of Common Stock (as hereinafter defined), $0.001
par value per share, at the applicable Exercise Price per share (as defined
below). The number and character of such shares of Common Stock and the
applicable Exercise Price per share are subject to adjustment as provided
herein.

 

As
used herein the following terms, unless the context otherwise requires, have
the following respective meanings:

 

(a)                                  The
term “Company” shall include IWT Tesoro Corporation and any person or entity
which shall succeed, or assume the obligations of, IWT Tesoro Corporation
hereunder.

 

(b)                                 The
term “Common Stock” includes (i) the Company’s Common Stock, par value
$0.001 per share; and (ii) any other securities into which or for which
any of the securities described in the preceding clause (i) may be
converted or exchanged pursuant to a plan of recapitalization, reorganization,
merger, sale of assets or otherwise.

 

(c)                                  The
term “Other Securities” refers to any stock (other than Common Stock) and other
securities of the Company or any other person (corporate or otherwise) which
the holder of the Warrant at any time shall be entitled to receive, or shall
have received, on the exercise of the Warrant, in lieu of or in addition to
Common Stock, or

 

 

which at any time shall be issuable or shall have been issued in
exchange for or in replacement of Common Stock or Other Securities pursuant to Section 4
or otherwise.

 

(d)                                 The
“Exercise Price” applicable under this Warrant shall be $1.12 per share;

 

1.                                       Exercise
of Warrant.

 

1.1.                              Number
of Shares Issuable upon Exercise. From and after the date hereof through
and including the Expiration Date, the Holder shall be entitled to receive,
upon exercise of this Warrant in whole or in part, by delivery of an original
or fax copy of an exercise notice in the form attached hereto as Exhibit A
(the “Exercise Notice”), shares of Common Stock of the Company, subject to
adjustment pursuant to Section 4.

 

1.2.                              Fair
Market Value. For purposes hereof, the “Fair Market Value” of a share of
Common Stock as of a particular date (the “Determination Date”) shall mean:

 

(a)                                  If
the Company’s Common Stock is traded on the American Stock Exchange or another
national exchange or is quoted on the National or Capital Market of The Nasdaq
Stock Market, Inc. (“Nasdaq”), then the closing or last sale price,
respectively, reported for the last business day immediately preceding the
Determination Date.

 

(b)                                 If
the Company’s Common Stock is not traded on the American Stock Exchange or
another national exchange or on the Nasdaq but is traded on the NASD Over the
Counter Bulletin Board, then it will mean the average of the closing bid and
asked prices reported for the last business day immediately preceding the
Determination Date.

 

(c)                                  Except
as provided in clause (d) below, if the Company’s Common Stock is not
publicly traded, then as the Holder and the Company agree or in the absence of
agreement by arbitration in accordance with the rules then in effect of
the American Arbitration Association, before a single arbitrator to be chosen
from a panel of persons qualified by education and training to pass on the
matter to be decided.

 

(d)                                 If
the Determination Date is the date of a liquidation, dissolution or winding up,
or any event deemed to be a liquidation, dissolution or winding up pursuant to
the Company’s charter, then all amounts to be payable per share to holders of
the Common Stock pursuant to the charter in the event of such liquidation,
dissolution or winding up, plus all other amounts to be payable per share in
respect of the Common Stock in liquidation under the charter, assuming for the
purposes of this clause (d) that all of the shares of Common Stock then
issuable upon exercise of the Warrant are outstanding at the Determination
Date.

 

1.3.                              Company
Acknowledgment. The Company will, at the time of the exercise of this
Warrant, upon the request of the holder hereof acknowledge in writing its
continuing obligation to afford to such holder any rights to which such holder
shall continue to be entitled after such exercise in accordance with the
provisions of this Warrant. If the holder

 

2

 

shall fail to make any such request, such failure shall not affect the
continuing obligation of the Company to afford to such holder any such rights.

 

1.4.                              Trustee
for Warrant Holders. In the event that a bank or trust company shall have
been appointed as trustee for the holders of this Warrant pursuant to Subsection 3.2,
such bank or trust company shall have all the powers and duties of a warrant
agent (as hereinafter described) and shall accept, in its own name for the
account of the Company or such successor person as may be entitled thereto, all
amounts otherwise payable to the Company or such successor, as the case may be,
on exercise of this Warrant pursuant to this Section 1.

 

2.                                       Procedure
for Exercise.

 

2.1.                              Delivery
of Stock Certificates, Etc., on Exercise. The Company agrees that the
shares of Common Stock purchased upon exercise of this Warrant shall be deemed
to be issued to the Holder as the record owner of such shares as of the close
of business on the date on which this Warrant shall have been surrendered and
payment made for such shares in accordance herewith so long as such surrender
and payment has been made no later than 12:00 noon (New York time) on such
business day and if received after 12:00 noon (New York time) on a business day
the shares of Common Stock shall be deemed issued on the next business day. As
soon as practicable after the exercise of this Warrant in full or in part, and
in any event within five (5) business days thereafter, the Company at its
expense (including the payment by it of any applicable issue taxes) will cause
to be issued in the name of and delivered to the Holder, or as such Holder
(upon payment by such Holder of any applicable transfer taxes) may direct in
compliance with applicable securities laws, a certificate or certificates for
the number of duly and validly issued, fully paid and nonassessable shares of
Common Stock (or Other Securities) to which such Holder shall be entitled on
such exercise, plus, in lieu of any fractional share to which such holder would
otherwise be entitled, cash equal to such fraction multiplied by the then Fair
Market Value of one full share, together with any other stock or other
securities and property (including cash, where applicable) to which such Holder
is entitled upon such exercise pursuant to Section 1 or otherwise.

 

2.2.                              Exercise.

 

(a)                                  Payment
may be made either (i) in cash or by certified or official bank check
payable to the order of the Company equal to the applicable aggregate Exercise
Price, (ii) by delivery of this Warrant, or shares of Common Stock and/or
Common Stock receivable upon exercise of this Warrant in accordance with the
formula set forth in subsection (b) below, or (iii) by a
combination of any of the foregoing methods, for the number of Common Shares
specified in such Exercise Notice (as such exercise number shall be adjusted to
reflect any adjustment in the total number of shares of Common Stock issuable
to the Holder per the terms of this Warrant) and the Holder shall thereupon be
entitled to receive the number of duly authorized, validly issued, fully-paid
and non-assessable shares of Common Stock (or Other Securities) determined as
provided herein.

 

(b)                                 Notwithstanding
any provisions herein to the contrary, if the Fair Market Value of one share of
Common Stock is greater than the Exercise Price (at the date of calculation as
set forth below), in lieu of exercising this Warrant for cash, the Holder may

 

3

 

elect to receive shares equal to the value (as determined below) of
this Warrant (or the portion thereof being exercised) by surrender of this
Warrant at the principal office of the Company together with the properly
endorsed Exercise Notice in which event the Company shall issue to the Holder a
number of shares of Common Stock computed using the following formula:

 

	
  X=

  	
  Y(A-B)

  	
   

  
	
   

  	
  A

  	
   

  
	
   

  	
   

  	
   

  
	
  Where X =

  	
  the number of shares of Common Stock to be issued to
  the Holder

  
	
   

  	
   

  
	
  Y =

  	
  the number of shares of Common Stock purchasable
  under this Warrant or, if only a portion of this Warrant is being exercised,
  the portion of this Warrant being exercised (at the date of such calculation)

  
	
   

  	
   

  
	
  A =

  	
  the Fair Market Value of one share of the Company’s
  Common Stock (at the date of such calculation)

  
	
   

  	
   

  
	
  B =

  	
  the Exercise Price per share (as adjusted to the
  date of such calculation)

  
				

 

3.                                       Effect
of Reorganization, Etc.; Adjustment of Exercise Price.

 

3.1.                              Reorganization,
Consolidation, Merger, Etc. In case at any time or from time to time, the
Company shall (a) effect a reorganization, (b) consolidate with or
merge into any other person, or (c) transfer all or substantially all of
its properties or assets to any other person under any plan or arrangement
contemplating the dissolution of the Company, then, in each such case, as a
condition to the consummation of such a transaction, proper and adequate
provision shall be made by the Company whereby the Holder, on the exercise hereof
as provided in Section 1 at any time after the consummation of such
reorganization, consolidation or merger or the effective date of such
dissolution, as the case may be, shall receive, in lieu of the Common Stock (or
Other Securities) issuable on such exercise prior to such consummation or such
effective date, the stock and other securities and property (including cash) to
which such Holder would have been entitled upon such consummation or in
connection with such dissolution, as the case may be, if such Holder had so
exercised this Warrant, immediately prior thereto, all subject to further
adjustment thereafter as provided in Section 4.

 

3.2.                              Dissolution.
In the event of any dissolution of the Company following the transfer of all or
substantially all of its properties or assets, the Company, concurrently with
any distributions made to holders of its Common Stock, shall at its expense
deliver or cause to be delivered to the Holder the stock and other securities
and property (including cash, where applicable) receivable by the Holder
pursuant to Section 3.1, or, if the Holder shall so instruct the Company,
to a bank or trust company specified by the Holder and having its principal
office in New York, NY as trustee for the Holder (the “Trustee”).

 

3.3.                              Continuation
of Terms. Upon any reorganization, consolidation, merger or transfer (and
any dissolution following any transfer) referred to in this Section 3,
this Warrant shall continue in full force and effect and the terms hereof shall
be applicable to the shares of stock and other securities and property
receivable on the exercise of this Warrant after the

 

4

 

consummation of such reorganization, consolidation or merger or the
effective date of dissolution following any such transfer, as the case may be,
and shall be binding upon the issuer of any such stock or other securities,
including, in the case of any such transfer, the person acquiring all or
substantially all of the properties or assets of the Company, whether or not
such person shall have expressly assumed the terms of this Warrant as provided
in Section 4. In the event this Warrant does not continue in full force
and effect after the consummation of the transactions described in this Section 3,
then the Company’s securities and property (including cash, where applicable)
receivable by the Holder will be delivered to the Holder or the Trustee as
contemplated by Section 3.2.

 

4.                                       Extraordinary
Events Regarding Common Stock. In the event that the Company shall (a) issue
additional shares of the Common Stock as a dividend or other distribution on
outstanding Common Stock or any preferred stock issued by the Company (b) subdivide
its outstanding shares of Common Stock, or (c) combine its outstanding
shares of the Common Stock into a smaller number of shares of the Common Stock,
then, in each such event, the Exercise Price shall, simultaneously with the
happening of such event, be adjusted by multiplying the then Exercise Price by
a fraction, the numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to such event and the denominator of which
shall be the number of shares of Common Stock outstanding immediately after
such event, and the product so obtained shall thereafter be the Exercise Price
then in effect. The Exercise Price, as so adjusted, shall be readjusted in the
same manner upon the happening of any successive event or events described
herein in this Section 4. The number of shares of Common Stock that the
Holder shall thereafter, on the exercise hereof as provided in Section 1,
be entitled to receive shall be adjusted to a number determined by multiplying
the number of shares of Common Stock that would otherwise (but for the
provisions of this Section 4) be issuable on such exercise by a fraction
of which (a) the numerator is the Exercise Price that would otherwise (but
for the provisions of this Section 4) be in effect, and (b) the
denominator is the Exercise Price in effect on the date of such exercise
(taking into account the provisions of this Section 4).

 

5.                                       Certificate
as to Adjustments. In each case of any adjustment or readjustment in the
shares of Common Stock (or Other Securities) issuable on the exercise of this
Warrant, the Company at its expense will promptly cause its Chief Financial
Officer or other appropriate designee to compute such adjustment or
readjustment in accordance with the terms of this Warrant and prepare a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based, including a
statement of (a) the consideration received or receivable by the Company
for any additional shares of Common Stock (or Other Securities) issued or sold
or deemed to have been issued or sold, (b) the number of shares of Common
Stock (or Other Securities) outstanding or deemed to be outstanding, and (c) the
Exercise Price and the number of shares of Common Stock to be received upon
exercise of this Warrant, in effect immediately prior to such adjustment or
readjustment and as adjusted or readjusted as provided in this Warrant. The
Company will forthwith mail a copy of each such certificate to the Holder and
any Warrant agent of the Company (appointed pursuant to Section 11
hereof).

 

6.                                       Reservation
of Stock, Etc., Issuable on Exercise of Warrant. The Company will at all
times reserve and keep available, solely for issuance and delivery on the
exercise of this

 

5

 

Warrant, shares of Common Stock (or Other Securities) from time to time
issuable on the exercise of this Warrant.

 

7.                                       Assignment;
Exchange of Warrant. Subject to compliance with applicable securities laws,
this Warrant, and the rights evidenced hereby, may be transferred by any registered
holder hereof (a “Transferor”) in whole or in part. On the surrender for
exchange of this Warrant, with the Transferor’s endorsement in the form of Exhibit B
attached hereto (the “Transferor Endorsement Form”) and together with evidence
reasonably satisfactory to the Company demonstrating compliance with applicable
securities laws, which shall include, without limitation, subject to certain
representations made by an transferee, the provision of a legal opinion from
the Transferor’s counsel (at the Company’s expense) that such transfer is
exempt from the registration requirements of applicable securities laws, the
Company at its expense (but with payment by the Transferor of any applicable
transfer taxes) will issue and deliver to or on the order of the Transferor
thereof a new Warrant of like tenor, in the name of the Transferor and/or the
transferee(s) specified in such Transferor Endorsement Form (each a “Transferee”),
calling in the aggregate on the face or faces thereof for the number of shares
of Common Stock called for on the face or faces of the Warrant so surrendered
by the Transferor.

 

8.                                       Replacement
of Warrant. On receipt of evidence reasonably satisfactory to the Company
of the loss, theft, destruction or mutilation of this Warrant and, in the case
of any such loss, theft or destruction of this Warrant, on delivery of an
indemnity agreement or security reasonably satisfactory in form and amount to
the Company or, in the case of any such mutilation, on surrender and
cancellation of this Warrant, the Company at its expense will execute and
deliver, in lieu thereof, a new Warrant of like tenor.

 

9.                                       Registration
Rights. The Holder has been granted certain registration rights by the
Company. These registration rights are set forth in a Registration Rights
Agreement entered into by the Company and Holder dated as of the date hereof,
as the same may be amended, modified and/or supplemented from time to time.

 

10.                                 Maximum
Exercise. Notwithstanding anything contained herein to the contrary, the
Holder shall not be entitled to exercise this Warrant in connection with that
number of shares of Common Stock which would exceed the difference between (i) 4.99%
of the issued and outstanding shares of Common Stock and (ii) the number
of shares of Common Stock beneficially owned by the Holder. For purposes of the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934,
as amended, and Regulation 13d-3 thereunder. The limitation described in the
first sentence of this Section 10 shall automatically become null and void
following notice to the Company upon the occurrence and during the continuance
of an Event of Default under and as defined in the Note made by the Company to
the Holder dated the date hereof (as amended, modified, restated and/or
supplemented from time to time, the “Note”), or upon 75 days prior notice to
the Company.

 

11.                                 Warrant
Agent. The Company may, by written notice to the each Holder of the
Warrant, appoint an agent for the purpose of issuing Common Stock (or Other
Securities) on the exercise of this Warrant pursuant to Section 1,
exchanging this Warrant pursuant to Section 7, and replacing this Warrant
pursuant to Section 8, or any of the foregoing, and thereafter any such

 

6

 

issuance, exchange or replacement, as the case may be, shall be made at
such office by such agent.

 

12.                                 Transfer
on the Company’s Books. Until this Warrant is transferred on the books of
the Company, the Company may treat the registered holder hereof as the absolute
owner hereof for all purposes, notwithstanding any notice to the contrary.

 

13.                                 Notices,
Etc. All notices and other communications from the Company to the Holder
shall be mailed by first class registered or certified mail, postage prepaid,
at such address as may have been furnished to the Company in writing by such
Holder or, until any such Holder furnishes to the Company an address, then to,
and at the address of, the last Holder who has so furnished an address to the
Company.

 

14.                                 Miscellaneous.
This Warrant and any term hereof may be changed, waived, discharged or
terminated only by an instrument in writing signed by the party against which
enforcement of such change, waiver, discharge or termination is sought. THIS
WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. ANY ACTION
BROUGHT CONCERNING THE TRANSACTIONS CONTEMPLATED BY THIS WARRANT SHALL BE
BROUGHT ONLY IN THE STATE COURTS OF NEW YORK OR IN THE FEDERAL COURTS LOCATED
IN THE STATE OF NEW YORK; PROVIDED, HOWEVER, THAT THE HOLDER MAY CHOOSE TO
WAIVE THIS PROVISION AND BRING AN ACTION OUTSIDE THE STATE OF NEW YORK. The
individuals executing this Warrant on behalf of the Company agree to submit to
the jurisdiction of such courts and waive trial by jury. The prevailing party
shall be entitled to recover from the other party its reasonable attorneys’
fees and costs. In the event that any provision of this Warrant is invalid or
unenforceable under any applicable statute or rule of law, then such
provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law. Any such provision which may prove invalid or unenforceable under any law
shall not affect the validity or enforceability of any other provision of this
Warrant. The headings in this Warrant are for purposes of reference only, and
shall not limit or otherwise affect any of the terms hereof. The invalidity or
unenforceability of any provision hereof shall in no way affect the validity or
enforceability of any other provision hereof. The Company acknowledges that
legal counsel participated in the preparation of this Warrant and, therefore,
stipulates that the rule of construction that ambiguities are to be
resolved against the drafting party shall not be applied in the interpretation
of this Warrant to favor any party against the other party.

 

[BALANCE OF PAGE
INTENTIONALLY LEFT BLANK;

SIGNATURE PAGE FOLLOWS]

 

7

 

IN
WITNESS WHEREOF, the Company has executed this Warrant as of the date first
written above.

 

 

	
   

  	
   

  	
  IWT TESORO CORPORATION

  
	
   

  	
   

  	
   

  
	
  WITNESS:

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  	
   

  

 

8

 

Exhibit A

 

FORM OF SUBSCRIPTION

(To Be Signed Only On Exercise Of Warrant)

 

TO:                            IWT
TESORO CORPORATION

 

Attention:                                         Chief
Financial Officer

 

The
undersigned, pursuant to the provisions set forth in the attached Warrant (No.     ),
hereby irrevocably elects to purchase (check applicable box):

 

	
  o

  	
              
  shares of the Common Stock covered by such Warrant; or

  
	
   

  	
   

  
	
  o

  	
  the maximum number of shares of Common Stock covered
  by such Warrant pursuant to the cashless exercise procedure set forth in Section 2.

  

 

The
undersigned herewith makes payment of the full Exercise Price for such shares
at the price per share provided for in such Warrant, which is $             .
Such payment takes the form of (check applicable box or boxes):

 

	
  o

  	
  $            in lawful money of the United States; and/or

  
	
   

  	
   

  
	
  o

  	
  the cancellation of such portion of the attached
  Warrant as is exercisable for a total of            
  shares of Common Stock (using a Fair Market Value of $          per share for purposes of this calculation); and/or

  
	
   

  	
   

  
	
  o

  	
  the cancellation of such number of shares of Common
  Stock as is necessary, in accordance with the formula set forth in Section 2.2,
  to exercise this Warrant with respect to the maximum number of shares of
  Common Stock purchasable pursuant to the cashless exercise procedure set
  forth in Section 2.

  

 

The
undersigned requests that the certificates for such shares be issued in the
name of, and delivered to                                  
whose address is                                                                                                                                                          .

 

The
undersigned represents and warrants that all offers and sales by the undersigned
of the securities issuable upon exercise of the within Warrant shall be made
pursuant to registration of the Common Stock under the Securities Act of 1933,
as amended (the “Securities Act”) or pursuant to an exemption from registration
under the Securities Act.

 

	
  Dated:

  	
   

  	
   

  	
   

  
	
   

  	
  (Signature must conform to name of holder
  as specified on the face of the Warrant)

  
	
   

  	
   

  
	
   

  	
  Address:                                                

  	
   

  
	
   

  	
   

  	
   

  

 

A-1

 

Exhibit B

 

FORM OF TRANSFEROR ENDORSEMENT

(To Be Signed Only On Transfer Of Warrant)

 

For
value received, the undersigned hereby sells, assigns, and transfers unto the
person(s) named below under the heading “Transferees” the right represented by
the within Warrant to purchase the percentage and number of shares of Common
Stock of [Newco] into which the within Warrant relates specified under the
headings “Percentage Transferred” and “Number Transferred,” respectively,
opposite the name(s) of such person(s) and appoints each such person Attorney
to transfer its respective right on the books of [Newco] with full power of
substitution in the premises.

 

	
  Transferees

  	
   

  	
  Address

  	
   

  	
  Percentage

  Transferred

  	
   

  	
  Number

  Transferred

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

	
  Dated:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (Signature must conform to name of holder
  as specified on the face of the Warrant)

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  SIGNED IN THE PRESENCE OF:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (Name)

  
	
  ACCEPTED AND AGREED:

  	
   

  	
   

  
	
  [TRANSFEREE]

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  (Name)

  	
   

  	
   

  

 

B-1

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