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covertpreferrredsecuritiesk.htm

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    
    

    

     

    

     

    

    CONVERTIBLE
PREFERRED SECURITIES AGREEMENT

     

    

     

    

     

    DATED
AS OF MAY 15, 2009

     

    

     

    between

     

    

     

    ECOLOGY
COATINGS, INC.

     

    

     

    and

     

    

     

    EQUITY
11, Ltd.

     

    

    

    

    
    

    

     

    

     

    

     

    

     

    

    CONVERTIBLE PREFERRED SECURITIES
AGREEMENT (this “Agreement”), dated as
of May 15, 2009, between Ecology Coatings, Inc., a
corporation organized  under the laws of the state of Nevada (the
“Company”), and
Equity 11, Ltd., a
corporation organized under the laws of the state of Michigan (the “Purchaser”).

     

    RECITALS

     

    WHEREAS, the Company desires
to sell to the Purchaser, and the Purchaser desires to purchase from the
Company, 5.0% Cumulative Convertible Preferred Shares, Series B of the Company
at a price per share of $1000 (the “Convertible Preferred
Shares, Series B”) containing the terms set forth in the Certificate of
Designation attached as Exhibit A hereto (the
“Certificate of
Designation”).

     

    NOW, THEREFORE, in
consideration of the mutual promises herein made, and in consideration of the
representations, warranties, and covenants herein contained, the Company and the
Purchaser agree as follows:

     

    All
capitalized terms used and not otherwise defined in this Agreement shall have
the definitions set forth on Annex I.

     

    ARTICLE
I

    Sale
of the Convertible Preferred Shares, Series B

     

    Section
1.1Authorization of
Issuance and Sale and Delivery of the Convertible Preferred Shares, Series
B.

     

    Subject
to the terms and conditions hereof, until December 15, 2009, the Purchaser
agrees to purchase and the Company agrees to sell and issue to the Purchaser at
the Closings, 5% Convertible Preferred Shares, Series B, at a price per share of
$1,000, convertible into common shares at the Conversion Price.

     

    Section
1.2 The Closing of the
Sale of the Convertible Preferred Shares, Series B.

     

    The
closings (the “Closings”) shall take
place at the offices of Purchaser, at 8:00 p.m., New York time, on the
date hereof, or such other time and date as the parties may agree upon (the date
that the Closing occurs, the “Closing
Date”).  At the Closing, on the terms and subject to the
conditions contained herein, the Company shall issue and deliver the Convertible
Preferred Shares, Series B against receipt by the Company of the Aggregate
Purchase Price by wire transfer of immediately available funds to an account,
which the Company shall designate to the Purchaser prior to the Closing in
writing.  The Convertible Preferred Shares, Series B shall be
evidenced by certificates.

    

    Section
1.3 Termination of
Certain Agreements.

    

    (1) The
parties agree that Purchaser will not acquire any further securities under the
SPA and the SPA will continue to define the terms and conditions with respect to
convertible preferred securities purchased under the SPA.  Sections
5.2, 5.3, 5.4, 5.5, 5.6, 5.7, and 5.9 of the SPA shall remain in full force and
effect with respect to the purchase of securities under the SPA.  In
all other respects, the SPA shall be considered terminated.

    

    (2) The
parties agree to terminate the Consulting Agreement between Company and James
Juliano dated January 5, 2009.

    

    (3) The
parties agree to eliminate the monthly compensation in Exhibit A of the
Consulting Services Agreement between Company and Sales Attack LC dated
September 17, 2008.  In all other respects, the terms of the
Consulting Services Agreement shall remain in full force and
effect.

    

    (4) Upon the
issuance of the Convertible Preferred Shares, Series B described in Section 2.1,
the parties acknowledge that the promissory notes dated December 24, 2008,
January 8, 2009 and May 5, 2009 in favor of Seven Industries Ltd. and JB Smith
LC will be considered paid in full and shall be cancelled.

    

    (5) Upon the
issuance of the Convertible Preferred Shares, Series B described in Section 2.1,
the parties acknowledge payment of the monthly rent under the Office Sublease
between Company and Seven Industries Ltd. shall be considered paid in full
through the month of May 2009.

    

    ARTICLE
II

    The
Initial Closing

     

    Section
2.1 Closing
Requirements.

     

    
      	
              (1)  

            	
              Within
      two (2) business days, the Company shall deliver to the
      Purchaser:

            

    

     

    (a) a duly
executed share certificate registered in the name of the Purchaser, representing
225 Convertible Preferred Shares, Series B, being issued to Purchaser pursuant
to this Agreement for outstanding amounts due to Purchaser and Purchaser’s
affiliates for office rent, marketing services, consultant services and
promissory notes;

      

    (b) a
Secretary’s Certificate, duly executed by the Secretary of the Company,
appending certified copies of the Company’s Fundamental Documents and
minutes/resolutions of the Board of Directors of the Company (the “Board”) (and, if
applicable, any committee) approving the Documents and the transactions
contemplated thereby (including, without limitation, the Certificate of
Designation );

     

    (c) an
Incumbency Certificate, duly executed by an authorized officer of the Company,
certifying with respect to the incumbency of the officers listed thereon and the
genuineness of such officers’ respective signatures.

     

    (3) At
the Initial Closing, the Purchaser shall deliver to the Company a duly executed
counterpart signature page to the Cross-Receipt.

    

    Section
2.2 Purchases of
Additional Preferred Shares.

    

    (1) Purchaser,
in Purchaser’s sole and absolute discretion, may purchase additional Convertible
Preferred Shares, Series B until December 15, 2009 convertible to common shares
at the Conversion Price.

    

    
      	
              (2)  

            	
              For
      each such additional purchase, Company shall deliver to
      Purchaser:

            

    

    

    (a) a duly
executed share certificate registered in the name of the Purchaser, representing
the number of additional Convertible Preferred Shares, Series B being purchased
by the Purchaser pursuant to this Agreement;

     

    (b) a duly
executed counterpart signature page to a cross-receipt (the “Cross-Receipt”) with
respect to the Company’s receipt of the Aggregate Purchase Price and the
Purchaser’s receipt of the additional Convertible Preferred Shares, Series
B.

    

    (3) For each
purchase of additional Convertible Preferred Shares, Series B, the Purchaser
shall deliver to the Company:

     

    (a) the
Aggregate Purchase Price for the additional Convertible Preferred Shares, Series
B being purchased by the Purchaser pursuant to this Agreement; and

     

    
      	
              (b)  

            	
              a
      duly executed counterpart signature page to the
    Cross-Receipt.

            

    

    

    Section
2.3 Restrictive
Legend.

     

    The
certificate representing each of the Convertible Preferred Shares, Series B
shall be stamped or otherwise imprinted with a legend substantially in the
following form (in addition to any legend required by applicable state
securities Laws), upon issuance thereof, and until such time as the same is no
longer required under the applicable requirements of the Securities
Act:

     

    THE
5% CUMULATIVE CONVERTIBLE PREFERRED SHARES, SERIES B REPRESENTED HEREBY HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAWS, AND
ECOLOGY COATINGS, INC. (THE “COMPANY”) HAS NOT BEEN REGISTERED UNDER THE
INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE “INVESTMENT COMPANY
ACT”).  NEITHER SUCH 5% CUMULATIVE CONVERTIBLE PREFERRED SHARES,
SERIES B NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, RESOLD OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH
TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION.

     

    THE HOLDER, BY ITS
ACCEPTANCE HEREOF, AGREES TO OFFER, RESELL OR OTHERWISE TRANSFER THE 5%
CUMULATIVE CONVERTIBLE PREFERRED SHARES, SERIES B REPRESENTED HEREBY, UNLESS
SUCH 5% CUMULATIVE CONVERTIBLE PREFERRED SHARES, SERIES B NO LONGER CONSTITUTE
“RESTRICTED SECURITIES” WITHIN THE MEANING OF RULE 144 UNDER THE SECURITIES ACT,
ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN
DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) TO ONE OR MORE PERSONS, EACH OF
WHICH IS AN “ACCREDITED INVESTOR” (AS DEFINED IN RULE 501 UNDER THE SECURITIES
ACT) THAT IS ACQUIRING SUCH 5% CUMULATIVE CONVERTIBLE PREFERRED SHARES, SERIES B
FOR ITS OWN ACCOUNT FOR INVESTMENT AND NOT WITH A VIEW TO, OR
FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE
SECURITIES ACT OR OTHER APPLICABLE SECURITIES LAWS OR (D) PURSUANT TO ANY OTHER
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, IN
EACH CASE SUBJECT TO ANY REQUIREMENT OF LAW THAT THE DISPOSITION OF ITS PROPERTY
OR THE PROPERTY OF SUCH ACCREDITED INVESTOR BE AT ALL TIMES WITHIN ITS OR THEIR
CONTROL.

     

    TO
THE FULLEST EXTENT PERMITTED BY LAW, ANY TRANSFER IN VIOLATION OF THE FOREGOING
WILL BE OF NO FORCE AND EFFECT, WILL BE VOID AB INITIO, AND WILL NOT OPERATE TO
TRANSFER ANY RIGHTS TO THE TRANSFEREE, NOTWITHSTANDING ANY INSTRUCTION TO THE
CONTRARY TO THE COMPANY, THE TRANSFER AGENT OR ANY INTERMEDIARY.

     

    Furthermore,
the Convertible Preferred Share certificate will contain a legend substantially
to the following effect:

     

    THE
COMPANY WILL FURNISH TO ANY SHAREHOLDER ON REQUEST AND WITHOUT CHARGE A FULL
STATEMENT OF (1) ANY RESTRICTIONS, LIMITATIONS, PREFERENCES OR REDEMPTION
PROVISIONS CONCERNING THE 5% CUMULATIVE CONVERTIBLE PREFERRED SHARES, SERIES B
AND (2) THE DESIGNATIONS AND ANY PREFERENCES, CONVERSION AND OTHER RIGHTS,
VOTING POWERS, RESTRICTIONS, LIMITATIONS AS TO DISTRIBUTIONS, AND OTHER
QUALIFICATIONS AND TERMS AND CONDITIONS OF REDEMPTION OF THE 5% CUMULATIVE
CONVERTIBLE PREFERRED SHARES, SERIES B, THE DIFFERENCES IN THE RELATIVE RIGHTS
AND PREFERENCES BETWEEN THE SHARES OF EACH SERIES OF SUCH CLASS TO THE EXTENT
THEY HAVE BEEN SET, AND THE AUTHORITY OF THE BOARD OF DIRECTORS OF THE COMPANY
TO SET THE RELATIVE RIGHTS AND PREFERENCES OF SUBSEQUENT SERIES OF 5% CUMULATIVE
CONVERTIBLE PREFERRED SHARES, SERIES B.  5% CUMULATIVE CONVERTIBLE
PREFERRED SHARES, SERIES B WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN WHOLE
SHARES.

     

    ARTICLE
III

    Representations
and Warranties of the Company

     

    As a
material inducement to the Purchaser to enter into and perform its obligations
under this Agreement, the Company hereby represents and warrants to the
Purchaser as follows:

     

    Section 3.1 Due
Creation, Good Standing and Due Qualification.  The Company has been duly
created and is validly existing corporation in good standing under the laws of
the state of Nevada, and pursuant to the resolutions of the Board (or a duly
authorized committee thereof)  has full power and authority to own,
lease and operate its properties and conduct its business as presently being
conducted and to enter into and perform its obligations under, or as
contemplated under, this Agreement; and the Company is duly qualified to
transact business as a foreign entity and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing would not result in a material
adverse change in the business, Assets, liabilities, operations, condition
(financial or otherwise) or operating results of the Company and its
Subsidiaries (as defined herein), taken as a whole (a “Material
Adverse Effect”). 

    

    Section
3.2 Authorization;
Enforceability; Corporate and Other Proceedings. 

     

    (1) The Company has all requisite power and
authority to execute and deliver each Document to which it is a party and to
perform its obligations under each such Document. Each Document to which the
Company is a party has been duly authorized by all necessary action on the part
of the Company, and each Document to which the Company is a party has been duly
executed and delivered by the Company, and, assuming the due authorization,
execution and delivery by
the other parties thereto, constitutes the valid and legally binding obligation
of the Company, enforceable in accordance with its terms and conditions, except
that the enforcement thereof may be subject to (i) bankruptcy, insolvency,
reorganization, receivership, moratorium, fraudulent conveyance or other similar
laws now or hereafter in effect relating to creditors’ rights generally and (ii)
general principles of equity (whether applied by a court of law or equity) and
the discretion of the court before which any proceeding therefor may be
brought.

     

    (2) The
authorization, issuance, sale and delivery of the Convertible Preferred Shares,
Series B have been duly authorized by all requisite action of the Board.
Notwithstanding anything contained on the schedules attached hereto, the
Convertible Preferred Shares, Series B being issued as of the Closing Date, if
and when issued, will be duly and validly issued and
outstanding, fully paid and nonassessable interests in the
Company, with no personal liability attaching to the
ownership thereof, free and clear of any Liens and will not be subject
to preemptive rights or other similar rights of any security holder of the
Company. The
underlying Common Shares issuable upon conversion of the Convertible Preferred
Shares, Series B have been duly authorized by all requisite action of the
Board and, when
issued upon such conversion and delivered against surrender of the Convertible
Preferred Shares, Series B, will be duly and validly issued, fully
paid and nonassessable interests in the Company
and will not be subject to any preemptive right, resale right, right of first
refusal or other similar rights of any security holder of the
Company.

     

    Section
3. Non
Contravention.  Notwithstanding anything contained on the
schedules attached hereto, the execution, delivery and performance by the
Company of the Documents, the consummation of the transactions contemplated
hereby and thereby
and compliance with the provisions hereof and thereof, including the
issuance, sale and delivery of the Convertible Preferred Shares, Series B have
not, do not and shall not (whether with or without
the giving of notice or passage of time or both), (a) violate any Law to which
the Company or any of its Subsidiaries is subject, (b) violate any provision of
the Fundamental Documents of the Company or the Fundamental Documents of the
Company’s Subsidiaries, (c) conflict with, result in a breach of, constitute a
default under, result in the acceleration of, create in any party the right to
accelerate, require the repurchase, redemption or repayment of, terminate,
modify or cancel, or require any notice under any material contract to which the
Company or any of its Subsidiaries is a party, or (d) result in the imposition
of any Lien upon any of the Assets of the Company or any of its
Subsidiaries.

     

    Section
3.4 Absence of
Defaults.  Except as disclosed in SEC filings, the Company is
not in violation of its respective Fundamental Documents and neither the Company
nor any of its Subsidiaries are in default in the performance or observance of
any obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, deed of trust, loan or credit agreement, note, lease or
other agreement or instrument to which the Company or any of its Subsidiaries is
a party or by which any of them may be bound or to which any of the property or
assets of the Company or any of its Subsidiaries is subject, except for such
violations or defaults that would not result in a Material Adverse
Effect.

     

    Section
3.5 Capitalization of
the Company. 

     

    (1) All of
the issued and outstanding beneficial interests in the Company have been duly
and validly authorized and issued and are fully paid and nonassessable interests
in the Company, have been issued in compliance with all federal and state
securities laws and were not issued in violation of any preemptive right, resale
right, right of first refusal or other similar right.

     

    (2) Except as
contemplated by the Documents, the Certificate of Designation or as otherwise
disclosed in the SEC Reports, there are, and immediately after consummation of
any Closing , there will be, no (i) outstanding warrants, options, agreements,
convertible securities or other commitments or instruments pursuant to which the
Company is or may become obligated to issue or sell any shares of the Company’s
capital stock or other securities (or securities
convertible into securities of the Company) except for the First Closing,
securities purchased under the SPA and  stock options and warrants
issued and outstanding prior to the Effective Date, (ii) preemptive rights,
resale rights, rights of first refusal or similar rights to
purchase or otherwise acquire shares of the capital stock or other securities of
the Company pursuant to any provision of Law, the Company’s Fundamental
Documents or any contract, “shareholders’ rights plan”, “poison pill” or similar
plan, arrangement or scheme to which the Company is a party or (iii) right,
contractual or otherwise, to cause the Company to register pursuant to the
Securities Act, any beneficial interests in the Company upon the issue and sale
of the Convertible Preferred Shares, Series B, in each case, other than those
rights that have been expressly waived, fully and unconditionally, prior to the
date hereof; immediately following the Closing hereunder.

     

    Section 3.6 Offering
Exemption.  Based upon and assuming
the accuracy of the representations of the Purchaser in Article VI, the
offering, sale and issuance of the Convertible Preferred Shares, Series B do not
require registration under the Securities Act or applicable state securities and
“blue sky” Laws.  The Company has made or shall make all requisite
filings and has taken or will take all action necessary to be taken to comply
with such federal and state securities or “blue sky” Laws.

     

    Section 3.7 SEC
Reports. The Company’s
Annual Report on Form 10-KSB most recently filed with the SEC (the “Annual
Report”) and (ii) each
subsequent report filed with the SEC pursuant to the Exchange Act (together with
the Annual Report, the “SEC
Reports”), as of their
respective dates, did not include any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not
misleading.  Such documents, when they were filed with the SEC,
conformed in all material respects to the requirements of the Exchange Act and
the rules and regulations of the SEC thereunder.  Since the date of
the filing of the Annual Report with the SEC, the Company has made all filings
with the SEC required to be made by the Company under the Exchange
Act.

     

    Section
3.8 Financial
Statements.  The consolidated financial statements of the
Company contained in the SEC Reports (the “Financial
Statements”) complied as to form in all material respects with the
published rules and regulations of the SEC with respect thereto, were prepared
in accordance with GAAP applied on a consistent basis during the periods
involved and fairly present, in all material respects, in conformity with GAAP,
the consolidated financial position of the Company and its consolidated
Subsidiaries as of the dates thereof and their consolidated results of
operations and changes in financial position for the periods then ended (except,
in each case, as may be indicated in the notes thereto and subject, in each
case, to normal year-end adjustments in the case of any unaudited interim
financial statements).

     

    Section
3.9 No Material
Adverse Change.  Since March 31, 2009 (the date of the most
recent financial statements of the Company filed with the SEC), except as
otherwise stated therein or in the SEC Reports, there has not been (i) any
change resulting in a Material Adverse Effect, (ii) any transaction which is
material to the Company or its Subsidiaries, except transactions in the ordinary
course of business, (iii) any obligation, direct or contingent, which is
material to the Company and its Subsidiaries taken as a whole, incurred by the
Company or its Subsidiaries, except obligations incurred in the, ordinary course
of business, (iv) any change in the beneficial interests in or outstanding
indebtedness of the Company or its Subsidiaries, except changes in the ordinary
course of business or (v) except for regular quarterly dividends on the
beneficial interests in the Company or its Subsidiaries, in amounts per share
that are consistent with past practice, there has been no dividend or
distribution of any kind declared, paid or made on the beneficial interests in
the Company  or its Subsidiaries.  Neither the Company or
its Subsidiaries has any material contingent obligation which is not disclosed
in this Agreement or the SEC Reports.

     

    Section
3.10 No Consent or
Approval Required.  No consent, approval or authorization of,
or declaration to or filing with, any Person, including pursuant to the Hart
Scott Rodino Antitrust Improvements Act of 1976, as amended, is required by the
Company for the valid authorization, execution and delivery by the Company of
any Document or for its consummation of the transactions contemplated thereby or
for the valid authorization, issuance and delivery of the Convertible Preferred
Shares, Series B, other than those consents, approvals, authorizations,
declarations or filings which have been obtained or made, as the case may be,
and such as may be required under state securities or “blue sky” laws in
connection with the purchase and resale of the Convertible Preferred Shares,
Series B.

     

    Section
3.11 Absence of
Proceedings.  Except as disclosed in the SEC Reports, there is
no Proceeding now
pending, or, to the knowledge of the Company, threatened, against or affecting
the Company or any of its Subsidiaries which, singly or in the aggregate, would
result in a Material Adverse Effect, or which might reasonably be expected to
materially and adversely affect the consummation of the transactions
contemplated herein or the performance by the Company of its obligations
hereunder.

     

    Section
3.12 Possession of
Licenses and Permits.  The Company and its Subsidiaries possess
such permits, licenses, approvals, consents and other authorizations
(collectively, “Governmental
Licenses”) issued by the appropriate federal, state, local or foreign,
regulatory agencies or bodies necessary to conduct the businesses now operated
by them; the Company and its Subsidiaries are in compliance with the terms and
conditions of all such Governmental Licenses, except where the failure so to
comply would not, singly or in the aggregate, result in a Material Adverse
Effect; all of the Governmental Licenses are valid and in full force and effect,
except where the invalidity of Governmental Licenses or the failure of such
Governmental Licenses to be in full force and effect would not, singly or in the
aggregate, result in a Material Adverse Effect; and neither the Company nor any
of its Subsidiaries has received any notice of proceedings relating to the
revocation or modification of any Governmental Licenses which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
result in a Material Adverse Effect.

     

    Section
3.13 Title to
Property.  The Company and its Subsidiaries do not own any real
property nor do they have any leases or subleases with respect to any real
property; the Company and its Subsidiaries have good and marketable title to the
investments described in the SEC Reports, in each case, free and clear of all
Liens of any kind except such as (i) are described in the SEC Reports or (ii) do
not, singly or in the aggregate, materially affect the value of any such
investments; and neither the Company nor any of its Subsidiaries has any notice
of any material claim of any sort that has been asserted by anyone adverse to
the rights of the Company or any of its Subsidiaries under any of such
investments, or affecting or questioning the rights of the Company or any
Subsidiary thereof to the continued possession of the investments.

     

    Section 3.14 Investment
Company Act.  The Company is not, and upon the
issuance and sale of the Convertible Preferred Shares, Series B as herein
contemplated and the application of the net proceeds therefrom will not be, an
“investment company” or an entity “controlled” by an “investment company”, as
such terms are defined in the Investment Company Act of 1940, as
amended.

      

    Section
3.15 Limitation of
Personal Liability.  The holders of the Convertible Preferred
Shares, Series B will be entitled to the same limitation of personal liability
as that extended to stockholders of private corporations for profit organized
under the General Corporation Law of the State of Nevada; provided, however,
that pursuant to the terms of this Agreement, the Purchaser will indemnify the
Company against any liability resulting from any inaccuracy in or breach of any
such investor’s representations and warranties in accordance with the terms
hereof; and provided.

     

    Section
3.16 Similar
Offerings.  None of the Company, its Affiliates, or any Person
acting on its or any of their behalf (in each case other than the Purchaser, as
to which the Company makes no representation), has, directly or indirectly,
solicited any offer to buy, sold or offered to sell or otherwise negotiated in
respect of, or will solicit any offer to buy, sell or offer to sell or otherwise
negotiate in respect of, in the United States or to any United States citizen or
resident, any security which is or would be integrated with the sale of the
Convertible Preferred Shares, Series B in a manner that would require the
Convertible Preferred Shares, Series B to be registered under the Securities
Act.

     

    Section
3.17 No General
Solicitation.  None of the Company, its Affiliates or any
person acting on its or any of their behalf (in each case other than the
Purchaser, as to whom the Company makes no representation) has engaged or will
engage, in connection with the offering of the Convertible Preferred Shares,
Series B, in any form of general solicitation or general advertising within the
meaning of Rule 502(c) under the Securities Act.

     

    Section
3.18 Maintenance of
Controls and Procedures.  The Company has established and
maintains “disclosure controls and procedures” (as such term is defined in Rules
13a-15 and 15d-15 under the Exchange Act) that (A) are designed to ensure that
material information relating to the Company , including its Subsidiaries, is
made known to the Company ’s Chief Executive Officer and its Chief Financial
Officer by others within those entities, particularly during the periods in
which the filings made by the Company with the SEC which it may make under
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act are being prepared and (B)
have been evaluated for effectiveness as of the end of the Company ’s most
recent quarterly report on Form 10-Q filed with the SEC.  The
Company’s accountants and the audit committee of the Board have been advised of
(x) any significant deficiencies in the design or operation of internal controls
that could adversely affect the Company’s ability to record, process, summarize,
and report financial data and (y) any fraud, whether or not material, that
involves management or other employees who have a role in the Company’s internal
controls.

      

    Section
3.19 Brokers or
Finders.  The Company has not retained any investment banker,
broker or finder in connection with this Agreement or the transactions
contemplated hereby (including the sale of the Convertible Preferred Shares,
Series B) or incurred any liability for any brokerage or finders’ fees, agent
commissions or any similar charges in connection with this Agreement or the
transactions contemplated hereby.

     

    ARTICLE
IV

    Representations
and Warranties of the Purchaser

     

    As a
material inducement to the Company to enter into and perform its obligations
under this Agreement, the Purchaser represents, warrants and covenants to the
Company as follows:

     

    Section 4.1 Experience. The Purchaser is an “accredited
investor” within the meaning of Regulation D promulgated under the Securities
Act and, by virtue of its experience in evaluating and investing in private
placement transactions of securities in companies similar to the Company, the
Purchaser is capable of evaluating the merits and risks of its investment in the
Company and has the capacity to protect its own interests.  The
Purchaser has had access to the Company’s senior management and has had the
opportunity to conduct such due diligence review as it has deemed
appropriate.

     

    Section 4.2 Investment.  The Purchaser has not been formed
solely for the purpose of making this investment and is not making this
investment with the view to, or for resale in connection with, any distribution
of any part thereof in violation of, or in a manner that would require
registration of the Convertible Preferred Shares, Series B being purchased
hereby under, the Securities Act.  The Purchaser understands that the
Convertible Preferred Shares, Series B have not been registered under the
Securities Act or applicable state securities or “blue sky” Laws by reason of a
specific exemption from the registration provisions of the Securities Act and
applicable state securities or “blue sky” Laws, the availability of which
depends upon, among other things, the bona fide nature of the investment intent
and the accuracy of the Purchaser’s representations as expressed herein and the
Purchaser will not take any actions that would have caused the Convertible
Preferred Shares, Series B being purchased hereby to be registered under the
Securities Act.  Notwithstanding the foregoing, the use of the
proceeds thereof shall not be deemed to be a violation of this representation,
warranty and covenant.

     

    Section 4.3 Transfer
Restrictions.  The Purchaser acknowledges and
understands that it must bear the economic risk of this investment for an
indefinite period of time because the Convertible Preferred Shares, Series B
must be held indefinitely unless subsequently registered under the Securities
Act and applicable state securities or “blue sky” Laws or unless an exemption
from such registration is available.  The Purchaser understands that
any transfer agent of the Company will be issued stop transfer instructions with
respect to the Convertible Preferred Shares, Series B unless any transfer
thereof is subsequently registered under the Securities Act and applicable state
securities or “blue sky” Laws or unless an exemption from such registration is
available.

     

    Section 4.4 Brokers or
Finders.  The Purchaser has not retained any
investment banker, broker or finder in connection with this Agreement or the
transactions contemplated hereby (including the sale of the Convertible
Preferred Shares, Series B) or incurred any liability for any brokerage or
finders’ fees, agent commissions or any similar charges in connection with this
Agreement or the transactions contemplated hereby.

     

    Section 4.5 Organization;
Good Standing; Qualification and Power.  The Purchaser is duly organized,
validly existing and in good standing under the Laws of its jurisdiction of
formation, has all requisite power to carry on its business as presently being
conducted and is qualified to do business and in good standing in every
jurisdiction in which the failure so to qualify or be in good standing could
reasonably be expected to have a material adverse effect on the business,
Assets, liabilities, operations, condition (financial or otherwise) or operating
results of the Purchaser and its subsidiaries, taken as a whole (a “Purchaser
Material Adverse Effect”).

     

    Section 4.6 Authorization;
Enforceability; Corporate and Other Proceedings.  The Purchaser has all requisite power
and authority to execute and deliver each Document to which it is a party and to
perform its obligations under each such Document.  Each Document to
which the Purchaser is a party has been duly authorized by all necessary action
on the part of the Purchaser, and each Document to which the Purchaser is a
party has been duly executed and delivered by the Purchaser, and assuming the
due authorization, execution and delivery by the other parties thereto
constitutes the valid and legally binding obligation of the Purchaser,
enforceable in accordance with its terms and conditions, except that the
enforcement thereof may be subject to (i) bankruptcy, insolvency,
reorganization, receivership, moratorium, fraudulent conveyance or other similar
laws now or hereafter in effect relating to creditors’ rights generally and (ii)
general principles of equity (whether applied by a court of law or equity) and
the discretion of the court before which any proceeding therefor may be
brought.

     

    Section 4.7 Non
Contravention.  The execution, delivery and performance
by the Purchaser of the Documents, the consummation of the transactions
contemplated thereby and compliance with the provisions thereof, including the
purchase of the Convertible Preferred Shares, Series B have not, do not and
shall not, (a) violate any Law to which the Purchaser or any of its subsidiaries
is subject, (b) violate any provision of the Fundamental Documents of the
Purchaser or any of its subsidiaries, (c) conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create in any party
the right to accelerate, require the repurchase of, terminate, modify or cancel,
or require any notice under any material contract to which the Purchaser or any
of its subsidiaries is a party or (d) result in the imposition of any Lien upon
any of the Assets of the Purchaser or any of its subsidiaries, except in the
case of (a), (c) and (d), as would not have a Purchaser Material Adverse
Effect.

     

    Section 4.8 No Consent
or Approval Required.  No consent, approval or authorization
of, or declaration to or filing with, any Person is required by the Purchaser
for the valid authorization, execution and delivery by the Purchaser of any
Document or for its consummation of the transactions contemplated thereby or for
the purchase of the Convertible Preferred Shares, Series B, other than those
consents, approvals, authorizations, declarations or filings which have been
obtained or made, as the case may be, and such as may be required under state
securities or “blue sky” laws in connection with the purchase and resale of the
Convertible Preferred Shares, Series B.

     

    Section 4.9 Similar
Offerings.  None
of the Purchaser, its Affiliates or any Person acting on its or any of their
behalf (in each case other than the Company( as to which the Purchaser makes no
representation), has, directly or indirectly, solicited any offer to buy, sold
or offered to sell or otherwise negotiated in respect of, or will solicit any
offer to buy, sell or offer to sell or otherwise negotiate in respect of, in the
United States or to any United States citizen or resident, any security which is
or would be integrated with the sale of the Convertible Preferred Shares, Series
B in a manner that would require the Convertible Preferred Shares, Series B to
be registered under the Securities Act.

     

    Section 4.10 No General
Solicitation.  None of the Purchaser, its Affiliates
or any person acting on its or any of their behalf (in each case other than the
Company, as to whom the Purchaser makes no representation) has engaged or will
engage, in connection with the offering of the Convertible Preferred Shares,
Series B, in any form of general solicitation or general advertising within the
meaning of Rule 502(c) under the Securities Act.

      

    ARTICLE
V

    Covenants

     

    Section
5.1 Governance  Rights.

     

    (1) For a
period of three years, the Company shall, acting through the Board, consistent
with and subject to its duties under Nevada law, take all actions necessary
allow the Purchaser to elect three (3) of the five (5) Board
members.  If there is an amendment to the Articles of Incorporation or
Bylaws of Company to increase the number of board seats greater than 5, the
Company will increase the number of Board members to be elected by Purchaser
sufficient that the number of directors appointed by Purchaser shall be a
majority of Board seats.  Of the three members designated by Purchaser
for election to the Board of Directors, at least one shall qualify as
“independent” in accordance with the applicable listing standards of the NYSE or
any other national or regional securities exchange or system of automated
dissemination of securities prices in the United States on which the common
shares are then traded or quoted, each as amended from time to
time  at least one of the three directors and will also qualify as a
“financial expert” under Section 407 of Sarbanes-Oxley and SEC Rules (17 CFR §
229.401).   Notwithstanding the foregoing, if after three (3)
years after the Effective Date of this Agreement, Purchaser does not hold
Convertible Preferred Shares, Series B (or, if converted into common shares
common shares from such conversion) as shown below, Purchaser shall obtain the
required number of resignations from members of the Board of Directors that
Purchaser has elected in accordance with the following:

     

    
      	
              # of Convertible/Common Shares
      Held

            	
              Number of Directors To Be Appointed by
      Purchaser

            
	
              0 -
      1,500 Convertible Preferred Shares, Series B or 10,000,000 Common
      Shares

            	
              0

            
	
              1,501
      - 3,500 Convertible Preferred Shares, Series B or 15,000,001 - 20,000,000
      Common Shares

            	
              1

            
	
              3,501
      – 6,250 Convertible Preferred Shares, Series B or 20,000,001 – 25,000,000
      Common Shares

            	
              2

            
	
              6,251+
      Convertible Preferred Shares, Series B or 25,000,001+ Common
      Shares

            	
              3

            

    

    

    (2) The
Purchaser shall provide written notice (the “Designation Notice”)
to the Board identifying each Designee.  Upon receiving a Designation
Notice, the Board shall take such actions as may reasonably be within their
power, consistent with and subject to their duties under Nevada law, to cause
the Board to nominate for appointment to the Board, the Designee(s), to include
the Designee(s) in the Company’s next election for directors to its Board and to
recommend that the shareholders of the Company vote for the Designee(s) for
election to the Board.

     

    (3) To
the extent that a Designee is unable to stand for election for any reason, the
Purchaser shall promptly provide to the Board a written notice of the name of
the person to be designated by them in substitution of such prior
Designee.

     

    (4) In
the event that a Designee ceases to serve as a Board member of the Company due
to death, resignation or removal of said director, the Purchaser may submit
written notice to the Board designating an individual to replace said
Designee.  The Board shall, consistent with and subject to their
duties under Nevada law, promptly recommend that the Board appoint such
replacement designee as a Board member of the Company to fill any vacancy
resulting from the death, resignation or removal of the Designee and to include
the Designee in the Company’s next election to its Board and recommend that the
shareholders of the Company vote for the Designee for election to the
Board.  If any such Designee is elected at an Annual Meeting of
Shareholders of the Company, the Designee will be nominated to the Board as a
member of the class of directors whose office have expired in that
year.

    

    (5) So long as Purchaser retains at least
1,501 of the Convertible Preferred Shares, Series B, the Company shall, acting
through the Board, consistent with and subject to their duties under Nevada law,
take all actions necessary to cause the nomination and election by the Board of
a Chief Executive Officer designated by Purchaser.

     

    Section
5.2 Dividends.  Dividends
will be cumulative and will accrue daily from the date of each Closing of this
offering at the annual rate of 5% of the stated value of the Convertible
Preferred Shares, Series B, payable semi-annually on each June 1 and December 1,
commencing June 1, 2009.  The initial stated value of the preferred
stock is $1,000 per share.  Any dividends must be declared by the
Company’s Board of Directors and must come from funds that are legally available
for dividend payments.  In the event that funds are not legally
available to pay any dividend on the convertible preferred stock, or if the
Company chooses to not pay the dividend in cash, the amount of the stated value
of the stock shall be increased by the amount of such unpaid
dividend.  Dividends on the Convertible Preferred Shares, Series B
will accrue regardless of whether or not earned or declared and regardless of
whether or not the Company has profits, surplus or other funds legally available
for the payment of dividends.  Except as stated in this Agreement,
Company shall not issue or declare any dividends with respect to any class of
its respective capital stock or purchase, acquire, or redeem any such stock,
without the prior written consent of Purchaser.

    

    Section
5.3                      Conversion.  The
Convertible Preferred Shares, Series B can be converted at the Purchaser’s
option at any time into shares of the Company’s common stock at the Conversion
Price.  The number of common shares will be determined by dividing the
stated value of the Convertible Preferred Shares, Series B to be converted by
the Conversion Price. On or after May 15, 2010, the Company may require the
Purchaser to convert up to 100% of its shares of convertible preferred stock if
the volume weighted average price of the Company’s common stock price exceeds
$3.00 per share for a continuous 30-day period.

     

    Section
5.4                      Liquidation
Preference.  In the event of a voluntary or involuntary
dissolution, liquidation or winding up of the Company, the Purchaser will be
entitled to be paid a liquidation preference equal to the stated value of the
Convertible Preferred Shares, Series B, plus accrued and unpaid dividends and
any other payments that may be due on such shares, before any distribution of
assets may be made to holders of capital stock ranking junior to the Convertible
Preferred Shares, Series B.

     

    Section
5.5                      Optional
Redemption.  On or after May 15, 2014 the Company may redeem
the Convertible Preferred Shares, Series B, in whole or in part, at its option
for the stated value at the time of such redemption, together with accrued but
unpaid dividends and other payments that may be due on such
shares.  On or after May 15, 2016 the Purchaser may redeem the
Convertible Preferred Shares, Series B, in whole or in part, at its option for
the stated value at the time of such redemption, together with accrued but
unpaid dividends and other payments that may be due on such shares.

     

    Section
5.6                      Voting
Rights.  The Convertible Preferred Shares, Series B will vote
on an as-converted basis with the common stock.  However, the Company
cannot alter or adversely change the rights of the convertible preferred stock,
authorize or create any class of senior or parity preferred stock, amend its
articles of incorporation or other charter documents in such a way that it would
adversely affect the rights of the convertible preferred stock, or increase the
number of authorized shares of the convertible preferred stock without the
approval of holders of a majority of the convertible preferred
stock.

     

    Section
5.7 Distributions Upon
Redemption.  Upon redemption of the Purchaser’s Convertible
Preferred Shares, Series B, the Company hereby confirms that the Purchaser shall
be entitled to accrued and unpaid distributions at an annual rate of 5%
(computed on the basis of a 360-day year consisting of twelve 30-day months as
provided in the Certificate of Designation) from the issue date thereof to, but
excluding, the redemption date, whether or not declared by the Board, as set
forth in the Certificate of Designation.

    

    Section
5.8  Registration
Rights.

    

    (1) If
Purchaser has converted its Convertible Preferred Shares, Series B to common
stock of the Company and such shares have not been otherwise registered within
the first six (6) months of this Agreement and at any time the Company proposes
to file a registration statement with the SEC, whether or not for sale for the
Company’s own account, on a form and in a manner that would also permit
registration of shares (other than in connection with a registration statement
on Forms S-4 or S-8 or any similar or successor form), Company shall give to
Purchaser, written notice of such proposed filing promptly, but in any case at
least twenty (20) days before the anticipated filing. The notice referred to in
the preceding sentence shall offer the holder(s) holding the Conversion Shares
the opportunity to register such amount of the Conversion Shares as he may
request (a “Piggyback Registration”). Subject to this Section, Company will
include in each such Piggyback Registration (and any related qualification under
state blue sky laws and other compliance filings, and in any underwriting
involved therein) that portion of the Conversion Shares with respect to which
Company has received written requests for inclusion therein within twenty
(20) days after the written notice from Company is given. The holders
holding any portion of the Conversion Shares will be permitted to withdraw all
or part of the Conversion Shares from a Piggyback Registration at any time prior
to the effective date of such Piggyback Registration.

    

    (2) The
Company will file for a registration of its common stock with the SEC on or
before January 15, 2010.  To the extent Purchaser converts its
Convertible Preferred Shares, Series B into common stock of the Company and/or
exercise warrants to purchase common stock of the Company, such common shares
will be included in the shares for which the Company will seek
registration.  Company shall bear all costs, fees and expenses
associated with the registration filing.

    

    Section
5.9  Exclusivity
Period.  During the time that Purchaser retains ownership of at
least 1,501 Convertible Preferred Shares, Series B (the “Exclusivity Period”),
the Company may not accept a financing proposal offered by any other party,
unless approved by Purchaser after Purchaser is offered to fund on the same
terms, and Company and Purchaser agree to work diligently, in good faith, to
negotiate, complete and enter into definitive agreements and related closing
documents, reflecting the terms and conditions hereof.

    

    Section
5.10  Capital Expenditures and
Transfers.  For 240 days after the Effective Date of this
Agreement, Company shall not make any capital acquisitions or expenditures over
ten thousand ($10,000.00) dollars without the prior written consent of
Purchaser.  This period may be extended for an additional 240 days by
a vote of  he entire Board , including the Board members designated by
Purchaser.  Company shall not make any payments or transfers of
property to any shareholder, officer, director, or key employee other than (A)
salaries, bonuses, and compensation for actual services rendered, as approved by
Purchaser; and (B) reasonable and customary directors’ fees for directors,
without the prior written consent of Purchaser.

    

    Section
5.11 Non-Disclosure.  Purchaser
agrees to treat all material, non-public information received from Company as
confidential information and not disclose such information to any third
party.  Purchaser agrees that it will not trade in Company’s stock
based on any material, non-public information.

    

    ARTICLE
VI

    Indemnification

     

    Section 6.1 Indemnification
Generally. The Company shall indemnify the
Purchaser and its Affiliates, and their respective directors, officers,
shareholders and other equity holders, partners, members, attorneys,
accountants, agents, advisors, representatives and employees and, as applicable,
their respective heirs, successors and permitted assigns (each of the foregoing,
in such capacity (as applicable), a “Purchaser
Indemnified Party”) from
and against any and all losses, damages, liabilities, fines, costs, claims,
charges, actions, proceedings, demands, judgments, settlement costs and expenses
of any nature whatsoever (including, without limitation, reasonable attorneys’
fees and out-of-pocket expenses), whether joint or several (any of the
foregoing, a “Loss”) resulting from any breach of a
representation, warranty or covenant by the Company. The Purchaser shall
indemnify the Company and its Affiliates, and their respective directors,
trustees, officers, shareholders and other equity holders, partners, members,
attorneys, accountants, agents, advisors, representatives and employees and, as
applicable, their respective heirs, successors and permitted assigns (each of
the foregoing, in such capacity (as applicable), a “Company
Indemnified Party”; each
Company Indemnified Party and Purchaser Indemnified Party, (an “Indemnified
Party”) from and against
any and all Losses resulting from any breach of a representation, warranty or
covenant by the Purchaser.

      

    Section 6.2 Indemnification
Procedures For Third-Party Claims.  If a claim by a third party (including claims for breaches of fiduciary
duties) is made against an Indemnified Party and such Indemnified Party intends to seek indemnity with respect thereto from the
Company (in the case of a Purchaser Indemnified Party seeking such indemnity) or
the Purchaser (in the case of a Company Indemnified Party seeking indemnity)
(each of the Company or the Purchaser, as the case may be, in such capacity, an
“Indemnifying
Party”), such Indemnified Party shall give
notice in writing as promptly as reasonably practicable to such Indemnifying
Party of any Proceeding commenced against or by it in respect of which indemnity
may be sought hereunder, but failure to so notify such Indemnifying Party shall
not relieve such Indemnifying Party from any liability that it may have on
account of this Article VI, so long as such failure shall not have materially
prejudiced the position of such Indemnifying Party.  Upon such
notification, the Indemnifying Party shall assume the defense of such Proceeding
brought by a third party, and, after such assumption, the Indemnified Party shall not be
entitled to reimbursement of any expenses thereafter incurred by it in connection with such
Proceeding, except as described
below.  In any such Proceeding, any Indemnified Party shall have the
right to retain its own counsel (including local counsel), but the fees and
expenses of such counsel shall be at the expense of such Indemnified Party
unless (i) the Indemnifying Party shall have failed to promptly assume and
thereafter conduct such defense, (ii) the Indemnifying Party and the Indemnified
Party shall have mutually agreed to the contrary, (iii) in the reasonable
determination of counsel for the Indemnified Party, representation of such
Indemnified Party by counsel obtained by the Indemnifying Party would be
inappropriate due to actual or potential conflicting interests between such
Indemnified Party and any other party represented by such counsel in such
proceeding. No Indemnifying Party, in the defense of a third-party claim, shall, except with the consent of the
Indemnified Party, consent to entry of any judgment or enter into any settlement
that does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all liability
in respect of such claim.  The Indemnifying Party shall not be liable
for any settlement of any Proceeding effected without its written consent (which
shall not be unreasonably withheld, delayed or conditioned by such Indemnifying
Party), but if settled with such consent or if there be final judgment for the
plaintiff, the Indemnifying Party shall indemnify the Indemnified Party from and
against any Loss by reason of such settlement or judgment. The Indemnifying
Party will advance expenses to an Indemnified Party as reasonably incurred so
long as such indemnified party shall have provided the indemnifying party with a
written undertaking to reimburse the indemnifying party for all amounts so
advanced if it is ultimately determined that the indemnified party is not
entitled to indemnification hereunder (which shall include breaches of fiduciary
duty if permitted above).

     

    Section
6.3 Survival of
Representations, Warranties and Covenants.  All representations
and warranties and covenants contained in this Agreement or made in writing by
or on behalf of the Company or the Purchaser in connection with the transactions
contemplated by this Agreement shall survive, for the duration of any statutes
of limitation applicable thereto, the execution and delivery of this Agreement,
any investigation at any time made by the Company, the Purchaser or on such
party’s behalf, the purchase of the Convertible Preferred Shares, Series B by
the Purchaser under this Agreement and any disposition of or payment on the
Convertible Preferred Shares, Series B.  All statements contained in
any certificate or other instrument delivered to the Purchaser or the Company by
or on behalf of the Company or the Purchaser pursuant to this Agreement shall be
deemed representations and warranties of the Company or the Purchaser,
respectively, under this Agreement.

     

    ARTICLE
VII

    Miscellaneous

     

    Section
7.1 Expenses and
Taxes.

     

    (1) Each
party to this Agreement shall bear its own respective costs and expenses
incurred in connection with the preparation, execution and delivery of this
Agreement and the agreements and transactions contemplated hereby, except that
the Company shall reimburse the Purchaser for its reasonable legal fees and
disbursements incurred in connection with the negotiation and documentation of
the purchase of the Convertible Preferred Shares, Series B.

     

    (2) All
transfer, stamp (including documentary stamp taxes, if any), and other similar
taxes (including, in each case, any penalties, interest or additions
thereto) with
respect to the initial purchase and sale of the Convertible Preferred Shares,
Series B, shall be borne by the Company.

     

    Section 7.2 Further
Assurances. Purchaser and the Company shall duly execute and deliver, or
cause to be duly executed and delivered, at its own cost and expense, such
further instruments and documents and to take all such action, in each case as
may be necessary or proper
in the reasonable judgment of each Company or the Purchaser, respectively, upon the
reasonable advice of counsel, to carry out the provisions and purposes of this
Agreement and the other Documents.

     

    Section 7.3 Securities
Law Disclosure; Public Announcement. The Company shall issue a current
report on Form 8-K within the time periods required thereby disclosing the
material terms of the transactions contemplated hereby and attaching this
Agreement as an exhibit thereto.  Except as set forth below, no public
release or announcement concerning the transactions contemplated hereby shall be
issued by the Company or any of its Subsidiaries without the prior consent of
the Purchasers (which consents shall not be unreasonably withheld), except as
such release or announcement may be required by law or the applicable rules or
regulations of any securities exchange or securities market, in which case the
Company shall allow the Purchaser to the extent reasonably practicable under the
circumstances, reasonable time to comment on such release or announcement in
advance of such issuance.

     

    Section 7.4 No
Third-Party Beneficiaries. Except as expressly provided herein,
this Agreement shall not confer any rights or remedies upon any Person other
than the parties hereto and their respective successors and permitted
assigns.

     

    Section
7.5 Entire
Agreement. This Agreement and the
other Documents constitute the entire agreement among the parties hereto and
supersede any prior understandings, agreements or representations by or among
such parties, written or oral, that may have related in any way to the subject
matter of any Document.

     

    Section 7.6 Successors
and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns.  The Company may not assign either this
Agreement or any of its rights, interests, or obligations hereunder without the
prior written approval of the Purchaser.  The rights and obligations
of the Purchaser hereunder shall be binding upon and inure to the benefit of any
and all Persons to whom the Purchaser transfers any Convertible Preferred
Shares, Series B  in each case with the same force and effect as if
the foregoing Persons were named herein as Purchaser parties hereto; provided,
that any such transferee of the Convertible Preferred Shares, Series B has
executed and delivered to the Company an Instrument of Accession in the form of
Exhibit
E. References herein to
Convertible Preferred Shares, Series B sold by the Company and purchased by the
Purchaser shall be deemed to include Convertible Preferred Shares, Series B held
or owned by any transferees of the Purchaser, and references to the Purchaser
herein (including, without limitation, such references contained in Article VI)
shall be deemed to include such transferees.  Notwithstanding the
foregoing, the Purchaser may not transfer or assign any of its rights or
obligations hereunder or the Convertible Preferred Shares, Series B in violation
of the provisions of the Certificate of Designation (including the restrictive
legends contained therein) or in violation of the Securities Act or any other
manner that would have resulted in a requirement to register the Convertible
Preferred Shares, Series B purchased on the date hereof.  Purchaser
may assign, transfer or delegate its obligations and rights under this Agreement
to any affiliate.

     

    Section 7.7 Counterparts. This Agreement may be executed in one
or more counterparts (including via facsimile or similar
instantaneous electronic transmission devices pursuant to which the signature of
or on behalf of such party can be seen), each of which shall be deemed an
original but all of which together shall constitute one and the same
instrument.

     

    Section 7.8 Notices. All notices, requests, demands, claims
and other communications hereunder shall be in writing and shall be deemed to
have been duly given if delivered personally, telecopied, sent by
internationally-recognized overnight courier or mailed by registered or
certified mail (return receipt requested), postage prepaid, to the parties at
the following addresses (or at such other address for a party as shall be
specified by like notice):

     

    If to the
Company, to:

     

    Ecology
Coatings, Inc.

    2701
Cambridge Court

    Suite
100

    Auburn
Hills, MI 48326

    

    Telephone:  (248)
736-6200

    Telecopy:  (866)750-2489

    Attention:  General
Counsel

     

    If to the
Purchaser, to:

     

    Equity
11, Ltd.

    2701
Cambridge Court

    #420

    Auburn
Hills, MI  48326

    Telephone:  (248)
377-8012

    Telecopy:  (248)
377-6302

    Attention:  JB
Smith

     

    All such
notices and other communications shall be deemed to have been given and received
(i) in the case of personal delivery, on the date of such delivery, (ii) in the
case of delivery by telecopy, on the date of such delivery, (iii) in the case of
delivery by internationally-recognized overnight courier, on the third Business
Day following dispatch and (iv) in the case of mailing, on the seventh Business
Day following such mailing.

     

    Section 7.9 Governing
Law. This agreement shall be governed by and
construed in accordance with the internal laws of the state of Michigan, without
regard to the principles of conflicts of laws thereof.

     

    Section 7.10 Submission
to Jurisdiction. Except as
otherwise set forth in this Section 7.10, no
claim under this Agreement by a party against the other party may be commenced, prosecuted or
continued in any court other than the courts of the State of Michigan located in
Pontiac, Michigan in Oakland County or in the United States District Court for
the Southern District of Michigan located in the City of Detroit,
Michigan, which courts shall have
exclusive jurisdiction over the adjudication of
such matters, and the parties hereto consent to personal jurisdiction, service
and venue in any court in which any claim arising out of or in any way relating
to this Agreement is brought by any third party against the Company or any
Indemnified Party.  The parties hereto agree that a final judgment in
any such action, proceeding or counterclaim brought in any such court shall be
conclusive and binding upon the parties and may be enforced in any other courts
in the jurisdiction of which the parties is or may be subject, by suit upon such
judgment.

     

    Section 7.11 Specific
Performance.  The parties hereto acknowledge that there would be no
adequate remedy at law if any party fails to perform any of its obligations hereunder, and accordingly
agree that each party, in addition to any other remedy to which it may be
entitled at law or in equity, shall be entitled to compel specific performance
of the obligations of any other party under this Agreement in accordance with
the terms and conditions of this Agreement and immediate injunctive relief,
without the necessity of proving the inadequacy of money damages as a remedy, in
any court of the United States or any State thereof having
jurisdiction.

     

    Section
7.12 Amendments and
Waivers.  No amendment of any provision of this Agreement shall
be valid unless the same shall be in writing and signed by both parties hereto.  No
waiver by any party of any default, misrepresentation, or breach of representation, warranty or covenant
hereunder, whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of representation, warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.  No such waiver
shall be effective unless signed by the party against which the waiver is to be
effective.

     

    Section
7.13 Incorporation of
Schedules and Exhibits.  The Annex, Schedules and Exhibits
identified in this Agreement are incorporated herein by reference and made a
part hereof.

     

    Section
7.14 Construction.  Where
specific language is used to clarify by example a general statement contained
herein, such specific language shall not be deemed to modify, limit or restrict
in any manner the construction of the general statement to which it
relates.  The use in this Agreement of the term “including” means
“including, without
limitation.”  The language used in this Agreement shall be
deemed to be the language chosen by the parties to express their mutual intent,
and no rule of strict construction shall be applied against any
party.

     

    Section
7.15 Interpretation.  Unless
otherwise indicated, references to “$” are references to
the U.S. dollar.  Accounting terms used but not otherwise defined
herein shall have the meanings given to them under GAAP.  As used in
this Agreement (including all Annexes, Schedules, Exhibits and
amendments hereto), the masculine, feminine and neuter gender and the singular
or plural number shall be deemed to include the others whenever the context so
requires.  References to Articles and Sections refer to articles and
sections of this Agreement.  Similarly, references to Annexes, Schedules and Exhibits
refer to schedules and exhibits, respectively, attached to this
Agreement.  Unless the content requires otherwise, words such as
“hereby,”
“herein,”
“hereinafter,”
“hereof,”
“hereto,”
“hereunder” and
words of like import refer to this Agreement.  The article and section
headings contained in this Agreement are inserted for convenience only and shall
not affect in any way the meaning or interpretation of this
Agreement.

     

    Section 7.16 Severability.  It is the desire and intent of the parties
that the provisions of this Agreement be enforced to the fullest extent
permissible under the Laws
and public policies
applied in each jurisdiction in which enforcement is
sought.  Accordingly, if any particular provision of this Agreement
shall be adjudicated by a court of competent jurisdiction to be invalid,
prohibited or unenforceable for any reason, such provision, as to such
jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of this
Agreement or affecting the validity or enforceability of such provision in any
other jurisdiction.  Notwithstanding the foregoing, if such
provision could be more narrowly written so as not to be invalid, prohibited or
unenforceable in such jurisdiction, it shall, as to such jurisdiction, be deemed
to be so narrowly written, to the minimum extent necessary to prevent the
rendering of such provision from being invalid or unenforceable, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction.

    

    Section
7.17 Waiver of Jury
Trial.

    

    EACH
OF THE PARTIES HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT
OR ANY OTHER DOCUMENT.

     

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

     

    

    

    

    
      	 
      	
              ECOLOGY
      COATINGS, INC.

            	 
      
	 
      	 
      	 
      
	
              By:

            	
              /s/ Robert G.
      Crockett                                                      

            	 
      
	 
      	
              Robert
      G. Crockett

            	 
      
	
              Its:

            	
              CEO

            	 
      

    

     

     

    
      	 
      	
              EQUITY
      11, LTD.

            	 
      
	 
      	 
      	 
      
	
              By:

            	
              /s/ JB
      Smith                                           

            	 
      
	 
      	
              JB
      Smith

            	 
      
	 
      	 
      	 
      
	
              Its:

            	
              Managing
      Partner

            	 
      

    

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    Annex I

     

    CERTAIN
DEFINITIONS

     

    “Assets” means, with
respect to any Person, all of the assets, rights, interests and other
properties, real, personal and mixed, tangible and intangible, owned by such
Person.

     

    “Business Day” means
any day that is not a Saturday, Sunday, legal holiday or other day on which
banks are required to be closed in New York, New York.

    

    “Conversion Price” for
each acquisition of 5% Convertible Preferred Shares, Series B, shall mean twenty
percent (20%) of the average of the closing price of the Company’s common stock
on the Over-The-Counter Bulletin Board exchange for the five prior trading days
prior to Purchaser’s investment.  The computation shall be rounded up
to the nearest cent (e.g. $.432 = $.44).

     

     “Documents” means this
Agreement and the Certificate of Designation, collectively.

     

    “Exchange Act” means
the Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.

     

    “Fundamental
Documents” means, with respect to a corporation, the charter and bylaws
(each as amended) or, with respect to any other Person, the documents by which
such Person (other than an individual) establishes its legal existence or which
govern its internal affairs.

     

    “GAAP” means, at any
time, generally accepted accounting principles in the jurisdiction in which the
Person to which such principles are applied is organized at such
time.

     

    “Governmental Entity”
means any court, administrative agency or commission or other governmental
authority or instrumentality, domestic or foreign, federal, state or
local.

     

    “Law” means any
constitution, law, statute, treaty, rule, directive, requirement or regulation
or Order, domestic or foreign, of any Governmental Entity or any rules or
regulations of any self-regulatory organization.

     

    “Lien” means any
security interest, pledge, bailment (in the nature of a pledge or for purposes
of security), mortgage, deed of trust, the grant of a power to confess judgment,
conditional sale, trust receipt or other title retention agreement (including
any lease in the nature thereof), lien, charge, encumbrance, claim, equity, easement,
reservation, restriction, cloud, right of first refusal or first offer, option,
equity or adverse claim or other similar arrangement or interest in real or
personal property.

     

     “Order” means any
order, writ, judgment, injunction, decree, determination or award issued by a
Governmental Entity.

    

     “Person” means any
individual, corporation, partnership, limited liability company, trust, estate,
or unincorporated organization, or other entity or Governmental Entity or other
juridical entity.

     

     “Proceeding” means any
action, suit, claim, inquiry, investigation or proceeding by or before any
Governmental Entity.

     

    “Securities Act” means
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder.

     

    “SPA”
means the Securities Purchase Agreement between Company and Purchaser dated
August 28, 2008.

    

    “Subsidiary” means any
entity in which the Company  directly or indirectly, through one or
more intermediaries, (a) holds beneficially or of record securities that
would entitle the Company  to exercise 50% or more of the votes that
could be cast in the election of members to the board of directors, board of
managers or other governing body of such entity, or (b) possesses, directly
or indirectly, power (whether through the ownership of voting securities or,
through membership on the board of directors, managers or other governing body,
by contract (including, without limitation, a limited partnership agreement or
general partnership agreement) or otherwise) to direct or cause the direction of
the management and policies of such entity.

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

    EXHIBIT
A

     

    CERTIFICATE
OF DESIGNATION

    of

    5%
CUMULATIVE CONVERTIBLE PREFERRED SHARES, SERIES B

    of

    ECOLOGY
COATINGS, INC.

      

    ECOLOGY
COATINGS, INC. is a Nevada corporation created and existing under the laws of
the state of Nevada (the “Company”),
and

     

    DOES
HEREBY CERTIFY:

     

    Section 1. Designation;
Number.

    This
series of Convertible Preferred Stock is designated as the “Convertible
Preferred Shares, Series B” (“Convertible Preferred
Shares, Series B”). The par value $0.001 per share.

    

    Section 2. Conversion.

    
      	
              (a)  

            	
              Each
      share of the Convertible Preferred Shares, Series B can be converted at
      the Purchaser’s option at any time into shares of the Company’s common
      stock at the Conversion Price.  The number of common shares will
      be determined by dividing the stated value of the Convertible Preferred
      Shares, Series B to be converted by the Conversion
  Price.

            

    

    
      	
              (b)  

            	
              If
      requested by the Company, each holder of record of a share of Convertible
      Preferred Stock must convert any whole number or all of such holder’s
      shares of Convertible Preferred Stock into fully paid and nonassessable
      shares of Common Stock at the Conversion Price if, on or after May 15,
      2010, the Company’s common stock price exceeds $3.00 per share for a
      continuous 30-day period

            

    

    
      	
              (c)  

            	
               Any
      such conversion may be effected by the holder of Convertible Preferred
      Shares, Series B by surrendering such holder’s certificate or certificates
      for the shares of Convertible Preferred Shares, Series B to be converted,
      duly endorsed, at the office of the Corporation or the office of any
      transfer agent for the Common Stock, together with a written notice to the
      Corporation at such office that such holder elects to convert all or a
      specified number of such shares of Convertible Preferred Stock. Promptly
      thereafter, the Corporation shall issue and deliver to such holder a
      certificate or certificates for the number of shares of Common Stock to
      which such holder shall be entitled as aforesaid. Such conversion shall be
      made at the close of business on the date of such surrender and the person
      entitled to receive the shares of Common Stock issuable on such conversion
      shall be treated for all purposes as the record holder of such shares of
      Common Stock on such date.

            

    

    

    Section 3. Voting
Rights.

    Each
holder thereof shall be entitled to vote, together with the holders of the
shares of Common Stock (and any other class or series that may similarly be
entitled to vote with the shares of Common Stock) as a single class, upon all
matters upon which holders of Common Stock are entitled to vote, with each share
of Convertible Preferred Shares, Series B entitled to one vote on such
matters.  The Company cannot alter or adversely change the rights of
the Convertible Preferred Shares, Series B, authorize or create any class of
senior or parity preferred stock, amend its articles of incorporation or other
charter documents in such a way that it would adversely affect the rights of the
Convertible Preferred Shares, Series B or increase the number of authorized
share of convertible preferred stock without the approval of holders of a
majority of the Convertible Preferred Shares, Series B.

    

    Section 4. Dividends.

    The
holders of shares of Series A Convertible Preferred Stock shall receive
cumulative dividends of 5% payable semi-annually on June 1 and December 1
commencing June 1, 2009.

    

    Section 5. Redemption.

    In the
event of any liquidation, dissolution, winding up or insolvency of the
Corporation, whether voluntary or involuntary, before any distribution or
payment is made to any holders of shares of Common Shares or any other class or
series of capital stock of the Company designated to be junior to the
Convertible Preferred Shares, Series B, and subject to the liquidation rights
and preferences of any class or series of preferred stock designated in the
future to be senior to, or on a parity with, the Convertible Preferred Shares,
Series B with respect to liquidation preferences, the holders of Convertible
Preferred Stock shall be entitled to be paid first out of the assets of the
Corporation available for distribution to holders of capital stock of all
classes whether such assets are capital, surplus or earnings together with the
amount of any accrued or capitalized dividends in respect thereof (the “Liquidation
Preference”). After payment in full to the holders of Convertible
Preferred Stock of the Liquidation Preference, holders of the Convertible
Preferred Stock shall, as such, have no right or claim to any of the remaining
Available Assets.

    

    Section
6.  Optional
Redemption.

    On or
after May 15, 2014 the Company may redeem the convertible preferred stock, in
whole or in part, at its option for the stated value at the time of such
redemption, together with accrued but unpaid dividends and other payments that
may be due on such shares.  On or after May 15, 2016 the Purchaser may
redeem the convertible preferred stock, in whole or in part, at its option for
the stated value at the time of such redemption, together with accrued but
unpaid dividends and other payments that may be due on such shares.

     

    Section 7. Additional
Definitions. For purposes of these resolutions, the following terms shall
have the following meanings:

    

    Common
Stock” refers to the common stock of the Corporation, par value $0.001
per share.

    

    IN
WITNESS WHEREOF, the Corporation has caused this Certificate of Designations to
be executed by a duly authorized officer of the Corporation as of this day of
May, 2009.

    
      	 
      	 
      	 
      	 
      	 
      
	 
      	
              ECOLOGY
      COATINGS, INC.

               

            	 
      
	 
      	
              By:  

            	
              /s/

            	 
      
	 
      	 
      	
              Name:  

            	 
      	 
      
	 
      	 
      	
              Title:  

            	 
      	 
      
	 
      

    

    

    

    

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

     

     

    ANNEX TO

    CERTIFICATE OF
DESIGNATION

     

    NOTICE OF
CONVERSION

     

    To:          Ecology
Coatings, Inc.

     

    Reference
is made to that certain Certificate of Designation of 5% Cumulative Convertible
Preferred Shares, Series B (the “5%
Designation”).  Capitalized terms used but not defined herein
have the meanings set forth in the 5% Designation.  Pursuant to the 5%
Designation, the undersigned, being a holder of 5% Cumulative Convertible
Preferred Shares, Series B (an “Exercising Holder”),
hereby elects to exercise its conversion rights as to a portion or portions of
its 5% Cumulative Convertible Preferred Shares, Series B, all as specified
opposite its signature below:

     

    Dated:

     

     

     

     

     

     

    
      	
               

              EXERCISING HOLDER

            	
              NUMBER
      OF 5%

              CUMULATIVE

              CONVERTIBLE

              PREFERRED
      SHARES,

              SERIES
      B TO BE

              CONVERTED
      TO

              COMMON SHARES

            
	
              Name

            	
              Signature

            

    

    

    
      	 
      	 
      	 
      

    

    

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

    EXHIBIT
E

     

    Instrument
of Accession

     

    Reference
is made to the Securities Purchase Agreement (the “Purchase Agreement”),
dated as of May 15, 2009, between Ecology Coatings, Inc., a statutory
corporation created under the laws of the state of Nevada, and Equity 11, Ltd.,
a Michigan corporation.  Capitalized terms used herein and not
otherwise defined herein shall have the meanings ascribed to them in the
Purchase Agreement.

     

    The
undersigned,_______________________, as a condition precedent to becoming the
owner or holder of record of _____________(_________) Convertible Preferred
Shares, Series B hereby agrees to become a Purchaser party to and to be bound by
all of the obligations of the Purchaser under the Convertible Preferred
Securities Agreement (other than with respect to Section 2.1 thereof), and shall
be the recipient of all the rights of the Purchaser under the Purchase Agreement
(other than with respect to Sections 7.1, 9.1 and 9.3 thereof).  The
undersigned hereby makes to the Company (as of the date written below) the
representations and warranties of the Purchaser contained in Article VI of the
Purchase Agreement.  The Company hereby makes (as of the date of the
Convertible Preferred Securities Agreement) the representations and warranties
of the Company contained in Article V of the Purchase Agreement, and the Company
hereby agrees that the undersigned shall have all of the rights of the Purchaser
under the Purchase Agreement (other than any rights provided to the Purchaser
under Sections 2.1, 7.1, 9.1 and 9.3 thereof).  This Instrument of
Accession shall take effect and shall become an integral part of the Purchase
Agreement immediately upon execution and delivery to the Company of this
Instrument of Accession.

     

    The
address for notification to the undersigned for purposes of Section 7.8 of the
Purchase Agreement is as follows:

     

     _______________

     

    Telephone:  _______________

    Telecopy:  _______________

    Attention:  _______________

     

    IN
WITNESS WHEREOF, the undersigned has caused this Instrument of Accession to be
signed as of the date below written.

     

    ____________________

     

    By:__________________

    Name:

    Title:

     

    Agreed to
and Accepted

     

    ECOLOGY
COATINGS, INC.

     

     

    By:______________________________

    Name:

    

    Its:dmgsettlement.htm

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    SETTLEMENT
AND RELEASE AGREEMENT

    This
Settlement and Release Agreement, by and between Ecology Coatings, Inc. (“ECOC”)
and DMG Advisors, LLC, Kirk Blosch and Jeff Holmes (DMG Advisors, LLC, Kirk
Blosch and Jeff Holmes collectively referred to as “Undersigned”), is effective
July 15, 2009.

    
      	
              1.  

            	
              In
      exchange for the following:

            

    

    
      	
              ·  

            	
              The
      parties agree to terminate their Consulting Agreement dated July 26, 2007
      (“Initial Consulting Agreement”).

            

    

    
      	
              ·  

            	
              ECOC
      currently owes Undersigned $200,000 for services in connection with the
      Initial Consulting Agreement.  The parties agree to reduce the
      obligation to $100,000 which will be satisfied in full by ECOC’s issuance
      of 500,000 shares to Undersigned.

            

    

    
      	
              ·  

            	
              The
      parties will enter into a new consulting agreement which will have a term
      of 6 months and payment by ECOC of 25,000 restricted shares of ECOC stock
      per month to Undersigned.

            

    

    
      	
              ·  

            	
              The
      Undersigned shall not use any of their shares of ECOC stock for short
      selling purposes.

            

    

    Undersigned
and Ecology Coatings, Inc., its directors, officers,
employees,  agents and affiliates, including Equity 11, Ltd. (“ECOC”)
each mutually forever release, discharge and indemnify each other from any and
all claims,
demands,  actions,  causes  of  action  and  any  other  rights
which either may have against the other, based upon or arising out of the
Initial Consulting Agreement entered into by and between the Undersigned and
ECOC.  Undersigned understands and agrees that the consideration as
specified herein represents the total amount of money required under this
Agreement to be paid on behalf of ECOC and that no further payments are
necessary or required.

    2. Undersigned acknowledges and agrees
this agreement constitutes the entire agreement between Undersigned and ECOC
with regard to the matter set forth herein and shall be binding upon and inure
to the benefit of the executors, administrators, personal representatives,
heirs, successors and assigns of each.

    
      	 
      	
              DMG
      ADVISORS, LLC, UNDERSIGNED

            	 
      	
              ECOLOGY
      COATINGS, INC.

            
	 
      	 
      	 
      	 
      
	
              By:

            	
              /s/
      Jeff Holmes

            	
              By:

            	
              /s/
      Robert G. Crockett

            
	 
      	
              Jeff
      Holmes

            	 
      	
              Robert
      G. Crockett

            
	 
      	 
      	 
      	 
      
	
              Its:

            	
              Manager

            	
              Its:

            	
              CEO

            
	 
      	 
      	 
      	 
      
	 
      	
              /s/
      Kirk Blosch

            	 
      	 
      
	 
      	
              Kirk
      Blosch, Individually, UNDERSINGED

            	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              /s/
      Jeff Holmes

            	 
      	 
      
	 
      	
              Jeff
      Holmes, Individually, UNDERSINGED

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