Document:

EX-10.1

 

Exhibit 10.1

SECURITIES PURCHASE AGREEMENT

     This SECURITIES PURCHASE AGREEMENT dated as of December 26, 2007 (this “Agreement”) by
and among Neoprobe Corporation, a Delaware corporation (the “Company”), and
Platinum-Montaur Life Sciences, LLC, a Delaware limited liability company (the
“Purchaser”).

Recital

     The Company wishes to sell to the Purchaser, and the Purchaser wishes to purchase from the
Company (a) the Company’s 10% Series A Convertible Senior Secured Promissory Note in the principal
amount of $7,000,000, due December 26, 2011 (the “Series A Note”), (b) the Company’s 10%
Series B Convertible Senior Secured Promissory Note in the principal amount of $3,000,000, due
December 26, 2011 (the “Series B Note”), (c) 3,000 shares of the Company’s 8% Series A
Convertible Preferred Stock (the “Preferred Stock”), (d) the Company’s Series W Warrant to
purchase shares of common stock of the Company (the “Series W Warrant”), (e) the Company’s
Series X Warrant to purchase shares of common stock of the Company (the “Series X
Warrant”), and (e) the Company’s Series Y Warrant to purchase shares of common stock of the
Company (the “Series Y Warrant”), in each case upon the terms and subject to the conditions
hereinafter set forth.

Statement of Agreement

     In consideration of the mutual covenants and agreements set forth herein and for other good
and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties
hereto agree as follows.

ARTICLE I

DEFINITIONS

     1.1 General Definitions. As used in this Agreement, and unless the context requires a
different meaning, the following terms have the meanings indicated:

     “2004 Notes” shall mean the Company’s Series A Convertible Promissory Notes, dated
December 13, 2004, issued to Biomedical Value Fund, L.P., Biomedical Offshore Value Fund, Ltd. and
David C. Bupp.

     “Account Control Agreement” shall mean the Blocked Account Control Agreement among
U.S. Bank National Association, the Purchaser and the Company, substantially in the form of
Exhibit A hereto.

     “Affiliate” shall mean, with respect to any Person, any other Person that directly or
indirectly controls or is controlled by or under common control with such Person. For the purposes
of this definition, “control,” when used with respect to any Person, means the possession,
direct or indirect, of the power to direct or cause the direction of the management and

 

 

policies of such Person, whether through the ownership of voting securities, by contract or
otherwise; and the terms of “affiliated,” “controlling” and “controlled”
have meanings correlative to the foregoing.

     “Agreement” shall mean this Agreement, including the exhibits and schedules attached
hereto, as the same may be amended, supplemented or modified in accordance with the terms hereof.

     “Board” shall mean the Board of Directors of the Company.

     “Business Day” shall mean any day except Saturday, Sunday and any day which shall be a
legal holiday or a day on which banking institutions in the state of New York generally are
authorized or required by law or other government actions to close.

     “By-laws” shall mean, unless the context in which such term is used otherwise
requires, the By-laws of the Company or any of its Subsidiaries as in effect on a Closing Date.

     “Certificate of Designations” shall mean the Certificate of Powers, Designations,
Preferences and Rights of the Preferred Stock, substantially in the form attached hereto as Exhibit
B.

     “Certificate of Incorporation” shall mean, unless the context in which it is used
shall otherwise require, the Certificate of Incorporation of the Company or any of its Subsidiaries
as in effect on a Closing Date.

     “Closing Date” shall mean the date of the First Closing, the date of the Second
Closing, or the date of the Third Closing, as the context may require.

     “Code” shall mean the Internal Revenue Code of 1986, as amended, or any successor
statute thereto.

     “Commission” shall mean the Securities and Exchange Commission or any similar agency
then having jurisdiction to enforce the Securities Act.

     “Common Stock” shall mean the Company’s common stock, par value $.001 per share, or
any other capital stock of the Company into which such stock is reclassified or reconstituted.

     “Contractual Obligations” shall mean as to any Person, any provision of any security
issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of
trust or other instrument or arrangement (whether in writing or otherwise) to which such Person is
a party or by which it or any of such Person’s property is bound.

     “Conversion Shares” shall mean the shares of Common Stock issuable upon conversion of
the Notes and the Preferred Stock in accordance with their respective terms

     “Event of Default” shall have the meaning assigned to such term in the Notes.

 

 

     “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, and the
rules and regulations of the Commission thereunder.

     “First Closing” and “First Closing Date” shall have the respective meanings
assigned to such terms in Section 2.2(a).

     “GAAP” shall mean generally accepted accounting principles in effect within the United
States, consistently applied.

     “Governmental Authority” shall mean the government of any nation, state, city,
locality or other political subdivision of any thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining to government,
regulation or compliance, and any corporation or other entity owned or controlled, through stock or
capital ownership or otherwise, by any of the foregoing.

     “Indebtedness” shall mean (a) any liabilities for borrowed money or amounts owed in
excess of an aggregate of $50,000; (b) other obligations evidenced by bonds, debentures, notes or
similar instruments and all reimbursement or other obligations in respect of letters of credit,
bankers’ acceptances, swap or hedging agreements or other financial products in excess, in the
aggregate, of $50,000, (c) all guaranties, endorsements and other contingent obligations in respect
of Indebtedness of others, whether or not the same are or should be reflected in the Company’s or a
Subsidiary’s balance sheet (or the notes thereto), except guaranties by endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary course of business;
and (d) the present value of any lease payments in excess of $50,000, in the aggregate, due under
leases required to be capitalized in accordance with GAAP.

     “Intercreditor Agreement” shall mean the Intercreditor Agreement among the Company,
the Purchaser, David Bupp, Cynthia B. Gochoco and Walter Bupp to be entered into on the First
Closing Date.

     “IP Security Agreement” shall mean the Patent, Trademark and Copyright Security
Agreement delivered by each of the Company and the Subsidiaries, substantially in the form attached
hereto as Exhibit C.

     “Lien” shall mean any mortgage, deed of trust, pledge, hypothecation, assignment,
encumbrance, lien (statutory or other), charge, claim, restriction or preference, priority, right
or other security interest or preferential arrangement of any kind or nature whatsoever (excluding
preferred stock and equity related preferences) including, without limitation, those created by,
arising under or evidenced by any conditional sale or other title retention agreement, the interest
of a lessor under a Capital Lease Obligation, or any financing lease having substantially the same
economic effect as any of the foregoing.

     “Lymphoseek” means the Company’s proprietary radiopharmaceutical in development that
is specifically designed and labeled for the targeting of lymphatic tissue, generally known as
Lymphoseek®.

 

 

     “Material Adverse Effect” shall mean a material adverse effect on, or a material
adverse change in, or a group of such effects on or changes in (i) the assets, business,
properties, prospects, operations, or financial condition of the Company and its Subsidiaries,
taken as a whole, or (ii) the ability of the Company to perform its obligations under this
Agreement.

     “Material Contracts” has the meaning set forth in Section 3.20.

     “Notes” shall mean the Series A Notes and the Series B Notes.

     “Permitted Encumbrances” shall mean:

          (a) Liens for Taxes, assessments or other governmental charges which are not yet due and
payable or which are being contested in good faith with a reserve or other appropriate provision
having been made therefor;

          (b) Liens of landlords, carriers, warehousemen, mechanics, materialmen and other similar liens
imposed by law, which are incurred in the ordinary course of business for sums not more than thirty
(30) days delinquent or which are being contested in good faith; provided that a reserve or other
appropriate provision shall have been made therefor and the aggregate amount of such Liens is less
than $100,000;

          (c) Liens incurred or deposits made in the ordinary course of business in connection with
workers’ compensation, unemployment insurance and other types of social security, or to secure the
performance of tenders, statutory obligations, surety, stay, customs and appeal bonds, bids,
leases, government contracts, trade contracts, performance and return of money bonds and other
similar obligations (exclusive of obligations for the payment of borrowed money);

          (d) Deposits in an aggregate amount not to exceed $100,000, made in the ordinary course of
business to secure liability to insurance carriers;

          (e) Leases or subleases granted to others not interfering in any material respect with the
business of the Company or any of its Subsidiaries; and

          (f) Easements, rights of way, restrictions and other similar charges or encumbrances not
interfering in any material respect with the ordinary conduct of the business of the Company or any
of its Subsidiaries.

     “Person” shall mean any individual, firm, corporation, limited liability company,
partnership, trust, incorporated or unincorporated association, joint venture, joint stock company,
Governmental Authority or other entity of any kind, and shall include any successor (by merger or
otherwise) of such entity.

     “Preferred Stock” shall have the meaning assigned in the recital to this Agreement,
and as further described in the statement of powers, designations, preferences, rights and
qualifications, limitations and restrictions attached hereto as Exhibit D.

 

 

     “Purchaser Affiliate” shall mean with respect to the Purchaser, any affiliate of such
Purchaser (as defined in Rule 405 under the Securities Act) and any Person who controls the
Purchaser or any affiliate of the Purchaser within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act.

     “Purchaser” shall have the meaning set forth in the recital to this Agreement.

     “Registration Rights Agreement” shall mean the Registration Rights Agreement, among
the Purchaser and the Company, substantially in the form of Exhibit E hereto.

     “Regulation D” shall mean Regulation D promulgated under the Securities Act, as the
same shall be in effect at the time.

     “Rule 144” shall mean Rule 144 promulgated under the Securities Act, as the same shall
be in effect at the time

     “SEC Reports” shall mean all forms, reports, statements and other documents
(including, without limitation, exhibits, annexes, supplements and amendments to such documents)
filed by the Company, or sent or made available by the Company to its security holders, under the
Exchange Act, the Securities Act, any national securities exchange or quotation system or
comparable Governmental Authority.

     “Second Closing” and “Second Closing Date” shall have the respective meanings
assigned to such terms in Section 2.2(b).

     “Securities” shall mean, collectively, the Notes, the Preferred Stock and the
Warrants.

     “Securities Act” shall mean the Securities Act of 1933, as amended, or any similar
federal statute, and the rules and regulations thereunder as the same shall be in effect at the
time.

     “Security Agreement” shall mean the Security Agreement substantially in the form
attached hereto as Exhibit F.

     “Series A Note” shall have the meaning assigned in the recital to this Agreement, the
form of which is attached hereto as Exhibit G.

     “Series B Note” shall have the meaning assigned in the recital to this Agreement, the
form of which is attached hereto as Exhibit H.

     “Series W Warrant” shall have the meaning assigned in the recital to this Agreement,
the form of which is attached hereto as Exhibit I.

     “Series X Warrant” shall have the meaning assigned in the recital to this Agreement,
the form of which is attached hereto as Exhibit J.

 

 

     “Series Y Warrant” shall have the meaning assigned in the recital to this Agreement,
the form of which is attached hereto as Exhibit K.

     “Short Sales” shall mean all “short sales” as defined in Rule 200 under the Exchange
Act.

     “Subsidiary” shall mean, with respect to any Person, a corporation or other entity of
which 50% or more of the voting power of the voting equity securities or equity interest is owned,
directly or indirectly, by such Person. Unless otherwise qualified, all references to a
“Subsidiary” or to “Subsidiaries” in this Agreement shall refer to a Subsidiary or Subsidiaries of
the Company or of a Subsidiary of the Company.

     “Third Closing” and “Third Closing Date” shall have the respective meanings
assigned to such terms in Section 2.2(c).

     “Trading Day” means any day during which the principal exchange on which the Common
Stock is traded shall be open for trading.

     “Transaction Documents” shall mean collectively, this Agreement, the Notes, the
Preferred Stock, the Certificate of Designations, the Warrants, the Security Agreement, the Account
Control Agreement, the Intercreditor Agreement and the IP Security Agreement.

     “Warrant Shares” shall mean the shares of Common Stock issuable upon exercise of the
Warrants in accordance with their respective terms.

     “Warrants” shall mean the Series W Warrants, the Series X Warrants and the Series Y
Warrants.

     1.2 Accounting Terms; Financial Statements. All accounting terms used herein and not
expressly defined in this Agreement shall have the respective meanings given to them in conformance
with GAAP. Financial statements and other information furnished after the date hereof pursuant to
the Agreement or the other Transaction Documents shall be prepared in accordance with GAAP as in
effect at the time of such preparation.

     1.3 Knowledge of the Company. All references to the knowledge of the Company or to
facts known by the Company shall mean actual knowledge of the Chief Executive Officer or Chief
Financial Officer of the Company

ARTICLE II

PURCHASE AND SALE OF SECURITIES

     2.1 Purchase and Sale of Notes, Preferred Stock and Warrants.

          (a) Subject to the terms and conditions herein set forth, the Company agrees to issue and sell
to the Purchaser, and the Purchaser agrees to purchase from the Company at the First Closing the
Series A Note and the Series W Warrant for an aggregate purchase price of $7,000,000 (the
“Series A Purchase Price”). At the First Closing the Company shall deliver or

 

 

cause to be delivered to the Purchaser (i) the Series A Note, and (ii) the Series W Warrant.
At the First Closing, the Purchaser shall deliver the Series A Purchase Price by wire transfer of
immediately available funds to the Company.

          (b) Subject to the terms and conditions herein set forth, the Company agrees to issue and sell
to the Purchaser, and the Purchaser agrees to purchase from the Company at the Second Closing the
Series B Note and the Series X Warrant for an aggregate purchase price of $3,000,000 (the
“Series B Purchase Price”). The Series X Warrant shall be initially exercisable for the
same number of shares of Common Stock as would be issuable if the Series B Note were to be
converted in full immediately following the Second Closing. At the Second Closing the Company
shall deliver or cause to be delivered to the Purchaser (i) Series B Note, and (ii) the Series X
Warrant. At the Second Closing, the Purchaser shall deliver the Series B Purchase Price by wire
transfer of immediately available funds to the Company. Notwithstanding anything to the contrary
contained herein, if the conditions to the Purchaser’s obligations to effect the Second Closing are
not satisfied by April 30, 2008, the Purchaser shall have no obligation hereunder to purchase the
Series B Note and the Series X Warrant. .The conversion price of the Series B Note and the exercise
price of the Series X Warrant shall be established as set forth in the forms attached hereto as
Exhibit H and Exhibit J.

          (c) Subject to the terms and conditions herein set forth, the Company agrees to issue and sell
to the Purchaser, and the Purchaser, severally but not jointly, agrees to purchase from the Company
at the Third Closing the Preferred Stock and the Series Y Warrant for an aggregate purchase price
of $3,000,000 (the “Preferred Stock Purchase Price”). The Series Y Warrant shall be
exercisable for the same number of shares of Common Stock as would be issuable if the Preferred
Stock were to be converted in full immediately following the Third Closing. At the Third Closing
the Company shall deliver or cause to be delivered to the Purchaser (i) 3,000 shares of the
Preferred Stock, and (ii) the Series Y Warrant. At the Third Closing, the Purchaser shall deliver
the Preferred Stock Purchase Price by wire transfer of immediately available funds to the Company.
Notwithstanding anything to the contrary contained herein, if the conditions to the Purchaser’s
obligations to effect the Third Closing are not satisfied by December 31, 2008, the Purchaser shall
have no obligation hereunder to purchase the Preferred Stock and the Series Y Warrant.

     2.2 Closings.

          (a) The purchase and issuance of the Series A Note and the Series W Warrant shall take place
at a closing (the “First Closing”) simultaneously with the execution and delivery of this
Agreement or on such other date and time as the Parties may agree (the “First Closing
Date”) at the offices of Purchaser, 152 West 57th Street, 54th Floor, New York, New York
provided that all of the conditions set forth in Article VI hereof and applicable to the First
Closing shall have been fulfilled or waived in accordance herewith.

          (b) The purchase and issuance of the Series B Note and the Series X Warrant shall take place
at a closing (the “Second Closing”) promptly (but not more than three Business Days)
following notice by the Company to the Purchaser of commencement of patient enrollment (defined as
the first patient dosed) in the Phase 3 clinical trials of Lymphoseek (NEO3-01B and NEO3-01M) or
such other date and time as the Parties may agree (the “Second 

 

 

Closing Date”) at the offices of the Purchaser, 152 West 57th Street, 54th Floor, New
York, New York, provided that all of the conditions set forth in Article VI hereof and applicable
to the Second Closing shall have been fulfilled or waived in accordance herewith.

          (c) The purchase and issuance of the Preferred Stock and the Series Y Warrant shall take place
at a closing (the “Third Closing”) promptly (but not more than three Business Days)
following (i) accrual of 200 evaluable patients who have completed surgery and injection of the
drug in the Phase 3 clinical trials of Lymphoseek (NEO3-01B and NEO3-01M), provided that the
Company and the Purchaser have determined in good faith from a review of the trial data from such
patients that the primary objective of efficacy of Lymphoseek in such patients, i.e., the
concordance of in-vivo detection rate of Lymphoseek and Vital Blue Dye in tumor-draining sentinel
lymph nodes as confirmed by pathology in at least eighty-five percent (85%) of such patients, has
been achieved; or (ii) such other date and time as the Parties may agree (the date of the Third
Closing being hereinafter referred to as the “Third Closing Date”), at the offices of the
Purchaser, 152 West 57th Street, 54th Floor, New York, New York provided that all of the
conditions set forth in Article VI hereof and applicable to the Third Closing shall have been
fulfilled or waived in accordance herewith.

     2.3 Conversion Shares and Warrant Shares. The Company has authorized and has reserved
and covenants to continue to reserve, free of preemptive rights and other similar contractual
rights of stockholders a total of 46,500,000 shares of Common Stock to effect the conversion of the
Notes and Preferred Stock, and any interest or dividends accrued and outstanding thereon, and the
exercise of the Warrants. The Company further covenants that, from and after the First Closing
Date, the Company shall reserve (and hereby covenants to continue to reserve), free of preemptive
rights and other similar contractual rights, a number of its authorized but unissued shares of
Common Stock equal to the aggregate number of shares of Common Stock issuable upon the conversion
of the Notes and Preferred Stock, and any interest or dividends accrued and outstanding thereon,
and the exercise of the Warrants (without regards to any limitation on conversion or exercise set
forth in the Notes, the Preferred Stock or the Warrants).

     2.4 Exemption From Registration. The Company and the Purchaser are executing and
delivering this Agreement in accordance with and in reliance upon the exemption from securities
registration afforded by Section 4(2) of the Securities Act, and the rules and regulations
promulgated thereunder, including Regulation D, and/or upon such other exemption from the
registration requirements of the Securities Act as may be available with respect to any or all of
the investments to be made hereunder.

     2.5 Financial Accounting and Tax Reporting. Each of the parties hereto agrees to take
reporting and other positions with respect to the Securities which are consistent with the purchase
price of the Securities set forth herein for all financial accounting purposes, unless otherwise
required by applicable GAAP or Commission rules (in which case the parties agree only to take
positions inconsistent with the purchase price of the Securities set forth herein provided that the
Lead Purchaser has consented thereto, which consent shall not be unreasonably withheld). Each of
the parties to this Agreement agrees to take reporting and other positions with respect to the
Securities which are consistent with the purchase price of the Securities set

 

 

forth herein for all other purposes, including without limitation, for all federal, state and
local tax purposes.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

     The Company hereby represents and warrants to the Purchaser, as of the date hereof and each
Closing Date (except as set forth on the Schedule of Exceptions attached hereto with each numbered
Schedule corresponding to the section number herein), as follows:

     3.1 Corporate Existence and Power. Except as set forth on Schedule 3.1, the Company
and each of its Subsidiaries: (a) is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation; (b) has all requisite corporate
power and authority to own and operate its property, to lease the property it operates as lessee
and to conduct the business in which it is currently, or is currently proposed to be, engaged; (c)
is duly qualified as a foreign corporation, licensed and in good standing under the laws of each
jurisdiction where its ownership, lease or operation of property or the conduct of its business
requires such qualification, except to the extent that the failure to so qualify would not have a
Material Adverse Effect; and (d) has the corporate power and authority to execute, deliver and
perform its obligations under each Transaction Document to which it is or will be a party.

     3.2 Subsidiaries.

          (a) Schedule 3.2 sets forth a complete and accurate list of all of the Subsidiaries of the
Company together with their respective jurisdictions of incorporation or organization. All of the
outstanding shares of capital stock of, or other equity interests in, the Subsidiaries are validly
issued, fully paid and nonassessable. Except as set forth on Schedule 3.2, all of the outstanding
shares of capital stock of, or other ownership interests in, each of the Subsidiaries are, and on
each Closing Date will be, owned by the Company or by a wholly owned Subsidiary free and clear of
any Liens. No Subsidiary has outstanding options, warrants, subscriptions, calls, rights,
convertible securities or other agreements or commitments obligating the Subsidiary to issue,
transfer or sell any securities of the Subsidiary.

          (b) Except for the Subsidiaries of the Company, the Company does not own of record or
beneficially, directly or indirectly, (i) any shares of outstanding capital stock or securities
convertible into capital stock of any other Person, or (ii) any equity, voting or participating
interest in any Person.

     3.3 Capitalization. The authorized capital stock and the issued and outstanding
shares of capital stock of the Company as of the First Closing Date is set forth on Schedule 3.3
hereto. All of the outstanding shares of the Common Stock and any other outstanding securities of
the Company have been duly and validly authorized. Except as set forth in this Agreement, the SEC
Reports or as set forth on Schedule 3.3 hereto, no shares of Common Stock or any other securities
of the Company are entitled to preemptive rights or registration rights and there are no
outstanding options, warrants, scrip, rights to subscribe to, call or commitments of any character

 

 

whatsoever relating to, or securities or rights convertible into, any shares of capital stock
of the Company. Furthermore, except as set forth in this Agreement and as set forth on Schedule
3.3 hereto, there are no contracts, commitments, understandings, or arrangements by which the
Company is or may become bound to issue additional shares of the capital stock of the Company or
options, securities or rights convertible into shares of capital stock of the Company. Except for
customary transfer restrictions contained in agreements entered into by the Company in order to
sell restricted securities or as provided on Schedule 3.3 hereto, the Company is not a party to or
bound by any agreement or understanding granting registration or anti-dilution rights to any person
with respect to any of its equity or debt securities. Except as set forth on Schedule 3.3, the
Company is not a party to, and it has no knowledge of, any agreement or understanding restricting
the voting or transfer of any shares of the capital stock of the Company. The Company does not
have any stock-based compensation or option plan, other than those disclosed in the SEC Reports
(the “Plans”). Pursuant to the Plans, as of December 26, 2007, an aggregate of 1,317,500 shares of
Common Stock remain available for issuance thereunder.

     3.4 Corporate Authorization; No Contravention. The execution, delivery and
performance by the Company of this Agreement and each other Transaction Document to which it is or
will be a party and the consummation of the transactions contemplated hereby and thereby, (a) has
been duly authorized by all necessary corporate action; (b) do not and will not contravene the
terms of the Certificate of Incorporation or By-Laws of the Company or any amendment thereof or any
federal, state, local or foreign statute, rule, regulation, order, judgment or decree (including
federal and state securities laws and regulations) applicable to the Company or any of its
Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries are bound
or affected; (c) do not and will not (i) conflict with, contravene, result in any material
violation or breach of or material default under (with or without the giving of notice or the lapse
of time or both), (ii) create in any other Person a right or claim of termination or amendment, or
(iii) require any material modification or acceleration or cancellation of, any Contractual
Obligation of the Company or any of its Subsidiaries; and (d) do not and will not result in the
creation of any Lien (or obligation to create a Lien) against any material property or asset of the
Company or any of its Subsidiaries other than the Lien created by the Security Agreement, except,
in all cases, for such conflicts, defaults, terminations, amendments, acceleration, cancellations
and violations as would not, individually or in the aggregate, have a Material Adverse Effect.

     3.5 Binding Effect. This Agreement has been, and each of the Transaction Documents to
which the Company will be a party to will be, duly executed and delivered by the Company, and this
Agreement constitutes, and such Transaction Documents will constitute, the legal, valid and binding
obligation of the Company enforceable against the Company in accordance with their respective
terms, except as enforceability may be limited by applicable bankruptcy, reorganization,
moratorium, liquidation, conservatorship, receivership or similar laws relating to, or affecting
generally the enforcement of, creditor’s rights and remedies or by other equitable principles of
general application.

     3.6 Governmental Authorization. Neither the Company nor any of its Subsidiaries is
required under federal, state, foreign or local law, rule or regulation to obtain any consent,
authorization or order of, or make any filing or registration with, any court or Governmental
Authority in order for it to execute, deliver or perform any of its obligations under the

 

 

Transaction Documents or issue and sell the Securities in accordance with the terms hereof
(other than any filings, consents and approvals which may be required to be made by the Company
under applicable state and federal securities laws, rules or regulations or any registration
provisions provided in the Registration Rights Agreement).

     3.7 Issuance of Securities. The Notes, Preferred Stock and Warrants to be issued at
the Closings have been duly authorized by all necessary corporate action and, when paid for or
issued in accordance with the terms hereof, the Notes and Preferred Stock shall be validly issued
and outstanding, free and clear of all liens, encumbrances and rights of refusal of any kind, and
the Preferred Stock shall be fully paid and non-assessable. When the Conversion Shares and Warrant
Shares are issued and paid for in accordance with the terms of this Agreement and as set forth in
the Notes, Preferred Stock and Warrants, such shares will be duly authorized by all necessary
corporate action and validly issued and outstanding, fully paid and nonassessable, free and clear
of all liens, encumbrances and rights of refusal of any kind and the holders shall be entitled to
all rights accorded to a holder of Common Stock.

     3.8 SEC Reports; Financial Statements. The Common Stock of the Company is registered
pursuant to Section 12(g) of the Exchange Act. Since December 31, 2004, except as described in
Schedule 3.8, the Company has filed in a timely manner all SEC Reports required to be filed by it
with the Commission pursuant to the reporting requirements of the Exchange Act. At the times of
their respective filings, each of the SEC Reports filed since December 31, 2006 (or, if amended or
superseded by a filing prior to the First Closing Date, then on the date of such filing), complied
in all material respects with the requirements of the Exchange Act and the rules and regulations of
the Commission promulgated thereunder and other federal, state and local laws, rules and
regulations applicable to such documents, and such SEC Reports did not 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 light of the circumstances under which they were made, not
misleading. As of their respective dates, the financial statements of the Company included in the
SEC Reports complied as to form in all material respects with applicable accounting requirements
and the published rules and regulations of the Commission or other applicable rules and regulations
with respect thereto. Such financial statements have been prepared in accordance with GAAP applied
on a consistent basis 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 not include footnotes or may be condensed or summary statements), and fairly
present in all material respects the financial position of the Company and its Subsidiaries as of
the dates thereof and the results of operations and cash flows for the periods then ended (subject,
in the case of unaudited statements, to normal year-end audit adjustments).

     3.9 No Material Adverse Change. Since December 31, 2006, the Company has not
experienced or suffered any Material Adverse Effect, except as disclosed in the SEC Reports or on
Schedule 3.9.

     3.10 No Undisclosed Liabilities. Except as disclosed on Schedule 3.10 or in the SEC
Reports, neither the Company nor any of its Subsidiaries has incurred any liabilities, obligations,
claims or losses (whether liquidated or unliquidated, secured or unsecured, absolute, accrued,
contingent or otherwise) other than those incurred in the ordinary course of the Company’s or its

 

 

Subsidiaries respective businesses or which, individually or in the aggregate, are not
reasonably likely to have a Material Adverse Effect.

     3.11 Indebtedness. Schedule 3.11 sets forth as of the date hereof all outstanding
secured and unsecured Indebtedness (other than trade accounts payable and accrued liabilities
incurred in the ordinary course of business) of the Company or any Subsidiary, or for which the
Company or any Subsidiary has commitments. Neither the Company nor any Subsidiary is in default
with respect to any Indebtedness (other than defaults under trade accounts payable and accrued
liabilities incurred in the ordinary course of business that would not reasonably expected to cause
a Material Adverse Effect).

     3.12 Title to Assets. Each of the Company and the Subsidiaries has good and valid
title to all of their respective real and personal property reflected in the SEC Reports, free and
clear of any mortgages, pledges, charges, liens, security interests or other encumbrances, except
for Permitted Encumbrances and those indicated on Schedule 3.12 hereto or such that, individually
or in the aggregate, do not cause a Material Adverse Effect. Any material leases of the Company and
each of its Subsidiaries are valid and subsisting and in full force and effect.

     3.13 Actions Pending. There is no action, suit, claim, investigation, arbitration,
alternate dispute resolution proceeding or other proceeding pending or, to the knowledge of the
Company, threatened against the Company or any Subsidiary which questions the validity of this
Agreement or any of the other Transaction Documents or any of the transactions contemplated hereby
or thereby or any action taken or to be taken pursuant hereto or thereto. Except as set forth in
the SEC Reports or on Schedule 3.13, there is no action, suit, claim, investigation, arbitration,
alternate dispute resolution proceeding or other proceeding pending or, to the knowledge of the
Company, threatened against or involving the Company, any Subsidiary or any of their respective
properties or assets, which individually or in the aggregate, would reasonably be expected, if
adversely determined, to have a Material Adverse Effect. There are no outstanding orders,
judgments, injunctions, awards or decrees of any court, arbitrator or Governmental Authority
against the Company or any Subsidiary or any officers or directors of the Company or Subsidiary in
their capacities as such, which individually or in the aggregate, could reasonably be expected to
have a Material Adverse Effect.

     3.14 Compliance with Law. The business of the Company and the Subsidiaries has been
and is presently being conducted in accordance with all applicable federal, state and local
governmental laws, rules, regulations and ordinances, except such that, individually or in the
aggregate, the noncompliance therewith could not reasonably be expected to have a Material Adverse
Effect. The Company and each of its Subsidiaries have all franchises, permits, licenses, consents
and other governmental or regulatory authorizations and approvals necessary for the conduct of its
business as now being conducted by it unless the failure to possess such franchises, permits,
licenses, consents and other governmental or regulatory authorizations and approvals, individually
or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.

     3.15 Taxes. The Company and each of its Subsidiaries has timely filed or has valid
extensions of the time to file all federal, state and other material tax returns required by law to
be filed by it, has paid or made provisions for the payment of all taxes shown to be due and all

 

 

additional assessments, and adequate provisions have been and are reflected in the financial
statements of the Company and the Subsidiaries for all current taxes and other charges to which the
Company or any Subsidiary is subject and which are not currently due and payable. Except as
disclosed on Schedule 3.15 hereto or in the SEC Reports, to the best of the Company’s knowledge,
none of the federal income tax returns of the Company or any Subsidiary have been audited by the
Internal Revenue Service. The Company has no knowledge of any additional assessments, adjustments
or contingent tax liability (whether federal or state) of any nature whatsoever, whether pending or
threatened against the Company or any Subsidiary for any period, nor of any basis for any such
assessment, adjustment or contingency.

     3.16 Brokers’ or Finders’ Fees. Except as set forth on Schedule 3.16, the Company has
not employed any broker or finder or incurred any liability for any brokerage or investment banking
fees, commissions, finders’ structuring fees, financial advisory fees or other similar fees in
connection with the transactions contemplated by this Agreement.

     3.17 Disclosure. Except for the transactions contemplated by this Agreement, the
Company confirms that neither it nor any other person acting on its behalf has provided the
Purchaser or its agents or counsel with any information that constitutes or might constitute
material, nonpublic information. To the Company’s knowledge, neither this Agreement or the
Schedules hereto nor any other documents, certificates or instruments furnished to the Purchaser by
or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by
this Agreement contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made herein or therein, in the light of the circumstances
under which they were made herein or therein, not misleading.

     3.18 Intellectual Property. Except as set forth on Schedule 3.18, the Company and each
of the Subsidiaries owns or possesses the rights to all patents, trademarks, domain names (whether
or not registered) and any patentable improvements or copyrightable derivative works thereof,
websites and intellectual property rights relating thereto, service marks, trade names, copyrights,
licenses and authorizations which are necessary for the conduct of its business as now conducted
without any conflict known by the Company with the rights of others.

     3.19 Books and Records; Internal Accounting Controls. The records and documents of the
Company and its Subsidiaries accurately reflect in all material respects the information relating
to the business of the Company and the Subsidiaries, the location and collection of their assets,
and the nature of all transactions giving rise to the obligations or accounts receivable of the
Company or any Subsidiary. The Company is in compliance in all material respects with all
provisions of the Sarbanes-Oxley Act of 2002 which are applicable to it as of the applicable
Closing Date. The Company and 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 GAAP and to maintain asset
accountability, (iii) access to assets is permitted only in accordance with management’s general or
specific authorization, and (iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken with respect to any
differences. The Company has established disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed such

 

 

disclosure controls and procedures to ensure that information required to be disclosed by the
Company in the reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Commission’s rules and forms.
The Chief Executive Officer and the Chief Financial Officer of the Company have signed, and the
Company has furnished to the Commission, all certifications required by Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002.

     3.20 Material Contracts. Except as disclosed in the SEC Reports or as set forth on
Schedule 3.20 (i) the Company and each of its Subsidiaries have performed all obligations required
to be performed by them to date under any written or oral contract, instrument, agreement,
commitment, obligation, plan or arrangement, filed or required to be filed with the Commission (the
“Material Contracts”), (ii) neither the Company nor any of its Subsidiaries has received
any notice of default under any Material Contract and, (iii) to the best of the Company’s
knowledge, neither the Company nor any of its Subsidiaries is in default under any Material
Contract now in effect, except where the effect of such default would not be reasonably likely to
have a Material Adverse Effect.

     3.21 Transactions with Affiliates. Except as set forth on Schedule 3.21 hereto or in
the SEC Reports, none of the officers, directors or Affiliates of the Company has entered into any
transaction with the Company or any Subsidiary that would be required to be disclosed pursuant to
Item 404(a), (b) or (c) of Regulation S-K of the Commission.

     3.22 Securities Act. The Company has complied and will comply with all applicable
federal and state securities laws in connection with the offer, issuance and sale of the Securities
hereunder. Neither the Company nor anyone acting on its behalf, directly or indirectly, has or
will take any action that would require registration under the Securities Act or applicable state
securities laws of the offer, sale or issuance of the Securities to the Purchaser. 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 any of the Securities.

     3.23 Employees. Neither the Company nor any Subsidiary has any collective bargaining
arrangements or agreements covering any of its employees. No executive officer or key employee of
the Company or any Subsidiary whose termination, either individually or in the aggregate, would be
reasonably likely to have a Material Adverse Effect, has terminated or, to the knowledge of the
Company, has any present intention of terminating his or her employment or engagement with the
Company or any Subsidiary.

     3.24 Absence of Certain Developments. Except as set forth in the SEC Reports or
provided on Schedule 3.24 hereto, since December 31, 2006, the business and operations of the
Company and each Subsidiary have been conducted in the ordinary course consistent with past
practice, and there has not been:

          (a) any declaration, setting aside or payment of any dividend or other distribution of the
assets of the Company or any Subsidiary with respect to any shares of capital stock of the Company
or any Subsidiary or any repurchase, redemption or other acquisition by

 

 

the Company or any Subsidiary of any outstanding shares of the Company’s or any Subsidiary’s
capital stock;

          (b) any damage, destruction or loss, whether or not covered by insurance, except for such
occurrences, individually and collectively, that have not had, and would not reasonably be expected
to have, a Material Adverse Effect;

          (c) any waiver by the Company or any Subsidiary of a valuable right or of a material debt owed
to it;

          (d) any material change or amendment to, or any waiver of any material right under any
Contractual Obligation by which the Company or any Subsidiary or any of the Company’s or any
Subsidiary’s assets or properties is bound or subject;

          (e) any change by the Company in its accounting principles, methods or practices or in the
manner in which it keeps its accounting books and records, except any such change required by a
change in GAAP or by the Commission;

          (f) any sale, transfer or disposition of any tangible or intangible asset, in each case in
excess of $250,000, other than in the ordinary course of business; or

          (g) any changes in executive officer compensation except in the ordinary course of business
and consistent with past practices; or

          (h) any capital expenditures or commitments therefor that aggregate in excess of $100,000;

     3.25 Investment Company Act Status. The Company is not, and as a result of and
immediately upon the Closing will not be, an “investment company” or a company “controlled” by an
“investment company,” within the meaning of the Investment Company Act of 1940, as amended.

     3.26 DTC Status. Except as set forth on Schedule 3.26 hereto, the Company’s transfer
agent is a participant in and the Common Stock is eligible for transfer pursuant to the Depository
Trust Company Automated Securities Transfer Program. The name, address, telephone number, fax
number, contact person and email of the Company transfer agent is set forth on Schedule 3.26
hereto.

     3.27 Clinical Trials. The material human clinical trials conducted by the Company or
in which the Company has participated and that are described in the SEC Reports, or the results of
which are referred to in the SEC Reports, if any, are the only material human clinical trials
currently being conducted by or on behalf of the Company, and, to the Company’s knowledge, such
studies and tests were and, if still pending, are being, conducted in accordance with experimental
protocols, procedures and controls pursuant to accepted professional scientific standards; the
descriptions of the results of such studies, tests and trials contained in the SEC Reports, if any,
were accurate and complete in all material respects as of the respective date(s) of such SEC
Reports. Except as set forth in the SEC Reports, the Company has no knowledge of any other studies
or tests, the results of which call into question the results of the clinical trials

 

 

described in the SEC Reports. The Company has not received any notices or correspondence from
the United States Food and Drug Administration (the “FDA”) or any other governmental agency
requiring the termination, suspension or modification of any clinical trials conducted by, or on
behalf of, the Company or in which the Company has participated that are described in the SEC
Reports, if any, or the results of which are referred to in the SEC Reports. All human clinical
trials previously conducted by or on behalf of the Company while conducted by or on behalf of the
Company, were conducted in accordance with experimental protocols, procedures and controls pursuant
to accepted professional scientific standards; the descriptions of the results of such studies,
tests and trials contained in the SEC Reports, if any, are accurate and complete in all material
respects as of the respective date(s) of such SEC Reports.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

     The Purchaser hereby represents and warrants to the Company, as of the date hereof and as of
each Closing Date, as follows:

     4.1 Organization and Standing. The Purchaser is a limited liability company duly
organized, validly existing and in good standing under the laws of Delaware.

     4.2 Authorization and Power. The Purchaser has the requisite power and authority to
enter into and perform the Transaction Documents and to purchase the Securities being sold to it
hereunder. The execution, delivery and performance of the Transaction Documents by the Purchaser
and the consummation by it of the transactions contemplated hereby (a) have been duly authorized by
all necessary limited liability company action, and (b) does not contravene the terms of the
organizational or governing documents of the Purchaser. No further consent or authorization of the
Purchaser, its board of directors or other governing body, or of its members, is required for the
execution, delivery or performance of the Transaction Documents by the Purchaser. When executed and
delivered by the Purchaser, the Transaction Documents shall constitute valid and binding
obligations of the Purchaser enforceable against the Purchaser in accordance with their terms,
except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation, conservatorship, receivership or similar laws relating to, or affecting
generally the enforcement of, creditor’s rights and remedies or by other equitable principles of
general application.

     4.3 Acquisition for Investment. The Purchaser is purchasing the Securities solely for
its own account and not with a view to or for sale in connection with a distribution thereof. The
Purchaser does not have a present intention to sell any of the Securities, nor a present
arrangement (whether or not legally binding) or intention to effect any distribution of any of the
Securities to or through any person or entity; provided, however, that by making the
representations herein, the Purchaser does not agree to hold the Securities for any minimum or
other specific term and reserves the right to dispose of the Securities at any time in accordance
with Federal and state securities laws applicable to such disposition. The Purchaser acknowledges
and agrees that certificates representing the Securities shall bear a legend to the following
effect:

 

 

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
SUCH ACT AND SUCH LAWS.

     4.4 Purchaser Status. At the time Purchaser was offered the Securities, it was, and
at the date hereof it is, and on each date on which it converts a Note or Preferred Stock, or
exercises a Warrant, it will be, an “accredited investor” as defined in Rule 501(a) under the
Securities Act. The Purchaser has such experience in business and financial matters that it is
capable of evaluating the merits and risks of an investment in the Securities. The Purchaser is not
required to be registered as a broker-dealer under Section 15 of the Exchange Act and the Purchaser
is not a broker-dealer. Each Purchaser acknowledges that an investment in the Securities is
speculative and involves a high degree of risk.

     4.5 Access to Information. The Purchaser acknowledges that it has reviewed the SEC
Reports, the Schedules to this Agreement and other information furnished by the Company, and has
been afforded (i) the opportunity to ask such questions as it has deemed necessary of, and to
receive answers from, representatives of the Company concerning the terms and conditions of the
offering of the Securities and the merits and risks of investing in the Securities; (ii) access to
information about the Company and Subsidiaries and their respective financial condition, results of
operations, business, properties, management and prospects sufficient to enable it to evaluate its
investment; and (iii) the opportunity to obtain such additional information that the Company
possesses or can acquire without unreasonable effort or expense that is necessary to make an
informed investment decision with respect to Purchaser’s investment in the Securities.

     4.6 Rule 144. The Purchaser understands that the Securities must be held indefinitely
unless such Securities are registered under the Securities Act or an exemption from registration is
available. The Purchaser acknowledges that the Purchaser is familiar with Rule 144, and that the
Purchaser has been advised that Rule 144 permits resales only under certain circumstances. The
Purchaser understands that to the extent that Rule 144 is not available, such Purchaser will be
unable to sell any Securities without either registration under the Securities Act or the existence
of another exemption from such registration requirement.

     4.7 Certain Trading Activities. The Purchaser has not directly or indirectly, nor has
any Person acting on behalf of or pursuant to any understanding with the Purchaser, engaged in any
transactions in the securities of the Company (including, without limitations, any Short Sales
involving the Company’s securities) since the earlier to occur of (a) the time that such Purchaser
was first contacted by or on behalf of the Company regarding an investment in the Company, or (b)
the 30th day prior to the date of this Agreement. The Purchaser covenants that neither it nor any
Person acting on its behalf or pursuant to any understanding with it will engage in any Short Sales
of the Common Stock until the earlier to occur of (i) the Third Closing Date, (ii) December 31,
2008, or (iii) the earlier termination of the Purchaser’s obligation to purchase the Preferred
Stock at the Third Closing (including the termination of such obligation resulting from a failure
to effect the Second Closing hereunder or the Company’s notification to the Purchaser of its

 

 

inability to satisfy the conditions set forth in 6.2(j)) (the “No-Short Period”).
Upon termination of the No-Short Period, the Purchaser shall be permitted to engage in Short Sales
or other hedging activities with respect to the Common Stock, but shall maintain, at any time while
the Notes or Preferred Stock are held by the Purchaser, a “net-long” position with respect to the
Common Stock, i.e., Purchaser may make Short Sales of Common Stock at any time when Purchaser holds
an equivalent offsetting long position in Common Stock (including, for purposes of this definition,
a long position in Common Stock underlying the Securities on an as-converted or as-exercised
basis).

     4.8 No General Solicitation. The Purchaser acknowledges that the Securities were not
offered to the Purchaser by means of any form of general or public solicitation or general
advertising, or publicly disseminated advertisements or sales literature, including (a) any
advertisement, article, notice or other communication published in any newspaper, magazine, or
similar media, or broadcast over television or radio, or (b) any seminar or meeting to which such
Purchaser was invited by any of the foregoing means of communications.

     4.9 Independent Investment Decision. The Purchaser has independently evaluated the
merits of its decision to purchase Securities pursuant to the Transaction Documents. The Purchaser
has not relied on the business or legal advice of the Company or any of its agents, counsel or
Affiliates in making its investment decision hereunder, and confirms that none of such Persons has
made any representations or warranties to such Purchaser in connection with the transactions
contemplated by the Transaction Documents other than as contained therein.

     4.10 Exemption From Registration. Each Purchaser understands that the Securities are
being offered and sold in reliance on a transactional exemption from the registration requirements
of federal and state securities laws and the Company is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgments and understandings of such Purchaser set
forth herein in order to determine the applicability of such exemptions and the suitability of such
Purchaser to acquire the Securities. The Purchaser understands that no Governmental Authority has
passed upon or made any recommendation or endorsement of the Securities.

     4.11 Certain Fees. The Purchaser has not employed any broker or finder or incurred any
liability for any brokerage or investment banking fees, commissions, finders’ structuring fees,
financial advisory fees or other similar fees in connection with the transactions contemplated by
this Agreement.

     4.12 No Agreements. The Purchaser has not agreed to act with any other Person for the
purpose of acquiring, holding, voting or disposing of the Securities purchased hereunder for
purposes of Section 13(d) of the Exchange Act, and the Purchaser is acting independently with
respect to its investment in the Securities.

 

 

ARTICLE V

COVENANTS

     Unless otherwise specified in this Section, for so long as any Notes have not been paid in
full or converted in full, or at least 750 shares of Preferred Stock remain outstanding, or, in the
case of Sections 5.8, 5.12 and 5.13, for so long as the Purchaser owns any Securities, the Company
covenants with the Purchaser as follows, which covenants are for the benefit of the Purchaser and
their respective permitted assignees.

     5.1 Registration and Listing. The Company shall cause its Common Stock to continue to
be registered under Sections 12(b) or 12(g) of the Exchange Act, to comply in all respects with its
reporting and filing obligations under the Exchange Act, to comply with all requirements related to
any registration statement filed pursuant to this Agreement, and to not take any action or file any
document (whether or not permitted by the Securities Act or the rules promulgated thereunder) to
terminate or suspend such registration or to terminate or suspend its reporting and filing
obligations under the Exchange Act or Securities Act, except as permitted herein. The Company will
take all action necessary to continue the listing or trading of its Common Stock on the OTC
Bulletin Board or other exchange or market on which the Common Stock is trading. Subject to the
terms of the Transaction Documents, the Company further covenants that it will take such further
action as the Purchaser may reasonably request, all to the extent required from time to time to
enable the Purchaser to sell the Securities without registration under the Securities Act within
the limitation of the exemptions provided by Rule 144 promulgated under the Securities Act. Upon
the request of the Purchaser, the Company shall deliver to the Purchaser a written certification of
a duly authorized officer as to whether it has complied with such requirements. Upon the request
of the Purchaser and if not then listed, the Company will submit a listing (or similar) application
for the Conversion Shares and the Warrant Shares on the principal exchange or trading market on
which the Common Stock is then traded.

     5.2 Inspection Rights. Provided same would not be in violation of Regulation FD, the
Company shall permit, during normal business hours and upon reasonable request and reasonable
notice, the Purchaser or any employees, agents or representatives thereof, so long as such
Purchaser shall be obligated hereunder to purchase the Notes or Preferred Stock, or shall
beneficially own any Conversion Shares or Warrant Shares, for purposes reasonably related to such
Purchaser’s interests as a stockholder, to examine the publicly available, non-confidential records
and books of account of, and visit and inspect the properties, assets, operations and business of
the Company and any Subsidiary, and to discuss the publicly available, non-confidential affairs,
finances and accounts of the Company and any Subsidiary with any of its officers, consultants,
directors, and key employees.

     5.3 Compliance with Laws. The Company shall comply, and cause each Subsidiary to
comply, with all applicable laws, rules, regulations and orders, noncompliance with which would be
reasonably likely to have a Material Adverse Effect.

     5.4 Recordkeeping and Books of Account. The Company shall keep and cause each
Subsidiary to keep adequate records and books of account, in which complete entries will be made in
accordance with GAAP consistently applied, reflecting all financial transactions of the Company and
its Subsidiaries, and in which, for each fiscal year, all proper reserves for depreciation,
depletion, obsolescence, amortization, taxes, bad debts and other purposes in connection with its
business shall be made.

 

 

     5.5 Reporting Requirements. If the Company ceases to file its periodic reports with
the Commission, or if the Commission ceases making these periodic reports available via the
Internet without charge, then the Company shall furnish the following to the Purchaser so long as
the Purchaser shall be obligated hereunder to purchase the Securities or shall beneficially own
Notes or Preferred Stock:

          (a) Quarterly Reports filed with the Commission on Form 10-QSB as soon as practical after the
document is filed with the Commission, and in any event within five (5) days after the document is
filed with the Commission;

          (b) Annual Reports filed with the Commission on Form 10-KSB as soon as practical after the
document is filed with the Commission, and in any event within five (5) days after the document is
filed with the Commission; and

          (c) Copies of all notices, information and proxy statements in connection with any meetings,
that are, in each case, provided to holders of shares of Common Stock, contemporaneously with the
delivery of such notices or information to such holders of Common Stock.

     5.6 Other Agreements. The Company shall not enter into any agreement in which the
terms of such agreement would materially restrict or impair the right or ability to perform of the
Company or any Subsidiary under any Transaction Document.

     5.7 Use of Proceeds. The proceeds from the sale of the Securities hereunder shall be
used by the Company to repay the outstanding principal balance of and accrued interest on the 2004
Notes, redemption of the warrants issued in connection therewith, and for general working capital
purposes.

     5.8 Reporting Status. So long as the Purchaser beneficially owns any of the
Securities, 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 permit such termination.

     5.9 Disclosure of Transaction. The Company shall issue a press release describing the
material terms of the transactions contemplated hereby on the day of the Closing but in no event
later than two hours after completion of the First Closing; provided, however, that if such
Closing is completed after 3:00 P.M. Eastern Time on any Trading Day, the Company shall issue such
press release no later than 9:00 A.M. Eastern Time on the first Trading Day following the Closing
Date. The Company shall also file with the Commission a Current Report on Form 8-K describing the
material terms of the transactions contemplated hereby (and attaching as exhibits thereto this
Agreement, each form of Note, the Security Agreement, each series of Warrant and the Press Release)
as soon as practicable following the Closing Date but in no event more than two (2) Trading Days
following the Closing Date. Both the press release and Form 8-K referenced in this Section shall
be subject to prior review and comment by the Purchaser.

     5.10 Disclosure of Material Information. The Company covenants and agrees that neither
it nor any other person acting on its behalf has provided or will provide the Purchaser or

 

 

its agents or counsel with any information that the Company believes constitutes material
non-public information, unless prior thereto the Purchaser shall have executed a written agreement
regarding the confidentiality and use of such information. The Company understands and confirms
that the Purchaser shall be relying on the foregoing representations in effecting transactions in
securities of the Company. In the event of a breach of the foregoing covenant by the Company, or
any of its Subsidiaries, or any of its or their respective officers, directors, employees and
agents, in addition to any other remedy provided herein or in the Transaction Documents, the
Company shall publicly disclose any material, non-public information in a Form 8-K within five (5)
Business Days of the date that it discloses such information to the Purchaser. In the event that
the Company discloses any material, non-public information to the Purchaser and fails to publicly
file a Form 8-K in accordance with the above, the 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. The Purchaser shall have no liability to
the Company, its Subsidiaries, or any of its or their respective officers, directors, employees,
stockholders or agents, for any such disclosure.

     5.11 Pledge of Securities. The Company acknowledges that the Securities may be pledged
by the 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 the Purchaser effecting a pledge of
the Securities shall not 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;
provided, however, that the Purchaser and its pledgee shall be required to comply with the
provisions of Article V hereof in order to effect a sale, transfer or assignment of Securities to
such pledgee. At the Purchaser’s expense, 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 the Purchaser.

     5.12 Transfer Agent Instructions. The Company shall issue irrevocable instructions to
its transfer agent, and any subsequent transfer agent, to issue certificates, registered in the
name of the Purchaser or its nominee(s), for the Conversion Shares and the Warrant Shares in such
amounts as specified from time to time by the Purchaser to the Company upon conversion of the Notes
or Preferred Stock, or exercise of the Warrants, in the form of Exhibit L attached hereto (the
“Irrevocable Transfer Agent Instructions”). Prior to registration of the Conversion Shares
and the Warrant Shares under the Securities Act, all such certificates shall bear the restrictive
legend specified in Section 4.3 of this Agreement, unless such Conversion Shares or Warrant Shares
may be sold pursuant to Rule 144. The Company warrants that no instruction other than the
Irrevocable Transfer Agent Instructions referred to in this Section 4.3 will be given by the
Company to its transfer agent and that the Conversion Shares and Warrant Shares shall otherwise be
freely transferable on the books and records of the Company as and to the extent provided in this
Agreement and the Registration Rights Agreement. Nothing in this Section 5.12 shall affect in any
way the Purchaser’s obligations and agreements under applicable law to comply with all applicable
prospectus delivery requirements, if any, upon resale of the Conversion Shares and the Warrant
Shares. If the Purchaser provides the Company with an opinion of counsel, in a generally
acceptable form, to the effect that a public sale, assignment or transfer of the Conversion Shares
or Warrant Shares may be made without registration under the Securities Act

 

 

or the Purchaser provides the Company with reasonable assurances that the Conversion Shares or
Warrant Shares can be sold pursuant to Rule 144 without any restriction as to the number of
securities acquired as of a particular date that can then be immediately sold, the Company shall
permit the transfer, and, in the case of the Conversion Shares and the Warrant Shares, promptly
instruct its transfer agent to issue one or more certificates in such name and in such
denominations as specified by such Purchaser and without any restrictive legend.

     5.13 Legend Removal; Rule 144. The Company will provide, at the Company’s expense,
such legal opinions in the future as are reasonably necessary for the issuance and resale of the
Common Stock issuable upon conversion of the Notes and the Preferred Stock and exercise of the
Warrants pursuant to an effective registration statement, Rule 144 under the Securities Act or an
exemption from registration. In the event that Common Stock is sold in a manner that complies with
an exemption from registration, the Company will promptly instruct its counsel (at its expense) to
issue to the transfer agent an opinion permitting removal of the legend (indefinitely, if under
Rule 144, such shares of Common Stock may be sold without regards to volume limitations or the
availability of current public information concerning the Company, or to otherwise permit sale of
the shares if pursuant to the other provisions of Rule 144).

     5.14 Variable Rate Securities. Without the prior written consent of the holders of a
majority of the outstanding principal balance of the Notes, the Company shall not issue or sell, or
agree to issue or sell Variable Equity Securities (as defined below) (the “Variable Equity
Securities Lock-Up”). For purposes hereof, the following shall be collectively referred to
herein as, the “Variable Equity Securities”: (A) any debt or equity securities which are
convertible into, exercisable or exchangeable for, or carry the right to receive additional shares
of Common Stock either (1) at any conversion, exercise or exchange rate or other price that is
based upon and/or varies with the trading prices of or quotations for Common Stock at any time
after the initial issuance of such debt or equity security, or (2) with a fixed conversion,
exercise or exchange price that is subject to being reset at some future date at any time after the
initial issuance of such debt or equity security due to a change in the market price of the
Company’s Common Stock since date of initial issuance, or (B) any amortizing convertible security
which amortizes prior to its maturity date, where the Company is required to or has the option to
(or the investor in such transaction has the option to require the Company to) make such
amortization payments in shares of Common Stock (whether or not such payments in stock are subject
to certain equity conditions), or (C) any transaction involving a written agreement between the
Company and an investor or underwriter whereby the Company has the right to “put” its securities to
the investor or underwriter over an agreed period of time and at an agreed price or price formula;
provided however, that the limitation contained in clause (C) above shall no longer apply upon and
after the date of the Third Closing. For purposes of the above, the “Market Price” shall
mean the volume weighted average price, as reported by Bloomberg Financial Markets
(“Bloomberg”), for the Common Stock for the 5 trading day period immediately preceding the
date in question.

     5.15 Ethicon Agreement. The Company has granted a security interest in, among other
things, all Accounts (as defined in the Security Agreement) including all rights to payment of sums
due and owing, including royalty payments under the Distribution Agreement (the “Ethicon
Agreement”) between the Company and Ethicon Endo-Surgery, Inc. (“Ethicon”). Upon and
after an Event of Default under the Notes, the Purchaser shall have full control and

 

 

dominion over the account identified in the Account Control Agreement in accordance with the
terms of the Account Control Agreement. All payments made to the Company pursuant to the Ethicon
Agreement shall be made to the account identified in the Account Control Agreement. In no event
shall the Company amend, modify or terminate the Ethicon Agreement so as to materially and
adversely affect the ability of the Company to repay the Notes; further, the Company covenants and
agrees that, to the extent it receives any payment in connection with any amendment, modification
or termination, it shall hold such payment in trust for the benefit of the holders of the Notes.
The Company shall, by April 1, 2008, deliver to the Purchaser the Instruction Letter attached
hereto as Exhibit M (the “Instruction Letter”) executed by each of the Company and Ethicon.

ARTICLE VI

CONDITIONS TO CLOSINGS

     6.1 Conditions Precedent to the Obligation of the Company to Close and to Sell the
Securities. The obligation hereunder of the Company to close and issue and sell the Securities
to the Purchaser at each Closing is subject to the satisfaction or waiver, at or before such
Closing of the conditions set forth below. These conditions are for the Company’s sole benefit and
may be waived by the Company at any time in its sole discretion.

          (a) Accuracy of the Purchaser’s Representations and Warranties. The representations
and warranties of the Purchaser shall be true and correct in all material respects as of the date
when made and as of the applicable Closing Date as though made at that time, except for
representations and warranties that are expressly made as of a particular date, which shall be true
and correct in all material respects as of such date.

          (b) Performance by the Purchaser. The Purchaser shall have performed, satisfied and
complied in all material respects with all covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the Purchaser at or prior to the
applicable Closing Date.

          (c) No Injunction. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any court or Governmental
Authority of competent jurisdiction which prohibits the consummation of any of the transactions
contemplated by this Agreement.

          (d) Delivery of Purchase Price. The Purchase Price for the Securities to be purchased
at the Closing shall have been delivered to the Company on the applicable Closing Date.

          (e) Delivery of Transaction Documents. The Transaction Documents which by their terms
are required to be executed and delivered at or before the Closing shall have been duly executed
and delivered by the Purchaser to the Company.

     6.2 Conditions Precedent to the Obligation of the Purchaser to Close and to Purchase the
Securities. The obligation hereunder of the Purchaser to purchase the Securities and
consummate the transactions contemplated by this Agreement at each Closing is subject to the

 

 

satisfaction or waiver, at or before such Closing, of each of the conditions set forth below.
These conditions are for the Purchaser’s sole benefit and may be waived by the Purchaser at any
time in its sole discretion.

          (a) Accuracy of the Company’s Representations and Warranties. Each of the
representations and warranties of the Company in this Agreement and the other Transaction Documents
shall be true and correct in all material respects as of the Closing Date, except for
representations and warranties that speak as of a particular date, which shall be true and correct
in all material respects as of such date.

          (b) Performance by the Company. The Company shall have performed, satisfied and
complied in all material respects with all covenants, agreements and conditions required by this
Agreement or the other Transaction Documents to be performed, satisfied or complied with by the
Company at or prior to the applicable Closing Date, and no default or event of default shall have
occurred under any of the Transaction Documents prior to the applicable Closing Date.

          (c) No Suspension, Etc. Trading in the Common Stock shall not have been suspended by
the Commission or the OTC Bulletin Board, and, at any time prior to the Closing Date, trading in
securities generally as reported by Bloomberg shall not have been suspended or limited, or minimum
prices shall not have been established on securities whose trades are reported by Bloomberg, or on
the New York Stock Exchange, nor shall a banking moratorium have been declared either by the United
States or New York State authorities, nor shall there have occurred any material outbreak or
escalation of hostilities or other national or international calamity or crisis of such magnitude
in its effect on, or any material adverse change in any financial market which, in each case, in
the judgment of such Purchaser, makes it impracticable or inadvisable to purchase the Securities.

          (d) No Injunction. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any court or Governmental
Authority of competent jurisdiction which prohibits the consummation of any of the transactions
contemplated by this Agreement.

          (e) No Proceedings or Litigation. No action, suit or proceeding before any arbitrator
or any Governmental Authority shall have been commenced, and no investigation by any Governmental
Authority shall have been threatened, against the Company or any Subsidiary, or any of the
officers, directors or affiliates of the Company or any Subsidiary seeking to restrain, prevent or
change the transactions contemplated by this Agreement, or seeking damages in connection with such
transactions.

          (f) Opinion of Counsel. The Purchaser shall have received an opinion of counsel to the
Company, dated the date of the applicable Closing Date, substantially in the form of Exhibit N
hereto, with such exceptions and limitations as shall be reasonably acceptable to counsel to the
Purchaser.

          (g) Delivery of Transaction Documents. The Company and the Subsidiaries, as
applicable, shall have duly executed and delivered to the Purchaser this Agreement, the

 

 

Security Agreement, the IP Security Agreement, the Account Control Agreement and the
Registration Rights Agreement. The Company shall have provided evidence of filing and acceptance
of the Certificate of Designations with the Secretary of State of the State of Delaware

          (h) Additional Conditions to the First Closing. The outstanding principal balance and
accrued interest on the 2004 Notes shall have been paid in full, and provision shall have been made
to the Purchaser’s reasonable satisfaction for the release of all Liens securing the 2004 Notes
upon or promptly after the First Closing, the parties thereto shall have entered into the
Intercreditor Agreement, and (iii) UCC Financing Statement 3087010 8 (filed with the Secretary of
State of the State of Delaware), naming David C. Bupp and Donald Garlikov as secured parties, shall
have been terminated..

          (i) Additional Conditions to the Second Closing. The First Closing shall have
occurred, the Purchaser shall have received notice by the Company of commencement of patient
enrollment in the Phase 3 clinical trials of Lymphoseek (defined as first patient dosed with
Lymphoseek), and no Event of Default shall have occurred and be continuing with respect to the
Series A Note or the other Transaction Documents. Further, as an additional condition of the
Purchaser’s obligations to purchase the Securities at the Second Closing, the Company and Ethicon
shall have executed the Instruction Letter.

          (j) Additional Conditions to the Third Closing. (i) The Second Closing shall have
occurred, (ii) 200 evaluable patients shall have been accrued who have completed surgery and
injection of the drug in the Phase 3 clinical trials of Lymphoseek (NEO3-01B and NEO3-01M), (iii)
the Company and the Purchaser shall have determined in good faith from a review of the trial data
from such patients that the primary objective of efficacy of Lymphoseek in such patients, i.e., the
concordance of in-vivo detection rate of Lymphoseek and Vital Blue Dye in tumor-draining sentinel
lymph nodes as confirmed by pathology in at least eighty-five percent (85%) of such patients, has
been achieved, and (iv) no Event of Default shall have occurred and be continuing with respect to
the Notes or the other Transaction Documents.

          (k) Notes and Warrants.

     (i) At or prior to the First Closing, the Company shall have delivered to the Purchaser
the Series A Note and the Series W Warrant.

     (ii) At or prior to the Second Closing, the Company shall have delivered to the
Purchaser the Series B Note and the Series X Warrant.

     (iii) At or prior to the Third Closing, the Company shall have delivered to the
Purchaser the Preferred Stock and the Series Y Warrant.

          (l) Secretary’s Certificate. The Company shall have delivered to the Purchaser a
secretary’s certificate, dated as of the applicable Closing Date, as to (i) the resolutions adopted
by the Board approving the transactions contemplated hereby, (ii) the Certificate of Incorporation,
(iii) the By-laws, each as in effect at such Closing, and (iv) the authority and incumbency of the
officers of the Company executing the Transaction Documents and any other documents required to be
executed or delivered in connection therewith.

 

 

          (m) Officer’s Certificate. On each Closing Date, the Company shall have delivered to
the Purchaser a certificate signed by an executive officer on behalf of the Company, dated as of
such Closing Date, confirming the accuracy of the Company’s representations, warranties and
covenants as of such Closing Date and confirming the compliance by the Company with the conditions
precedent set forth in paragraphs (a)-(e) and (l) of this Section 6.2 as of such Closing Date
(provided that, with respect to the matters in paragraphs (d) and (e) of this Section 6.2, such
confirmation shall be based on the knowledge of the executive officer after due inquiry).

          (n) Material Adverse Effect. No Material Adverse Effect shall have occurred.

          (o) Transfer Agent Instructions. The Irrevocable Transfer Agent Instructions, in the
form of Exhibit M attached hereto, shall have been delivered to and executed by the Company’s
transfer agent, and delivered to the Purchaser’s counsel to be held in escrow pending the Closing.

          (p) UCC Financing Statements. The Company shall have authorized the filing of all UCC
financing statements in form and substance satisfactory to the Purchaser at the appropriate offices
to create a valid and perfected security interest in the Collateral (as defined in the Security
Agreement), which filings are to be made promptly following Closing.

ARTICLE VII

INDEMNIFICATION

     7.1 General Indemnity. The Company agrees to indemnify and hold harmless the Purchaser
and Purchaser Affiliates from and against any and all losses, liabilities, deficiencies, costs,
damages and expenses (including, without limitation, reasonable attorneys’ fees, charges and
disbursements) incurred by the them as a result of any inaccuracy in or breach of the
representations, warranties or covenants made by the Company herein; provided, however, that the
Company shall not be liable under this Section 7.1 to an indemnified party: (a) to the extent that
it is finally judicially determined that such losses, liabilities, deficiencies, costs, damages and
expenses resulted primarily from the willful misconduct or gross negligence of such indemnified
party or (b) to the extent that it is finally judicially determined that such losses, liabilities,
deficiencies, costs, damages and expenses resulted primarily from the breach by any indemnified
party of any representation, warranty, covenant or other agreement of such indemnified party
contained in this Agreement.

     7.2 Indemnification Procedure. Any party entitled to indemnification under this
Article VII (an “indemnified party”) will give written notice to the indemnifying party of
any matter giving rise to a claim for indemnification; provided, that the failure of any party
entitled to indemnification hereunder to give notice as provided herein shall not relieve the
indemnifying party of its obligations under this Article VII except to the extent that the
indemnifying party is actually prejudiced by such failure to give notice. In case any such action,
proceeding or claim is brought against an indemnified party in respect of which indemnification is
sought hereunder, the indemnifying party shall be entitled to participate in and, unless in the
reasonable judgment of the indemnifying party a conflict of interest between it and the indemnified
party exists with

 

 

respect to such action, proceeding or claim (in which case the indemnifying party shall be
responsible for the reasonable fees and expenses of one separate counsel for the indemnified
parties), to assume the defense thereof with counsel reasonably satisfactory to the indemnified
party. In the event that the indemnifying party advises an indemnified party that it will contest
such a claim for indemnification hereunder, or fails, within thirty (30) days of receipt of any
indemnification notice to notify, in writing, such person of its election to defend, settle or
compromise, at its sole cost and expense, any action, proceeding or claim (or discontinues its
defense at any time after it commences such defense), then the indemnified party may, at its
option, defend, settle or otherwise compromise or pay such action or claim. In any event, unless
and until the indemnifying party elects in writing to assume and does so assume the defense of any
such claim, proceeding or action, the indemnified party’s costs and expenses arising out of the
defense, settlement or compromise of any such action, claim or proceeding shall be losses subject
to indemnification hereunder. The indemnified party shall cooperate fully with the indemnifying
party in connection with any negotiation or defense of any such action or claim by the indemnifying
party and shall furnish to the indemnifying party all information reasonably available to the
indemnified party which relates to such action or claim. The indemnifying party shall keep the
indemnified party fully apprised at all times as to the status of the defense or any settlement
negotiations with respect thereto. If the indemnifying party elects to defend any such action or
claim, then the indemnified party shall be entitled to participate in such defense with counsel of
its choice at its sole cost and expense. The indemnifying party shall not be liable for any
settlement of any action, claim or proceeding effected without its prior written consent.
Notwithstanding anything in this Article VII to the contrary, the indemnifying party shall not,
without the indemnified party’s prior written consent, settle or compromise any claim or consent to
entry of any judgment in respect thereof which imposes any future obligation on the indemnified
party or which does not include, as an unconditional term thereof, the giving by the claimant or
the plaintiff to the indemnified party of a release from all liability in respect of such claim.
The indemnification obligations to defend the indemnified party required by this Article VII shall
be made by periodic payments of the amount thereof during the course of investigation or defense,
as and when bills are received or expense, loss, damage or liability is incurred, so long as the
indemnified party shall refund such moneys if it is ultimately determined by a court of competent
jurisdiction that such party was not entitled to indemnification.

     7.3 Registration Rights. Notwithstanding anything to the contrary in this Article
VII, the indemnification and contribution provisions of the Registration Rights shall govern any
claim made with respect to registration statements filed pursuant thereto or sales made thereunder.

ARTICLE VIII

[RESERVED]

ARTICLE IX

MISCELLANEOUS

     9.1 Fees and Expenses. Each party shall pay the fees and expenses of its advisors,
counsel, accountants and other experts, if any, and all other expenses, incurred by such party

 

 

incident to the negotiation, preparation, execution, delivery and performance of this
Agreement; provided, however, that the Company shall pay to the Purchaser in connection with (i)
the preparation, negotiation, execution and delivery of the Transaction Documents and the
transactions contemplated thereunder, which payment shall be in the amount of $30,000 (which
payment has been made by the Company prior to the First Closing), (ii) any amendments,
modifications or waivers of this Agreement or any of the other Transaction Documents Documents, and
(iii) any filing fees associated with Financing Statements or the recording of security interests
in intellectual property at the United States Patent and Trademark Office. In addition, the
Company shall pay all reasonable fees and expenses incurred by the Purchaser in connection with the
enforcement of this Agreement or any of the other Transaction Documents, including, without
limitation, all reasonable attorneys’ fees and expenses, subject, in the case of any suit, action
or proceeding to enforce the Transaction Documents, to Section 9.2(b).

     9.2 Specific Performance; Consent to Jurisdiction; Venue.

          (a) The Company and the Purchaser acknowledge and agree that irreparable damage would occur in
the event that any of the provisions of this Agreement or the other Transaction Documents were not
performed in accordance with their specific terms or were otherwise breached. It is accordingly
agreed that the parties shall be entitled to an injunction or injunctions to prevent or cure
breaches of the provisions of this Agreement or the other Transaction Documents and to enforce
specifically the terms and provisions hereof or thereof, this being in addition to any other remedy
to which any of them may be entitled by law or equity.

          (b) Each party to this Agreement hereby irrevocably agrees that the any legal action or
proceeding arising out of or relating to this Agreement or the other Transaction Documents
(including without limitation the Securities) and any agreements or transactions contemplated
hereby or thereby may be brought in the Courts of New York County, New York or of the United States
of America for the Southern District of New York and hereby expressly submits to the personal
jurisdiction and venue of such courts for the purposes thereof and expressly waives any claim of
improper venue and any claim that such courts are an inconvenient forum. Each party hereby
irrevocably consents to the service of process of any of the aforementioned courts in any such
suit, action or proceeding by the mailing of copies thereof by registered or certified mail,
postage prepaid, at the address in effect for notices to it under this Agreement, such service to
become effective ten (10) days after such mailing. Nothing in this Section 9.2 shall affect or
limit any right to serve process in any other manner permitted by law. The Company and the
Purchaser hereby agree that the prevailing party in any suit, action or proceeding arising out of
or relating to the Securities, this Agreement or the other Transaction Documents, shall be entitled
to reimbursement for reasonable legal fees from the non-prevailing party. The parties hereby waive
all rights to a trial by jury.

     9.3 Entire Agreement; Amendment. This Agreement and the Transaction Documents contain
the entire understanding and agreement of the parties with respect to the matters covered hereby
and, except as specifically set forth herein or in the other Transaction Documents, neither the
Company nor the Purchaser make any representation, warranty, covenant or undertaking with respect
to such matters, and they supersede all prior understandings and agreements with respect to said
subject matter, all of which are merged herein. No provision of this Agreement may be waived or
amended other than by a written instrument signed by the Company and the holders of

 

 

at least a majority of the principal amount of the Notes and shares of Preferred Stock then
outstanding. Any amendment or waiver effected in accordance with this Section 9.3 shall be binding
upon the Purchaser (and its permitted assigns) and the Company.

     9.4 Notices. Any notice, demand, request, waiver or other communication required or
permitted to be given hereunder shall be in writing and shall be effective (a) upon hand delivery
by telecopy or facsimile at the address or number designated below (if delivered on a business day
during normal business hours where such notice is to be received), or the first business day
following such delivery (if delivered other than on a business day during normal business hours
where such notice is to be received) or (b) on the second business day following the date of
mailing by express courier service, fully prepaid, addressed to such address, or upon actual
receipt of such mailing, whichever shall first occur. The addresses for such communications shall
be:

	 	 	 
	If to the Company:

	 	Neoprobe Corporation
	 

	 	425 Metro Place North, Suite 300
	 

	 	Dublin, Ohio 43017-1367
	 

	 	Facsimile No.: (614) 793-7520
	 

	 	Attention: David C. Bupp, Chief Executive
	 

	 	Officer and President
	 
	 	 
	with copies (which copies

	 	Porter, Wright, Morris & Arthur, LLP
	shall not constitute notice

	 	41 South High Street, Suite 2800
	to the Company) to:

	 	Columbus, Ohio 43215
	 

	 	Telecopier No.: (614) 227-2100
	 

	 	Attention: William J. Kelly, Jr., Esq.
	 
	 	 
	If to the Purchaser:

	 	Platinum-Montaur Life Sciences, LLC
	 

	 	152 West 57th Street, 54th Floor,
	 

	 	New York, New York 10019
	 

	 	Attention: Michael Goldberg, M.D.
	 
	 	 
	with copies (which copies

	 	Burak Anderson & Melloni, PLC
	shall not constitute notice

	 	30 Main Street, PO Box 787
	to the Purchaser) to:

	 	Burlington, Vermont 05402-0787
	 

	 	Facsimile No.: (802) 862-8176
	 

	 	Attention: Shane W. McCormack

Any party hereto may from time to time change its address for notices by giving written notice of
such changed address to the other party hereto.

     9.5 Waivers. No waiver by either party of any default with respect to any provision,
condition or requirement of this Agreement shall be deemed to be a continuing waiver in the

 

 

future or a waiver of any other provision, condition or requirement hereof, nor shall any
delay or omission of any party to exercise any right hereunder in any manner impair the exercise of
any such right accruing to it thereafter.

     9.6 Headings. The article, section and subsection headings in this Agreement are for
convenience only and shall not constitute a part of this Agreement for any other purpose and shall
not be deemed to limit or affect any of the provisions hereof.

     9.7 Successors and Assigns. This Agreement shall inure to the benefit of and be
binding upon the successors and permitted assigns of the parties hereto. Subject to applicable
securities laws and any restrictions contained herein, the Purchaser may assign any of its
respective rights under any of the Transaction Documents to any Person, and any holder of a Note,
shares of Preferred Stock, a Warrant or any Conversion Shares or Warrant Shares may assign, in
whole or in part, such Note, shares of Preferred Stock, a Warrant or any Conversion Shares or
Warrant Shares to any Person. The Company may not assign any of its rights, or delegate any of its
obligations, under this Agreement without the prior written consent of the Purchaser, and any such
purported assignment by the Company without the written consent of the Purchaser shall be void and
of no effect.

     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 Governing Law. This Agreement shall be governed by and construed in accordance
with the internal laws of the State of New York, without giving effect to any of the conflicts of
law principles which would result in the application of the substantive law of another
jurisdiction, except to the extent that the General Corporation Law of the State of Delaware shall
apply.

     9.10 Survival. The representations and warranties of the Company and the Purchaser
contained in Articles III and IV shall survive the execution and delivery hereof and the Closing
until the third anniversary of the Closing Date. The agreements and covenants set forth herein
shall survive the execution and delivery hereof and Closing hereunder.

     9.11 Counterparts. Electronic transmissions or retransmissions of images of any
executed original document shall be deemed to be the same as the delivery of an executed original.
At the request of any party hereto, the other parties hereto shall confirm such electronic
transmissions by executing duplicate original documents and delivering the same to the requesting
party or parties. This Agreement may be executed in any number of counterparts and by the parties
hereto in separate counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement, it being understood
that all parties need not sign the same counterpart.

     9.12 Publicity. The Company agrees that it will not disclose, and will not include in
any public announcement, the name of the Purchaser without the consent of the Purchaser, which
consent shall not be unreasonably withheld or delayed, or unless and until such disclosure is
required by law, rule or applicable regulation, including without limitation any disclosure

 

 

pursuant to the Registration Statement, and then only to the extent of such requirement.
Notwithstanding the foregoing, the Purchaser consents to being identified in any filings the
Company makes with the Commission to the extent required by law or the rules and regulations of the
Commission.

     9.13 Severability. The provisions of this Agreement are severable and, in the event
that any court of competent jurisdiction shall determine that any one or more of the provisions or
part of the provisions contained in this Agreement shall, for any reason, be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not
affect any other provision or part of a provision of this Agreement and this Agreement shall be
reformed and construed as if such invalid or illegal or unenforceable provision, or part of such
provision, had never been contained herein, so that such provisions would be valid, legal and
enforceable to the maximum extent possible.

     9.14 Further Assurances. From and after the date of this Agreement, upon the request
of the Purchaser or the Company, the Company and the Purchaser shall execute and deliver such
instruments, documents and other writings and perform such further acts as may be reasonably
necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of
this Agreement and the other Transaction Documents.

     9.15 No Strict Construction. The parties hereto have participated jointly in the
negotiation and drafting of this Agreement and the other Transaction Documents. In the event an
ambiguity or question of intent or interpretation arises under any provision of this Agreement or
any Transaction Document, this Agreement or such other Transaction Document shall be construed as
if drafted jointly by the parties thereto, and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of any of the provisions of this
Agreement or any other Transaction Document.

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

[Signature Page Follows]

 

 

	 	 	 	 	 
	 	NEOPROBE CORPORATION

 	 
	 	By:  	/s/ David C. Bupp
 	 
	 	 	Name:  	David C. Bupp 	 
	 	 	Title:  	President & Chief Executive Officer 	 
	 
	 	PURCHASER:

PLATINUM-MONTAUR LIFE SCIENCES, LLC
	 
	 
	 	By:  	/s/ Michael Goldberg
 	 
	 	 	Name:  	Michael Goldberg 	 
	 	 	Title:  	Portfolio ManagerEX-10.2

 

Exhibit 10.2

THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE SECURITIES LAWS, AND
MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR
RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL IN THE FORM, SUBSTANCE AND SCOPE REASONABLY
SATISFACTORY TO THE MAKER THAT THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION
HEREOF MAY BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION FROM REGISTRATION
UNDER THE ACT AND SUCH STATE SECURITIES LAWS.

NEOPROBE CORPORATION

10% Series A Senior Secured Convertible Promissory Note

due December 26, 2011

			
	 	 	 
	No: 1
	 	$7,000,000.00
	Dated: December 26, 2007	 	 

     For value received, NEOPROBE CORPORATION, a Delaware corporation (the “Maker”), hereby
promises to pay to the order of Platinum-Montaur Life Sciences, LLC, 152 West 57th
Street, New York, NY 10019 (together with its successors, representatives and permitted assigns,
the “Holder”), in accordance with the terms hereinafter provided, the principal amount of
Seven Million and 00/100 Dollars ($7,000,000), together with interest thereon. This Note is being
issued pursuant to the Purchase Agreement (as defined in Section 1.1 hereof). Upon satisfaction of
conditions set forth in the Purchase Agreement, the Maker may issue to the Holder the Maker’s 10%
Series B Senior Secured Convertible Promissory Note (“Series B Note”) and shares of the
Maker’s 8% Series A Convertible Preferred Stock (“Preferred Stock”). The Series A Note and
the Series B Note are collectively referred to herein as the “Notes.”

     All payments under or pursuant to this Note shall be made in United States Dollars in
immediately available funds to the Holder at the address of the Holder first set forth above or at
such other place as the Holder may designate from time to time in writing to the Maker or by wire
transfer of funds to the Holder’s account, instructions for which are attached hereto as Exhibit A. The outstanding principal balance of this Note shall be due and payable on December 26, 2011 (the
“Maturity Date”) or at such earlier time as provided herein.

ARTICLE I

PAYMENT TERMS

     1.1 Purchase Agreement. This Note has been executed and delivered pursuant to the
Securities Purchase Agreement, dated as of December 26, 2007 (the “Purchase Agreement “),
by and among the Maker and the purchasers listed therein. Capitalized terms used and not otherwise
defined herein shall have the meanings set forth for such terms in the Purchase Agreement.

 

 

     1.2 Interest. Beginning on the issuance date of this Note (the “Issuance
Date”), the outstanding principal balance of this Note shall bear interest, in arrears, at a
rate per annum equal to ten percent (10%), payable monthly on the first day of each calendar month
(each, an “Interest Payment Date”) commencing February 1, 2008, at the option of the Maker
in (A) cash or (B) in registered shares of Common Stock; provided, however, (i) payment of interest
in shares of Common Stock may only occur if during the 20 Trading Days immediately prior to the
applicable Interest Payment Date and through and including the date such shares of Common Stock are
issued to the Holder all of the Equity Conditions, unless waived by the Holder in writing, have
been met and the Maker shall have given the Holder notice in accordance with the notice
requirements set forth below, and (ii) as to such Interest Payment Date, on or prior to such
Interest Payment Date, the Maker shall have delivered to the Holder’s account with The Depository
Trust Company a number of shares of Common Stock to be applied against such interest payment equal
to the quotient of (x) the applicable interest payment divided by (y) 90% of the average VWAP for
the five (5) Trading Days immediately preceding the Interest Payment Date. Interest shall be
computed on the basis of a 360-day year of twelve (12) 30-day months, shall compound monthly and
shall accrue commencing on the Issuance Date. Furthermore, upon the occurrence of an Event of
Default (as defined in Section 2.1 hereof), the Maker will pay interest to the Holder, payable on
demand, on the outstanding principal balance of and unpaid interest on the Note from the date of
the Event of Default until such Event of Default is cured at the rate of the lesser of thirteen
percent (13%) and the maximum applicable legal rate per annum. Notwithstanding the above, the
Maker may not issue a number of shares of Common Stock in excess of the Maximum Monthly Interest
Share Amount toward the payment of Interest, as to all outstanding Series A Notes and Series B
Notes, in the aggregate, during any rolling twenty (20) Trading Day period. For purposes hereof,
“Maximum Monthly Interest Share Amount” means 20% of the aggregate dollar trading volume
(as reported on Bloomberg) of the Common Stock on the principal Trading Market over the twenty (20)
consecutive Trading Day period immediately prior to the applicable Interest Payment Date.

     1.3 Payment of Principal; No Prepayment. The Principal Amount hereof shall be paid
in full on the Maturity Date or, if earlier, upon acceleration of this Note in accordance with the
terms hereof. Any amount of principal repaid hereunder may not be reborrowed. The Maker may not
prepay any portion of the principal amount of this Note without the prior written consent of the
Holder, which may be withheld in the Holder’s sole and absolute discretion; provided, however, that
the Maker may prepay the principal balance of this Note (together with accrued and unpaid interest
on such prepaid amount) that is not convertible (determined without giving effect to the
limitations on conversion set forth in Section 3.4 hereof) into Common Stock under Section 3.1 at
any time upon ten (10) business days’ prior written notice to the Holder.

     1.4 Security Agreement. The obligations of the Maker hereunder are secured by a
continuing security interest in certain assets of the Maker pursuant to the terms of a Security
Agreement dated as of December 26, 2007 by and between the Maker and the Holder, a Patent,
Trademark and Copyright Security Agreement, dated as of December 26, 2007, by and among the Maker
and the Maker’s subsidiaries, on the one hand, and the Holder, on the other hand, and a Blocked
Account Control Agreement (“Account Control Agreement”) among the Maker, the Holder and
U.S. Bank National Association (“Bank”), pursuant to the terms of Section 5.15 of the
Purchase Agreement.

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     1.5 Payment on Non-Business Days. Whenever any payment to be made shall be due on a
Saturday, Sunday or a public holiday under the laws of the State of New York, such payment may be
due on the next succeeding business day and such next succeeding day shall be included in the
calculation of the amount of accrued interest payable on such date.

     1.6 Transfer. This Note may be transferred or sold, subject to the provisions of
Section 5.8 hereof, or pledged, hypothecated or otherwise granted as security by the Holder.

     1.7 Replacement. Upon receipt of a duly executed, notarized and unsecured written
statement from the Holder with respect to the loss, theft or destruction of this Note (or any
replacement hereof) and a standard indemnity, or, in the case of a mutilation of this Note, upon
surrender and cancellation of such Note, the Maker shall issue a new Note, of like tenor and
amount, in lieu of such lost, stolen, destroyed or mutilated Note.

     1.8 Use of Proceeds. The Maker shall use the proceeds of this Note as set forth in
the Purchase Agreement.

     1.9 Allocation of Payments. All payments to each of the Series A Holders under the
Series A Notes shall be made pro rata among the Series A Holders based upon the aggregate unpaid
principal amount of the Series A Notes held by them.

ARTICLE II

EVENTS OF DEFAULT; REMEDIES

     2.1 Events of Default. The occurrence of any of the following events shall be an “Event of
Default” under this Note:

          (a) any default in the payment of (i) the principal amount hereunder when due, or (ii)
interest on, or liquidated damages in respect of, this Note, as and when the same shall become due
and payable (whether on the Maturity Date or by acceleration or otherwise); or

          (b) the suspension from listing, without subsequent listing on any one of, or the failure of
the Common Stock to be listed on at least one of the OTC Bulletin Board, the American Stock
Exchange, the Nasdaq Global Select Market, the Nasdaq Global Market, the Nasdaq Capital Market or
The New York Stock Exchange, Inc. for a period of more than five (5) consecutive Trading Days; or

          (c) the Maker shall fail to (i) timely deliver the shares of Common Stock upon conversion of
the Note or any interest accrued and unpaid, (ii) file a Registration Statement in accordance with
the terms of the Registration Rights Agreement or (iii) make the payment of any fees or other
payments due under this Note, the Purchase Agreement, the Registration Rights Agreement or the
other Transaction Documents, which failure is not remedied within five (5) business days after such
performance is due; or

          (d) while the Registration Statement is required to be maintained effective pursuant to the
terms of the Registration Rights Agreement, the effectiveness of the Registration Statement (as
defined in the Registration Rights Agreement) lapses for any reason (including,

3

 

without limitation, the issuance of a stop order) or is unavailable to the Holder for sale of
the Registrable Securities (as defined in the Registration Rights Agreement) as provided in the
Registration Rights Agreement (other than as a result of any breach of the Registration Rights
Agreement or violation of law by any holder of the Notes, or their agents or Affiliates), and such
lapse or unavailability continues for a period of ten (10) consecutive Trading Days, provided
that the Maker has not exercised its rights pursuant to Section 3(n) of the Registration Rights
Agreement; or

          (e) default shall be made in the performance or observance of (i) any covenant, condition or
agreement contained in this Note (other than is set forth in (a) through (d) above) and such
default is not cured within ten (10) days after the earlier of (A) the date the Maker receives
notice from the Holder of the occurrence thereof or (B) the date on which the Maker knew or should
have known, if it had exercised reasonable diligence, of such default, or (ii) any material
covenant, condition or agreement contained in the Purchase Agreement, Registration Rights
Agreement, the Series B Note, or any other Transaction Document that is not covered by any other
provisions of this Section 2.1 and such default is not cured within ten (10) days after the earlier
of (A) the date the Maker receives notice from the Holder of the occurrence thereof or (B) the date
on which the Maker knew or should have known, if it had exercised reasonable diligence, of such
default; or

          (f) any material representation or warranty made by the Maker herein or in the Purchase
Agreement, the Series B Note or any other Transaction Document shall prove to have been false or
incorrect or breached in a material respect on the date as of which made; or

          (g) the Maker shall (i) default in any payment of any amount or amounts of principal of or
interest on any Indebtedness (other than the Indebtedness hereunder) the aggregate principal amount
of which Indebtedness, in the aggregate, exceeds $100,000, which default entitles the holder or
holders of such Indebtedness to accelerate the maturity thereof, or (ii) default in the observance
or performance of any other agreement or condition relating to any Indebtedness or contained in any
instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or
condition exist, which default, event or condition continues beyond any applicable cure period, and
the effect of which default, event or condition is to cause, or to permit the holder or holders or
beneficiary or beneficiaries of such Indebtedness to cause with the giving of notice if required,
such Indebtedness to become due prior to its stated maturity; or

          (h) the Maker shall (i) apply for or consent to 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 or assets, (ii) make a general assignment for the benefit of its creditors,
(iii) commence a voluntary case under the United States Bankruptcy Code (as now or hereafter in
effect) or under the comparable laws of any jurisdiction (foreign or domestic), (iv) file a
petition seeking to take advantage of any bankruptcy, insolvency, moratorium, reorganization or
other similar law affecting the enforcement of creditors’ rights generally, (v) acquiesce in
writing to any petition filed against it in an involuntary case under United States Bankruptcy Code
(as now or hereafter in effect) or under the comparable laws of any jurisdiction (foreign or
domestic), (vi) admit in writing its inability to pay its debts as they become due, or

4

 

(vii) take any action under the laws of any jurisdiction (foreign or domestic) analogous to
any of the foregoing; or

          (i) a proceeding or case shall be commenced in respect of the Maker, without its application
or consent, in any court of competent jurisdiction, seeking (i) the liquidation, reorganization,
moratorium, dissolution, winding up, or composition or readjustment of its debts, (ii) the
appointment of a trustee, receiver, custodian, liquidator or the like of it or of all or any
substantial part of its assets in connection with the liquidation or dissolution of the Maker, or
(iii) similar relief in respect of it under any law providing for the relief of debtors, and such
proceeding or case described in clause (i), (ii) or (iii) shall continue undismissed, or unstayed
and in effect, for a period of sixty (60) days or any order for relief shall be entered in an
involuntary case under United States Bankruptcy Code (as now or hereafter in effect) or under the
comparable laws of any jurisdiction (foreign or domestic) against the Maker or action under the
laws of any jurisdiction (foreign or domestic) analogous to any of the foregoing shall be taken
with respect to the Maker and shall continue undismissed, or unstayed and in effect for a period of
sixty (60) days; or

          (j) at any point after the accrual of 200 evaluable patients who have completed surgery and
injection of the drug in the Phase 3 clinical trials of Lymphoseek (NEO3-01B and NEO3-01M), the
failure of Maker to achieve the primary objective in such trials of efficacy of Lymphoseek, which
is the concordance of in-vivo detection rate of Lymphoseek and Vital Blue Dye in tumor-draining
sentinel lymph nodes as confirmed by pathology in at least eighty-five percent (85%) of such
patients, determined in good faith by the Company and the Holder following a review of the trial
data; or

          (k) the Bank shall provide written notice to the Maker or Holder of the Bank’s termination of
the Account Control Agreement, and the Maker does not within forty-five (45) days following such
notice (i) establish a replacement blocked account pursuant to Section 5.15 of the Purchase
Agreement with another financial institution, on substantially the same terms contained in the
Account Control Agreement, or as otherwise reasonably acceptable to Maker and Holder (the
“Replacement Account”), (ii) transfer all funds held in the account subject to the Account
Control Agreement to the Replacement Account, and (iii) provide evidence to the Holder that an
instruction letter, substantially in the form of the Instruction Letter attached as Exhibit M to
the Purchase Agreement, has been executed by each of the Maker and Ethicon, irrevocably instructing
Ethicon to make payments under the Ethicon Agreement to the Replacement Account; or

          (l) the occurrence of any default or event of default under any other Note or the failure by
the Maker to comply with its material obligations under the Certificate of Designations governing
the terms of the Preferred Stock.

     2.2 Remedies Upon An Event of Default. If an Event of Default shall have occurred and
shall be continuing, the Holder of this Note may at any time at its option declare the entire
unpaid principal balance of this Note, together with all interest accrued hereon, due and payable,
and thereupon, the same shall be accelerated and so due and payable, without presentment, demand,
protest, or notice, all of which are hereby expressly unconditionally and irrevocably waived by the
Maker; provided, however, that upon the occurrence of an Event of Default

5

 

described above, the Holder, in its sole and absolute discretion, may (a) demand that the
entire principal amount of this Note then outstanding and all accrued and unpaid interest thereon
shall be converted into shares of Common Stock at the Conversion Price per share on the Trading Day
immediately preceding the date the Holder demands conversion pursuant to this clause, or (b)
exercise or otherwise enforce any one or more of the Holder’s rights, powers, privileges, remedies
and interests under this Note (including, if applicable, pursuant to Section 3.7 hereof), the
Purchase Agreement, the Registration Rights Agreement or applicable law. No course of delay on the
part of the Holder shall operate as a waiver thereof or otherwise prejudice the right of the
Holder. No remedy conferred hereby shall be exclusive of any other remedy referred to herein or now
or hereafter available at law, in equity, by statute or otherwise. No notice or other action of
Holder shall be required in the case of an Event of Default set forth in Sections 2.1(h) or (i),
and, in such event, the outstanding principal balance and accrued interest hereunder shall be
automatically due and payable.

ARTICLE III

CONVERSION; ANTIDILUTION

     3.1 Conversion Option. At any time and from time to time on or after the Issuance
Date, up to fifty percent (50%) of the outstanding principal balance of this Note (the
“Conversion Amount”) shall be convertible (in whole or in part), at the option of the
Holder (the “Conversion Option”), into such number of fully paid and non-assessable shares
of Common Stock (the “Conversion Rate”) as is determined by dividing (x) that portion of
the Conversion Amount as of such date that the Holder elects to convert by (y) the Conversion Price
(as defined in Section 3.2 hereof) then in effect on the date on which the Holder faxes a notice of
conversion (the “Conversion Notice”), duly executed, to the Maker (facsimile number (614)
793-7520, Attn.: Brent L. Larson, Vice President — Finance) (the “Conversion Date”);
provided, however, that the Conversion Price shall be subject to adjustment as described in Section
3.5 below. The Holder shall deliver this Note to the Maker at the address designated in the
Purchase Agreement at such time that this Note is fully converted. With respect to partial
conversions of this Note, the Maker shall keep written records of the amount of this Note converted
as of each Conversion Date.

     3.2 Conversion Price. The term “Conversion Price” shall mean $0.26, subject to
adjustment under Section 3.5 hereof.

     3.3 Mechanics of Conversion.

          (a) Not later than three (3) Trading Days after any Conversion Date, the Maker or its
designated transfer agent, as applicable, shall issue and deliver to the Depository Trust Company
(“DTC”) account on the Holder’s behalf via the Deposit Withdrawal Agent Commission System (“DWAC”)
as specified in the Conversion Notice, the number of shares of Common Stock to which the Holder
shall be entitled upon such conversion, registered in the name of the Holder or its designee. In
the alternative, not later than three (3) Trading Days after any Conversion Date, the Maker shall
deliver to the applicable Holder by express courier a certificate or certificates which shall be
free of restrictive legends and trading restrictions (other than those required pursuant to the
Purchase Agreement) representing the number of shares of Common Stock being acquired upon the
conversion of this Note (the “Delivery Date”).

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Notwithstanding the foregoing to the contrary, the Maker or its transfer agent shall only be
obligated to issue and deliver the shares to the DTC on the Holder’s behalf via DWAC (or
certificates free of restrictive legends) if such conversion is in connection with a sale by the
Holder and the Holder has complied with the applicable prospectus delivery requirements or an
exemption from such registration requirements (each as evidenced by documentation furnished to and
reasonably satisfactory to the Maker). If in the case of any Conversion Notice such certificate or
certificates are not delivered to or as directed by the Holder by the Delivery Date, the Holder
shall be entitled by written notice to the Maker at any time on or before its receipt of such
certificate or certificates thereafter, to rescind such conversion, in which event the Maker shall
immediately return this Note tendered for conversion, whereupon the Maker and the Holder shall each
be restored to their respective positions immediately prior to the delivery of such notice of
revocation, except that any amounts described in Sections 3.3(b) and (c) shall be payable through
the date notice of rescission is given to the Maker.

          (b) The Maker understands that a delay in the delivery of the shares of Common Stock upon
conversion of this Note beyond the Delivery Date could result in economic loss to the Holder. If
the Maker fails to deliver to the Holder such shares via DWAC (or, if applicable, certificates), or
fails to deliver unlegended certificates representing such shares if required pursuant to Section
3.3(a) hereof, by the Delivery Date, the Maker shall pay to such Holder, in cash, an amount per
Trading Day for each Trading Day until such shares are delivered via DWAC or certificates are
delivered (if applicable), together with interest on such amount at a rate of 10% per annum,
accruing until such amount and any accrued interest thereon is paid in full, equal to the greater
of (A) (i) 1% of the aggregate principal amount of the Notes requested to be converted for the
first five (5) Trading Days after the Delivery Date and (ii) 2% of the aggregate principal amount
of the Notes requested to be converted for each Trading Day thereafter and (B) $2,000 per day
(which amount shall be paid as liquidated damages and not as a penalty). Nothing herein shall limit
a Holder’s right to pursue actual damages for the Maker’s failure to deliver certificates
representing shares of Common Stock upon conversion within the period specified herein and such
Holder shall have the right to pursue all remedies available to it at law or in equity (including,
without limitation, a decree of specific performance and/or injunctive relief). Notwithstanding
anything to the contrary contained herein, the Holder shall be entitled to withdraw a Conversion
Notice, and upon such withdrawal the Maker shall only be obligated to pay the liquidated damages
accrued in accordance with this Section 3.3(b) through the date the Conversion Notice is withdrawn.

     3.4 Ownership Cap and Certain Conversion Restrictions.

          (a) Notwithstanding anything to the contrary set forth in Section 3 of this Note, at no time
may the Holder convert all or a portion of this Note if the number of shares of Common Stock to be
issued pursuant to such conversion would exceed, when aggregated with all other shares of Common
Stock owned by the Holder at such time, the number of shares of Common Stock which would result in
the Holder beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act
and the rules thereunder) more than 4.99% of all of the Common Stock outstanding at such time;
provided, however, that upon the Holder providing the Maker with sixty-one (61) days notice
(pursuant to Section 4.1 hereof) (the “Waiver Notice”) that the Holder waives the
limitations contained in this Section 3.4(a) with regard to any or all shares of Common Stock
issuable upon conversion of this Note, this Section

7

 

3.4(a) will be of no force or effect with regard to all or a portion of the Note referenced in
the Waiver Notice.

          (b) Notwithstanding anything to the contrary set forth in Section 3 of this Note, at no time
may the Holder convert all or a portion of this Note if the number of shares of Common Stock to be
issued pursuant to such conversion, when aggregated with all other shares of Common Stock owned by
the Holder at such time, would result in the Holder beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act and the rules thereunder) in excess of 9.99% of
the then issued and outstanding shares of Common Stock outstanding at such time; provided,
however, that upon the Holder providing the Maker with a Waiver Notice that the Holder waives the
limitations contained in this Section 3.4(b) with regard to any or all shares of Common Stock
issuable upon conversion of this Note, this Section 3.4(b) shall be of no force or effect with
regard to all or a portion of the Note referenced in the Waiver Notice.

          (c) Notwithstanding the above, the provisions of Section 3.4(a) and 3.4(b) shall not be
applicable when calculating any adjustment to the Conversion Price hereunder or any other
adjustments under Section 3.5 hereof.

     3.5 Adjustment of Conversion Price.

          (a) Until the Note has been paid in full or converted in full, the Conversion Price shall be
subject to adjustment from time to time as follows (but shall not be increased, other than pursuant
to Section 3.5(a)(i) hereof):

     (i) Adjustments for Stock Splits and Combinations. If the Maker shall at any time or
from time to time after the Issuance Date, effect a stock split of the outstanding Common
Stock, the applicable Conversion Price in effect immediately prior to the stock split shall
be proportionately decreased. If the Maker shall at any time or from time to time after the
Issuance Date, combine the outstanding shares of Common Stock, the applicable Conversion
Price in effect immediately prior to the combination shall be proportionately increased. Any
adjustments under this Section 3.5(a)(i) shall be effective at the close of business on the
date the stock split or combination occurs.

     (ii) Adjustments for Certain Dividends and Distributions. If the Maker shall at any
time or from time to time after the Issuance Date, make or issue or set a record date for
the determination of holders of Common Stock entitled to receive a dividend or other
distribution payable in shares of Common Stock, then, and in each event, the applicable
Conversion Price in effect immediately prior to such event shall be decreased as of the time
of such issuance or, in the event such record date shall have been fixed, as of the close of
business on such record date, by multiplying, the applicable Conversion Price then in effect
by a fraction:

     (A) the numerator of which shall be the total number of shares of Common Stock
issued and outstanding immediately prior to the time of such issuance or the close
of business on such record date; and

8

 

     (B) the denominator of which shall be the total number of shares of Common
Stock issued and outstanding immediately prior to the time of such issuance or the
close of business on such record date plus the number of shares of Common Stock
issuable in payment of such dividend or distribution.

     (iii) Adjustment for Other Dividends and Distributions. If the Maker shall at any
time or from time to time after the Issuance Date, make or issue or set a record date for
the determination of holders of Common Stock entitled to receive a dividend or other
distribution payable in securities of the Maker or any other Person other than shares of
Common Stock, then, and in each event, an appropriate revision to the applicable Conversion
Price shall be made and provision shall be made (by adjustments of the Conversion Price or
otherwise) so that the holders of this Note shall receive upon conversions thereof, in
addition to the number of shares of Common Stock receivable thereon, the number of
securities of the Maker or other issuer (as applicable) which they would have received had
this Note been converted into Common Stock on the date of such event and had thereafter,
during the period from the date of such event to and including the Conversion Date, retained
such securities (together with any distributions payable thereon during such period), giving
application to all adjustments called for during such period under this Section 3.5(a)(iii)
with respect to the rights of the holders of this Note; provided, however, that if such
record date shall have been fixed and such dividend is not fully paid or if such
distribution is not fully made on the date fixed therefor, the Conversion Price shall be
adjusted pursuant to this paragraph as of the time of actual payment of such dividends or
distributions.

     (iv) Adjustments for Reclassification, Exchange or Substitution. If the Common Stock
issuable upon conversion of this Note at any time or from time to time after the Issuance
Date shall be changed to the same or different number of shares of any class or classes of
stock, whether by reclassification, exchange, substitution or otherwise (other than by way
of a stock split or combination of shares or stock dividends provided for in Sections
3.5(a)(i), (ii) and (iii), or a reorganization, merger, consolidation, or sale of assets
provided for in Section 3.5(a)(v)), then, and in each event, an appropriate revision to the
Conversion Price shall be made and provisions shall be made (by adjustments of the
Conversion Price or otherwise) so that the Holder shall have the right thereafter to convert
this Note into the kind and amount of shares of stock and other securities receivable upon
reclassification, exchange, substitution or other change, by holders of the number of shares
of Common Stock into which such Note might have been converted immediately prior to such
reclassification, exchange, substitution or other change, all subject to further adjustment
as provided herein.

     (v) Adjustments for Reorganization, Merger, Consolidation or Sales of Assets. If at
any time or from time to time after the Issuance Date there shall be a capital
reorganization of the Maker (other than by way of a stock split or combination of shares or
stock dividends or distributions provided for in Section 3.5(a)(i), (ii) and (iii), or a
reclassification, exchange or substitution of shares provided for in Section 3.5(a)(iv)), or
a merger or consolidation of the Maker with or into another corporation where the holders of
outstanding voting securities prior to such merger or consolidation do not own over fifty
percent (50%) of the outstanding voting securities of the merged or

9

 

consolidated entity, immediately after such merger or consolidation, or the sale of all
or substantially all of the Maker’s properties or assets to any other person (an
“Organic Change”), then as a part of such Organic Change, (A) if the
surviving entity in any such Organic Change has a class of equity securities registered
under the Exchange Act, and its common stock is listed or quoted on a national exchange or
the OTC Bulletin Board, an appropriate revision to the Conversion Price shall be made and
provision shall be made (by adjustments of the Conversion Price or otherwise) so that the
Holder shall have the right thereafter to convert such Note into the
kind and amount of shares of stock and other securities or property of the Maker or any successor corporation
resulting from such Organic Change, and (B) if the surviving entity in any such Organic
Change does not have a class of equity securities registered under the Exchange Act, or its
common stock is not listed or quoted on a national exchange or the OTC Bulletin Board, the
Holder shall have the right to accelerate the maturity of this Note. In any case referenced
in clause (A) above, appropriate adjustment shall be made in the application of the
provisions of this Section 3.5(a)(v) with respect to the rights of the Holder after the
Organic Change to the end that the provisions of this Section 3.5(a)(v) (including any
adjustment in the applicable Conversion Price then in effect and the number of shares of
stock or other securities deliverable upon conversion of this Note) shall be applied after
that event in as nearly an equivalent manner as may be practicable.

     (vi) Adjustments for Issuance of Additional Shares of Common Stock. In the event the
Maker, shall, at any time, from time to time, issue or sell any additional shares of common
stock (otherwise than as provided in the foregoing subsections (i) through (v) of this
Section 3.5(a)) (“Additional Shares of Common Stock”), at a price per share less
than the Conversion Price then in effect or without consideration, then the Conversion Price
upon each such issuance shall be reduced to a price determined by multiplying the Conversion
Price then in effect by a fraction (A) the numerator of which is the total number of shares
of Common Stock then outstanding plus the number of shares of Common Stock which the
aggregate consideration received or to be received by the Company for the shares so issued
(or deemed issued) would purchase at such Conversion Price, and (B) the denominator of which
is the total number of shares of Common Stock then outstanding plus the number of shares of
Common Stock so issued (or deemed issued). Notwithstanding the foregoing, there shall be no
adjustment to the Conversion Price upon any issuance or deemed issuance of Common Stock if
the holders of a majority of the outstanding principal amount of the Series A Notes waive in
writing such adjustment.

     (vii) Issuance of Common Stock Equivalents. The provisions of this Section
3.5(a)(vii) shall apply if (A) the Maker, at any time after the Issuance Date, shall issue
any securities convertible into or exchangeable for, directly or indirectly, Common Stock
(“Convertible Securities”), other than the Notes or Preferred Stock issuable
pursuant to the Purchase Agreement, or (B) any rights or warrants or options to purchase any
such Common Stock or Convertible Securities, other than the Warrants (“Rights”)
(Convertible Securities and Rights hereafter being collectively referred to as the
“Common Stock Equivalents”) shall be issued or sold. If the price per share for
which Additional Shares of Common Stock is issuable pursuant to any such Common Stock
Equivalent shall be (or is subsequently adjusted to be) less than the applicable

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Conversion Price then in effect, or if, after any such issuance of Common Stock
Equivalents, the price per share for which Additional Shares of Common Stock may be issuable
thereafter is amended or adjusted, and such price as so amended or adjusted shall be less
than the applicable Conversion Price in effect at the time of such amendment or adjustment,
then the applicable Conversion Price upon each such issuance, amendment or adjustment shall
be adjusted as provided in subsection (vi) of this Section 3.5(a), with the maximum number
of shares of Common Stock issuable upon conversion or exercise of such Common Stock
Equivalents being deemed to have be issued or sold by the Company at the time of issuance or
sale of such Common Stock Equivalents. For purposes of this Section 3.5(a)(vii), the “price
per share for which Additional Shares of Common Stock is issuable” shall be determined by
dividing (X) the total amount received or receivable by the Company as consideration for the
issue or sale of such Common Stock Equivalents, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the conversion or exercise
thereof, by (B) the total maximum number of shares of Common Stock issuable upon the
conversion or exercise of all such Common Stock Equivalents. No further adjustment of the
Conversion Price shall be made when Common Stock is actually issued upon the conversion or
exchange of such Common Stock Equivalents, and if any such issue or sale of Convertible
Securities is made upon exercise of any Rights for which adjustment of the Conversion Price
had been or are to be made pursuant to other provisions of Section 3.5(a)(vi), no further
adjustment of the Conversion Price shall be made by reason of such issue or sale.

     (viii) Consideration for Stock. In case any shares of Common Stock or any Common
Stock Equivalents shall be issued or sold:

     (A) in connection with any merger or consolidation in which the Maker is the
surviving corporation (other than any consolidation or merger in which the
previously outstanding shares of Common Stock of the Maker shall be changed to or
exchanged for the stock or other securities of another corporation), the amount of
consideration therefor shall be, deemed to be the fair value, as determined
reasonably and in good faith by the Board of Directors of the Maker, of such portion
of the assets and business of the nonsurviving corporation as such Board may
determine to be attributable to such shares of Common Stock, Convertible Securities,
rights or warrants or options, as the case may be; or

     (B) in the event of any consolidation or merger of the Maker in which the Maker
is not the surviving corporation or in which the previously outstanding shares of
Common Stock of the Maker shall be changed into or exchanged for the stock or other
securities of another corporation, or in the event of any sale of all or
substantially all of the assets of the Maker for stock or other securities of any
corporation, the Maker shall be deemed to have issued a number of shares of its
Common Stock for stock or securities or other property of the other corporation
computed on the basis of the actual exchange ratio on which the transaction was
predicated, and for a consideration equal to the fair market value on the date of
such transaction of all such stock or securities or other property of the other
corporation. If any such calculation results in adjustment of the applicable

11

 

Conversion Price, or the number of shares of Common Stock issuable upon
conversion of the Notes, the determination of the applicable Conversion Price or the
number of shares of Common Stock issuable upon conversion of the Notes immediately
prior to such merger, consolidation or sale, shall be made after giving effect to
such adjustment of the number of shares of Common Stock issuable upon conversion of
the Notes. In the event Common Stock is issued with other shares or securities or
other assets of the Maker for consideration which covers both, the consideration
computed as provided in this Section 3.5(a)(viii) shall be allocated among such
securities and assets as determined in good faith by the Board of Directors of the
Maker; or

     (C) other than as set forth above, for any non-cash consideration, the value of
the consideration other than cash received by the Maker shall be deemed to be the
fair market value of such consideration, as determined mutually in good faith by the
Maker’s Board of Directors and the Holder or, if the Maker’s Board of Directors and
the Holder fail to agree, at the Maker’s expense by an appraiser selected the
Maker’s Board of Directors and reasonably acceptable to the Holder.

          (b) Record Date. In case the Maker shall take record of the holders of its Common
Stock for the purpose of entitling them to subscribe for or purchase Common Stock or Convertible
Securities, then the date of the issue or sale of the shares of Common Stock shall be deemed to be
such record date.

          (c) Certain Issues Excepted. Anything herein to the contrary notwithstanding, the
Maker shall not be required to make any adjustment to the Conversion Price in connection with any
of the following: (i) issuance of the Notes, Preferred Stock or Warrants to the Purchasers pursuant
to the terms of the Purchase Agreement; (ii) issuances of securities upon the exercise or exchange
of or conversion of any securities exercisable or exchangeable for or convertible into shares of
Common Stock issued and outstanding on the date of this Note, provided that such securities have
not been amended since the date of this Note to increase the number of such securities or to
decrease the exercise, exchange or conversion price of any such securities (including the Notes,
Preferred Stock and Warrants issued to the Purchasers pursuant to the Purchase Agreement); (iii)
securities issued pursuant to acquisitions or strategic transactions approved by a majority of the
disinterested directors, but not including a transaction with an entity whose primary business is
investing in securities or a transaction, the primary purpose of which is to raise capital; or (iv)
the issuance of shares of Common Stock in payment of interest on the Notes, or as a dividend or
distribution on the Preferred Stock.

          (d) No Impairment. The Maker shall not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed hereunder by the Maker,
but will at all times in good faith, assist in the carrying out of all the provisions of this
Section 3.5 and in the taking of all such action as may be necessary or appropriate in order to
protect the Conversion Rights of the Holder against impairment.

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          (e) Certificates as to Adjustments. Upon occurrence of each adjustment or
readjustment of the Conversion Price or number of shares of Common Stock issuable upon conversion
of this Note pursuant to this Section 3.5, the Maker at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and furnish to the Holder a
certificate setting forth such adjustment and readjustment, showing in detail the facts upon which
such adjustment or readjustment is based. The Maker shall, upon written request of the Holder, at
any time, furnish or cause to be furnished to the Holder a like certificate setting forth such
adjustments and readjustments, the applicable Conversion Price in effect at the time, and the
number of shares of Common Stock and the amount, if any, of other securities or property which at
the time would be received upon the conversion of this Note. Notwithstanding the foregoing, the
Maker shall not be obligated to deliver a certificate unless such certificate would reflect an
increase or decrease of at least one percent (1%) of such adjusted amount.

          (f) Issue Taxes. The Maker shall pay any and all issue and other taxes, excluding
federal, state or local income taxes, that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of this Note pursuant thereto; provided, however, that the
Maker shall not be obligated to pay any transfer taxes resulting from any transfer requested by the
Holder in connection with any such conversion.

          (g) Fractional Shares. No fractional shares of Common Stock shall be issued upon
conversion of this Note. In lieu of any fractional shares to which the Holder would otherwise be
entitled, the Maker shall pay cash equal to the product of such fraction multiplied by the average
of the Closing Prices of the Common Stock for the five (5) consecutive Trading Days immediately
preceding the Conversion Date.

          (h) Regulatory Compliance. If any shares of Common Stock to be reserved for the
purpose of conversion of this Note or any interest accrued thereon require registration or listing
with or approval of any governmental authority, stock exchange or other regulatory body under any
federal or state law or regulation or otherwise before such shares may be validly issued or
delivered upon conversion, the Maker shall, at its sole cost and expense, in good faith and as
expeditiously as possible, endeavor to secure such registration, listing or approval, as the case
may be.

     3.6 Inability to Fully Convert.

          (a) Holder’s Option if Maker Cannot Fully Convert. If, upon the Maker’s receipt of a
Conversion Notice, the Maker cannot issue shares of Common Stock registered for resale under the
Registration Statement if required pursuant to the Registration Rights Agreement for any reason,
including, without limitation, because the Maker (i) does not have a sufficient number of shares of
Common Stock authorized and available, (ii) is otherwise prohibited by applicable law or by the
rules or regulations of any stock exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Maker or any of its securities from issuing all of the
Common Stock which is to be issued to the Holder pursuant to a Conversion Notice or (iii) fails to
have a sufficient number of shares of Common Stock registered for resale under the Registration
Statement, then the Maker shall issue as many shares of Common Stock as it is able to issue in
accordance with the Holder’s Conversion Notice and,

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with respect to the unconverted portion of this Note, the Holder, solely at Holder’s option
(and in addition to all other remedies hereunder), can elect to:

     (A) require the Maker to prepay that portion of this Note for which the Maker
is unable to issue Common Stock in accordance with the Holder’s Conversion Notice
(the “Mandatory Prepayment”) in an amount equal to one hundred twenty-five
percent (125% of the portion of aggregate principal amount of this Note that Maker
was unable to convert to Common Stock (the “Mandatory Prepayment Price”);

     (B) if the Maker’s inability to fully convert is pursuant to Section
3.6(a)(iii) above, require the Maker to issue restricted shares of Common Stock in
accordance with such holder’s Conversion Notice; or

     (C) void its Conversion Notice and retain or have returned, as the case may be,
this Note that was to be converted pursuant to the Conversion Notice (provided that
the Holder’s voiding its Conversion Notice shall not effect the Maker’s obligations
to make any payments which have accrued prior to the date of such notice).

          (b) Mechanics of Fulfilling Holder’s Election. The Maker shall immediately send via
facsimile to the Holder, upon receipt of a facsimile copy of a Conversion Notice from the Holder
which cannot be fully satisfied as described in Section 3.6(a) above, a notice of the Maker’s
inability to fully satisfy the Conversion Notice (the “Notice of Inability to Convert”).
Such Inability to Convert Notice shall indicate (i) the reason why the Maker is unable to fully
satisfy such holder’s Conversion Notice, (ii) the amount of this Note which cannot be converted,
and (iii) the applicable Mandatory Prepayment Price. The Holder shall notify the Maker of its
election pursuant to Section 3.6(a) above by delivering written notice via facsimile to the Maker
(“Election Upon Inability to Convert”).

          (c) Payment of Prepayment Price. If the Holder shall elect to have its Notes prepaid
pursuant to Section 3.6(a)(A) above, the Maker shall pay the Mandatory Prepayment Price to the
Holder within thirty (30) days of the Maker’s receipt of the Holder’s Election Upon Inability to
Convert, provided that prior to the Maker’s receipt of the Holder’s Election Upon Inability to
Convert the Maker has not delivered a notice to the Holder stating, to the satisfaction of the
Holder, that the event or condition resulting in the Mandatory Prepayment has been cured and all
Conversion Shares issuable to the Holder can and will be delivered to the Holder in accordance with
the terms of this Note. If the Maker shall fail to pay the applicable Mandatory Prepayment Price to
the Holder within five (5) business days following the Maker’s receipt of the Holder’s Election
Upon Inability to Convert (other than pursuant to a dispute as to the determination of the
arithmetic calculation of the Mandatory Prepayment Price), in addition to any remedy the Holder may
have under this Note and the Purchase Agreement, such unpaid amount shall bear interest at the rate
of two percent (2%) per month (prorated for partial months) until paid in full. Until the full
Mandatory Prepayment Price is paid in full to the Holder, the Holder may (i) void the Mandatory
Prepayment with respect to that portion of the Note for which the full Mandatory Prepayment Price
has not been paid, (ii) receive back such Note, and (iii) require that the Conversion Price of such
returned Note be adjusted to the lesser of (A) the

14

 

Conversion Price as in effect on the date on which the Holder voided the Mandatory Prepayment
and (B) the lowest Closing Price during the period beginning on the Conversion Date and ending on
the date the Holder voided the Mandatory Prepayment.

          (d) Pro-rata Conversion and Prepayment. In the event the Maker receives a Conversion
Notice from more than one holder of the Series A Notes on the same day and the Maker can convert
and prepay some, but not all, of the Series A Notes pursuant to this Section 3.6, the Maker shall
convert and prepay from each holder of the Series A Notes electing to have its Series A Notes
converted and prepaid at such time an amount equal to such holder’s pro-rata amount (based on the
principal amount of the Series A Notes held by such holder relative to the principal amount of the
Series A Notes outstanding) of all the Series A Notes being converted and prepaid at such time.

     3.7 Prepayment Upon Triggering Event.

          (a) Prepayment Option Upon Triggering Event. In addition to all other rights of the
Holder contained herein, after a Triggering Event (as defined below), the Holder shall have the
right, at the Holder’s option, to require the Maker to prepay all or a portion of this Note in cash
at a price equal to the sum of (i) the greater of (A) one hundred percent (100%) of the aggregate
principal amount of this Note plus all accrued and unpaid interest and (B) the aggregate principal
amount of this Note plus all accrued but unpaid interest hereon, divided by the Conversion Price on
(x) the date the Prepayment Price (as defined below) is demanded or otherwise due or (y) the date
the Prepayment Price is paid in full, whichever is less, multiplied by the VWAP on (x) the date the
Prepayment Price is demanded or otherwise due, and (y) the date the Prepayment Price is paid in
full, whichever is greater, and (ii) all other amounts, costs, expenses and liquidated damages due
in respect of this Note and the other Transaction Documents (the “Prepayment Price”). If
the Holder demands payment of the Prepayment Price pursuant to this Section 3.7, the Maker shall
deliver such payment to the Holder within 5 business days after the receipt of such demand.

          (b) Triggering Event. A “Triggering Event” shall be deemed to have occurred
at such time as any of the following events:

               (i) any Event of Default pursuant to Sections 2.1 (b), (c) or (d) shall have occurred;

               (ii) the Maker’s notice to any holder of the Notes, including by way of public announcement,
at any time, of its inability to comply or its intention not to comply with proper requests for
conversion of any Notes into shares of Common Stock; or

               (iii) the Maker deregisters its shares of Common Stock and as a result such shares of Common
Stock are no longer publicly traded; or

               (iv) the Maker consummates a “going private” transaction and as a result the Common Stock is
no longer registered under Sections 12(b) or 12(g) of the Exchange Act.

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     3.8 No Rights as Shareholder. Nothing contained in this Note shall be construed as
conferring upon the Holder, prior to the conversion of this Note, the right to vote or to receive
dividends or to consent or to receive notice as a shareholder in respect of any meeting of
shareholders for the election of directors of the Maker or of any other matter, or any other rights
as a shareholder of the Maker.

ARTICLE IV

COVENANTS

     For so long as this Note is outstanding, without the prior written consent of the holders of
at least a majority of the then outstanding principal balance hereof:

     4.1 No Liens. The Maker shall not, and shall not permit its Subsidiaries to, enter
into, create, incur, assume or suffer to exist any Liens on or with respect to any of its assets
now owned or hereafter acquired or any interest therein or any income or profits therefrom, other
than:

          (a) Liens that are Permitted Encumbrances;

          (b) Liens for purchase money obligations, incurred in the ordinary course of the Maker’s
business, to acquire assets that do not exceed the purchase price of the asset and that encumber
only the asset being purchased; and

          (c) any Lien listed on Schedule 3.12 to the Purchase Agreement.

     4.2 No Indebtedness. The Maker shall not, and shall not permit any Subsidiary to,
enter into, create, incur, assume or suffer to exist any Indebtedness, other than

          (a) Indebtedness existing on the date hereof and disclosed in the Commission Documents;

          (b) Indebtedness created under the Transaction Documents;

          (c) Non-current liabilities for post-employment healthcare and other insurance benefits;

          (d) Trade payables and insurance premium financing incurred in the ordinary course of business
and consistent with past practices; and

          (e) Indebtedness secured by Liens permitted under Section 4.1.

     4.3 Compliance with Transaction Documents. The Maker shall, and shall cause its
Subsidiaries to, comply with its obligations under this Note, the Series B Note and the other
Transaction Documents.

     4.4 Compliance with Law. The Maker shall, and shall cause each of its Subsidiaries
to, comply with law and duly observe and conform in all material respects to all valid

16

 

requirements of Governmental Authorities relating to the conduct of its business or to its
properties or assets.

     4.5 Transactions with Affiliates. The Maker shall not, and shall not permit its
Subsidiaries to, engage in any transactions with any officer, director, employee or any Affiliate
of the Maker, including any contract, agreement or other arrangement providing for the furnishing
of services to or by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or, to the knowledge of the
Maker, any entity in which any officer, director, or any such employee has a substantial interest
or is an officer, director, trustee or partner, in each case in excess of $50,000, other than (i)
for payment of reasonable salary for services actually rendered, as approved by the Board of
Directors of the Maker as fair in all respects to the Maker, and (ii) reimbursement for expenses
incurred on behalf of the Maker.

     4.6 No Dividends. The Maker shall not, and shall not permit any Subsidiary to, (a)
declare or pay any dividends or make any distributions to any holder(s) of Common Stock or other
equity security of the Maker or such Subsidiaries (other than dividend and distributions from a
Subsidiary to the Maker and dividends on the Preferred Stock), (b) purchase or otherwise acquire
for value, directly or indirectly, any shares or other equity security of the Maker, (c) form or
create any subsidiary become a partner in any partnership or joint venture, or make any acquisition
of any interest in any Person or acquire substantially all of the assets of any Person, or (d)
transfer, assign, pledge, issue or otherwise permit any equity or other ownership interests in the
Subsidiaries to be beneficially owned or held by any person other than the Maker and, in the case
of Cira Biosciences, Inc. the persons owning or holding such securities on the date hereof;
provided, however, that Maker’s Cira Biosciences, Inc. subsidiary may issue equity
securities in connection with third-party arms-length capital raising transactions and pay
dividends to the holders of such equity securities in accordance with their terms.

     4.7 No Merger or Sale of Assets. The Maker shall not, and shall not permit any
Subsidiary to, (a) merge or consolidate or sell or dispose of all its assets or any substantial
portion thereof, or (b) in any way or manner alter its organizational structure or effect a change
of entity; provided, however, that the Maker shall be permitted to sell or dispose of its assets
(but not all or substantially all of its assets) in the ordinary course of its business and
consistent with past practice.

     4.8 Payment of Taxes, Etc. The Maker shall, and shall cause each of its Subsidiaries
to, promptly pay and discharge, or cause to be paid and discharged, when due and payable, all
lawful taxes, assessments and governmental charges or levies imposed upon the income, profits,
property or business of the Maker and the Subsidiaries, except for such failures to pay that,
individually or in the aggregate, have not had and would not reasonably be expected to have a
Material Adverse Effect; provided, however, that any such tax, assessment, charge or levy need not
be paid if the validity thereof shall currently be contested in good faith by appropriate
proceedings and if the Maker or such Subsidiaries shall have set aside on its books adequate
reserves with respect thereto, and provided, further, that the Maker and such Subsidiaries will pay
all such taxes, assessments, charges or levies forthwith upon the commencement of proceedings to
foreclose any lien which may have attached as security therefor.

17

 

     4.9 Corporate Existence. the Maker shall, and shall cause each of its Subsidiaries
to, maintain in full force and effect its corporate existence, rights and franchises and all
licenses and other rights to use property owned or possessed by it and reasonably deemed to be
necessary to the conduct of its business.

     4.10 Investment Company Act. The Maker shall conduct its businesses in a manner so
that it will not become subject to the Investment Company Act of 1940, as amended.

     4.11 Maintenance of Assets. The Maker shall, and shall cause its Subsidiaries to,
keep its properties in good repair, working order and condition, reasonable wear and tear excepted,
and from time to time make all necessary and proper repairs, renewals, replacements, additions and
improvements thereto.

     4.12 Indebtedness to Affiliates. The Maker shall not, and shall not permit any
Subsidiary to, make any payment on any indebtedness owed to officers, directors or Affiliates,
except for reimbursements of reasonable and typical business expenses.

     4.13 Restriction on Dividends. The Maker shall not, and shall not permit any
Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist or become
effective any encumbrance or restriction on the ability of any Subsidiary to pay dividends or
distributions to the Maker, pay any indebtedness owed to the Maker or transfer any properties or
assets to the Maker

     4.14 No Investments. The Maker shall not, and shall not permit any Subsidiary to,
make or suffer to exist any Investments or commitments therefor, other than Investments made in the
ordinary course of business.

     4.15 Transfers to Subsidiaries. The Maker shall not make any transfers of funds or
other assets to any Subsidiary except in the ordinary course of business and consistent with past
practice.

ARTICLE V

MISCELLANEOUS

     5.1 Notices. Any notice, demand, request, waiver or other communication required or
permitted to be given hereunder shall be in writing and shall be effective (a) upon hand delivery,
telecopy or facsimile at the address or number designated in the Purchase Agreement (if delivered
on a business day during normal business hours where such notice is to be received), or the first
business day following such delivery (if delivered other than on a business day during normal
business hours where such notice is to be received) or (b) on the second business day following the
date of mailing by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The Maker will give written notice to
the Holder at least ten (10) days prior to the date on which the Maker takes a record (x) with
respect to any dividend or distribution upon the Common Stock, (y) with respect to any pro rata
subscription offer to holders of Common Stock or (z) for determining rights to vote with respect to
any Organic Change, dissolution, liquidation or winding-up and in no event shall such notice be
provided to such holder prior to such information being made known to the

18

 

public. The Maker will also give written notice to the Holder at least ten (10) days prior to
the date on which any Organic Change, dissolution, liquidation or winding-up will take place and in
no event shall such notice be provided to the Holder prior to such information being made known to
the public. The Maker shall promptly notify the Holder of this Note of any notices sent or
received, or any actions taken with respect to the Series A Notes.

     5.2 Governing Law. This Note shall be governed by and construed in accordance with
the internal laws of the State of New York, without giving effect to any of the conflicts of law
principles which would result in the application of the substantive law of another jurisdiction.
This Note shall not be interpreted or construed with any presumption against the party causing this
Note to be drafted.

     5.3 Headings. Article and section headings in this Note are included herein for
purposes of convenience of reference only and shall not constitute a part of this Note for any
other purpose.

     5.4 Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief.
The remedies provided in this Note shall be cumulative and in addition to all other remedies
available under this Note, at law or in equity (including, without limitation, a decree of specific
performance and/or other injunctive relief), no remedy contained herein shall be deemed a waiver of
compliance with the provisions giving rise to such remedy and nothing herein shall limit a holder’s
right to pursue actual damages for any failure by the Maker to comply with the terms of this Note.
Amounts set forth or provided for herein with respect to payments, conversion and the like (and the
computation thereof) shall be the amounts to be received by the holder thereof and shall not,
except as expressly provided herein, be subject to any other obligation of the Maker (or the
performance thereof). The Maker acknowledges that a breach by it of its obligations hereunder will
cause irreparable and material harm to the Holder and that the remedy at law for any such breach
may be inadequate. Therefore the Maker agrees that, in the event of any such breach or threatened
breach, the Holder shall be entitled, in addition to all other available rights and remedies, at
law or in equity, to seek and obtain such equitable relief, including but not limited to an
injunction restraining any such breach or threatened breach, without the necessity of showing
economic loss and without any bond or other security being required.

     5.5 Enforcement Expenses. In the event of any default under this Note, Maker agrees
to pay the reasonable costs and expenses of Holder in enforcing this Note (including reasonable
attorneys’ fees and court costs), subject, in the case of any suit, action or proceeding to enforce
this Note, to Section 5.9.

     5.6 Binding Effect. The obligations of the Maker and the Holder set forth herein
shall be binding upon the successors and assigns of each such party, whether or not such successors
or assigns are permitted by the terms hereof.

     5.7 Amendments. This Note may not be modified or amended in any manner except in
writing executed by the Maker and the holders of a majority of the outstanding principal balance of
the Series A Notes.

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     5.8 Compliance with Securities Laws. The Holder of this Note acknowledges that this
Note is being acquired solely for the Holder’s own account and not as a nominee for any other
party, and for investment, and that the Holder shall not offer, sell or otherwise dispose of this
Note. This Note and any Note issued in substitution or replacement therefor shall be stamped or
imprinted with a legend in substantially the following form:

“THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE SECURITIES LAWS, AND
MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR RECEIPT BY THE MAKER OF AN
OPINION OF COUNSEL IN THE FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO THE MAKER THAT THIS
NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE MAY BE SOLD, TRANSFERRED,
HYPOTHECATED OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND SUCH
STATE SECURITIES LAWS.”

     5.9 Consent to Jurisdiction. Each of the Maker and the Holder irrevocably agrees that
the any legal action or proceeding arising out of or relating to this Note may be brought in the
Courts of New York County, New York or of the United States of America for the Southern District of
New York and hereby expressly submits to the personal jurisdiction and venue of such courts for the
purposes thereof and expressly waives any claim of improper venue and any claim that such courts
are an inconvenient forum. Each of the Maker and the Holder hereby irrevocably consents to the
service of process of any of the aforementioned courts in any such suit, action or proceeding by
the mailing of copies thereof by registered or certified mail, postage prepaid, at the address in
effect for notices to it under the Purchase Agreement, such service to become effective 10 days
after such mailing. Nothing in this Section 5.9 shall affect or limit any right to serve process in
any other manner permitted by law. Each of the Maker and the Holder hereby agree that the
prevailing party in any suit, action or proceeding arising out of or relating to this Note shall be
entitled to reimbursement for reasonable legal fees from the non-prevailing party. The Maker and
the Holder hereby waive all rights to trial by jury.

     5.10 Parties in Interest. This Note shall be binding upon, inure to the benefit of and
be enforceable by the Maker, the Holder and their respective successors and permitted assigns.

     5.11 Failure or Indulgence Not Waiver. No failure or delay on the part of the Holder
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.

     5.12 Waivers; Dispute Resolution.

          (a) Except as otherwise specifically provided herein, the Maker and all others that may become
liable for all or any part of the obligations evidenced by this Note, hereby waive presentment,
demand, notice of nonpayment, protest and all other demands and notices in connection with the
delivery, acceptance, performance and enforcement of this Note, and do hereby consent to any number
of renewals of extensions of the time or payment hereof and agree

20

 

that any such renewals or extensions may be made without notice to any such persons and
without affecting their liability herein and do further consent to the release of any person liable
hereon, all without affecting the liability of the other persons, firms or Maker liable for the
payment of this Note. No delay or omission on the part of the Holder in exercising its rights under
this Note, or course of conduct relating hereto, shall operate as a waiver of such rights or any
other right of the Holder, nor shall any waiver by the Holder of any such right or rights on any
one occasion be deemed a waiver of the same right or rights on any future occasion.

          (b) In the case of a dispute as to the determination of the Closing Price or the VWAP or the
arithmetic calculation of the Conversion Price, any adjustment to the Conversion Price, liquidated
damages amount, interest or dividend calculation, or any redemption price, redemption amount,
adjusted Conversion Price, or similar calculation, or as to whether a subsequent issuance of
securities is prohibited hereunder or would lead to an adjustment to the Conversion Price, the
Maker shall submit the disputed determinations or arithmetic calculations via facsimile within two
(2) Business Days of receipt, or deemed receipt, of the Conversion Notice, any redemption notice,
default notice or other event giving rise to such dispute, as the case may be, to the Holder. If
the Holder and the Maker are unable to agree upon such determination or calculation within two (2)
Business Days of such disputed determination or arithmetic calculation being submitted to the
Holder, then the Maker shall, within two (2) Business Days submit via facsimile (a) the disputed
determination of the Closing Price or the VWAP to an independent, reputable investment bank
selected by the Maker and approved by the Holder, which approval shall not be unreasonably
withheld, (b) the disputed arithmetic calculation of the Conversion Price, adjusted Conversion
Price or any redemption price, redemption amount or default amount to the Maker’s independent,
outside accountant or (c) the disputed facts regarding whether a subsequent issuance of securities
is prohibited hereunder or would lead to an adjustment to the Conversion Price (or any of the other
above described facts not expressly designated to the investment bank or accountant), to an expert
attorney from a nationally recognized outside law firm (having at least 100 attorneys and having
with no prior relationship with the Maker) selected by the Maker and approved by the Lead Purchaser
as defined in the Purchase Agreement). The Maker, at the Maker’s expense, shall cause the
investment bank, the accountant, the law firm, or other expert, as the case may be, to perform the
determinations or calculations and notify the Maker and the Holder of the results no later than
five (5) Business Days from the time it receives the disputed determinations or calculations. Such
investment bank’s, accountant’s or attorney’s determination or calculation, as the case may be,
shall be binding upon all parties absent demonstrable error.

     5.13 Additional Definitions. Terms used herein and not defined shall have the meanings
set forth in the Purchase Agreement. For the purposes hereof, the following terms shall have the
following meanings:

“Closing Price” shall mean (i) the last trading price per share of the Common Stock on such
date on the OTC Bulletin Board or a registered national stock exchange on which the Common Stock is
then listed, or if there is no such price on such date, then the last trading price on such
exchange or quotation system on the date nearest preceding such date, or (ii) if the price of the
Common Stock is not then reported by the OTC Bulletin Board or a registered national securities
exchange, then the average of the “Pink Sheet” quotes for the relevant date, as reported by the
National Quotation Bureau, Inc., or (iii) if the Common Stock is not then publicly traded the fair

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market value of a share of Common Stock as determined by the Holder and reasonably acceptable to
the Maker.

“Equity Conditions” shall mean, during the period in question, (i) the Maker shall have
duly honored all conversions and redemptions scheduled to occur or occurring by virtue of one or
more Conversion Notices of the Holder, if any, (ii) all liquidated damages and other amounts owing
to the Holder in respect of this Note shall have been paid; (iii) there is an effective
Registration Statement pursuant to which the Holder is permitted to utilize the prospectus
thereunder to resell all of the shares issuable pursuant to the Transaction Documents, whether by
conversion or exercise, forced conversion, in lieu of cash interest or otherwise (and the Maker
believes, in good faith, that such effectiveness will continue uninterrupted for the foreseeable
future), (iv) the Common Stock is trading on the Trading Market and all of the shares issuable
pursuant to the Transaction Documents are listed for trading on a Trading Market (and the Maker
believes, in good faith, that trading of the Common Stock on a Trading Market will continue
uninterrupted for the foreseeable future), (v) there is a sufficient number of authorized but
unissued and otherwise unreserved shares of Common Stock for the issuance of all of the shares
issuable pursuant to the Transaction Documents, (vi) there is then existing no Event of Default or
event which, with the passage of time or the giving of notice, would constitute an Event of
Default, (vii) the issuance of the shares in question (including shares of Common Stock as interest
hereunder) to the Holder would not violate the 4.99% or 9.99% beneficial ownership limitations set
forth in Section 3.4 hereof, and (viii) no public announcement of a pending or proposed Triggering
Event has occurred.

“Investment” means, with respect to any Person, all investments in any other Person,
whether by way of extension of credit, loan, advance, purchase of stock or other ownership interest
(other than ownership interests in such Person), bonds, notes, debentures or other securities, or
otherwise, and whether existing on the date of this Agreement or thereafter made, but such term
shall not include the cash surrender value of life insurance policies on the lives of officers or
employees, excluding amounts due from customers for services or products delivered or sold in the
ordinary course of business.

“Trading Day” means (a) a day on which the Common Stock is traded on the OTC Bulletin
Board, or (b) if the Common Stock is not traded on the OTC Bulletin Board, a day on which the
Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of reporting prices);
provided , however , that in the event that the Common Stock is not listed or quoted as set forth
in (a) or (b) hereof, then Trading Day shall mean any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in the State of New York are
authorized or required by law or other government action to close.

“Trading Market” means the Over the Counter Bulletin Board, the New York Stock Exchange,
the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the
American Stock Exchange.

“VWAP” means, for any date, (i) the daily volume weighted average price of the Common Stock
for such date on the OTC Bulletin Board (or national securities exchange, if applicable) as

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reported by Bloomberg Financial L.P. (based on a Trading Day from 9:30 a.m. Eastern Time to 4:02
p.m. Eastern Time); (ii) if the Common Stock is not then listed or quoted on the OTC Bulletin Board
(or national securities exchange, if applicable) and if prices for the Common Stock are then
reported in the “Pink Sheets” published by the Pink Sheets, LLC (or a similar organization or
agency succeeding to its functions of reporting prices), the most recent bid price per share of the
Common Stock so reported; or (iii) in all other cases, the fair market value of a share of Common
Stock as determined by an independent appraiser selected in good faith by the Holder and reasonably
acceptable to the Maker.

[Signature on following page]

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IN WITNESS WHEREOF, the Maker has caused this Note to be duly executed by its duly authorized
officer as of the date first above indicated.

NEOPROBE CORPORATION

By: /s/ David C. Bupp                                   

Its:
President and CEO                                   

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