Document:

exv10w11

 

Exhibit 10.11

THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR ANY STATE SECURITIES LAWS
AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES
ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR THE ISSUER SHALL HAVE RECEIVED AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE ISSUER THAT REGISTRATION OF SUCH SECURITIES UNDER THE
SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.

SERIES A WARRANT TO PURCHASE

SHARES OF COMMON STOCK

OF

NOVARAY MEDICAL, INC.

Expires:
December 27, 2012

	 	 	 
	No.: W-A-07-[     ]

	 	Number of Shares:                     
	Date
of Issuance: December 27, 2007
	 	 

     FOR VALUE RECEIVED, the undersigned, NOVARAY MEDICAL, INC., a Delaware corporation (together
with its successors and assigns, the “Issuer”), hereby certifies that
                     or its registered assigns is entitled to subscribe for and purchase, during
the Term (as hereinafter defined), up to                      shares (subject to adjustment as
hereinafter provided) of the duly authorized, validly issued, fully paid and non-assessable Common
Stock of the Issuer, at an exercise price per share equal to the Warrant Price then in effect,
subject, however, to the provisions and upon the terms and conditions hereinafter set forth.
Capitalized terms used in this Warrant and not otherwise defined herein shall have the respective
meanings specified in Section 8 hereof.

     1. Term. The term of this Warrant shall commence on the date hereof and shall expire
at 6:00 p.m., Eastern Time, on December 27, 2012 (such period being the “Term”).

     2. Method of Exercise; Payment; Issuance of New Warrant; Transfer and
Exchange.

     (a) Time of Exercise. The purchase rights represented by this Warrant may be
exercised in whole or in part during the Term.

     (b) Method of Exercise. The Holder hereof may exercise this Warrant, in whole or in
part, by the surrender of this Warrant (with the exercise form attached hereto duly executed) at

 

 

the principal office of the Issuer, and by the payment to the Issuer of an amount of
consideration therefor equal to the Warrant Price in effect on the date of such exercise multiplied
by the number of shares of Warrant Stock with respect to which this Warrant is then being
exercised, payable at such Holder’s election (i) by certified or official bank check or by wire
transfer to an account designated by the Issuer, (ii) by “cashless exercise” in accordance with the
provisions of subsection (c) of this Section 2, or (iii) by a combination of the
foregoing methods of payment selected by the Holder of this Warrant.

     (c) Cashless Exercise. Notwithstanding any provisions herein to the contrary and
commencing one (1) year following the Original Issue Date if the Per Share Market Value of one
share of Common Stock is greater than the Warrant Price (at the date of calculation as set forth
below), the Holder may exercise this Warrant by a cashless exercise and shall receive the number of
shares of Common Stock equal to an amount (as determined below) by surrender of this Warrant at the
principal office of the Issuer together with the properly endorsed Notice of Exercise in which
event the Issuer shall issue to the Holder a number of shares of Common Stock computed using the
following formula:

	 	 	 	 	 
	 

	 	X =
	 	Y - (A)(Y)

           B
	 
	 	 	 	 
	Where

	 	X =
	 	the number of shares of Common Stock to be issued to the Holder.
	 
	 	 	 	 
	 

	 	Y =
	 	the number of shares of Common Stock purchasable upon
exercise of all of the Warrant or, if only a portion of the Warrant is being
exercised, the portion of the Warrant being exercised.
	 
	 	 	 	 
	 

	 	A =
	 	the Warrant Price.
	 
	 	 	 	 
	 

	 	B =
	 	the Per Share Market Value of one share of Common Stock.

     (d) Issuance of Stock Certificates. In the event of any exercise of this Warrant in
accordance with and subject to the terms and conditions hereof, certificates for the shares of
Warrant Stock so purchased shall be dated the date of such exercise and delivered to the Holder
hereof within a reasonable time, not exceeding three (3) Trading Days after such exercise (the
“Delivery Date”) or, at the request of the Holder (provided that a registration statement
under the Securities Act providing for the resale of the Warrant Stock is then in effect and the
Holder so requests in writing of the Issuer), issued and delivered to the Depository Trust Company
(“DTC”) account on the Holder’s behalf via the Deposit Withdrawal Agent Commission System
(“DWAC”) within a reasonable time, not exceeding three (3) Trading Days after such
exercise, and the Holder hereof shall be deemed for all purposes to be the holder of the shares of
Warrant Stock so purchased as of the date of such exercise. Notwithstanding the foregoing to the
contrary, the Issuer or its transfer agent shall only be obligated to issue and deliver the shares
to the DTC on a holder’s behalf via DWAC if the Issuer and its transfer agent are participating in
DTC through the DWAC system. The Holder shall deliver this original Warrant, or an indemnification
undertaking in a form reasonably satisfactory to the Issuer with respect to such Warrant in the
case of its loss, theft or destruction, at such time that this Warrant is fully

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exercised. With respect to partial exercises of this Warrant, the Issuer shall keep written
records for the Holder of the number of shares of Warrant Stock exercised as of each date of
exercise.

     (e) Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Exercise.
In addition to any other rights available to the Holder, if the Issuer fails to cause its transfer
agent to transmit to the Holder a certificate or certificates representing the Warrant Stock
pursuant to an exercise on or before the Delivery Date, and if after such date the Holder is
required by its broker to purchase (in an open market transaction or otherwise) shares of Common
Stock to deliver in satisfaction of a sale by the Holder of the Warrant Stock which the Holder
anticipated receiving upon such exercise (a “Buy-In”), then the Issuer shall (1) pay in
cash to the Holder the amount by which (x) the Holder’s total purchase price (including brokerage
commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by
multiplying (A) the number of shares of Warrant Stock that the Issuer was required to deliver to
the Holder in connection with the exercise at issue times (B) the Warrant Price, as may be adjusted
in accordance with this Warrant, and (2) at the option of the Holder, either reinstate the portion
of the Warrant and equivalent number of shares of Warrant Stock for which such exercise was not
honored or deliver to the Holder the number of shares of Common Stock that would have been issued
had the Issuer timely complied with its exercise and delivery obligations hereunder. For example,
if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In
with respect to an attempted exercise of the Warrant for shares of Common Stock with an aggregate
sale price giving rise to such purchase obligation of $10,000, under clause (1) of the immediately
preceding sentence the Issuer shall be required to pay the Holder $1,000. The Holder shall provide
the Issuer written notice indicating the amounts payable to the Holder in respect of the Buy-In,
together with applicable confirmations and other evidence reasonably requested by the Issuer.
Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder,
at law or in equity including, without limitation, a decree of specific performance and/or
injunctive relief with respect to the Issuer’s failure to timely deliver certificates representing
shares of Common Stock upon exercise of this Warrant as required pursuant to the terms hereof.

     (f) Transferability/Exchangeability of Warrant. Subject to Section 2(h)
hereof, this Warrant may be transferred by a Holder, in whole or in part, without the consent of
the Issuer. If transferred pursuant to this paragraph, this Warrant may be transferred on the
books of the Issuer by the Holder hereof in person or by duly authorized attorney, upon surrender
of this Warrant at the principal office of the Issuer, properly endorsed (by the Holder executing
an assignment in the form attached hereto) and upon payment of any necessary transfer tax or other
governmental charge imposed upon such transfer. This Warrant is exchangeable at the principal
office of the Issuer for Warrants to purchase the same aggregate number of shares of Warrant Stock,
each new Warrant to represent the right to purchase such number of shares of Warrant Stock as the
Holder hereof shall designate at the time of such exchange. All Warrants issued on transfers or
exchanges shall be dated the Original Issue Date and shall be identical with this Warrant except as
to the number of shares of Warrant Stock issuable pursuant thereto.

     (g) Continuing Rights of Holder. The Issuer will, at the time of or at any time after
each exercise of this Warrant, upon the request of the Holder hereof, acknowledge in writing the
extent, if any, of its continuing obligation to afford to such Holder all rights to which such

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Holder shall continue to be entitled after such exercise in accordance with the terms of this
Warrant; provided that if any such Holder shall fail to make, or the Issuer shall fail to honor,
any such request, the failure shall not affect the continuing obligation of the Issuer to afford
such rights to such Holder.

     (h) Compliance with Securities Laws.

     (i) The Holder of this Warrant, by acceptance hereof, acknowledges that this Warrant
and the shares of Warrant Stock to be issued upon exercise hereof are 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 will not offer, sell or otherwise dispose of this Warrant or any shares
of Warrant Stock to be issued upon exercise hereof except pursuant to an effective
registration statement, or an exemption from registration, under the Securities Act and any
applicable state securities laws.

     (ii) Except as provided in paragraph (iii) below, this Warrant and all certificates
representing shares of Warrant Stock issued upon exercise hereof shall be stamped or
imprinted with a legend in substantially the following form:

THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE “SECURITIES ACT”) OR ANY STATE SECURITIES LAWS AND MAY
NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED
UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS
OR THE ISSUER SHALL HAVE RECEIVED AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE ISSUER THAT REGISTRATION OF SUCH SECURITIES
UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE
STATE SECURITIES LAWS IS NOT REQUIRED.

     (iii) The Issuer agrees to reissue this Warrant or certificates representing any of the
Warrant Stock, without the legend set forth above if at such time, prior to making any
transfer of any such securities, the Holder shall give written notice to the Issuer
describing the manner and terms of such transfer. Such proposed transfer will not be
effected until: (a) either (i) the Issuer has received an opinion of counsel reasonably
satisfactory to the Issuer, to the effect that the registration of such securities under the
Securities Act is not required in connection with such proposed transfer, or (ii) a
registration statement under the Securities Act covering such proposed disposition has been
filed by the Issuer with the Securities and Exchange Commission and has become effective
under the Securities Act, and (b) either (i) the Issuer has received an opinion of counsel
reasonably satisfactory to the Issuer, to the effect that registration or qualification
under the securities or “blue sky” laws of any state is not required in connection with

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such proposed disposition, or (ii) compliance with applicable state securities or “blue
sky” laws has been effected or a valid exemption exists with respect thereto. The Issuer
will respond to any such notice from a holder within five (5) Trading Days. In the case of
any proposed transfer under this Section 2(h), the Issuer will pay the expenses of
and use reasonable efforts to comply with any such applicable state securities or “blue sky”
laws, but shall in no event be required, (x) to qualify to do business in any state where it
is not then qualified, or (y) to take any action that would subject it to tax or to the
general service of process in any state where it is not then subject. The restrictions on
transfer contained in this Section 2(h) shall be in addition to, and not by way of
limitation of, any other restrictions on transfer contained in any other section of this
Warrant. Whenever a certificate representing the Warrant Stock is required to be issued to
a Holder without a legend, at the request of the Holder, in lieu of delivering physical
certificates representing the Warrant Stock, the Issuer shall cause its transfer agent to
electronically transmit the Warrant Stock to the Holder by crediting the account of the
Holder’s Prime Broker with DTC through its DWAC system (to the extent not inconsistent with
any provisions of this Warrant or the Purchase Agreement).

     (i) Accredited Investor Status. In no event may the Holder exercise this Warrant in
whole or in part unless the Holder is an “accredited investor” as defined in Regulation D under the
Securities Act.

     3. Stock Fully Paid; Reservation and Listing of Shares; Covenants.

     (a) Stock Fully Paid. The Issuer represents, warrants, covenants and agrees that all
shares of Warrant Stock which may be issued upon the exercise of this Warrant or otherwise
hereunder will, when issued in accordance with the terms of this Warrant, be duly authorized,
validly issued, fully paid and non-assessable and free from all taxes, liens and charges. The
Issuer further covenants and agrees that during the period within which this Warrant may be
exercised, the Issuer will at all times have authorized and reserved for the purpose of the
issuance upon exercise of this Warrant a number of authorized but unissued shares of Common Stock
equal to at least one hundred ten percent (110%) of the number of shares of Common Stock issuable
upon exercise of this Warrant without regard to any limitations on exercise.

     (b) Reservation. If any shares of Common Stock required to be reserved for issuance
upon exercise of this Warrant or as otherwise provided hereunder require registration or
qualification with any Governmental Authority under any federal or state law before such shares may
be so issued, the Issuer will in good faith use best efforts as expeditiously as possible at its
expense to cause such shares to be duly registered or qualified. If the Issuer shall list any
shares of Common Stock on any securities exchange or market it will, at its expense, list thereon,
and maintain and increase when necessary such listing of, all shares of Warrant Stock from time to
time issued upon exercise of this Warrant or as otherwise provided hereunder (provided that such
Warrant Stock has been registered pursuant to a registration statement under the Securities Act
then in effect), and, to the extent permissible under the applicable securities exchange rules, all
unissued shares of Warrant Stock which are at any time issuable hereunder, so long as any shares of
Common Stock shall be so listed. The Issuer will also so list on each securities exchange or
market, and will maintain such listing of, any other securities which the Holder of this Warrant

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shall be entitled to receive upon the exercise of this Warrant if at the time any securities
of the same class shall be listed on such securities exchange or market by the Issuer.

     (c) Covenants. The Issuer shall not by any action including, without limitation,
amending the Certificate of Incorporation or the by-laws of the Issuer, or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities
or any other action, avoid or seek to avoid the observance or performance of any of the terms of
this Warrant, but will at all times in good faith assist in the carrying out of all such terms and
in the taking of all such actions as may be necessary or appropriate to protect the rights of the
Holder hereof against dilution (to the extent specifically provided herein) or impairment. Without
limiting the generality of the foregoing, the Issuer will (i) not permit the par value, if any, of
its Common Stock to exceed the then effective Warrant Price, (ii) not amend or modify any provision
of the Certificate of Incorporation or by-laws of the Issuer in any manner that would materially
and adversely affect the rights of the Holders of the Warrants, (iii) take all such action as may
be reasonably necessary in order that the Issuer may validly and legally issue fully paid and
nonassessable shares of Common Stock, free and clear of any liens, claims, encumbrances and
restrictions (other than as provided herein) upon the exercise of this Warrant, and (iv) use best
efforts to obtain all such authorizations, exemptions or consents from any public regulatory body
having jurisdiction thereof as may be reasonably necessary to enable the Issuer to perform its
obligations under this Warrant.

     (d) Loss, Theft, Destruction, Mutilation of Warrants. Upon receipt of evidence
satisfactory to the Issuer of the ownership of and the loss, theft, destruction or mutilation of
any Warrant and, in the case of any such loss, theft or destruction, upon receipt of indemnity or
security satisfactory to the Issuer or, in the case of any such mutilation, upon surrender and
cancellation of such Warrant, the Issuer will make and deliver, in lieu of such lost, stolen,
destroyed or mutilated Warrant, a new Warrant of like tenor and representing the right to purchase
the same number of shares of Common Stock.

     (e) Payment of Taxes. The Issuer will pay any documentary stamp taxes attributable to
the initial issuance of the Warrant Stock issuable upon exercise of this Warrant; provided,
however, that the Issuer shall not be required to pay any tax or taxes which may be payable in
respect of any transfer involved in the issuance or delivery of any certificates representing
Warrant Stock in a name other than that of the Holder in respect to which such shares are issued.

     4. Adjustment of Warrant Price and Number of Shares Issuable Upon Exercise. The
Warrant Price and the number of shares of Warrant Stock that may be purchased upon exercise of this
Warrant shall be subject to adjustment from time to time as set forth in this Section 4.
The Issuer shall give the Holder notice of any event described below which requires an adjustment
pursuant to this Section 4 in accordance with the notice provisions set forth in
Section 5.

     (a) Recapitalization, Reorganization, Reclassification, Consolidation, Merger or Sale.

     (i) In case the Issuer after the Original Issue Date shall do any of the following
(each, a “Triggering Event”): (a) consolidate or merge with or into any other

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Person and the Issuer shall not be the continuing or surviving Person of such consolidation
or merger, or (b) permit any other Person to consolidate with or merge into the Issuer and
the Issuer shall be the continuing or surviving Person but, in connection with such
consolidation or merger, any Capital Stock of the Issuer shall be changed into or exchanged
for Securities of any other Person or cash or any other property, or (c) transfer all or
substantially all of its properties or assets to any other Person, or (d) effect a capital
reorganization or reclassification of its Capital Stock, then, and in the case of each such
Triggering Event, proper provision shall be made to the Warrant Price and the number of shares of Warrant Stock that may be purchased upon exercise of this Warrant so that, upon
the basis and the terms and in the manner provided in this Warrant, the Holder of this
Warrant shall be entitled upon the exercise hereof at any time after the consummation of
such Triggering Event, to the extent this Warrant is not exercised prior to such Triggering
Event, to receive at the Warrant Price as adjusted to take into account the consummation of
such Triggering Event, in lieu of the Common Stock issuable upon such exercise of this
Warrant prior to such Triggering Event, the Securities, cash and property to which such
Holder would have been entitled upon the consummation of such Triggering Event if such
Holder had exercised the rights represented by this Warrant immediately prior thereto
(including the right of a shareholder to elect the type of consideration it will receive
upon a Triggering Event), subject to adjustments (subsequent to such corporate action) as
nearly equivalent as possible to the adjustments provided for elsewhere in this Section
4. Immediately upon the occurrence of a Triggering Event, the Issuer shall notify the
Holder in writing of such Triggering Event and provide the calculations in determining the
number of shares of Warrant Stock issuable upon exercise of the new warrant and the adjusted
Warrant Price. Upon the Holder’s request, the continuing or surviving Person as a result of
such Triggering Event shall issue to the Holder a new warrant of like tenor evidencing the
right to purchase the adjusted number of shares of Warrant Stock and the adjusted Warrant
Price pursuant to the terms and provisions of this Section 4(a)(i). Notwithstanding
the foregoing to the contrary, this Section 4(a)(i) shall only apply if the
surviving entity pursuant to any such Triggering Event has a class of equity securities
registered pursuant to the Securities Exchange Act of 1934, as amended, and its common stock
is listed or quoted on a national securities exchange, national automated quotation system
or the OTC Bulletin Board. In the event that the surviving entity pursuant to any such
Triggering Event is not a public company that is registered pursuant to the Securities
Exchange Act of 1934, as amended, or its common stock is not listed or quoted on a national
securities exchange, national automated quotation system or the OTC Bulletin Board, then the
Holder shall have the right to demand that the Issuer pay to the Holder an amount in cash
equal to the value of this Warrant calculated in accordance with the Black-Scholes formula.

     (ii) In the event that the Holder has elected not to exercise this Warrant prior to the
consummation of a Triggering Event, so long as the surviving entity pursuant to any
Triggering Event is a company that has a class of equity securities registered pursuant to
the Securities Exchange Act of 1934, as amended, and its common stock is listed or quoted on
a national securities exchange, national automated quotation system or the OTC Bulletin
Board, the surviving entity and/or each Person (other than the Issuer) which may be required
to deliver any shares of Warrant Stock (including all Securities,

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cash or property) upon the exercise of this Warrant as provided herein shall assume, by
written instrument delivered to, and reasonably satisfactory to, the Holder of this Warrant,
(A) the obligations of the Issuer under this Warrant (and if the Issuer shall survive the
consummation of such Triggering Event, such assumption shall be in addition to, and shall
not release the Issuer from, any continuing obligations of the Issuer under this Warrant)
and (B) the obligation to deliver to such Holder such Securities, cash or property as, in
accordance with the foregoing provisions of this subsection (a).

     (b) Stock Dividends, Subdivisions and Combinations. If at any time the Issuer shall:

     (i) make or issue or set a record date for the holders of the Common Stock for the
purpose of entitling them to receive a dividend payable in, or other distribution of, shares
of Common Stock,

     (ii) subdivide its outstanding shares of Common Stock into a larger number of shares of
Common Stock, or

     (iii) combine its outstanding shares of Common Stock into a smaller number of shares of
Common Stock,

then (1) the number of shares of Common Stock for which this Warrant is exercisable immediately
after the occurrence of any such event shall be adjusted to equal the number of shares of Common
Stock which a record holder of the same number of shares of Common Stock for which this Warrant is
exercisable immediately prior to the occurrence of such event would own or be entitled to receive
after the happening of such event, and (2) the Warrant Price then in effect shall be adjusted to
equal (A) the Warrant Price then in effect multiplied by the number of shares of Common Stock for
which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of
shares of Common Stock for which this Warrant is exercisable immediately after such adjustment.

     (c) Certain Other Distributions. If at any time the Issuer shall make or issue or set
a record date for the holders of the Common Stock for the purpose of entitling them to receive any
dividend or other distribution of:

     (i) cash,

     (ii) any evidences of its indebtedness, any shares of stock of any class or any other
Securities or property of any nature whatsoever (other than cash, Common Stock Equivalents
or Additional Shares of Common Stock), or

     (iii) any warrants or other rights to subscribe for or purchase any evidences of its
indebtedness, any shares of stock of any class or any other securities or property of any
nature whatsoever (other than cash, Common Stock Equivalents or Additional Shares of Common
Stock), then (1) the number of shares of Common Stock for which this Warrant is exercisable
shall be adjusted to equal the product of the number of shares of

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Common Stock for which this Warrant is exercisable immediately prior to such adjustment
multiplied by a fraction (A) the numerator of which shall be the Per Share Market Value of
Common Stock at the date of taking such record and (B) the denominator of which shall be
such Per Share Market Value minus the amount allocable to one share of Common Stock of any
such cash so distributable and of the fair value (as determined in good faith by the Board
of Directors of the Issuer of any and all such evidences of indebtedness, shares of stock,
other securities or property or warrants or other subscription or purchase rights so
distributable, and (2) the Warrant Price then in effect shall be adjusted to equal (A) the
Warrant Price then in effect multiplied by the number of shares of Common Stock for which
this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of shares of Common Stock for which this Warrant is exercisable immediately after such
adjustment. A reclassification of the Common Stock (other than a change in par value, or
from par value to no par value or from no par value to par value) into shares of Common
Stock and shares of any other class of stock shall be deemed a distribution by the Issuer to
the holders of its Common Stock of such shares of such other class of stock within the
meaning of this Section 4(c) and, if the outstanding shares of Common Stock shall be
changed into a larger or smaller number of shares of Common Stock as a part of such
reclassification, such change shall be deemed a subdivision or combination, as the case may
be, of the outstanding shares of Common Stock within the meaning of Section 4(b).

     (d) Warrant Price Adjustments. The Warrant Price shall be subject to adjustment from
time to time as follows:

     (i) (A) If the Issuer shall issue, after the date upon which any shares of Preferred
Stock were first issued (the “Purchase Date”), any Additional Shares of Common Stock
(as defined below) without consideration or for a consideration per share less than the
Conversion Price for the Preferred Stock in effect immediately prior to the issuance of such
Additional Shares of Common Stock, the Warrant Price for this Warrant in effect immediately
prior to each such issuance shall (except as otherwise provided in this Section 4(d)(i)) be
adjusted concurrently with such issuance to a price determined by multiplying such Warrant
Price by a fraction, the numerator of which shall be the number of shares of Common Stock
outstanding and deemed issued pursuant to Section 4(d)(i)(E) immediately prior to such
issuance plus the number of shares of Common Stock that the aggregate consideration received
by this Issuer for such issuance would purchase at such Conversion Price; and the
denominator of which shall be the number of shares of Common Stock outstanding and deemed
issued pursuant to Section 4(d)(i)(E) immediately prior to such issuance plus the number of shares of such Additional Shares of Common Stock.

          (B) No adjustment of the Warrant Price pursuant to this Section 4(d) shall be made in
an amount less than one cent per share, provided that any adjustments that are not required
to be made by reason of this sentence shall be carried forward and shall be either taken
into account in any subsequent adjustment made prior to one (1) year from the date of the
event giving rise to the adjustment being carried forward, or shall be made at the end of
one (1) year from the date of the event giving rise to the adjustment being

9

 

carried forward. Except to the limited extent provided for in Sections 4(d)(i)(E)(3) and
4(d)(i)(E)(4), no adjustment of such Warrant Price pursuant to this Section 4(d)(i) shall
have the effect of increasing the Warrant Price above the Warrant Price in effect
immediately prior to such adjustment.

          (C) For purposes of this Section 4(d)(i), in the case of the issuance of Additional
Shares of Common Stock for cash, the consideration shall be deemed to be the amount of cash
paid therefor before deducting any reasonable discounts, commissions or other expenses
allowed, paid or incurred by this Issuer for any underwriting or otherwise in connection
with the issuance and sale thereof.

          (D) For purposes of this Section 4(d)(i), in the case of the issuance of the Additional
Shares of Common Stock for a consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair value thereof as determined by
the Board irrespective of any accounting treatment.

          (E) In the case of the issuance (whether before, on or after the Purchase Date) of
Common Stock Equivalents, the following provisions shall apply for all purposes of this
Section 4(d)(i):

               (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise
(assuming the satisfaction of any conditions to exercisability, including, without
limitation, the passage of time, of such options to purchase or rights to subscribe for
Common Stock shall be deemed to have been issued at the time such options or rights were
issued and for a consideration equal to the consideration (determined in the manner provided
in Sections 4(d)(i)(C) and 4(d)(i)(D)), if any, received by this Issuer upon the issuance of
such options or rights plus the minimum exercise price provided in such options or rights
for the Common Stock covered thereby.

               (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion
of, or in exchange (assuming the satisfaction of any conditions to convertibility or
exchangeability, including, without limitation, the passage of time, for any such
convertible or exchangeable securities or upon the exercise of options to purchase or rights
to subscribe for such convertible or exchangeable securities and subsequent conversion or
exchange thereof shall be deemed to have been issued at the time such securities were issued
or such options or rights were issued and for a consideration equal to the consideration, if
any, received by the Issuer for any such securities and related options or rights (excluding
any cash received on account of accrued interest or accrued dividends), plus the minimum
additional consideration, if any, to be received by the Issuer upon the conversion or
exchange of such securities or the exercise of any related options or rights (the
consideration in each case to be determined in the manner provided in Sections 4(d)(i)(C)
and 4(d)(i)(D))

               (3) In the event of any change in the number of shares of Common Stock deliverable or
in the consideration payable to the Issuer upon exercise of

10

 

such options or rights or upon conversion of or in exchange for such convertible or
exchangeable securities, including, but not limited to, a change resulting from the
antidilution provisions thereof, the Warrant Price, to the extent in any way affected by or
computed using such options, rights or securities, shall be recomputed to reflect such
change, but no further adjustment shall be made for the actual issuance of Common Stock or
any payment of such consideration upon the exercise of any such options or rights or the
conversion or exchange of such securities.

               (4) Upon the expiration of any such options or rights, the termination of any such
rights to convert or exchange or the expiration of any options or rights related to such
convertible or exchangeable securities, the Warrant Price, to the extent in any way affected
by or computed using such options, rights or securities or options or rights related to such
securities, shall be recomputed to reflect the issuance of only the number of shares of
Common Stock (and convertible or exchangeable securities that remain in effect) actually
issued upon the exercise of such options or rights, upon the conversion or exchange of such
securities or upon the exercise of the options or rights related to such securities.

               (5) The number of shares of Common Stock deemed issued and the consideration deemed
paid therefor pursuant to Sections 4(d)(i)(E)(1) and 4(d)(i)(E)(2) shall be appropriately
adjusted to reflect any change, termination or expiration of the type described in either
Section 4(d)(i)(E)(3) or 4(d)(i)(E)(4).

          (ii) Termination. Notwithstanding anything else contained herein, the right to any
adjustments to the Warrant Price pursuant to this Section 4(d) shall terminate upon the earlier of:
(i) the expiration of the Term; or (ii) the occurrence of a Triggering Event. In addition, no
adjustment to the Warrant Price shall be made for all or any portion of this Warrant that is
exercised prior to any issuance of Additional Shares of Common Stock that would require an
adjustment pursuant to this Section 4(d).

     (e) Other Provisions applicable to Adjustments under this Section. The following
provisions shall be applicable to the making of adjustments of the number of shares of Common Stock
for which this Warrant is exercisable and the Warrant Price then in effect provided for in this
Section 4:

     (i) Computation of Consideration. Except as otherwise provided, to the extent
that any Additional Shares of Common Stock or any Common Stock Equivalents (or any warrants
or other rights therefor) shall be issued for cash consideration, the consideration received
by the Issuer therefor shall be the amount of the cash received by the Issuer therefor, or,
if such Additional Shares of Common Stock or Common Stock Equivalents are offered by the
Issuer for subscription, the subscription price, or, if such Additional Shares of Common
Stock or Common Stock Equivalents are sold to underwriters or dealers for public offering
without a subscription offering, the initial public offering price (in any such case
subtracting any amounts paid or receivable for accrued interest or accrued dividends and
without taking into account any compensation, discounts or expenses paid or incurred by the
Issuer for and in the underwriting of, or

11

 

otherwise in connection with, the issuance thereof). In connection with any merger or
consolidation in which the Issuer is the surviving Person (other than any consolidation or
merger in which the previously outstanding shares of Common Stock of the Issuer shall be
changed to or exchanged for the stock or other securities of another Person), the amount of
consideration therefore shall be, deemed to be the fair value, as determined reasonably and
in good faith by the Board, of such portion of the assets and business of the nonsurviving
Person as the Board may determine to be attributable to such shares of Common Stock or
Common Stock Equivalents, as the case may be. The consideration for any Additional Shares
of Common Stock issuable pursuant to any warrants or other rights to subscribe for or
purchase the same shall be the consideration received by the Issuer for issuing such
warrants or other rights plus the additional consideration payable to the Issuer upon
exercise of such warrants or other rights. The consideration for any Additional Shares of
Common Stock issuable pursuant to the terms of any Common Stock Equivalents shall be the
consideration received by the Issuer for issuing warrants or other rights to subscribe for
or purchase such Common Stock Equivalents, plus the consideration paid or payable to the
Issuer in respect of the subscription for or purchase of such Common Stock Equivalents, plus
the additional consideration, if any, payable to the Issuer upon the exercise of the right
of conversion or exchange in such Common Stock Equivalents. In the event of any
consolidation or merger of the Issuer in which the Issuer is not the surviving Person or in
which the previously outstanding shares of Common Stock of the Issuer shall be changed into
or exchanged for the stock or other securities of another Person, or in the event of any
sale of all or substantially all of the assets of the Issuer for stock or other securities
of any Person, the Issuer shall be deemed to have issued a number of shares of its Common
Stock for stock or securities or other property of the other Person 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 Person. In the event any consideration received
by the Issuer for any securities consists of property other than cash, the fair market value
thereof at the time of issuance or as otherwise applicable shall be as determined in good
faith by the Board. In the event Common Stock is issued with other shares or securities or
other assets of the Issuer for consideration which covers both, the consideration computed
as provided in this Section 4(e)(i) shall be allocated among such securities and
assets as determined in good faith by the Board.

     (ii) When Adjustments to Be Made. The adjustments required by this Section
4 shall be made whenever and as often as any specified event requiring an adjustment
shall occur, except that any adjustment of the number of shares of Common Stock for which
this Warrant is exercisable that would otherwise be required may be postponed (except in the
case of a subdivision or combination of shares of the Common Stock, as provided for in
Section 4(b)) up to, but not beyond the date of exercise if such adjustment either
by itself or with other adjustments not previously made adds or subtracts less than one
percent (1%) of the shares of Common Stock for which this Warrant is exercisable immediately
prior to the making of such adjustment. Any adjustment representing a change of less than
such minimum amount (except as aforesaid) which is postponed shall be carried forward and
made (x) as soon as such

12

 

adjustment, together with other adjustments required by this Section 4 and not
previously made, would result in a minimum adjustment, or (y) on the date of exercise. For
the purpose of any adjustment, any specified event shall be deemed to have occurred at the
close of business on the date of its occurrence.

     (iii) Fractional Interests. In computing adjustments under this Section
4, fractional interests in Common Stock shall be taken into account to the nearest one
one-hundredth (1/100th) of a share.

     (iv) When Adjustment Not Required. If the Issuer shall take a record of the
holders of its Common Stock for the purpose of entitling them to receive a dividend or
distribution or subscription or purchase rights and shall, thereafter and before the
distribution to stockholders thereof, legally abandon its plan to pay or deliver such
dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall
be required by reason of the taking of such record and any such adjustment previously made
in respect thereof shall be rescinded and annulled.

     (h) Form of Warrant after Adjustments. The form of this Warrant need not be changed
because of any adjustments in the Warrant Price or the number and kind of Securities purchasable
upon the exercise of this Warrant.

     (i) Escrow of Warrant Stock. If after any property becomes distributable pursuant to
this Section 4 by reason of the taking of any record of the holders of Common Stock, but
prior to the occurrence of the event for which such record is taken, and the Holder exercises this
Warrant, any shares of Common Stock issuable upon exercise by reason of such adjustment shall be
deemed the last shares of Common Stock for which this Warrant is exercised (notwithstanding any
other provision to the contrary herein) and such shares or other property shall be held in escrow
for the Holder by the Issuer to be issued to the Holder upon and to the extent that the event
actually takes place, upon payment of the current Warrant Price. Notwithstanding any other
provision to the contrary herein, if the event for which such record was taken fails to occur or is
rescinded, then such escrowed shares shall be cancelled by the Issuer and escrowed property
returned.

     5. Notice of Adjustments. Whenever the Warrant Price or Warrant Share Number shall be
adjusted pursuant to Section 4 hereof (for purposes of this Section 5, each an
“Adjustment”), the Issuer shall cause its Chief Financial Officer to prepare and execute a
certificate setting forth, in reasonable detail, the event requiring the Adjustment, the amount of
the Adjustment, the method by which such Adjustment was calculated (including a description of the
basis on which the Board made any determination hereunder), and the Warrant Price and Warrant Share
Number after giving effect to such Adjustment, and shall cause copies of such certificate to be
delivered to the Holder of this Warrant promptly after each Adjustment. Any dispute between the
Issuer and the Holder of this Warrant with respect to the matters set forth in such certificate may
at the option of the Holder of this Warrant be submitted to an Independent Appraiser mutually
selected by the Holder and the Issuer. The Independent Appraiser shall be instructed to deliver a
written opinion as to such matters to the Issuer and such Holder within thirty (30) days after
submission to it of such dispute. Such opinion shall be final and binding on

13

 

the parties hereto. The costs and expenses of the initial firm selected as Independent
Appraiser shall be paid equally by the Issuer and the Holder.

     6. Fractional Shares. No fractional shares of Warrant Stock will be issued in
connection with any exercise hereof, but in lieu of such fractional shares, the Issuer shall round
the number of shares to be issued upon exercise down to the nearest whole number of shares.

     7. Ownership Cap and Exercise Restriction. Notwithstanding anything to the contrary
set forth in this Warrant, at no time may a Holder of this Warrant exercise this Warrant if the
number of shares of Common Stock to be issued pursuant to such exercise would exceed, when
aggregated with all other shares of Common Stock owned by such Holder at such time, the number of
shares of Common Stock which would result in such Holder beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act and the rules thereunder) in excess of 4.99% of
the then issued and outstanding shares of Common Stock; provided, however, that
upon a holder of this Warrant providing the Issuer with sixty-one (61) days notice (pursuant to
Section 12 hereof) (the “Waiver Notice”) that such Holder would like to waive this
Section 7 with regard to any or all shares of Common Stock issuable upon exercise of this
Warrant, this Section 7 will be of no force or effect with regard to all or a portion of
the Warrant referenced in the Waiver Notice; provided, further, that during the
sixty-one (61) day period prior to the Expiration Date of this Warrant the Holder may waive this
Section 7 upon providing the Waiver Notice at any time during such sixty-one (61) day period,
provided, further, that any Waiver Notice during the sixty-one (61) day period
prior to the Expiration Date will not be effective until the Expiration Date.

     8. Definitions. For the purposes of this Warrant, the following terms have the
following meanings:

     “Additional Shares of Common Stock” means any shares of Common Stock issued (or
deemed to have been issued pursuant to Section 4(d)(i)(E)) by
this Issuer after the
Purchase Date other than: (a) shares of Common Stock issued pursuant to a transaction
described in Section 4(c) hereof; (b) up to 3,750,000 shares of Common Stock (as adjusted
for any stock splits, stock dividends, combinations, recapitalizations or the like) issued
or deemed issued to employees, consultants, officers, directors or vendors (if in
transactions with primarily non-financing purposes) of this Issuer directly or pursuant to
a stock option plan or restricted stock purchase plan approved by the Board; (c) shares of
Common Stock issued or issuable (I) in a bona fide, firmly underwritten public offering
under the Securities Act before which or in connection with which all outstanding Preferred
Shares will be automatically converted to Common Stock, or (II) upon exercise of warrants or
rights granted to underwriters in connection with such a public offering; (d) shares of
Common Stock issued pursuant to the conversion or exercise of convertible or exercisable
securities outstanding as of the Purchase Date or subsequently issued after the Purchase
Date in accordance with this definition; (e) shares of Common Stock issued or issuable in
connection with a bona fide business acquisition of or by the Issuer, whether by merger,
consolidation, sale of assets, sale or exchange of stock or otherwise, each as approved by
the Board; (f) up to 500,000 shares of Common Stock (as adjusted for any stock splits, stock
dividends, combinations, recapitalizations or

14

 

the like) issued or issuable to persons or entities with which this Issuer has business
relationships provided such issuances are for other than primarily equity financing
purposes; or (g) shares of Common Stock issued or issuable in connection with any
transaction where such securities so issued are excepted from the definition “Additional
Shares of Common Stock” by the affirmative vote of holders of at least a majority of the
shares of Common Stock issued or issuable upon exercise of all Series A Warrants issued
pursuant to the Purchase Agreement.

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

     “Capital Stock” means and includes (i) any and all shares, interests,
participations or other equivalents of or interests in (however designated) corporate stock,
including, without limitation, shares of preferred or preference stock, (ii) all partnership
interests (whether general or limited) in any Person which is a partnership, (iii) all
membership interests or limited liability company interests in any limited liability
company, and (iv) all equity or ownership interests in any Person of any other type.

     “Certificate of Incorporation” means the Certificate of Incorporation of the
Issuer as in effect on the Original Issue Date, and as hereafter from time to time amended,
modified, supplemented or restated in accordance with the terms hereof and thereof and
pursuant to applicable law.

     “Common Stock” means the Common Stock of the Issuer, par value $0.0001 per
share, and any other Capital Stock into which such stock may hereafter be changed.

     “Common Stock Equivalent” means any Convertible Security or warrant, option or
other right to subscribe for or purchase any Additional Shares of Common Stock or any
Convertible Security.

     “Conversion Price” means $2.67 per share, as may be adjusted in accordance with
the Certificate of Designations for the Preferred Stock, filed with the Delaware Secretary
of State in accordance with the terms of the Purchase Agreement.

     “Convertible Securities” means evidences of indebtedness, shares of Capital
Stock or other Securities which are or may be at any time convertible into or exchangeable
for Additional Shares of Common Stock. The term “Convertible Security” means one of
the Convertible Securities.

     “Delivery Date” shall be the date not exceeding three (3) Trading Days after an
exercise of this Warrant.

     “DTC” means the Depository Trust Company.

     “DWAC” means the Deposit Withdrawal Agent Commission System.

     “Expiration
Date” means December 27, 2012.

15

 

     “Governmental Authority” means any governmental, regulatory or self-regulatory
entity, department, body, official, authority, commission, board, agency or instrumentality,
whether federal, state or local, and whether domestic or foreign.

     “Holders” mean the Persons who shall from time to time own any Warrant. The
term “Holder” means one of the Holders.

     “Independent Appraiser” means a nationally recognized or major regional
investment banking firm or firm of independent certified public accountants of recognized
standing (which may be the firm that regularly examines the financial statements of the
Issuer) that is regularly engaged in the business of appraising the Capital Stock or assets
of corporations or other entities as going concerns, and which is not affiliated with either
the Issuer or the Holder of any Warrant.

     “Issuer” means NovaRay Medical, Inc., a Delaware corporation, and its
successors.

     “Majority Holders” means at any time the Holders of Warrants exercisable for a
majority of the shares of Warrant Stock issuable under the Warrants at the time outstanding.

     “Original Issue Date” means the date this Warrant is issued to the Holder as
set forth above.

     “OTC Bulletin Board” means the over-the-counter electronic bulletin board.

     “Other Common” means any other Capital Stock of the Issuer of any class which
shall be authorized at any time after the date of this Warrant (other than Common Stock) and
which shall have the right to participate in the distribution of earnings and assets of the
Issuer without limitation as to amount.

     “Outstanding Common Stock” means, at any given time, the aggregate amount of
outstanding shares of Common Stock, assuming full exercise, conversion or exchange (as
applicable) of all options, warrants and other Securities which are convertible into or
exercisable or exchangeable for, and any right to subscribe for, shares of Common Stock that
are outstanding at such time.

     “Person” means an individual, corporation, limited liability company,
partnership, joint stock company, trust, unincorporated organization, joint venture,
Governmental Authority or other entity of whatever nature.

     “Per Share Market Value” means on any particular date (a) the last closing bid
price per share of the Common Stock on such date on the OTC Bulletin Board or another
registered national stock exchange on which the Common Stock is then listed, or if there is
no such price on such date, then the closing bid price on such exchange or quotation

16

 

system on the date nearest preceding such date, or (b) if the Common Stock is not
listed then on the OTC Bulletin Board or any registered national stock exchange, the last
closing bid price for a share of Common Stock in the over-the-counter market, as reported by
the OTC Bulletin Board or in the National Quotation Bureau Incorporated or similar
organization or agency succeeding to its functions of reporting prices) at the close of
business on such date, or (c) if the Common Stock is not then reported by the OTC Bulletin
Board or the National Quotation Bureau Incorporated (or similar organization or agency
succeeding to its functions of reporting prices), then the “Pink Sheet” quotes for the
applicable Trading Days preceding such date of determination, or (d) if the Common Stock is
not then publicly traded the fair market value of a share of Common Stock as determined by
an Independent Appraiser selected in good faith by the Majority Holders; provided, however,
that the Issuer, after receipt of the determination by such Independent Appraiser, shall
have the right to select an additional Independent Appraiser, in which case, the fair market
value shall be equal to the average of the determinations by each such Independent
Appraiser; and provided, further that all determinations of the Per Share Market Value shall
be appropriately adjusted for any stock dividends, stock splits or other similar
transactions during such period. The determination of fair market value by an Independent
Appraiser shall be based upon the fair market value of the Issuer determined on a going
concern basis as between a willing buyer and a willing seller and taking into account all
relevant factors determinative of value, and shall be final and binding on all parties. In
determining the fair market value of any shares of Common Stock, no consideration shall be
given to any restrictions on transfer of the Common Stock imposed by agreement or by federal
or state securities laws, or to the existence or absence of, or any limitations on, voting
rights.

     “Preferred Stock” means shares of the Issuer’s Series A Convertible Preferred
Stock, par value $0.0001 per share issued to the Purchasers pursuant to the Purchase
Agreement and pursuant to the Series J Warrant.

     “Purchase
Agreement” means the Series A Convertible Preferred
Stock and Warrant Purchase
Agreement dated as of December 27, 2007, among the Issuer and the Purchasers.

     “Purchasers” means the purchasers of the Series A Convertible Preferred Stock
and the Warrants issued by the Issuer pursuant to the Purchase Agreement.

     “Securities” means any debt or equity securities of the Issuer, whether now or
hereafter authorized, any instrument convertible into or exchangeable for Securities or a
Security, and any option, warrant or other right to purchase or acquire any Security.
“Security” means one of the Securities.

     “Securities Act” means the Securities Act of 1933, as amended, or any similar
federal statute then in effect.

17

 

     “Subsidiary” means any corporation at least 50% of whose outstanding Voting
Stock shall at the time be owned directly or indirectly by the Issuer or by one or more of
its Subsidiaries, or by the Issuer and one or more of its Subsidiaries.

     “Term” has the meaning specified in Section 1 hereof.

     “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.

     “Voting Stock” means, as applied to the Capital Stock of any corporation,
Capital Stock of any class or classes (however designated) having ordinary voting power for
the election of a majority of the members of the Board of Directors (or other governing
body) of such corporation, other than Capital Stock having such power only by reason of the
happening of a contingency.

     “Warrants” means the Warrants issued and sold pursuant to the Purchase
Agreement, including, without limitation, this Warrant, and any other warrants of like tenor
issued in substitution or exchange for any thereof pursuant to the provisions of Section
2(c), 2(d) or 2(e) hereof or of any of such other Warrants.

     “Warrant Price” initially means $4.25, as such price may be adjusted from time
to time as shall result from the adjustments specified in this Warrant, including
Section 4 hereto.

     “Warrant Share Number” means at any time the aggregate number of shares of
Warrant Stock which may at such time be purchased upon exercise of this Warrant, after
giving effect to all prior adjustments and increases to such number made or required to be
made under the terms hereof.

     “Warrant Stock” means Common Stock and/or Preferred Stock (as applicable)
issuable upon exercise of any Warrant or Warrants or otherwise issuable pursuant to any
Warrant or Warrants and/or Securities, cash and property to which such Holder would have
been entitled upon the occurrence of certain events set forth in Section 4.

     9. Other Notices. In case at any time:

	 	(A)	 	the Issuer shall make any
distributions to the holders of Common Stock; or

18

 

	 	(B)	 	the Issuer shall authorize the
granting to all holders of its Common Stock of rights to
subscribe for or purchase any shares of Capital Stock of any
class or other rights; or

	 	(C)	 	there shall be any
reclassification of the Capital Stock of the Issuer; or

	 	(D)	 	there shall be any capital
reorganization by the Issuer; or

	 	(E)	 	there shall be any (i)
consolidation or merger involving the Issuer or (ii) sale,
transfer or other disposition of all or substantially all of the
Issuer’s property, assets or business (except a merger or other
reorganization in which the Issuer shall be the surviving
corporation and its shares of Capital Stock shall continue to be
outstanding and unchanged and except a consolidation, merger,
sale, transfer or other disposition involving a wholly-owned
Subsidiary); or

	 	(F)	 	there shall be a voluntary or
involuntary dissolution, liquidation or winding-up of the Issuer
or any partial liquidation of the Issuer or distribution to
holders of Common Stock;

then, in each of such cases, the Issuer shall give written notice to the Holder of the date on
which (i) the books of the Issuer shall close or a record shall be taken for such dividend,
distribution or subscription rights or (ii) such reorganization, reclassification, consolidation,
merger, disposition, dissolution, liquidation or winding-up, as the case may be, shall take place.
Such notice also shall specify the date as of which the holders of Common Stock of record shall
participate in such dividend, distribution or subscription rights, or shall be entitled to exchange
their certificates for Common Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or
winding-up, as the case may be. Such notice shall be given at least twenty (20) days prior to the
action in question and not less than ten (10) days prior to the record date or the date on which
the Issuer’s transfer books are closed in respect thereto. This Warrant entitles the Holder to
receive copies of all financial and other information distributed or required to be distributed to
the holders of the Common Stock.

     10. Amendment and Waiver; Failure or Indulgence Not Waiver. Any term, covenant,
agreement or condition in this Warrant may be amended, or compliance therewith may be waived
(either generally or in a particular instance and either retroactively or prospectively), by a
written instrument or written instruments executed by the Issuer and the Majority Holders;
provided, however, that no such amendment or waiver shall reduce the Warrant Share Number, increase
the Warrant Price (except as provided herein), shorten the period during which this Warrant may be
exercised or modify any provision of this Section 10 without the consent of the Holder of
this Warrant. No consideration shall be offered or paid to any person to amend or consent to a
waiver or modification of any provision of this Warrant unless the same

19

 

consideration is also offered to all holders of the Warrants. 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, 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.

     11. Governing Law; Jurisdiction. This Warrant 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 Warrant shall not be interpreted or construed with any presumption against the
party causing this Warrant to be drafted. The Issuer and the Holder agree that venue for any
dispute arising under this Warrant will lie exclusively in the state or federal courts located in
New York County, New York, and the parties irrevocably waive any right to raise forum non
conveniens or any other argument that New York is not the proper venue. The Issuer and the Holder
irrevocably consent to personal jurisdiction in the state and federal courts of the state of New
York. The Issuer and the Holder consent to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address in effect for notices to it under
this Warrant and agrees that such service shall constitute good and sufficient service of process
and notice thereof. Nothing in this Section 11 shall affect or limit any right to serve
process in any other manner permitted by law. The Issuer and the Holder hereby agree that the
prevailing party in any suit, action or proceeding arising out of or relating to this Warrant or
the Purchase Agreement, 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.

     12. 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 Issuer:

	 	NovaRay Medical, Inc.
	 

	 	1850 Embarcadero Road
	 

	 	Palo Alto, CA 94303
	 

	 	Attention: Chief Executive Officer
	 

	 	Tel. No.: (650) 331-7337
	 

	 	Fax No.: (650) 565-8601
	 
	 	 
	with copies (which copies
	 	 
	shall not constitute notice)
to:

	 	Morrison & Foerster, LLP
	 

	 	755 Page Mill Road
	 

	 	Palo Alto, California 94304-1018

20

 

	 	 	 
	 

	 	Attn: Michael C. Phillips
	 

	 	Facsimile: (650) 494-0792
	 
	 	 
	If to any Holder:

	 	At the address of such Holder set forth on
Exhibit A to the Purchase Agreement, with
copies to Holder’s counsel as set forth on
Exhibit A or as specified in writing by such
Holder

     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.

     13. Warrant Agent. The Issuer may, by written notice to each Holder of this Warrant,
appoint an agent having an office in New York, New York for the purpose of replacing this Warrant
pursuant to Section 3(d) hereof, or any of the foregoing, and thereafter any such issuance,
exchange or replacement, as the case may be, shall be made at such office by such agent.

     14. Remedies. The Issuer stipulates that the remedies at law of the Holder of this
Warrant in the event of any default or threatened default by the Issuer in the performance of or
compliance with any of the terms of this Warrant are not and will not be adequate and that, to the
fullest extent permitted by law, such terms may be specifically enforced by a decree for the
specific performance of any agreement contained herein or by an injunction against a violation of
any of the terms hereof or otherwise.

     15. Successors and Assigns. This Warrant and the rights evidenced hereby shall inure
to the benefit of and be binding upon the successors and assigns of the Issuer, the Holder hereof
and (to the extent provided herein) the Holders of Warrant Stock issued pursuant hereto, and shall
be enforceable by any such Holder or Holder of Warrant Stock.

     16. Modification and Severability. If, in any action before any court or agency
legally empowered to enforce any provision contained herein, any provision hereof is found to be
unenforceable, then such provision shall be deemed modified to the extent necessary to make it
enforceable by such court or agency. If any such provision is not enforceable as set forth in the
preceding sentence, the unenforceability of such provision shall not affect the other provisions of
this Warrant, but this Warrant shall be construed as if such unenforceable provision had never been
contained herein.

     17. Headings. The headings of the Sections of this Warrant are for convenience of
reference only and shall not, for any purpose, be deemed a part of this Warrant.

     18. Registration Rights. The Holder of this Warrant is entitled to the benefit of
certain registration rights with respect to the shares of Warrant Stock issuable upon the exercise
of this Warrant pursuant to the Registration Rights Agreement and the registration rights with
respect to the shares of Warrant Stock issuable upon the exercise of this Warrant by any subsequent
Holder may only be assigned in accordance with the terms and provisions of the Registrations Rights
Agreement and Section 2(e) hereof.

21

 

     19. Enforcement Expenses. If any action at law or in equity is necessary to enforce
or interpret the terms of this Warrant, the prevailing party shall be entitled to reasonable
attorney’s fees, costs and necessary disbursements in addition to any other relief to which such
party may be entitled.

     20. Binding Effect. The obligations of the Issuer 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.

[remainder of page intentionally left blank]

22

 

     IN WITNESS WHEREOF, the Issuer has executed this Series A Warrant as of the day and year first
above written.

	 	 	 	 	 
	 	NOVARAY MEDICAL, INC.

 	 
	 	By:  	 	 
	 	 	Name:  	Jack Price 	 
	 	 	Title:  	Chief Executive Officer 	 
	 

23

 

EXERCISE FORM

SERIES A WARRANT

NOVARAY MEDICAL, INC.

     The undersigned                     , pursuant to the provisions of the within Warrant, hereby elects to
purchase                       shares of Common Stock of NovaRay Medical, Inc. covered by the within Warrant.

	 	 	 	 	 	 	 	 	 	 	 
	Dated:

	 	 	 	 	 	Signature
	 	 	 	 
	 

	 	 
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	Address	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 

Number of shares
of Common Stock beneficially owned or deemed beneficially owned by the Holder on
the date of Exercise:                                         

The undersigned is an “accredited investor” as defined in Regulation D under the Securities Act of
1933, as amended.

The undersigned intends that payment of the Warrant Price shall be made as (check one):

               Cash Exercise ____________

               Cashless Exercise _________

If the Holder has elected a
Cash Exercise, the Holder shall pay the sum of $________ by certified
or official bank check (or via wire transfer) to the Issuer in accordance with the terms of the
Warrant.

If the Holder has elected a Cashless Exercise, a certificate shall be issued to the Holder for the
number of shares equal to the whole number portion of the product of the calculation set forth
below, which is _______. The Issuer shall pay a cash adjustment in respect of the fractional
portion of the product of the calculation set forth below in an amount equal to the product of the
fractional portion of such product and the Per Share Market Value on the date of exercise, which
product is _________.

     X
= Y - (A)(Y)

B

Where:

The number of shares of Common Stock to be issued to the Holder                      (“X”).

The number of shares of Common Stock purchasable upon exercise of all of the Warrant or, if only a portion
of the Warrant is being exercised, the portion of the Warrant being exercised                      (“Y”).

 

 

The
Warrant Price _________ (“A”).

The Per
Share Market Value of one share of Common Stock _________ (“B”).

ASSIGNMENT

FOR VALUE RECEIVED, _________ hereby sells, assigns and transfers unto _________
the within Warrant and all rights evidenced thereby and does irrevocably constitute and appoint
_________, attorney, to transfer the said Warrant on the books of the within named corporation.

	 	 	 	 	 	 	 	 	 	 	 
	Dated:

	 	 	 	 	 	Signature
	 	 	 	 
	 

	 	 
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	Address	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 

PARTIAL ASSIGNMENT

FOR VALUE
RECEIVED, ______ hereby sells, assigns and transfers unto
________ the right to purchase ___shares
of Warrant Stock evidenced by the within Warrant together
with all rights therein, and does irrevocably constitute and appoint ______, attorney,
to transfer that part of the said Warrant on the books of the within named corporation.

	 	 	 	 	 	 	 	 	 	 	 
	Dated:

	 	 	 	 	 	Signature
	 	 	 	 
	 

	 	 
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	Address	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 

FOR USE BY THE ISSUER ONLY:

This
Warrant No. W-___ canceled (or transferred or
exchanged) this ___ day of __________, _________,
shares of Common Stock issued therefor in the name of _________, Warrant No. W- ______ issued
for _________ shares of Common Stock in the name of _______________.exv10w12

 

Exhibit 10.12

REGISTRATION RIGHTS AGREEMENT

     This Registration Rights Agreement (this “Agreement”) is made and entered into as of
December 27, 2007, by and among NovaRay Medical, Inc., a Delaware corporation (the
“Company”), and the purchasers listed on Schedule I hereto (the
“Purchasers”).

          This Agreement is being entered into pursuant to the Series A Convertible Preferred Stock and
Warrant Purchase Agreement dated as of the date hereof among the Company and the Purchasers
participating in the Initial Closing (the “Purchase Agreement”). The Company may sell and
issue additional shares of Preferred Stock and Warrants (each as defined below) (the
“Additional Securities”) to certain Purchasers and other purchasers (the “Additional
Purchasers”) pursuant to the Purchase Agreement.

          The Company and the Purchasers hereby agree as follows:

     1. Definitions.

          Capitalized terms used and not otherwise defined herein shall have the meanings given such
terms in the Purchase Agreement. As used in this Agreement, the following terms shall have the
following meanings:

          “Advice” shall have meaning set forth in Section 3(m).

          “Affiliate” means, 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.

          “Board” shall have meaning set forth in Section 3(n).

          “Business Day” means 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.

          “Commission” means the Securities and Exchange Commission.

          “Common Stock” means the Company’s Common Stock, par value $.001 per share.

          “Company” means NovaRay Medical, Inc., a Delaware corporation.

          “Conversion Shares” means any shares of Common Stock issuable upon conversion of the
Preferred Stock.

          “Demand Effectiveness Date” means, subject to Section 2(d) hereof, with
respect to the Demand Registration Statement the earlier of (A) the one hundred twentieth
(120th) day following the Demand Filing Date or (B) the date which is within five (5)
Business Days after the date on which the Commission informs the Company (i) that the Commission
will not review the Demand Registration Statement or (ii) that the Company may request the
acceleration of the effectiveness of the Demand Registration Statement.

i

 

          “Demand Effectiveness Period” shall have the meaning set forth in Section
2(b).

          “Demand Filing Date” means, subject to Section 2(d) hereof, the forty-fifth
(45th) day following the receipt by the Company of the Demand Notice.

          “Demand Notice” shall have the meaning set forth in Section 2(b).

          “Demand Registration Statement” shall have the meaning set forth in Section
2(b).

          “Effectiveness Date” means, subject to Section 2(d) hereof, with respect to
the Registration Statement to be filed pursuant to Section 2(a) hereof, the earlier of (A)
the two hundred tenth (210th) day following the Filing Date or (B) the date which is
within five (5) Business Days after the date on which the Commission informs the Company (i) that
the Commission will not review such Registration Statement or (ii) that the Company may request the
acceleration of the effectiveness of such Registration Statement.

          “Effectiveness Period” shall have the meaning set forth in Section 2.

          “Event” shall have the meaning set forth in Section 7(e).

          “Event Date” shall have the meaning set forth in Section 7(e).

          “Exchange Act” means the Securities Exchange Act of 1934, as amended.

          “Filing Date” means, subject to Section 2(d) hereof, the forty-fifth
(45th) day following the last day on which Preferred Stock and Warrants may be sold
pursuant to the Purchase Agreement.

          “Holder” or “Holders” means the holder or holders, as the case may be, from
time to time of Registrable Securities.

          “Indemnified Party” shall have the meaning set forth in Section 5(c).

          “Indemnifying Party” shall have the meaning set forth in Section 5(c).

          “Initiating Holders” shall have the meaning set forth in Section 2(b).

          “Losses” shall have the meaning set forth in Section 5(a).

          “Mandatorily Registrable Securities” means (i) the Shell Shares; (ii) the shares of
Common Stock issuable upon conversion of the Preferred Stock; (iii) the Specified Shares, and (iv)
any securities issued or issuable upon any stock split, dividend or other distribution,
recapitalization or similar event with respect to the foregoing.

          “Person” means an individual or a corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability company, joint stock company,
government (or an agency or political subdivision thereof) or other entity of any kind.

          “Preferred Stock” means shares of the Company’s Series A Convertible Preferred Stock
issued to the Purchasers pursuant to the Purchase Agreement (and for the avoidance of doubt, shall
not include the Underlying Preferred Stock).

ii

 

          “Proceeding” means an action, claim, suit, investigation or proceeding (including,
without limitation, an investigation or partial proceeding, such as a deposition), whether
commenced or threatened.

          “Prospectus” means the prospectus included in the Registration Statement (including,
without limitation, a prospectus that includes any information previously omitted from a prospectus
filed as part of an effective registration statement in reliance upon Rule 430A promulgated under
the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the
terms of the offering of any portion of the Registrable Securities covered by the Registration
Statement, and all other amendments and supplements to the Prospectus, including post-effective
amendments, and all material incorporated by reference in such Prospectus.

          “Registrable Securities” means (i) the Mandatorily Registrable Securities; and (ii)
the Warrant Shares.

          “Registration Statement” means all or any (as the context requires) of the
registration statements and any additional registration statements contemplated by Section
2, including (in each case) the Prospectuses, amendments and supplements to such registration
statements or Prospectuses, including pre- and post-effective amendments, all exhibits thereto, and
all material incorporated by reference in such registration statements.

          “Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities
Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter
adopted by the Commission having substantially the same effect as such Rule.

          “Rule 144(k)” means Rule 144(k) promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the Commission having substantially the same effect as such Rule.

          “Rule 158” means Rule 158 promulgated by the Commission pursuant to the Securities
Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter
adopted by the Commission having substantially the same effect as such Rule.

          “Rule 415” means Rule 415 promulgated by the Commission pursuant to the Securities
Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter
adopted by the Commission having substantially the same effect as such Rule.

          “Rule 424” means Rule 424 promulgated by the Commission pursuant to the Securities
Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter
adopted by the Commission having substantially the same effect as such Rule.

          “Securities Act” means the Securities Act of 1933, as amended.

          “Shell Shares” means the 187,266 shares of Common Stock owned as of the date hereof by
Vision Opportunity Master Fund, Ltd.

          “Special Counsel” means Sadis & Goldberg LLP.

          “Specified Shares” means 5,202 shares of the Company’s Common Stock issued in the
Merger to the certain purchasers of common stock of NovaRay, Inc. pursuant to subscription
agreements dated December 20, 2007.

iii

 

          “Underlying Preferred Stock” means the Company’s Series A Convertible Preferred Stock
issuable upon exercise of the Series J Warrant.

          “Warrants” means the warrants to purchase shares of Common Stock and/or Underlying
Preferred Stock (as applicable) issued to the Purchasers pursuant to the Purchase Agreement.

          “Warrant Shares” means the shares of Common Stock issuable upon exercise of the
Warrants and the shares of Common Stock issuable upon conversion of the Underlying Preferred Stock,
and any securities issued or issuable upon any stock split, dividend or other distribution,
recapitalization or similar event with respect to the foregoing.

     2. Registration.

          (a) Mandatory Registration. On or prior to the Filing Date, the Company shall prepare
and file with the Commission a “resale” Registration Statement providing for the resale of all
Mandatorily Registrable Securities for an offering to be made on a continuous basis pursuant to
Rule 415. Such Registration Statement shall be on Form SB-2 (except if the Company is not then
eligible to register for resale the Mandatorily Registrable Securities on Form SB-2, in which case
such registration shall be on another appropriate form in accordance herewith and the Securities
Act and the rules promulgated thereunder). Such Registration Statement shall cover to the extent
allowable under the Securities Act and the rules promulgated thereunder (including Rule 416), such
indeterminate number of additional shares of Common Stock resulting from stock splits, stock
dividends or similar transactions with respect to the Mandatorily Registrable Securities. The
Company shall (i) not permit any securities other than the Mandatorily Registrable Securities to be
included in such Registration Statement (except as may be required to satisfy any listing
requirements of the OTC Bulletin Board as may be approved by the Holders) and (ii) use its best
efforts to cause such Registration Statement to be declared effective under the Securities Act as
promptly as possible after the filing thereof, but in any event prior to the Effectiveness Date,
and to keep such Registration Statement continuously effective under the Securities Act until such
date as is the earlier of (x) the date when all Mandatorily Registrable Securities covered by such
Registration Statement have been sold, or (y) as to any Mandatorily Registrable Securities held by
any Holder, the date on which such Mandatorily Registrable Securities may be sold without any
restriction pursuant to Rule 144(k) as determined by the counsel to the Company pursuant to a
written opinion letter, addressed to the Company’s transfer agent to such effect (the
“Effectiveness Period”). If at any time and for any reason, an additional Registration
Statement is required to be filed because at such time the actual number of shares of Common Stock
into which the Preferred Stock is convertible plus the number of shares of Common Stock previously
issued upon such conversion exceeds the number of shares of Mandatorily Registrable Securities
remaining under such Registration Statement, the Company shall have twenty (20) Business Days to
file such additional Registration Statement, and the Company shall use its reasonable commercial
efforts to cause such additional Registration Statement to be declared effective by the Commission
as soon as possible, but in no event later than sixty (60) Business Days after filing.

          (b) Demand Registration. If the Company shall receive, at any time after the
Effectiveness Date of the Registration Statement pursuant to a mandatory registration under
Section 2(a) but prior to five (5) years from the date of this Agreement, a written request
from the Holders of a majority in interest of the Warrant Shares (the “Initiating Holders”)
that the Company file a registration statement under the Securities Act, then the Company shall,
within fifteen (15) days after the receipt of such written request, give written notice of such
request to all Holders (the “Demand Notice”), and file by the Demand Filing Date a
Registration Statement (the “Demand Registration Statement”) under the Securities Act
covering all Warrant Shares requested to be registered by the Holders in a written request received
by the Company within fifteen (15) days of the mailing of the Demand Notice, provided that

iv

 

such Registration Statement must be declared effective by the Commission by the Demand
Effectiveness Date. The Demand Registration Statement required hereunder shall be on Form SB-2
(except if the Company is not then eligible to register for resale the Warrant Shares on Form SB-2,
in which case the Demand Registration Statement shall be on another appropriate form). The Demand
Registration Statement required hereunder shall contain the Plan of Distribution, attached hereto
as Exhibit A (which may be modified to respond to comments, if any, received by the
Commission). The Company shall (i) not permit any securities other than the Warrant Shares to be
included in the Demand Registration Statement and (ii) use its best efforts to cause the Demand
Registration Statement to be declared effective under the Securities Act as promptly as possible
after the filing thereof, and to keep such Demand Registration Statement continuously effective
under the Securities Act until such date as is the earlier of (x) the date when all Warrant Shares
covered by such Demand Registration Statement have been sold or (y) the date on which the Warrant
Shares may be sold without any restriction pursuant to Rule 144(k) as determined by the counsel to
the Company pursuant to a written opinion letter, addressed to the Company’s transfer agent to such
effect (the “Demand Effectiveness Period”). The Company shall not be required to effect a
Demand Registration Statement pursuant to this Section 2(b): (aa) after the Company has effected
one Demand Registration Statement pursuant to this Section 2(b), and such registrations have been
declared or ordered effective; and (bb) during the period starting with the date sixty (60) days
prior to the Company’s good faith estimate of the date of the filing of, and ending on a date one
hundred eighty (180) days following the effective date of, a Company-initiated Registration
Statement subject to Section 2(c), provided that the Company is actively employing in good faith
all reasonable efforts to cause such registration statement to become effective.

          (c) Piggyback Registrations Rights. If at any time when there is not an effective
Registration Statement covering the Warrant Shares, the Company shall determine to prepare and file
with the Commission a registration statement relating to an offering for its own account or the
account of others under the Securities Act of any of its equity securities, other than on Form S-4
or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to
equity securities to be issued solely in connection with any acquisition of any entity or business
or equity securities issuable in connection with stock option or other employee benefit plans, the
Company shall send to each Holder of Warrant Shares written notice of such determination and, if
within thirty (30) days after receipt of such notice, or within such shorter period of time as may
be specified by the Company in such written notice as may be necessary for the Company to comply
with its obligations with respect to the timing of the filing of such registration statement, any
such Holder shall so request in writing (which request shall specify the Warrant Shares intended to
be disposed of by the Purchasers), the Company will cause the registration under the Securities Act
of all Warrant Shares which the Company has been so requested to register by the Holder, to the
extent required to permit the disposition of the Warrant Shares so to be registered; provided that
if at any time after giving written notice of its intention to register any securities and prior to
the effective date of the registration statement filed in connection with such registration, the
Company shall determine for any reason not to register or to delay registration of such securities,
the Company may, at its election, give written notice of such determination to such Holder and,
thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation
to register any Warrant Shares in connection with such registration (but not from its obligation to
pay expenses in accordance with Section 4 hereof), and (ii) in the case of a determination
to delay registering, shall be permitted to delay registering any Warrant Shares being registered
pursuant to this Section 2(c) for the same period as the delay in registering such other
securities. The Company shall include in such registration statement all or any part of such
Warrant Shares such Holder requests to be registered; provided, however, that the Company shall not
be required to register any Warrant Shares pursuant to this Section 2(c) that are eligible
for sale pursuant to Rule 144(k) of the Securities Act. In the case of an underwritten public
offering, if the managing underwriter(s) or underwriter(s) should reasonably object to the
inclusion of the Warrant Shares in such registration statement, then if the Company after
consultation with the managing underwriter should reasonably determine that the inclusion of such
Warrant Shares would materially

v

 

adversely affect the offering contemplated in such registration statement, and based on such
determination recommends inclusion in such registration statement of fewer or none of the Warrant
Shares of the Holders, then (x) the number of Warrant Shares of the Holders included in such
registration statement shall be reduced pro-rata among such Holders (based upon the number of
Warrant Shares requested to be included in the registration), if the Company after consultation
with the underwriter(s) recommends the inclusion of fewer Warrant Shares, or (y) none of the
Warrant Shares of the Holders shall be included in such registration statement, if the Company
after consultation with the underwriter(s) recommends the inclusion of none of such Warrant Shares;
provided, however, that if securities are being offered for the account of other persons or
entities as well as the Company, such reduction shall not represent a greater fraction of the
number of Warrant Shares intended to be offered by the Holders than the fraction of similar
reductions imposed on such other persons or entities (other than the Company).

          (d) Notwithstanding anything to the contrary set forth in this Section 2, in the event
the Commission does not permit the Company to register all of the Mandatorily Registrable
Securities in a Registration Statement because of the Commission’s application of Rule 415, the
Company shall register in such Registration Statement the number of Mandatorily Registrable
Securities as is permitted by the Commission, provided, however, that the number of Mandatorily
Registrable Securities to be included in such Registration Statement or any subsequent registration
statement shall be determined in the following order: (i) first, the Shell Shares; (ii) second, the
shares of Common Stock issuable upon conversion of the Preferred Stock shall be registered on a pro
rata basis among the holders of the Preferred Stock, and (iii) third, the Specified Shares shall be
registered on a pro rata basis among the holders of the Specified Shares. In addition, in the event
the Commission does not permit the Company to register all of the Warrant Shares in a Demand
Registration Statement because of the Commission’s application of Rule 415, the Company shall
register in such Demand Registration Statement the number of Warrant Shares as is permitted by the
Commission, provided, however, that the number of Warrant Shares to be included in such Demand
Registration Statement or any subsequent registration statement shall be determined in the
following order: (i) first, the shares of Common Stock issuable upon conversion of the Underlying
Preferred Stock shall be registered on a pro rata basis among the holders of the Underlying
Preferred Stock, and (ii) second, the shares of Common Stock issuable upon exercise of the Warrants
shall be registered on a pro rata basis among the holders of the Warrants. In the event the
Commission does not permit the Company to register all of the Mandatorily Registrable Securities
and/or Warrant Shares (as the case may be) in a Registration Statement, the Company shall use its
reasonable commercial efforts to file subsequent Registration Statements to register the
Mandatorily Registrable Securities and/or Warrant Shares (as the case may be) that were not
registered in such Registration Statement as promptly as possible and in a manner permitted by the
Commission. For purposes of only this Section 2(d), “Filing Date” means with
respect to each subsequent Registration Statement filed pursuant hereto, the later of (i) sixty
(60) Business Days following the sale of substantially all of the Registrable Securities included
in the initial Registration Statement or any subsequent Registration Statement and (ii) six (6)
months following the effective date of the initial Registration Statement or any subsequent
Registration Statement, as applicable, or such earlier date as permitted by the Commission. For
purposes of only this Section 2(d), “Effectiveness Date” means with respect to each
subsequent Registration Statement filed pursuant hereto, the earlier of (A) the one hundred
twentieth (120th) Business Day following the filing date of such Registration Statement
(or in the event such Registration Statement receives a “full review” by the Commission, the one
hundred fortieth (140th) Business Day following such filing date) or (B) the date which
is within five (5) Business Days after the date on which the Commission informs the Company (i)
that the Commission will not review such Registration Statement or (ii) that the Company may
request the acceleration of the effectiveness of such Registration Statement; provided
that, if the Effectiveness Date falls on a Saturday, Sunday or any other day which shall be
a legal holiday or a day on which the Commission is authorized or required by law or other
government actions to close, the Effectiveness Date shall be the following Business Day.

vi

 

     3. Registration Procedures.

          In connection with the Company’s registration obligations hereunder, the Company shall:

          (a) Prepare and file with the Commission, on or prior to the Filing Date and/or Demand Filing
Date, as applicable, a Registration Statement on Form SB-2 (or if the Company is not then eligible
to register for resale the Registrable Securities on Form SB-2 such registration shall be on
another appropriate form in accordance herewith and the Securities Act and the rules promulgated
thereunder) in accordance with the plan of distribution as set forth on Exhibit A hereto
and in accordance with applicable law, and cause the applicable Registration Statement to become
effective and remain effective as provided herein; provided, however, that not less than three (3)
Business Days prior to the filing of the applicable Registration Statement or any related
Prospectus or any amendment or supplement thereto, the Company shall furnish to the Holders and
Special Counsel, copies of all such documents proposed to be filed, which documents will be subject
to the review of such Holders and such Special Counsel.

          (b) (i) Prepare and file with the Commission such amendments, including post-effective
amendments, to the applicable Registration Statement as may be necessary to keep the applicable
Registration Statement continuously effective as to the applicable Registrable Securities for the
Effectiveness Period or the Demand Effectiveness Period, as applicable, and prepare and file with
the Commission such additional Registration Statements as necessary in order to register for resale
under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be
amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to
be filed pursuant to Rule 424 (or any similar provisions then in force); (iii) respond as promptly
as possible, but in no event later than ten (10) Business Days, to any comments received from the
Commission with respect to the applicable Registration Statement or any amendment thereto and as
promptly as possible provide the Holders true and complete copies of all correspondence from and to
the Commission relating to the applicable Registration Statement; and (iv) comply in all material
respects with the provisions of the Securities Act and the Exchange Act with respect to the
disposition of all Registrable Securities covered by the applicable Registration Statement during
the Effectiveness Period or the Demand Effectiveness Period, as applicable, in accordance with the
intended methods of disposition by the Holders thereof set forth in the applicable Registration
Statement as so amended or in such Prospectus as so supplemented.

          (c) Notify the Holders of Registrable Securities and Special Counsel as promptly as possible
(and, in the case of (i)(A) below, not less than three (3) Business Days prior to such filing, and
in the case of (iii) below, on the same day of receipt by the Company of such notice from the
Commission) and confirm such notice in writing no later than one (1) Business Day following the day
(i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to the applicable
Registration Statement is filed; (B) when the Commission notifies the Company whether there will be
a “review” of such Registration Statement and whenever the Commission comments in writing on such
Registration Statement and (C) with respect to such Registration Statement or any post-effective
amendment, when the same has become effective; (ii) of any request by the Commission or any other
Federal or state governmental authority for amendments or supplements to the applicable
Registration Statement or Prospectus or for additional information; (iii) of the issuance by the
Commission of any stop order suspending the effectiveness of the applicable Registration Statement
covering any or all of the Registrable Securities or the initiation or threatening of any
Proceedings for that purpose; (iv) if at any time any of the representations and warranties of the
Company contained in any agreement contemplated hereby ceases to be true and correct in all
material respects; (v) of the receipt by the Company of any notification with respect to the
suspension of the qualification or exemption from qualification of any of the Registrable
Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for
such purpose; and (vi) of the occurrence of any event that makes any statement made in the
applicable Registration Statement or Prospectus or any document incorporated or deemed to be
incorporated therein

vii

 

by reference untrue in any material respect or that requires any revisions to such
Registration Statement, Prospectus or other documents so that, in the case of such Registration
Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were made, not
misleading.

          (d) Use its reasonable commercial efforts to avoid the issuance of, or, if issued, obtain the
withdrawal of, as promptly as possible, (i) any order suspending the effectiveness of the
applicable Registration Statement or (ii) any suspension of the qualification (or exemption from
qualification) of any of the Registrable Securities for sale in any jurisdiction.

          (e) If requested by the Holders of a majority in interest of the applicable Registrable
Securities, (i) promptly incorporate in a Prospectus supplement or post-effective amendment to the
applicable Registration Statement such information as the Company reasonably agrees should be
included therein and (ii) make all required filings of such Prospectus supplement or such
post-effective amendment as soon as practicable after the Company has received notification of the
matters to be incorporated in such Prospectus supplement or post-effective amendment.

          (f) If requested by any Holder, furnish to such Holder, without charge, at least one conformed
copy of each Registration Statement and each amendment thereto, including financial statements and
schedules, all documents incorporated or deemed to be incorporated therein by reference, and all
exhibits to the extent requested by such Person (including those previously furnished or
incorporated by reference) promptly after the filing of such documents with the Commission.

          (g) Promptly deliver to each Holder and Special Counsel, without charge, as many copies of the
Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement
thereto as such Persons may reasonably request; and subject to the provisions of Sections 3(m)
and 3(n), the Company hereby consents to the use of such Prospectus and each amendment or
supplement thereto by each of the selling Holders in connection with the offering and sale of the
Registrable Securities covered by such Prospectus and any amendment or supplement thereto.

          (h) Prior to any public offering of Registrable Securities, use its reasonable commercial
efforts to register or qualify or cooperate with the selling Holders and Special Counsel in
connection with the registration or qualification (or exemption from such registration or
qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky
laws of such jurisdictions within the United States as any Holder requests in writing, to keep each
such registration or qualification (or exemption therefrom) effective during the Effectiveness
Period or the Demand Effectiveness Period, as applicable, and to do any and all other acts or
things necessary or advisable to enable the disposition in such jurisdictions of the Registrable
Securities covered by a Registration Statement; provided, however, that the Company shall not be
required to qualify generally to do business in any jurisdiction where it is not then so qualified
or to take any action that would subject it to general service of process in any such jurisdiction
where it is not then so subject or subject the Company to any material tax in any such jurisdiction
where it is not then so subject.

          (i) Cooperate with the Holders to facilitate the timely preparation and delivery of
certificates representing Registrable Securities to be sold pursuant to a Registration Statement,
which certificates, to the extent permitted by the Purchase Agreement and applicable federal and
state securities laws, shall be free of all restrictive legends, and to enable such Registrable
Securities to be in such denominations and registered in such names as any Holder may request in
connection with any sale of Registrable Securities.

viii

 

          (j) Upon the occurrence of any event contemplated by Section 3(c)(v), as promptly as
possible, prepare a supplement or amendment, including a post-effective amendment, to the
applicable Registration Statement or a supplement to the related Prospectus or any document
incorporated or deemed to be incorporated therein by reference, and file any other required
document so that, as thereafter delivered, neither such Registration Statement nor such Prospectus
will contain an untrue statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the circumstances under
which they were made, not misleading.

          (k) Use its reasonable commercial efforts to cause all Registrable Securities relating to the
applicable Registration Statement to be listed or quoted on the OTC Bulletin Board or any other
securities exchange, quotation system or market, if any, on which similar securities issued by the
Company are then listed or quoted, as and when required pursuant to the Purchase Agreement.

          (l) Comply in all material respects with all applicable rules and regulations of the
Commission and make generally available to its security holders earning statements satisfying the
provisions of Section 11(a) of the Securities Act and Rule 158 not later than 45 days after the end
of any 12-month period (or 90 days after the end of any 12-month period if such period is a fiscal
year) commencing on the first day of the first fiscal quarter of the Company after the effective
date of the Registration Statement, which statement shall conform to the requirements of Rule 158.
For the avoidance of doubt, the filing and continued availability of the information on the EDGAR
electronic filing system shall satisfy the requirements of this subsection (l).

          (m) The Company may require each selling Holder to furnish to the Company information
regarding such Holder and the distribution of such Registrable Securities as is required by law to
be disclosed in the applicable Registration Statement, Prospectus, or any amendment or supplement
thereto, and the Company may exclude from such registration the Registrable Securities of any such
Holder who fails to furnish such information within a reasonable time after receiving such request
without penalty.

          If a Registration Statement refers to any Holder by name or otherwise as the holder of any
securities of the Company, then such Holder shall have the right to require (if such reference to
such Holder by name or otherwise is not required by the Securities Act or any similar federal
statute then in force) the deletion of the reference to such Holder in any amendment or supplement
to the Registration Statement filed or prepared subsequent to the time that such reference is
required.

          Each Holder covenants and agrees that it will not sell any Registrable Securities under a
Registration Statement until the Company has electronically filed the Prospectus as then amended or
supplemented as contemplated in Section 3(g) and notice from the Company that such
Registration Statement and any post-effective amendments thereto have become effective as
contemplated by Section 3(c).

          Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a
notice from the Company of the occurrence of any event of the kind described in Section
3(c)(ii), 3(c)(iii), 3(c)(iv), 3(c)(v) or 3(n), such Holder will forthwith discontinue
disposition of such Registrable Securities under the applicable Registration Statement until such
Holder’s receipt of the copies of the supplemented Prospectus and/or amended Registration Statement
contemplated by Section 3(j), or until it is advised in writing (the “Advice”) by
the Company that the use of the applicable Prospectus may be resumed, and, in either case, has
received copies of any additional or supplemental filings that are incorporated or deemed to be
incorporated by reference in such Prospectus or Registration Statement.

ix

 

          (n) If (i) there is material non-public information regarding the Company which the Company’s
Board of Directors (the “Board”) reasonably determines not to be in the Company’s best
interest to disclose and which the Company is not otherwise required to disclose, (ii) there is a
significant business opportunity (including, but not limited to, the acquisition or disposition of
assets (other than in the ordinary course of business) or any merger, consolidation, tender offer
or other similar transaction) available to the Company which the Board reasonably determines not to
be in the Company’s best interest to disclose, or (iii) the Company is required to file a
post-effective amendment to a Registration Statement to incorporate the Company’s quarterly and
annual reports and audited financial statements on Forms 10-QSB and 10-KSB, then the Company may
postpone or suspend filing or effectiveness of a registration statement for a period not to exceed
thirty (30) consecutive days; provided that the Company may not postpone or suspend filing or
effectiveness of a registration statement under this Section 3(n) for more than sixty (60)
days in the aggregate during any three hundred sixty (360) day period; provided, however, that no
such postponement or suspension shall be permitted for consecutive thirty (30) day periods arising
out of the same set of facts, circumstances or transactions.

     4. Registration Expenses.

          All fees and expenses incident to the performance of or compliance with this Agreement by the
Company, except as and to the extent specified in this Section 4, shall be borne by the
Company whether or not any Registration Statement is filed or becomes effective and whether or not
any Registrable Securities are sold pursuant to any Registration Statement. The fees and expenses
referred to in the foregoing sentence shall include, without limitation, (i) all registration and
filing fees (including, without limitation, fees and expenses (A) with respect to filings required
to be made with the OTC Bulletin Board and each other securities exchange or market on which
Registrable Securities are required hereunder to be listed, (B) with respect to filing fees
required to be paid to the Financial Industry Regulatory Authority (“FINRA), (including,
without limitation, pursuant to FINRA Rule 2710) and (C) in compliance with state securities or
Blue Sky laws (including, without limitation, fees and disbursements of counsel for the Holders in
connection with Blue Sky qualifications of the Registrable Securities and determination of the
eligibility of the Registrable Securities for investment under the laws of such jurisdictions as
the Holders of a majority of Registrable Securities may designate)), (ii) printing expenses
(including, without limitation, expenses of printing certificates for Registrable Securities and of
printing prospectuses if the printing of prospectuses is requested by the holders of a majority of
the Registrable Securities included in the Registration Statement), (iii) messenger, telephone and
delivery expenses, (iv) fees and disbursements of counsel for the Company and Special Counsel for
the Holders, in the case of the Special Counsel, up to a maximum amount of $5,000 for each
Registration Statement filed pursuant to this Agreement, (v) Securities Act liability insurance, if
the Company desires such insurance, and (vi) fees and expenses of all other Persons retained by the
Company in connection with the consummation of the transactions contemplated by this Agreement,
including, without limitation, the Company’s independent public accountants (including the expenses
of any comfort letters or costs associated with the delivery by independent public accountants of a
comfort letter or comfort letters). In addition, the Company shall be responsible for all of its
internal expenses incurred in connection with the consummation of the transactions contemplated by
this Agreement (including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any annual audit, the fees and
expenses incurred in connection with the listing of the Registrable Securities on any securities
exchange as required hereunder. The Company shall not be responsible for any discounts,
commissions, transfer taxes or other similar expenses incurred by the Holders in connection with
the sale of the Registrable Securities.

x

 

     5. Indemnification.

          (a) Indemnification by the Company. The Company shall, notwithstanding any termination
of this Agreement, indemnify and hold harmless each Holder, the officers, directors, managers,
partners, members, shareholders, agents, brokers, investment advisors and employees of each of
them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act) and the officers, directors, managers, partners, members,
shareholders, agents and employees of each such controlling Person, to the fullest extent permitted
by applicable law, from and against any and all losses, claims, damages, liabilities, costs
(including, without limitation, costs of preparation and attorneys’ fees) and expenses
(collectively, “Losses”), as incurred, arising out of or relating to (i) any violation by
the Company of the Securities Act, the Exchange Act, any state securities laws, or any rule or
regulation promulgated under the Securities Act, the Exchange Act or any state securities laws, or
(ii) untrue or alleged untrue statement of a material fact contained in any Registration Statement,
any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any
preliminary prospectus, or arising out of or relating to any omission or alleged omission of a
material fact required to be stated therein or necessary to make the statements therein (in the
case of any Prospectus or form of prospectus or supplement thereto, in the light of the
circumstances under which they were made) not misleading, except to the extent, but only to the
extent, that such untrue statements or omissions are based upon information regarding Holder or
such other Indemnified Party furnished to the Company by such Holder for use therein, which
information was relied on by the Company for use therein, provided, however, that
the foregoing indemnity and disbursements, agreement with respect to any preliminary prospectus
will not inure to the benefit of any Person indemnified pursuant to this Section 5(a) from whom the
person asserting any such losses, claims, damages or liabilities purchased shares in the offering,
if a copy of the prospectus (as then amended or supplemented if the Company will have furnished any
amendments or supplements thereto) was not sent or given by or on behalf of such Indemnified Person
to such person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the shares to such person, and if the prospectus (as so amended or
supplemented) would have cured the defect giving rise to such loss, claim, damage or liability.
The Company shall notify the Holders promptly of the institution, threat or assertion of any
Proceeding of which the Company is aware in connection with the transactions contemplated by this
Agreement.

          (b) Indemnification by Holders. Each Holder shall, severally and not jointly,
indemnify and hold harmless the Company, its directors, managers, partners, members, shareholders,
officers, agents and employees, each Person who controls the Company (within the meaning of Section
15 of the Securities Act and Section 20 of the Exchange Act), and the directors, managers,
partners, members, shareholders, officers, agents and employees of such controlling Persons, to the
fullest extent permitted by applicable law, from and against all Losses, as incurred, based solely
upon any untrue or alleged untrue statement of a material fact contained in any Registration
Statement, any Prospectus, or any form of prospectus, or in any amendment or supplement thereto or
in any preliminary prospectus, or based solely upon any omission or alleged omission of a material
fact required to be stated therein or necessary to make the statements therein (in the case of any
Prospectus or form of prospectus or supplement thereto, in the light of the circumstances under
which they were made) not misleading, to the extent, but only to the extent, that such untrue
statement or omission is contained in any information so furnished by such Holder to the Company
expressly for use therein and that such information was reasonably relied upon by the Company for
use therein and was reviewed and expressly approved in writing by such Holder expressly for the use
in the applicable Registration Statement or such Prospectus or such form of Prospectus or any
amendment or supplement thereto. Notwithstanding anything to the contrary contained herein, each
Holder shall be liable under this Section 5(b) for only that amount as does not exceed the
net proceeds to such Holder as a result of the sale of Registrable Securities pursuant to the
applicable Registration Statement.

xi

 

          (c) Conduct of Indemnification Proceedings. If any Proceeding shall be brought or
asserted against any Person entitled to indemnity hereunder (an “Indemnified Party”), such
Indemnified Party promptly shall notify the Person from whom indemnity is sought (the
“Indemnifying Party”) in writing, and the Indemnifying Party shall be entitled to assume
the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified
Party and the payment of all fees and expenses incurred in connection with defense thereof;
provided that the failure of any Indemnified Party to give such notice shall not relieve the
Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only)
to the extent that it shall be finally determined by a court of competent jurisdiction (which
determination is not subject to appeal or further review) that such failure shall have proximately
and materially adversely prejudiced the Indemnifying Party.

          An Indemnified Party shall have the right to employ separate counsel in any such Proceeding
and to participate in the defense thereof, but the fees and expenses of such counsel shall be at
the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in
writing to pay such fees and expenses; or (2) the Indemnifying Party shall have failed promptly to
assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such
Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding
(including any impleaded parties) include both such Indemnified Party and the Indemnifying Party,
and any such party shall have been advised by counsel that a conflict of interest is likely to
exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in
which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to
employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not
have the right to assume the defense thereof and such counsel shall be at the expense of the
Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such
Proceeding effected without its written consent, which consent shall not be unreasonably withheld
or delayed. No Indemnifying Party shall, without the prior written consent of the Indemnified
Party, effect any settlement of any pending or threatened Proceeding in respect of which any
Indemnified Party is a party and indemnity has been sought hereunder, unless such settlement
includes an unconditional release of such Indemnified Party from all liability on claims that are
the subject matter of such Proceeding.

          All fees and expenses of the Indemnified Party (including reasonable fees and expenses to the
extent incurred in connection with investigating or preparing to defend such Proceeding in a manner
not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten
(10) Business Days of written notice thereof to the Indemnifying Party (regardless of whether it is
ultimately determined that an Indemnified Party is not entitled to indemnification hereunder;
provided that the Indemnified Party shall reimburse all such fees and expenses to the extent it is
finally judicially determined that such Indemnified Party is not entitled to indemnification
hereunder).

          (d) Contribution. If a claim for indemnification under Section 5(a) or 5(b) is
due but unavailable to an Indemnified Party because of a failure or refusal of a governmental
authority to enforce such indemnification in accordance with its terms (by reason of public policy
or otherwise), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in
such proportion as is appropriate to reflect the relative benefits received by the Indemnifying
Party on the one hand and the Indemnified Party on the other from the offering of the Preferred
Stock and Warrants. If, but only if, the allocation provided by the foregoing sentence is not
permitted by applicable law, the allocation of contribution shall be made in such proportion as is
appropriate to reflect not only the relative benefits referred to in the foregoing sentence but
also the relative fault, as applicable, of the Indemnifying Party and Indemnified Party in
connection with the actions, statements or omissions that resulted in such Losses as well as any
other relevant equitable considerations. The relative fault of such Indemnifying Party and
Indemnified Party shall be determined by reference to, among other things, whether any action in
question, including any

xii

 

untrue or alleged untrue statement of a material fact or omission or alleged omission of a
material fact, has been taken or made by, or relates to information supplied by, such Indemnifying
Party or Indemnified Party, and the parties’ relative intent, knowledge, access to information and
opportunity to correct or prevent such action, statement or omission. The amount paid or payable by
a party as a result of any Losses shall be deemed to include, subject to the limitations set forth
in Section 5(c), any reasonable attorneys’ or other reasonable fees or expenses incurred by
such party in connection with any Proceeding to the extent such party would have been indemnified
for such fees or expenses if the indemnification provided for in this Section was available to such
party in accordance with its terms. In no event shall any selling Holder be required to contribute
an amount under this Section 5(d) in excess of the net proceeds received by such Holder
upon sale of such Holder’s Registrable Securities pursuant to the Registration Statement giving
rise to such contribution obligation.

          The parties hereto agree that it would not be just and equitable if contribution pursuant to
this Section 5(d) were determined by pro rata allocation or by any other method of
allocation that does not take into account the equitable considerations referred to in the
immediately preceding paragraph. No Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.

          The indemnity and contribution agreements contained in this Section are in addition to any
liability that the Indemnifying Parties may have to the Indemnified Parties pursuant to the law.

     6. Rule 144.

          As long as any Holder owns Registrable Securities, the Company covenants to timely file (or
obtain extensions in respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to Section 13(a) or 15(d) of the
Exchange Act. As long as any Holder owns Registrable Securities, if the Company is not required to
file reports pursuant to Section 13(a) or 15(d) of the Exchange Act, it will prepare and furnish to
the Holders and make publicly available in accordance with Rule 144(c) promulgated under the
Securities Act annual and quarterly financial statements, together with a discussion and analysis
of such financial statements in form and substance substantially similar to those that would
otherwise be required to be included in reports required by Section 13(a) or 15(d) of the Exchange
Act, as well as any other information required thereby, in the time period that such filings would
have been required to have been made under the Exchange Act. The Company further covenants that it
will take such further action as any Holder may reasonably request, all to the extent required from
time to time to enable such Person to sell Conversion Shares and Warrant Shares without
registration under the Securities Act within the limitation of the exemptions provided by Rule 144
promulgated under the Securities Act, including providing any legal opinions relating to such sale
pursuant to Rule 144. Upon the request of any Holder, the Company shall delivery to such Holder a
written certification of a duly authorized officer as to whether it has complied with such
requirements.

     7. Miscellaneous.

          (a) Remedies. In the event of a breach by the Company or by a Holder, of any of their
obligations under this Agreement, such Holder or the Company, as the case may be, in addition to
being entitled to exercise all rights granted by law and under this Agreement, including recovery
of damages, will be entitled to specific performance of its rights under this Agreement. The
Company and each Holder agree that monetary damages would not provide adequate compensation for any
losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby
further agrees that, in the event of any action for specific performance in respect of such breach,
it shall waive the defense that a remedy at law would be adequate.

xiii

 

          (b) No Inconsistent Agreements. Neither the Company nor any of its subsidiaries has,
as of the date hereof entered into and currently in effect, nor shall the Company or any of its
subsidiaries, on or after the date of this Agreement, enter into any agreement with respect to its
securities that is inconsistent with the rights granted to the Holders in this Agreement or
otherwise conflicts with the provisions hereof. Except as disclosed in the Purchase Agreement,
neither the Company nor any of its subsidiaries has previously entered into any agreement currently
in effect granting any registration rights with respect to any of its securities to any Person.
Without limiting the generality of the foregoing, without the written consent of the Holders of a
majority of the then outstanding Registrable Securities, the Company shall not grant to any Person
the right to request the Company to register any securities of the Company under the Securities Act
unless the rights so granted are subject in all respects to the prior rights in full of the Holders
set forth herein, and are not otherwise in conflict with the provisions of this Agreement.

          (c) Failure to File Registration Statement and Other Events. The Company and the
Holders agree that the Holders will suffer damages if a Registration Statement is not filed on or
prior to the Filing Date and/or the Demand Filing Date, as applicable, and not declared effective
by the Commission on or prior to the Effectiveness Date and/or the Demand Effectiveness Date, as
applicable and maintained in the manner contemplated herein during the Effectiveness Period and/or
the Demand Effectiveness Period, as applicable, or if certain other events occur. The Company and
the Holders further agree that it would not be feasible to ascertain the extent of such damages
with precision. Accordingly, if (A) the applicable Registration Statement is not filed on or prior
to the Filing Date and/or the Demand Filing Date, as applicable, or (B) the applicable Registration
Statement is not declared effective by the Commission on or prior to the Effectiveness Date and/or
the Demand Effectiveness Date, as applicable, or (C) the Company fails to respond in writing to any
and all comments from the Commission within ten (10) Business Days of receipt of such comments or
(D) the Company fails to file with the Commission a request for acceleration in accordance with
Rule 461 promulgated under the Securities Act within five (5) Business Days of the date that the
Company is notified (orally or in writing, whichever is earlier) by the Commission that a
Registration Statement will not be “reviewed,” or is not subject to further review, or (E) the
applicable Registration Statement is filed with and declared effective by the Commission but
thereafter ceases to be effective as to all applicable Registrable Securities, as the case may be,
at any time prior to the expiration of the Effectiveness Period and/or the Demand Effectiveness
Period, as the case may be, without being succeeded immediately by a subsequent Registration
Statement filed with and declared effective by the Commission in accordance with Section 2
hereof, or (F) the Company has breached Section 3(n), or (G) trading in the Common Stock
shall be suspended or if the Common Stock is no longer quoted on or is delisted from the OTC
Bulletin Board (or other principal exchange on which the Common Stock is traded) for any reason for
more than ten (10) Business Days in the aggregate (any such failure or breach being referred to as
an “Event,” and for purposes of clauses (A) and (B) the date on which such Event occurs, or
for purposes of clause (C) the date on which such ten (10) Business Day period is exceeded, or for
purposes of clause (D) the date on which such five (5) Business Day period is exceeded, or for
purposes of clause (E) after more than fifteen (15) Business Days, or for purposes of clause (G)
the date on which such ten (10) Business Day period is exceeded, being referred to as “Event
Date”), the Company shall pay an amount in cash or registered Common Stock (at the Company’s
sole discretion) to each Holder, as partial liquidated damages and not as a penalty, equal to one
and a half percent (1.5%) of the amount of the Holder’s initial investment in the Preferred Stock
and Warrants for each calendar month or portion thereof thereafter from the Event Date until the
applicable Event is cured; provided, however, that (x) if there is a delay in a Registration
Statement being declared effective due to comments concerning the Merger or the status of the
Company prior to consummation of the Merger, the penalties pursuant to this Section shall be waived
until such comments have been satisfied, (y) should any Registrable Securities be freely tradable
pursuant to Rule 144, the Company shall have no obligation to pay penalties pursuant to this
Section, and (z) in no event shall the amount of liquidated damages payable at any time and from
time to time to any Holder pursuant to this Section 7(c) exceed an aggregate of

xiv

 

twelve percent (12%) of the amount of the Holder’s initial investment in the Preferred Stock
and Warrants. Notwithstanding anything to the contrary in this paragraph (e), if (i) any of the
Events described in clauses (A), (B), (C), (D), (E) or (G) shall have occurred, (ii) on or prior to
the applicable Event Date, the Company shall have exercised its rights under Section 3(n)
hereof and (iii) the postponement or suspension permitted pursuant to such Section 3(n)
shall remain effective as of such applicable Event Date, then the applicable Event Date shall be
deemed instead to occur on the third Business Day following the termination of such postponement or
suspension. Liquidated damages payable by the Company pursuant to this Section 7(c) shall
be payable on the first (1st) Business Day of each thirty (30) day period following the
Event Date. In the event that the Company exercises its right to pay the amounts due under this
Section 7(c) in registered Common Stock, such shares shall be valued in a manner consistent
with valuation of such shares in the Purchase Agreement. Notwithstanding the foregoing provisions
of this Section 7(c), the Company may not exercise its right to pay the amounts due under
this Section 7(c) in registered Common Stock, unless such shares meet all the requirements
under this Agreement for transferability set forth in this Agreement applicable to shares of Common
Stock registered in accordance with this Agreement.

          (d) Amendments and Waivers. The provisions of this Agreement, including the provisions
of this sentence, may not be amended, modified or supplemented, and waivers or consents to
departures from the provisions hereof may not be given, unless the same shall be in writing and
signed by the Company and the Holders of a majority of the Registrable Securities outstanding. No
consideration shall be offered or paid to any Holders of Preferred Stock or Holders of the Warrants
to amend or consent to a waiver or modification of any provision of any of the Transaction
Documents unless the same consideration also is offered to all of the parties to the Transaction
Documents, Holders of Preferred Stock or Holders of the Warrants, as the case may be. The Company
has not, directly or indirectly, made any agreements with any Purchasers relating to the terms or
conditions of the transactions contemplated by the Transaction Documents except as set forth in the
Transaction Documents. 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, 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.

          (e) 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
or by 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:

	 	NovaRay Medical, Inc

1850 Embarcadero Road
	 

	 	Palo Alto, CA 94303
	 

	 	Attention: Chief Executive Officer
	 

	 	Tel. No.: (408) 966-5738
	 

	 	Fax No.: (650) 565-8601

xv

 

	 	 	 
	with copies to:

	 	Morrison & Foerster LLP
	 

	 	755 Page Mill Road
	 

	 	Palo Alto, California 94304-1018
	 

	 	Attn: Michael C. Phillips
	 

	 	Facsimile: (650) 494-0792
	 
	 	 
	If to any Purchaser:

	 	At the address of such Purchaser set forth on
	 

	 	Schedule I to this Agreement, with copies to
	 

	 	Purchaser’s counsel (which copies shall not
	 

	 	constitute notice to such purchaser) as set forth
	 

	 	on Schedule I or as specified in writing by such
	 

	 	Purchaser.
	 
	 	 
	with copies to

	 	Sadis & Goldberg LLP
	Special Counsel:

	 	551 Fifth Avenue, 21st Floor
	 

	 	New York, New York 10176
	 

	 	Attention: Paul Fasciano, Esq.
	 

	 	Facsimile: (212) 573-8026

          Any party hereto may from time to time change its address for notices by giving at least ten
(10) days written notice of such changed address to the other parties hereto.

          (f) Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties and their successors and permitted assigns and shall inure to the benefit of
each Holder and its successors and assigns. The Company may not assign this Agreement or any of its
rights or obligations hereunder without the prior written consent of each Holder.

          (g) Assignment of Registration Rights. The rights of each Holder hereunder, including
the right to have the Company register for resale Registrable Securities in accordance with the
terms of this Agreement, shall be automatically assignable by each Holder to any Person who
acquires all or a portion of the Registrable Securities to any Person if: (i) the Holder agrees in
writing with the transferee or assignee to assign such rights, and a copy of such agreement is
furnished to the Company within a reasonable time after such assignment, (ii) the Company is,
within a reasonable time after such transfer or assignment, furnished with written notice of (A)
the name and address of such transferee or assignee, and (B) the securities with respect to which
such registration rights are being transferred or assigned, (iii) following such transfer or
assignment the further disposition of such securities by the transferee or assignees is restricted
under the Securities Act and applicable state securities laws unless such securities are registered
in a Registration Statement under this Agreement (in which case the Company shall be obligated to
amend such Registration Statement to reflect such transfer or assignment) or are otherwise exempt
from registration, (iv) at or before the time the Company receives the written notice contemplated
by clause (ii) of this Section, the transferee or assignee agrees in writing with the Company to be
bound by all of the provisions of this Agreement, and (v) such transfer shall have been made in
accordance with the applicable requirements of the Purchase Agreement. In addition, each Holder
shall have the right to assign its rights hereunder to any other person with the prior written
consent of the Company, which consent shall not unreasonably be withheld. The rights to assignment
shall apply to the Holders (and to subsequent) successors and assigns.

          (h) Termination of Registration Rights. No Holder shall be entitled to exercise any
right provided for in this Agreement following the earlier of: (i) the fifth (5th)
anniversary of the date of this Agreement, or (ii) as to any Holder, such earlier time at which all
Registrable Securities held by such

xvi

 

Holder (and any affiliate of the Holder with whom such Holder must aggregate its sales under
Rule 144) can be sold in any ninety (90) day period without registration in compliance with Rule
144 of the Act.

          (i) Underwriter Status. The Company may not deem any Holder to be an “underwriter”
within the meaning of the Securities Act within any Registration Statement without the prior
written consent of such Holder.

          (j) Counterparts. This Agreement may be executed in any number of 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 and shall become effective when counterparts have been signed
by each party and delivered to the other parties hereto, it being understood that all parties need
not sign the same counterpart. In the event that any signature is delivered by facsimile or
electronic mail transmission, such signature shall create a valid binding obligation of the party
executing (or on whose behalf such signature is executed) the same with the same force and effect
as if such facsimile or electronic mail signature were the original thereof.

          (k) Governing Law; Jurisdiction. The parties acknowledge and agree that any claim,
controversy, dispute or action relating in any way to this agreement or the subject matter of this
agreement shall be governed solely by the laws of the State of New York, without regard to any
conflict of laws doctrines. The parties irrevocably consent to being served with legal process
issued from the state and federal courts located in New York and irrevocably consent to the
exclusive personal jurisdiction of the federal and state courts situated in the State of New York.
The parties irrevocably waive any objections to the personal jurisdiction of these courts. Said
courts shall have sole and exclusive jurisdiction over any and all claims, controversies, disputes
and actions which in any way relate to this agreement or the subject matter of this agreement. The
parties also irrevocably waive any objections that these courts constitute an oppressive, unfair,
or inconvenient forum and agree not to seek to change venue on these grounds or any other grounds.
The parties hereby agree that the prevailing party in any suit, action or proceeding arising out of
or relating to this Agreement or the Purchase Agreement, 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. Nothing in this Section 7(k) shall affect or limit any right to serve process in
any other manner permitted by law.

          (l) Cumulative Remedies. The remedies provided herein are cumulative and not exclusive
of any remedies provided by law.

          (m) Additional Purchasers. Upon the sale of Additional Securities to Additional
Purchasers in accordance with the Purchase Agreement, the Company, without prior action on the part
of any Holder, shall require each Additional Purchaser to execute and deliver this Agreement. Each
such Additional Purchaser, upon execution and delivery of this Agreement by the Company and such
Additional Purchaser, shall be added to Schedule I attached hereto and deemed a Purchaser
hereunder.

          (n) 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 such provision 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.

xvii

 

          (o) 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.

[remainder of page intentionally left blank]

xviii

 

     IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be
duly executed by their respective authorized persons as of the date first indicated above.

	 	 	 	 	 
	 	NOVARAY MEDICAL, INC.

 	 
	 	By:  	/s/ Jack Price	 
	 	 	Name:  	Jack Price 	 
	 	 	Title:  	Chief Executive Officer 	 

xix

 

	 	 	 	 	 

     IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be
duly executed by their respective authorized persons as of the date first indicated above.

	 	 	 	 	 
	 	VISION OPPORTUNITY MASTER FUND, LTD.

 	 
	 	By:  	/s/ Adam Benowitz	 
	 	 	Name:  	Adam Benowitz	 
	 	 	Title:  	Director	 

 

 

	 	 	 	 	 

     IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be
duly executed by their respective authorized persons as of the date first indicated above.

	 	 	 	 	 
	 	LYNDA WIJCIK

 	 
	 	By:  	/s/ Lynda Wijcik	 
	 	 	Name:  	Lynda Wijcik	 
	 	 	Title:  	 	 

 

 

	 	 	 	 	 

     IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be
duly executed by their respective authorized persons as of the date first indicated above.

	 	 	 	 	 
	 	COMMERCE AND INDUSTRY INSURANCE COMPANY

By: AIG Global Investment Corp.,

its investment advisor

 	 
	 	By:  	/s/ F.T. Chong	 
	 	 	Name:  	F.T. Chong	 
	 	 	Title:  	Managing Director	 

 

 

     IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be
duly executed by their respective authorized persons as of the date first indicated above.

	 	 	 	 	 
	 	AIU INSURANCE COMPANY

By: AIG Global Investment Corp.,

its investment advisor

 	 
	 	By:  	/s/
F.T. Chong	 
	 	 	Name:  	F.T. Chong	 
	 	 	Title:  	Managing Director	 

 

 

	 	 	 	 	 

     IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be
duly executed by their respective authorized persons as of the date first indicated above.

	 	 	 	 	 
	 	AIG PRIVATE EQUITY PORTFOLIO, L.P.

By: AIG PEP GP, L.P., its General Partner

By: AIG PEP, LLC, its General Partner

By: AIG Global Investment Corp., its Sole Member

 	 
	 	By:  	/s/ F.T. Chong	 
	 	 	Name:  	F.T. Chong	 
	 	 	Title:  	Managing Director	 

 

 

	 	 	 	 	 

     IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be
duly executed by their respective authorized persons as of the date first indicated above.

	 	 	 	 	 
	 	AIG HORIZON PARTNERS FUND, L.P.

By: AIG Horizon Partners GP, L.P., its General Partner

By: AIG Horizon Partners LLC, its General Partner

By: AIG Global Investment Corp., its Managing Member

 	 
	 	By:  	/s/
F.T. Chong	 
	 	 	Name:  	F.T. Chong	 
	 	 	Title:  	Managing Director	 

 

 

	 	 	 	 	 

     IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be
duly executed by their respective authorized persons as of the date first indicated above.

	 	 	 	 	 
	 	AIG HORIZON SIDE-BY-SIDE FUND, L.P.

By: AIG Horizon SBS GP, L.P.,

its General Partner

By: AIG Horizon Partners, LLC,

its General Partner

By: AIG Global Investment Corp.,

its Managing Member

 	 
	 	By:  	/s/ F.T. Chong	 
	 	 	Name:  	F.T. Chong	 
	 	 	Title:  	Managing Director 	 
	 

 

 

     IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be
duly executed by their respective authorized persons as of the date first indicated above.

	 	 	 	 	 
	 	WHEATLEY MEDTECH PARTNERS, L.P.

 	 
	 	By:  	
/s/ Barry Rubenstein	 
	 	 	Name:  	Barry Rubenstein	 
	 	 	Title:  	CEO, Wheatley Medtech Partners, LLC

General Partner	 

 

 

	 	 	 	 	 

     IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be
duly executed by their respective authorized persons as of the date first indicated above.

	 	 	 	 	 
	 	LLOYD INVESTMENTS, L.P.

 	 
	 	By:  	
/s/ L.J. Lloyd	 
	 	 	Name:  	L.J. Lloyd	 
	 	 	Title:  	G.P.	 

 

 

	 	 	 	 	 

     IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be
duly executed by their respective authorized persons as of the date first indicated above.

	 	 	 	 	 
	 	HEARTSTREAM CAPITAL B.V.

 	 
	 	By:  	
/s/ George Hersbach	 
	 	 	Name:  	George Hersbach	 
	 	 	Title:  	President & CEO	 

 

 

	 	 	 	 	 

     IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be
duly executed by their respective authorized persons as of the date first indicated above.

	 	 	 	 	 
	 	BIOBRIDGE LLC

 	 
	 	By:  	
/s/ Lynda Wijcik	 
	 	 	Name:  	Lynda Wijcik	 
	 	 	Title:  	Mng. Partner	 
	 

 

 

     IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be
duly executed by their respective authorized persons as of the date first indicated above.

	 	 	 	 	 
	 	ARIE JACOB MANINTVELD

 	 
	 	By:  	
/s/ Arie Jacob Manintveld	 
	 	 	Name:  	Arie Jacob Manintveld	 
	 	 	Title:  	 	 
	 

 

 

Schedule I

	 	 	 	 	 	 	 
	Names and Addresses of the	 	 	 	 	 	Preferred Stock &
	Purchasers	 	Investment Amount	 	Warrants Purchased
	Vision Opportunity Master Fund,
Ltd.

c/o Vision Capital Advisors, LLC

20 West 55th Street

New York, NY 10019

Attn: Antti Uusiheimala

	 	$	10,000,001.73	 	 	Preferred Shares: 3,745,319

Series A Warrants: 1,248,439

Series J Warrants: 2,309,469

Series J-A Warrants: 769,823

	 
	 	 	 	 	 	 
	Lynda Wijcik 

15941 Overlook Way

Los Gatos, CA 95070

	 	$	325,577.13	 	 	Preferred Shares: 121,939

Series A Warrants: 40,646

	 
	 	 	 	 	 	 
	Commerce and Industry Insurance
Company

c/o Mellon Securities Trust
Company

Attn: Mike Visone

Ref: AGIFCII11102/Commerce &

Industry Insurance Company

120 Broadway, 13th Floor

New York, NY 10271

	 	$	582,658.08	 	 	Preferred Shares: 218,224

Series A Warrants: 72,741

	 
	 	 	 	 	 	 
	AIU Insurance Company

c/o Mellon Securities Trust
Company

Attn: Mike Visone

Ref: AGIFAIU10902/AIU Insurance

Company 120 Broadway, 13th Floor

New York, NY 10271

	 	$	308,232.81	 	 	Preferred Shares: 115,443

Series A Warrants: 38,481

	 
	 	 	 	 	 	 
	AIG Private Equity Portfolio, L.P.

Attn: Matt Joyce

Mellon Bank One Mellon Bank
Center

Rm 151-0510

Pittsburgh, PA 15258

	 	$	102,439.89	 	 	Preferred Shares: 38,367

Series A Warrants: 12,789

	 
	 	 	 	 	 	 
	AIG Horizon Partners Fund L.P.

Attn: Matt Joyce

Mellon Bank One Mellon Bank
Center 

Rm 151-0510

Pittsburgh, PA 15258

	 	$	58,537.08	 	 	Preferred Shares: 21,924

Series A Warrants: 7,308

 

 

	 	 	 	 	 	 	 
	Names and Addresses of the	 	 	 	 	 	Preferred Stock &
	Purchasers	 	Investment Amount	 	Warrants Purchased
	AIG Horizon Side-by-Side Fund L.P.

Attn: Matt Joyce

Mellon Bank One Mellon Bank
Center

Rm 151-0510

Pittsburgh, PA 15258

	 	$	   130,792.62	 	 	Preferred Shares: 48,986

Series A Warrants: 16,328

	 
	 	 	 	 	 	 
	Wheatley MedTech Partners, L.P.

Attn: David R. Dantzker, M.D.

825 Third Ave. 32nd Floor

	 	$	367,670.21	 	 	Preferred Shares: 142,632

Series A Warrants: 47,544

	 
	 	 	 	 	 	 
	Lloyd Investments, L.P.

Attn: Jack Lloyd

7 Haciendas Road

Orinda, CA 94563-1714

	 	$	65,329.56	 	 	Preferred Shares: 24,468

Series A Warrants: 8,156

	 
	 	 	 	 	 	 
	Heartstream Capital B.V.

Attn: George J.M. Hersbach

President & CEO

Gooise Poort

Gooimeer 3 - 25

1411 DC Naarden

Netherlands

	 	$	580,769.86	 	 	Preferred Shares: 271,896

Series A Warrants: 90,632

	 
	 	 	 	 	 	 
	BioBridge LLC

Attn: Lynda Wijcik

15941 Overlook Dr.

Los Gatos, CA 95070

	 	$	211,745.95	 	 	Preferred Shares: 99,132

Series A Warrants: 33,044

	 
	 	 	 	 	 	 
	Arie Jacob Manintveld

c/o Heartstream Capital BV

Gooise Poort

Gooimeer 3 - 25

1411 DC Naarden

Netherlands

	 	$	210,519.89	 	 	Preferred Shares: 98,558

Series A Warrants: 32,852

 

 

EXHIBIT A

Plan of Distribution

     The selling security holders and any of their pledgees, donees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares of common stock
being offered under this prospectus on any stock exchange, market or trading facility on which
shares of our common stock are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling security holders may use any one or more of the following methods
when disposing of shares:

	 	•	 	ordinary brokerage transactions and transactions in which the broker-dealer solicits
purchasers;
	 
	 	•	 	block trades in which the broker-dealer will attempt to sell the shares as agent but may
position and resell a portion of the block as principal to facilitate the transaction;
	 
	 	•	 	purchases by a broker-dealer as principal and resales by the broker-dealer for its account;
	 
	 	•	 	an exchange distribution in accordance with the rules of the applicable exchange;
	 
	 	•	 	privately negotiated transactions;
	 
	 	•	 	to cover short sales made after the date that the registration statement of which this
prospectus is a part is declared effective by the Commission;
	 
	 	•	 	broker-dealers may agree with the selling security holders to sell a specified number of
such shares at a stipulated price per share;
	 
	 	•	 	a combination of any of these methods of sale; and
	 
	 	•	 	any other method permitted pursuant to applicable law.

     The shares may also be sold under Rule 144 under the Securities Act of 1933, as amended
(“Securities Act”), if available, rather than under this prospectus. The selling security
holders have the sole and absolute discretion not to accept any purchase offer or make any sale of
shares if they deem the purchase price to be unsatisfactory at any particular time.

     The selling security holders may pledge their shares to their brokers under the margin
provisions of customer agreements. If a selling security holder defaults on a margin loan, the
broker may, from time to time, offer and sell the pledged shares.

     Broker-dealers engaged by the selling security holders may arrange for other broker-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from the selling security
holders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in
amounts to be negotiated, which commissions as to a particular broker or dealer may be in excess of
customary commissions to the extent permitted by applicable law.

     If sales of shares offered under this prospectus are made to broker-dealers as principals, we
would be required to file a post-effective amendment to the registration statement of which this
prospectus is a part. In the post-effective amendment, we would be required to disclose the names
of any participating broker-dealers and the compensation arrangements relating to such sales.

 

 

     The selling security holders and any broker-dealers or agents that are involved in selling the
shares offered under this prospectus may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with these sales. Commissions received by these broker-dealers or
agents and any profit on the resale of the shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act. Any broker-dealers or agents that
are deemed to be underwriters may not sell shares offered under this prospectus unless and until we
set forth the names of the underwriters and the material details of their underwriting arrangements
in a supplement to this prospectus or, if required, in a replacement prospectus included in a
post-effective amendment to the registration statement of which this prospectus is a part.

     The selling security holders and any other persons participating in the sale or distribution
of the shares offered under this prospectus will be subject to applicable provisions of the
Exchange Act, and the rules and regulations under that act, including Regulation M. These
provisions may restrict activities of, and limit the timing of purchases and sales of any of the
shares by, the selling security holders or any other person. Furthermore, under Regulation M,
persons engaged in a distribution of securities are prohibited from simultaneously engaging in
market making and other activities with respect to those securities for a specified period of time
prior to the commencement of such distributions, subject to specified exceptions or exemptions. All
of these limitations may affect the marketability of the shares.

     If any of the shares of common stock offered for sale pursuant to this prospectus are
transferred other than pursuant to a sale under this prospectus, then subsequent holders could not
use this prospectus until a post-effective amendment or prospectus supplement is filed, naming such
holders. We offer no assurance as to whether any of the selling security holders will sell all or
any portion of the shares offered under this prospectus.

     We have agreed to pay all fees and expenses we incur incident to the registration of the
shares being offered under this prospectus. However, each selling security holder and purchaser is
responsible for paying any discounts, commissions and similar selling expenses they incur.

     We and the selling security holders have agreed to indemnify one another against certain
losses, damages and liabilities arising in connection with this prospectus, including liabilities
under the Securities Act.

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