Document:

Exhibit 10.1

Exhibit 10.1

Execution Version

SECURITIES PURCHASE AGREEMENT

AMONG

IRVINE SENSORS CORPORATION

COSTA BRAVA PARTNERSHIP III L.P.

AND

THE GRIFFIN FUND LP

DATED AS OF DECEMBER 23, 2010

 

 

 

TABLE OF CONTENTS

	 	 	 	 	 
	1. Authorization of Securities
	 	 	2	 
	2. Sale and Purchase of the Securities
	 	 	2	 
	3. Closing; Payment of Purchase Price; Use of Proceeds
	 	 	2	 
	3.1. Closings
	 	 	2	 
	3.2. Milestone Closing
	 	 	3	 
	3.3. Use of Proceeds
	 	 	3	 
	3.4. Bridge Note Conversion
	 	 	4	 
	4. Representations and Warranties of the Purchasers; Register of Securities; Restrictions on Transfer
	 	 	4	 
	4.1. Organization
	 	 	4	 
	4.2. Validity
	 	 	4	 
	4.3. Brokers
	 	 	4	 
	4.4. Investment Representations and Warranties
	 	 	5	 
	4.5. Acquisition for Own Account
	 	 	5	 
	4.6. Ability to Protect Its Own Interests and Bear Economic Risks
	 	 	5	 
	4.7. Accredited Investor
	 	 	5	 
	4.8. Access to Information
	 	 	5	 
	4.9. Restricted Securities
	 	 	5	 
	4.10. No Public Market
	 	 	6	 
	4.11. Residence
	 	 	6	 
	4.12. Holdings
	 	 	6	 
	4.13. Tax Advisors
	 	 	6	 
	4.14. Communication of Offer
	 	 	6	 
	5. Representations and Warranties by the Company
	 	 	6	 
	5.1. Capitalization
	 	 	7	 
	5.2. Due Issuance and Authorization of Capital Stock
	 	 	9	 
	5.3. Organization
	 	 	9	 
	5.4. Subsidiaries
	 	 	9	 
	5.5. Consents
	 	 	10	 
	5.6. Authorization; Enforcement
	 	 	10	 
	5.7. Valid Issuance of Securities
	 	 	10	 
	5.8. No Conflicts
	 	 	11	 
	5.9. Material Contracts
	 	 	11	 
	5.10. Right of First Refusal; Stockholders Agreement; Voting and Registration Rights
	 	 	12	 
	5.11. Previous Issuances
	 	 	12	 
	5.12. No Integrated Offering
	 	 	12	 
	5.13. SEC Reports; Financial Statements
	 	 	12	 
	5.14. No Undisclosed Material Liabilities
	 	 	13	 
	5.15. Litigation
	 	 	13	 
	5.16. Taxes
	 	 	13	 
	5.17. Employee Matters
	 	 	14	 
	5.18. Compliance with Laws
	 	 	15	 
	5.19. Brokers
	 	 	15	 
	5.20. Environmental Matters
	 	 	15	 
	5.21. Intellectual Property Matters
	 	 	16	 

 

ii

 

	 	 	 	 	 
	5.22. Related-Party Transactions
	 	 	19	 
	5.23. Title to Property and Assets
	 	 	19	 
	5.24. Disclosure
	 	 	20	 
	5.25. Absence of Changes
	 	 	20	 
	5.26. Illegal Payments
	 	 	21	 
	5.27. Suppliers and Customers
	 	 	21	 
	5.28. Regulatory Permits
	 	 	22	 
	5.29. Insurance
	 	 	22	 
	5.30. Investment Company
	 	 	22	 
	5.31. Securities and Exchange Act Requirements
	 	 	22	 
	5.32. Accountants
	 	 	22	 
	5.33. Application of Takeover Protections
	 	 	22	 
	5.34. Stock Options
	 	 	22	 
	5.35. 2010 Nonqualified Stock Option Plan
	 	 	23	 
	6. Conditions of Parties’ Obligations
	 	 	23	 
	6.1. Conditions of the Purchasers’ Obligations
	 	 	23	 
	6.2. Additional Conditions of the Purchasers’ Obligations at the Milestone Closing
	 	 	26	 
	6.3. Conditions of the Company’s Obligations
	 	 	27	 
	6.4. Conditions of Each Party’s Obligations
	 	 	27	 
	7. Transfer Restrictions; Restrictive Legend
	 	 	27	 
	7.1. Transfer Restrictions
	 	 	27	 
	7.2. Unlegended Certificates
	 	 	28	 
	8. Registration, Transfer and Substitution of Certificates for Shares
	 	 	28	 
	8.1. Stock Register; Ownership of Securities
	 	 	28	 
	8.2. Replacement of Certificates
	 	 	28	 
	9. Definitions
	 	 	28	 
	10. Enforcement
	 	 	33	 
	10.1. Cumulative Remedies
	 	 	33	 
	10.2. No Implied Waiver
	 	 	33	 
	11. Confidentiality
	 	 	33	 
	12. Miscellaneous
	 	 	34	 
	12.1. Waivers and Amendments
	 	 	34	 
	12.2. Notices
	 	 	34	 
	12.3. Indemnification
	 	 	35	 
	12.4. No Waivers
	 	 	35	 
	12.5. Successors and Assigns
	 	 	35	 
	12.6. Headings
	 	 	35	 
	12.7. Governing Law
	 	 	35	 
	12.8. Expenses
	 	 	36	 
	12.9. Jurisdiction
	 	 	36	 
	12.10. Waiver of Jury Trial
	 	 	37	 
	12.11. Counterparts; Effectiveness
	 	 	37	 
	12.12. Entire Agreement
	 	 	37	 
	12.13. Severability
	 	 	37	 
	12.14. Exculpation Among Purchasers; Attorney
	 	 	37	 

 

iii

 

LIST OF EXHIBITS

	 	 	 
	EXHIBIT A

	 	Form of 12% Convertible Subordinated Secured Note
	EXHIBIT B

	 	Form of Security Agreement
	EXHIBIT C

	 	Form of Joinder Agreement
	EXHIBIT D

	 	2010 Nonqualified Stock Option Plan 
	EXHIBIT E

	 	Form of Stockholders Agreement
	EXHIBIT F

	 	Form of Voting Agreement
	EXHIBIT G

	 	Form of Employment Agreement for John Carson
	EXHIBIT H

	 	Form of Employment Agreement for Bill Joll
	EXHIBIT I

	 	Form of Employment Agreement for John Stuart
	EXHIBIT J

	 	Form of Indemnification Agreement for Costa Brava Directors and Griffin Directors

 

iv

 

SECURITIES PURCHASE AGREEMENT

This SECURITIES PURCHASE AGREEMENT (this “Agreement”) is made and entered into as of December
23, 2010 by and among Irvine Sensors Corporation, a Delaware corporation (the “Company”), Costa
Brava Partnership III L.P., a Delaware limited partnership (“Costa Brava”) and the Griffin Fund LP,
a Delaware limited partnership (“Griffin”) (each of Costa Brava and Griffin is referred to herein
as a “Purchaser,” and such purchasers together with any Bridge Note Holders (as defined below) who
execute a joinder agreement and participate in the Bridge Note Conversion (as defined below) are
collectively referred to herein as the “Purchasers”). Certain terms used and not otherwise defined
in the text of this Agreement are defined in Section 9 hereof.

W I T N E S S E T H

WHEREAS, the Company desires to issue and to sell to the Purchasers, and the Purchasers desire
to purchase from the Company, Notes and Milestone Notes of the Company (as hereinafter defined) and
shares of Common Stock of the Company, all in accordance with the terms and provisions of this
Agreement;

WHEREAS, Costa Brava and Griffin have committed to investing a minimum of $11,400,000 (the
“Commitment Amount”) regarding the transactions as described herein;

WHEREAS, the Company previously sold 10% Unsecured Convertible Promissory Notes due May 31,
2011 (the “Bridge Notes”) to investors in an aggregate amount of $3,000,000 (the “Total Bridge Note
Amount”) as a “bridge” to the current transactions contemplated by this Agreement, and, as
additional consideration for the Bridge Notes, the Company has agreed to issue shares of its Common
Stock to each investor with a value equal to 25% of the principal amount of the Bridge Notes
purchased, based on a valuation per share of the greater of (i) the fair market value of the Common
Stock as determined by the last closing sales price of the Company’s Common Stock prior to the date
of issuance of the Bridge Notes, and (ii) $0.13 per share, but not greater than $0.14 per share
(the “Bridge Financing”);

WHEREAS, subject to certain requirements, at the discretion of an investor holding a Bridge
Note (the “Bridge Note Holder”), the principal value of the Bridge Note and any accrued interest
thereon may be converted after the Initial Closing (as defined below) into the securities issued
at the Initial Closing on the same terms and conditions as Costa Brava and Griffin (the “Bridge
Note Conversion”);

WHEREAS, as soon as practicable after the Initial Closing, the Company shall hold two or more
subsequent closings (the “Bridge Closings”) to effect the closing of the Bridge Note Conversion for
those Bridge Note Holders who elect to participate in the Bridge Note Conversion;

 

 

 

NOW, THEREFORE, in consideration of the foregoing and the mutual representations, warranties
and covenants herein contained, the parties hereto hereby agree as follows:

1. Authorization of Securities. The Company has authorized the issuance and sale of:
(i) 66,100,000 shares of its Common Stock, par value $0.01 per share (the “Common Stock”); (ii) 12%
Convertible Subordinated Secured Notes due December 23, 2015, in an aggregate principal amount of up to
$9,820,800 (the “Notes”); and (iii) Milestone Notes (as defined below) in an aggregate principal
amount of $1,200,000. Each Note and Milestone Note shall be substantially in the form of
Exhibit A attached hereto, shall be duly executed by the Company and shall be dated as of
the date of the applicable Closing (as defined in Section 3.1). The Notes and the Milestone Notes
will be subordinated in right of payment to the $2,500,000 Secured Promissory Note, dated as of
April 14, 2010, issued by the Company to Timothy Looney, and secured by substantially all of the
assets of the Company pursuant to the Security Agreement, substantially in the form of Exhibit
B hereto, which shall be duly executed by the Company and the Holder Representative (as defined
in the Notes). The shares of Common Stock into which the Notes and the Milestone Notes are
convertible are sometimes referred to herein as the “Conversion Shares” and the Common Stock,
Notes, Milestone Notes and Conversion Shares are sometimes referred to herein collectively as the
“Securities”.

2. Sale and Purchase of the Securities. Upon the terms and subject to the conditions
herein contained, the Company agrees to sell to each Purchaser, and each Purchaser agrees,
severally and not jointly, to purchase from the Company, at each Closing (as defined in Section
3.1): (i) the number of shares of Common Stock set forth opposite such Purchaser’s name on
Schedule I, attached hereto, for an aggregate purchase price (the “Common Stock Purchase
Price”) set forth opposite such Purchaser’s name on Schedule I (which shall be equal to
$0.07 per share); (ii) the principal amount of the Note set forth opposite such Purchaser’s name on
Schedule I at a price equal to 100% of the principal amount of the Note (the “Note Purchase
Price”) set forth opposite such Purchaser’s name on Schedule I; and, as applicable, (iii)
the principal amount of the Milestone Note set forth opposite such Purchaser’s name on Schedule
I at a price equal to 100% of the principal amount of the Milestone Note (the “Milestone Note
Purchase Price”) set forth opposite such Purchaser’s name on Schedule I.

3. Closing; Payment of Purchase Price; Use of Proceeds; Bridge Note Conversion.

3.1. Closings.

(a) The initial closing (the “Initial Closing”) with respect to the transaction
contemplated in Section 2 hereof shall take place at the offices of Ropes & Gray LLP,
Prudential Tower, 800 Boylston St., Boston, Massachusetts on December 23, 2010, or at such
other time and place as the Company and Purchasers may agree, including remotely via the
exchange of documents and signatures (the “Initial Closing Date”). The term “Closing” shall
refer to the Initial Closing, the Bridge Closings and the Milestone Closing (as defined
below), to the extent there is a Milestone Closing. At each Closing, as applicable, the
Company shall issue to each Purchaser: (i) shares of Common Stock which such Purchaser is
purchasing at such Closing as set

 

2

 

forth on Schedule I, attached hereto, against delivery to the Company by such Purchaser of a wire transfer
in the amount of the Common Stock Purchase Price therefor as set forth on Schedule
I, such shares to be evidenced by certificates, registered in the name of such
Purchaser, to be delivered by the transfer agent within five business days after the
Closing; (ii) a Note representing the principal amount which such Purchaser is purchasing at
such Closing as set forth on Schedule I, in the name of such Purchaser, against
delivery to the Company by such Purchaser of a wire transfer in the amount of the Note
Purchase Price therefor as set forth on Schedule I or conversion of the Bridge Notes
in the case of the Bridge Closings; (iii) a Milestone Note representing the principal amount
which such Purchaser is purchasing at such Closing as set forth on Schedule I, in
the name of such Purchaser, against delivery to the Company by such Purchaser of a wire
transfer in the amount of the Milestone Note Purchase Price therefor as set forth on
Schedule I. Schedule I shall be updated to reflect the Bridge Note
Conversion; and (iv) a Note representing the principal amount issued to such Purchaser as a
result of the Bridge Note Conversion as set forth on Schedule I, in the name of such
Purchaser, against delivery to the Company by such Purchaser of the Bridge Conversion
Documents (as defined below).

(b) On the date of the Initial Closing but immediately following the Initial Closing,
each of Costa Brava and Griffin agrees to elect the Bridge Note Conversion and convert all
of the principal and accrued interest on its respective Bridge Notes and purchase additional
Notes and shares of Common Stock in the amounts set forth on Schedule I in
consideration for the cancellation of such Bridge Notes. The Notes so purchased shall have
the same terms as set forth in the form of Note attached as Exhibit A hereto. Each
of Costa Brava and Griffin shall return their respective original Bridge Notes to the
Company and each agrees that upon receipt of the Notes and the shares of Common Stock so
purchased, its respective Bridge Notes shall be cancelled, and the Company shall have no
further obligations thereunder.

(c) As soon as practicable following the Initial Closing, but not later than 120 days
following the Initial Closing (or such later date as may be approved by the Board of
Directors of the Company (the “Board of Directors”)), the Company shall hold one or more
subsequent Bridge Closings to effect the Bridge Note Conversion for all of the other Bridge
Note Holders who elect the Bridge Note Conversion. The Company shall, from time to time,
update Schedule I to reflect the Bridge Note Conversion at the subsequent Bridge
Closings.

3.2. Milestone Closing. As soon as reasonably practicable upon completion of the
Amendment to the Certificate of Incorporation set forth in Section 6.2(a) but not later than April
30, 2010, and subject to the fulfillment of the other closing conditions set forth in Section 6.2
(the “Milestone Conditions”), Costa Brava and Griffin shall purchase, and the Company shall sell, on the terms
and conditions contained in this Agreement, Milestone Notes, which shall have the same terms as set
forth in the form of Note attached as Exhibit A hereto (the “Milestone Notes”). If the
Milestone Conditions are not satisfied or capable of being satisfied by April 30, 2010, then Costa
Brava and Griffin are released from their obligations under this Section 3.2. The purchase and sale of the
Milestone Notes are referred to in this Agreement as the “Milestone Closing” and the date of the
Milestone Closing is referred to as the “Milestone Closing Date.”

3.3. Use of Proceeds. The Company agrees to use the proceeds from the Initial
Closing as follows: $3,000,000 to pay the Company’s accounts payable as set forth on Schedule
II. The remainder of the proceeds from the Initial Closing and the proceeds from the Milestone
Closing shall be used for working capital and general corporate purposes.

 

3

 

3.4.  Bridge Note Conversion. Immediately prior to the Initial Closing, the Company
shall send a notice (the “Bridge Notice”) to each of the Bridge Note Holders, notifying them of
their right to elect to participate in the Bridge Note Conversion. The Bridge Note Holders who
elect the Bridge Note Conversion will be required to execute and deliver to the Company the
following within the time period specified in the Bridge Notice: (i) an indication of interest
form; (ii) a joinder to this Agreement, in substantially the form attached as Exhibit C;
and (iii) the original Bridge Note (collectively, the “Bridge Conversion Documents”). Any Bridge
Note Holder participating in the Bridge Note Conversion shall be deemed a “Purchaser” hereunder,
and shall make all the representations and warranties of a Purchaser set forth in Section 4 below
as of the date of such Purchaser’s Bridge Closing, and shall have all of the rights and obligations
hereunder as a Purchaser and under the Transaction Documents, but only if the Company has received
all of the executed Bridge Conversion Documents within the time period specified in the Bridge
Notice.

4. Representations and Warranties of the Purchasers; Register of Securities; Restrictions
on Transfer. Each Purchaser, severally as to itself and not jointly, represents and warrants
to the Company that the statements contained in this Section 4 are true and complete as of the date
of this Agreement and will be true and complete as of the date of each Closing:

4.1. Organization. Any Purchaser which is a corporation, limited liability company,
partnership or trust represents that such Purchaser is duly formed, validly existing and in good
standing under the laws of its jurisdiction of organization or formation, has not been organized,
reorganized or recapitalized specifically for the purpose of investing in the Company and has all
corporate, limited liability company, partnership or trust power (as the case may be) and authority
to enter into this Agreement and the other Transaction Documents and instruments referred to herein
to which it is a party and to consummate the transactions contemplated hereby and thereby.

4.2. Validity. The execution, delivery and performance of this Agreement, and the
other Transaction Documents and instruments referred to herein, in each case to which such
Purchaser is a party, and the consummation by such Purchaser of the transactions contemplated
hereby and thereby, have been duly authorized by all necessary action on the part of such
Purchaser. This Agreement has been duly executed and delivered by such Purchaser, and the other
Transaction Documents and instruments referred to herein to which it is a party will be duly
executed and delivered by such Purchaser, and each such agreement and instrument constitutes or
will constitute a valid and binding obligation of such Purchaser enforceable against it in
accordance
with its terms except as limited by applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance, and any other laws of general application affecting enforcement
of creditors’ rights generally, and as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies.

4.3. Brokers. There is no broker, investment banker, financial advisor, finder or
other Person which has been retained by or is authorized to act on behalf of such Purchaser who
might be entitled to any fee or commission for which the Company will be liable in connection with
the execution of this Agreement and the consummation of the transactions contemplated hereby.

 

4

 

4.4. Investment Representations and Warranties. Such Purchaser understands and agrees
that the offering and sale of the Securities have not been registered under the Securities Act or
any applicable state securities laws and are being made in reliance upon federal and state
exemptions for transactions not involving a public offering which depend upon, among other things,
the bona fide nature of the investment intent and the accuracy of the Purchaser’s representations
as expressed herein. The Purchaser acknowledges that the Company has no obligation to register or
qualify the Securities for resale.

4.5. Acquisition for Own Account. Such Purchaser is acquiring the Securities for its
own account for investment and not with a view toward distribution in a manner which would violate
the Securities Act or any applicable state securities laws.

4.6. Ability to Protect Its Own Interests and Bear Economic Risks. Such Purchaser, by
reason of the business and financial experience of its management, has the capacity to protect its
own interests in connection with the transactions contemplated by this Agreement and the other
Transaction Documents and is capable of evaluating the merits and risks of the investment in the
Securities. Such Purchaser is able to bear the economic risk of an investment in the Securities
and is able to sustain a loss of all of its investment in the Securities without economic hardship
if such a loss should occur.

4.7. Accredited Investor. Such Purchaser is an “accredited investor” as that term is
defined in Regulation D promulgated under the Securities Act.

4.8. Access to Information. Such Purchaser has been given access to all Company
documents, records, and other information, and has had adequate opportunity to ask questions of,
and receive answers from, the Company’s officers, employees, agents, accountants, and
representatives concerning the Company’s business, operations, financial condition, assets,
liabilities, and all other matters relevant to its investment in the Securities. The foregoing,
however, does not limit or modify the representations and warranties made by the Company pursuant
to Section 5 of this Agreement or the right of the Purchasers to rely thereon.

4.9. Restricted Securities.

(a) Such Purchaser understands that the Securities will be characterized as “restricted
securities” under the federal securities laws inasmuch as they are being acquired from the
Company in a transaction not involving a public offering and that under such laws and
applicable regulations such Securities may be resold without registration under the
Securities Act only in certain limited circumstances.

(b) Such Purchaser acknowledges that the Securities must be held indefinitely unless
subsequently registered under the Securities Act and under applicable state securities laws
or an exemption from such registration is available. Such Purchaser understands that the
Company is under no obligation to register the Securities, except as provided in the
Transaction Documents.

(c) Such Purchaser is aware of the provisions of Rule 144 under the Securities Act
which permit limited resale of securities purchased in a private placement.

 

5

 

4.10. No Public Market. Such Purchaser understands that no public market now exists
for any of the Securities issued by the Company, and that the Company has made no assurances that a
public market will ever exist for the Securities.

4.11. Residence. The office or offices of such Purchaser in which its investment
decision was made is located at the address or addresses of such Purchaser set forth on
Schedule I hereto.

4.12. Holdings. As of immediately prior to the Initial Closing, such Purchaser is
not an “interested stockholder” as that term is defined in Section 203 of the Delaware General
Corporation Law.

4.13. Tax Advisors. Such Purchaser has had the opportunity to review with such
Purchaser’s own tax advisors the federal, state and local tax consequences of this investment,
where applicable, and the transactions contemplated by this Agreement. Such Purchaser is relying
solely on the Purchaser’s own determination as to tax consequences or the advice of such tax
advisors and not on any statements or representations of the Company or any of its agents and
understands that such Purchaser (and not the Company) shall be responsible for such Purchaser’s own
tax liability that may arise as a result of this investment or the transactions contemplated by
this Agreement.

4.14. Communication of Offer. The offer to sell the Securities was directly
communicated to such Purchaser by the Company. At no time was such Purchaser presented with or
solicited by any leaflet, advertisement, article, notice or other communication published in any
newspaper, magazine, or similar media or broadcast over television or radio, or any other
form of general advertising, or solicited or invited to attend a promotional meeting or any
seminar or meeting by any general solicitation or general advertising.

5. Representations and Warranties by the Company. Except as disclosed by the Company
in a written Disclosure Schedule provided by the Company to the Purchasers dated the date hereof
(the “Disclosure Schedule”), the Company represents and warrants to each Purchaser that the
statements contained in this Section 5 are true and complete as of the date of this Agreement and
will be true and complete as of the date of the Initial Closing and the Milestone Closing, as the
case may be. The Disclosure Schedule shall be arranged in sections corresponding to the numbered
and lettered sections and subsections contained in this Section 5, and the disclosures in any
section or subsection of the Disclosure Schedule shall qualify other sections and subsections in
this Section 5 only to the extent it is clear from a reasonable reading of the disclosure that such
disclosure is applicable to such other sections and subsections.

 

6

 

5.1. Capitalization.

(a) As of the date hereof, without giving effect to any of the Closings, the authorized
capital stock of the Company consists of 150,000,000 shares of Common Stock, par value $0.01
per share, 1,000,000 shares of preferred stock, par value $0.01 per share (“Preferred
Stock”), of which 175,000 shares are designated Series A-1 10% Cumulative Convertible
Preferred Stock (“Series A-1 Preferred Stock”), 40,000 shares are designated Series A-2 10%
Cumulative Convertible Preferred Stock (“Series A-2 Preferred Stock”), 10,000 shares are
designated Series B Convertible Preferred Stock (“Series B Preferred Stock”) and 37,500
shares are designated Series C Convertible Preferred Stock (“Series C Preferred Stock”). As
of the date hereof, there are 35,457,791 shares of Common Stock issued and outstanding, no
 shares of Series A-1 Preferred Stock issued and outstanding, 3,682.25 shares of Series A-2
Preferred Stock issued and outstanding, 1,821.2838 shares of Series B Preferred Stock issued
and outstanding and 37,500 shares of Series C Preferred Stock issued and outstanding. The
Company has reserved 1,148,460 shares of Common Stock for issuance upon the conversion of
the outstanding Series A-2 Preferred Stock, 3,643,568 shares of Common Stock for the
conversion of the outstanding Series B Preferred Stock, and 3,750,000 shares of Common Stock
for the conversion of the outstanding Series C Preferred Stock, as well as additional shares
as may be necessary to give effect to certain anti-dilution provisions applicable to any of
such securities. The Company has reserved 2,369,951 shares of Common Stock for issuance to
officers, directors, employees and consultants of the Company pursuant to its 2006 Omnibus
Incentive Plan, as amended and in effect, duly adopted by the Board of Directors and
approved by the Company stockholders (the “2006 Incentive Plan”). Of such reserved shares
of Common Stock for the 2006 Incentive Plan, options to purchase 1,034,600 shares of Common
Stock have been granted under the 2006 Incentive Plan and are currently outstanding, and
1,335,351 shares of Common Stock remain available for issuance to officers, directors,
employees and consultants pursuant to the 2006 Incentive Plan upon qualification of the 2006
Incentive Plan by the California Department of Corporations. The Company has reserved
18,500,000 shares of Common Stock for issuance to officers, directors, employees and
consultants of the Company pursuant to its 2010 Nonqualified Stock Option Plan, a copy of
which is attached as Exhibit D (the “2010 Plan”), and which has been duly adopted by
the Board of Directors, but has not been approved by the Company stockholders. Of such
reserved shares of Common Stock available for issuance under the 2010 Plan, no options to
purchase shares of Common Stock have been granted and are currently outstanding; however,
the Compensation Committee of the Board of Directors has approved the grant of options to
purchase the options set forth on Schedule 5.1(a) immediately following the issuance
of the Common Stock to the Purchasers in the Initial Closing. The Company plans to reserve
an additional 46,500,000 shares of Common Stock for issuance to officers, directors,
employees and consultants of the Company pursuant to a new equity incentive plan, the 2010
Omnibus Incentive Plan, to be adopted by the Board of Directors and the stockholders (the
“2010 Omnibus Plan”). Of such shares, no options have been granted under the 2010 Omnibus
Plan as of the Initial Closing. The Company has no other shares of capital stock
authorized, issued or outstanding. A capitalization table presenting the capitalization of
the Company as of the date hereof, without giving effect to any of the Closings, is set
forth on Schedule 5.1(a) hereto. At the Milestone Closing, the Company shall
provide an updated capitalization table representing the capitalization of the Company on
such date thereof.

 

7

 

(b) As of the date hereof, after giving effect to the Initial Closing and the Bridge
Closings, and assuming all of the Bridge Note Holders elect the Bridge Note Conversion,
exclusive of the effect of conversion of accrued interest on the Bridge Notes, there are
100,874,933 shares of Common Stock issued and outstanding, no shares of Series A-1 Preferred
Stock issued and outstanding, 3,682.25 shares of Series A-2 Preferred Stock issued and
outstanding, 1,821.2838 shares of Series B Preferred Stock issued and outstanding and
3,682.25 shares of Series C Preferred Stock issued and outstanding. The Company has
reserved 2,104,143 shares of Common Stock for the conversion of the outstanding Series A-2
Preferred Stock, 3,642,568 shares of Common Stock for the conversion of the outstanding
Series B Preferred Stock, and 3,750,000 shares of Common Stock for the conversion of the
outstanding Series C Preferred Stock. The Company has reserved 2,369,951 shares of Common
Stock for issuance to officers, directors, employees and consultants of the Company pursuant
to its 2006 Incentive Plan. Of such reserved shares of Common Stock for the 2006 Incentive
Plan, options to purchase 1,034,600 shares of Common Stock have been granted under the 2006
Incentive Plan and are currently outstanding, and 1,335,351 shares of Common Stock remain
available for issuance to officers, directors, employees and consultants pursuant to the
2006 Incentive Plan upon qualification of the 2006 Incentive Plan by the California
Department of Corporations. The Company has reserved 18,500,000 shares of Common Stock for
issuance to officers, directors, employees and consultants of the Company pursuant to its
2010 Plan, and which has been duly adopted by the Board of Directors, but has not been
approved by the Company stockholders. Of such reserved shares of Common Stock available for
issuance under the 2010 Plan, no options to purchase shares of Common Stock have been
granted and are currently outstanding and 18,500,000 shares of Common Stock remain available
for issuance to officers, directors, employees and consultants pursuant to the 2010 Plan.
The Company has no other shares of capital stock authorized, issued or outstanding. A
capitalization table presenting the capitalization of
the Company, after giving effect to the Initial Closing and Bridge Closings, is set
forth on Schedule 5.1(b) hereto.

(c) As of the date hereof, without giving effect to any of the Closings, except as may
be granted by this Agreement, the other Transaction Documents or the Employment Agreements,
(i) other than as set forth in Schedule 5.1(c), there are no outstanding options,
warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into or exercisable or exchangeable for,
any shares of capital stock of the Company, or arrangements by which the Company is or may
become bound to issue additional shares of capital stock, nor are any such issuances or
arrangements contemplated other than pursuant to the 2006 Incentive Plan and 2010 Plan; (ii)
other than as set forth in Schedule 5.1(c), there are no agreements or arrangements
under which the Company is or may become obligated to register the sale of any of its
securities under the Securities Act; (iii) the Company has no obligation (contingent or
otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any
interests therein or to pay any dividend or make any distribution in respect thereof, except
as required by the Charter Documents; and (iv) except for 2,369,951 shares of Common Stock
reserved for issuance under the 2006 Incentive Plan and 18,500,000 shares of Common Stock
reserved for issuance under the 2010 Plan, as set forth in Schedule 5.1(c) hereto,
the Company has not reserved any shares of capital stock for issuance pursuant to any stock
option plan or similar arrangement.

 

8

 

(d) As of the date hereof, after giving effect to the Initial Closing and the Bridge
Closings, and assuming all of the Bridge Note Holders elect the Bridge Note Conversion,
except as may be granted by this Agreement, the other Transaction Documents and the
Employment Agreements, (i) other than as set forth in Schedule 5.1(d), there are no
outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into or exercisable or
exchangeable for, any shares of capital stock of the Company, or arrangements by which the
Company is or may become bound to issue additional shares of capital stock, nor are any such
issuances or arrangements contemplated other than pursuant to the 2006 Incentive Plan, 2010
Plan or the 2010 Omnibus Plan; (ii) other than as set forth in Schedule 5.1(d),
there are no agreements or arrangements under which the Company is or may become obligated
to register the sale of any of its securities under the Securities Act; (iii) the Company
has no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of
its equity securities or any interests therein or to pay any dividend or make any
distribution in respect thereof, except as required by the Charter Documents; and (iv)
except for 2,369,951 shares of Common Stock reserved for issuance under the 2006 Incentive
Plan and 18,500,000 shares of Common Stock reserved for issuance under the 2010 Plan as set
forth in Schedule 5.1(d) hereto, the Company has not reserved any shares of capital
stock for issuance pursuant to any stock option plan or similar arrangement.

5.2. Due Issuance and Authorization of Capital Stock. All of the outstanding shares
of capital stock of the Company have been validly issued and are fully paid and non-assessable.
The sale and delivery of the shares of Common Stock to
the Purchasers pursuant to the terms hereof will vest in the holders thereof legal and valid
title to such Common Stock, free and clear of any lien, claim, judgment, charge, mortgage, security
interest, pledge, escrow, equity or other encumbrance other than restrictions pursuant to any
applicable state or federal securities laws (collectively, “Encumbrances”). The issuance of the
Conversion Shares to the Purchasers pursuant to the terms hereof upon conversion of the Notes or
the Milestone Notes will vest in the holders thereof legal and valid title to such Conversion
Shares, free and clear of any Encumbrances.

5.3. Organization. The Company and each of its Subsidiaries (a) is duly incorporated
or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of
its formation, except, in the case of its Subsidiaries, where the failure to be so incorporated,
organized, existing or in good standing would not have a Material Adverse Effect, (b) is duly
qualified to do business as a foreign entity and is in good standing in each jurisdiction where the
nature of the property owned or leased by it or the nature of the business conducted by it makes
such qualification necessary, except where the failure to be so qualified would not have a Material
Adverse Effect, (c) has its principal place of business and chief executive office at 3001 Red Hill
Avenue, Building 4, Suite 108, Costa Mesa, CA 92626 and (d) has all requisite corporate power and
authority to own or lease and operate its assets and carry on its business as presently being
conducted.

5.4. Subsidiaries. All of the direct and indirect Subsidiaries of the Company are set
forth on Schedule 5.4. Except as set forth in Schedule 5.4, the Company owns,
directly or indirectly, all of the capital stock or other equity interests of each Subsidiary free
and clear of any Encumbrances, and all of the issued and outstanding shares of capital stock of
each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and
similar rights to subscribe for or purchase securities. None of the Subsidiaries has material
assets, liabilities or operations, and, in the aggregate, the Subsidiaries do not represent more
than 1% of the consolidated assets of the Company.

 

9

 

5.5. Consents. Except as set forth on Schedule 5.5, neither the execution,
delivery or performance of this Agreement or the other Transaction Documents by the Company, nor
the consummation by it of the obligations and transactions contemplated hereby or thereby
(including, without limitation, the issuance, the reservation for issuance and the delivery of the
Securities) requires any consent of, authorization by, exemption from, filing with or notice to any
Governmental Entity or any other Person, other than filings required under applicable U.S. federal
and state securities laws or filings with applicable Governmental Entities to perfect the security
interests created by the Security Agreement.

5.6. Authorization; Enforcement. The Company has all requisite corporate power and
has taken all necessary corporate action required for the due authorization, execution, delivery
and performance by the Company of this Agreement and the other Transaction Documents and the
consummation of the transactions contemplated hereby and thereby (including, without limitation,
the issuance of the Securities and the provision to the Purchasers
of the rights contemplated by the Transaction Documents) and no action on the part of the
stockholders of the Company is required, except for the requirement to obtain stockholder approval
for the Amendment to the Certificate of Incorporation contemplated by Section 6.2(a) and to approve
the 2010 Omnibus Plan. The execution, delivery and performance by the Company of each of the
Transaction Documents and the consummation by the Company of the transactions contemplated hereby
and thereby, have been duly authorized by all necessary corporate action on the part of the
Company, except for the requirement to obtain stockholder approval for the Amendment to the
Certificate of Incorporation contemplated by Section 6.2(a) and the 2010 Omnibus Plan. This
Agreement has been duly executed and delivered by the Company, and the other Transaction Documents
and instruments referred to herein to which it is a party will be duly executed and delivered by
the Company, and each such agreement constitutes or will constitute a legal, valid and binding
obligation of the Company enforceable against it in accordance with its terms, except to the extent
that enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance, and any other laws of general application affecting enforcement of
creditors’ rights generally, and as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies.

5.7. Valid Issuance of Securities. The Securities, when issued, sold and delivered
in accordance with the terms and for the consideration set forth in this Agreement, at each
Closing, will be duly authorized and a sufficient number of authorized but unissued shares of
Common Stock (which may be unissued or issued but held by the Company as treasury shares) will have
been, upon obtaining stockholder approval for the Amendment to the Certificate of Incorporation
contemplated by Section 6.2(a), reserved for issuance or conversion of the Notes and Milestone
Notes, and upon such issuance or conversion in accordance with the terms of this Agreement, all
such Securities will be duly authorized, validly issued, fully paid and non-assessable, and free
from all taxes and Encumbrances, and will not be subject to preemptive rights or other similar
rights of stockholders of the Company.

 

10

 

5.8. No Conflicts. Except as set forth on Schedule 5.8, the execution,
delivery and performance of each of the Transaction Documents and the consummation of the
transactions contemplated hereby and thereby (including, without limitation, the issuance and
reservation for issuance, as applicable, of the Securities) will not (a) result in a violation of
the certificate of incorporation, as amended, and the by-laws of the Company (the “Charter
Documents”) or the certificates of formation, operating agreements, certificates of incorporation
or by-laws of its Subsidiaries, (b) conflict with or result in the breach of the terms, conditions
or provisions of or constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give rise to any right of termination, acceleration or
cancellation under, any material agreement, lease, mortgage, license, indenture, instrument or
other contract to which the Company or any Subsidiary is a party, (c) result in a violation of any
law, rule, regulation, order, judgment or decree (including, without limitation, U.S. federal and
state securities laws and regulations) applicable to the Company or any Subsidiary or by which any
property or asset of the Company or any Subsidiary is bound or affected, or (d) result in a
material violation of any rule or regulation of FINRA or its Trading Markets, or (e) result in the
creation of any Encumbrance upon any of the Company’s or any Subsidiary’s assets. Except as set
forth on Schedule 5.8, neither the Company nor any Subsidiary is in violation of its
Charter
Documents, and the Company and each Subsidiary is not in default (and no event has occurred
which, with notice or lapse of time or both, would cause the Company or any Subsidiary to be in
default) under, nor has there occurred any event giving others (with notice or lapse of time or
both) any rights of termination, amendment, acceleration or cancellation of, any material
agreement, indenture or instrument to which the Company is a party. Neither the business of the
Company nor any Subsidiary is being conducted in violation of any law, ordinance or regulation of
any Governmental Entity, except where the violation would not result in a Material Adverse Effect.

5.9. Material Contracts. Each Material Contract is the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with its terms, except to
the extent that enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance, and any other laws of general application affecting enforcement
of creditors’ rights generally, and as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies. The Company is in compliance with all
material terms of the Material Contracts, and there has not occurred any breach, violation or
default or any event that, with the lapse of time, the giving of notice or the election of any
Person, or any combination thereof, would constitute a breach, violation or default by the Company
under any such Material Contract or, to the knowledge of the Company, by any other Person to any
such contract except where such breach, violation or default would not have a Material Adverse
Effect. To the knowledge of the Company, it has not been notified that any party to any Material
Contract intends to cancel, terminate, not renew or exercise an option under any Material Contract,
whether in connection with the transactions contemplated hereby or otherwise.

 

11

 

5.10. Right of First Refusal; Stockholders Agreement; Voting and Registration Rights.
Except as provided in this Agreement or the other Transaction Documents, or as otherwise set forth
in Schedule 5.10, no party has any right of first refusal, right of first offer, right of
co-sale, preemptive right or other similar right or any registration right regarding the securities
of the Company. Except pursuant to any agreement listed on Schedule 5.10, there are no
provisions of the Charter Documents, and no Material Contracts, other than this Agreement or the
other Transaction Documents, which (a) may affect or restrict the voting rights of each Purchaser
with respect to the Securities in its capacity as a stockholder of the Company, (b) restrict the
ability of each Purchaser, or any successor thereto or assignee or transferee thereof, to transfer
the Securities, (c) would adversely affect the Company’s or each Purchaser’s right or ability to
consummate the transactions contemplated by this Agreement or comply with the terms of the other
Transaction Documents and the transactions contemplated hereby or thereby, (d) require the vote of
more than a majority of the Company’s issued and outstanding Common Stock, voting together as a
single class, to take or prevent any corporate action, other than those matters requiring a
different vote under Delaware law, or (e) entitle any party to nominate or elect any director of
the Company or require any of the Company’s stockholders to vote for any such nominee or other
person as a director of the Company in each case.

5.11. Previous Issuances. All shares of capital stock and other securities previously
issued by the Company have been issued in transactions registered under or exempt from the
registration requirements under the Securities Act and all applicable state securities or “blue
sky” laws, and in compliance with all applicable corporate laws. The Company has not violated the
Securities Act or any applicable state securities or “blue sky” laws in connection with the
previous issuance of any shares of capital stock or other securities.

5.12. No Integrated Offering. Neither the Company, nor any of its Affiliates or any
other Person acting on the Company’s behalf, has directly or indirectly engaged in any form of
general solicitation or general advertising with respect to the Securities or the Bridge Financing
nor have any of such Persons made any offers or sales of any security of the Company or its
Affiliates or solicited any offers to buy any security of the Company or its Affiliates other than
the Bridge Financing under circumstances that would require registration of the Securities under
the Securities Act or any other securities laws or cause this offering of Securities to be
integrated with any prior offering of securities of the Company for purposes of the Securities Act
or any applicable stockholder approval provisions of any Trading Market on which any securities of
the Company are listed or designated.

5.13. Financial Statements.

(a) Except as set forth in Schedule 5.13, the Company has filed all reports,
schedules, forms, statements and other documents required to be filed by the Company under
the Securities Act and the Exchange Act, including pursuant to Section 13(a) or 15(d)
thereof, since October 1, 2008 (the foregoing materials, including the exhibits thereto and
documents incorporated by reference therein, being collectively referred to herein as the
“SEC Reports”) on a timely basis or has received a valid extension of such time of filing
and has filed any such SEC Reports prior to the expiration of any such extension. As of
their respective dates, the SEC Reports complied as to form in all material respects with
the requirements of the Securities Act and the Exchange Act, as applicable, and none of the
SEC Reports, when filed, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were made, not
misleading. All agreements to which the Company is a party or to which the property or
assets of the Company are subject which are required to be described in or filed as exhibits
to an SEC Report, have been so described or filed.

 

12

 

(b) The financial statements of the Company included in the SEC Reports comply in all
material respects with applicable accounting requirements and the rules and regulations of
the Commission with respect thereto as in effect at the time of filing. Such financial
statements have been prepared in accordance with GAAP, except as may be otherwise specified
in such financial statements or the notes thereto and except that unaudited financial
statements may not contain all footnotes required by GAAP, and fairly present the financial
position of the Company and its consolidated subsidiaries as
of and for the dates thereof and the results of operations and cash flows for the
periods then ended, subject, in the case of unaudited statements, to normal, immaterial,
year-end audit adjustments.

5.14. No Undisclosed Material Liabilities. Except as previously disclosed to Costa
Brava and Griffin in writing, as of the date of this Agreement, there are no liabilities of the
Company or any Subsidiary of any kind whatsoever, whether interest-bearing indebtedness, or
liabilities accrued, contingent, absolute, determined, determinable or otherwise, other than
liabilities:

(a) reflected in the financial statements (including the footnotes thereto) included in
the SEC Reports;

(b) disclosed on Schedule 5.14 hereto; or

(c) created under, or incurred in connection with, this Agreement or the other
Transaction Documents; or

(d) immaterial liabilities incurred in the ordinary course of business, such as trade
payables, subsequent to the financial statements included in the SEC Reports.

5.15. Litigation. Except as set forth in Schedule 5.15 or in the Company’s Annual
Report on Form 10-K for the fiscal year ended October 3, 2010, under the captions “Legal
Proceedings” and “Risk Factors.” There is no claim, action, suit, arbitration, investigation or
other proceeding pending against, or to the knowledge of the Company, threatened against or
affecting, the Company or any of its Subsidiaries or any of their properties or, to the knowledge
of the Company, any of their respective officers or directors before any court or arbitrator or any
governmental body, agency or official, except as set forth on Schedule 5.15.

5.16. Taxes.

(a) Except as set forth on Schedule 5.16, the Company and each of its
Subsidiaries have properly filed all federal, foreign, state, local, and other tax returns
and reports which are required to be filed by it, which returns and reports were properly
completed and are true and correct in all material respects, and all taxes, interest, and
penalties due and owing have been timely paid. There are no outstanding waivers or
extensions of time with respect to the assessment or audit of any tax or tax return of the
Company or any Subsidiary, or claims now pending or matters under discussion between the
Company or any Subsidiary and any taxing authority in respect of any tax of the Company.
The Company has no uncertain tax positions pursuant to FASB Interpretation 48 (FIN 48),
Accounting for Uncertainty in Income Taxes.

 

13

 

(b) The Company and its Subsidiaries have filed all material tax returns and reports
(or timely extensions) as required by law relating to any material tax
liability of Company and its Subsidiaries. Such returns and reports are true and
correct in all material respects and the Company and its Subsidiaries have paid all material
taxes and other assessments due. There are no pending, or to the knowledge of the Company
and its subsidiaries, contemplated reviews, audits or proceedings with respect to any tax
return, report or other tax liability of the Company or any of its Subsidiaries, which, in
either case, relates to any material tax liability of the Company or any Subsidiaries.

5.17. Employee Matters.

(a) The Company has listed any “employee benefit plan” subject to the Employee
Retirement Income Security Act of 1974, as amended (“ERISA”), that it maintains for
employees on Schedule 5.17(a).

(b) Except as set forth on Schedule 5.17(b) or as contemplated in the
Employment Agreements, (i) no director or officer or other employee of the Company or any
Subsidiary will become entitled to any retirement, severance or similar benefit or enhanced
or accelerated benefit (including any acceleration of vesting) or lapse of repurchase rights
or obligations with respect to any employee benefit plan subject to ERISA or other benefit
under any compensation plan or arrangement of the Company or any Subsidiary (each, an
“Employee Benefit Plan”) solely as a result of the transactions contemplated in this
Agreement; and (ii) no payment made or to be made to any current or former employee or
director of the Company, or any of its Affiliates by reason of the transactions contemplated
hereby (whether alone or in connection with any other event, including, but not limited to,
a termination of employment) will constitute an “excess parachute payment” within the
meaning of Section 280G of the Code.

(c) No executive officer, to the knowledge of the Company, is, or is now reasonably
expected to be, in violation of any term of any employment contract, confidentiality,
disclosure or proprietary information agreement or non-competition agreement, or any other
contract or agreement or any restrictive covenant with the Company, and, to the knowledge of
the Company, the continued employment of each such executive officer does not subject the
Company or any of its Subsidiaries to any material liability with respect to any of the
foregoing matters.

 

14

 

(d) The Company and its Subsidiaries, taken as a whole, are in compliance with all
applicable federal, state, local and foreign statutes, laws (including, without limitation,
common law), judicial decisions, regulations, ordinances, rules, judgments, orders and codes
respecting employment, employment practices, labor, terms and conditions of employment and
wages and hours, except where the failure to comply would not have a Material Adverse
Effect, and no work stoppage or labor strike against the Company or any Subsidiary is
pending or, to their knowledge, threatened, nor is the Company or any Subsidiary involved in
or, to their knowledge, threatened with any labor dispute, grievance or litigation relating
to labor matters involving any current or former employees of the Company or any Subsidiary
or independent contractors. There are no suits, actions, disputes, claims (other than
routine claims for benefits), investigations or audits pending or, to the knowledge of the
Company, threatened in connection with any
Employee Benefit Plan, but excluding any of the foregoing which would not have a
Material Adverse Effect. Each Employee Benefit Plan subject to the Patient Protection and
Affordable Care Act, as modified by the Health Care and Education Reconciliation Act, and
related regulations, has been operated in compliance therewith and is a “grandfathered
health plan” as defined therein.

(e) No Key Employee of the Company (which includes all of the Company’s executive
officers and John Leon) has advised the Company (orally or in writing) that he or she
intends to terminate employment with the Company, nor does the Company have a present
intention to terminate the employment of any officer or Key Employee.

5.18. Compliance with Laws. The Company and its Subsidiaries, taken as a whole, have,
and are in material compliance with the terms of, all franchises, permits, licenses and other
rights and privileges necessary to conduct the Company’s and each Subsidiary’s, taken as a whole,
present and proposed business and is in compliance with and has not violated, in any material
respect, any applicable provisions of any laws, statutes, ordinances or regulations or the terms of
any judgments, orders, decrees, injunctions or writs.

5.19. Brokers. Except as set forth on Schedule 5.19, there is no investment
banker, broker, finder, financial advisor or other Person which has been retained by or is
authorized to act on behalf of the Company or any Subsidiary who might be entitled to any fee or
commission in connection with the transactions contemplated by this Agreement.

5.20. Environmental Matters.

(a) (i) (i) No written notice, notification, demand, request for information, citation,
summons, complaint or order has been received by, and no investigation, action, claim, suit,
proceeding or review is pending or, to the knowledge of the Company, threatened by any
Person against, the Company or any Subsidiary, and no penalty has been assessed against the
Company or any Subsidiary, in each case, with respect to any matters relating to or arising
out of any Environmental Law; (ii) the Company and each Subsidiary is in compliance with all
Environmental Laws except where the failure to comply would not have a Material Adverse
Effect; and (iii) to the knowledge of the Company there are no liabilities of or relating
to the Company or any Subsidiary relating to or arising out of any Environmental Law except
such as would not have a Material Adverse Effect, and, to the knowledge of the Company,
there is no existing condition, situation or set of circumstances which could reasonably be
expected to result in such a liability.

 

15

 

(b) For purposes of this Agreement, the term “Environmental Laws” means federal, state,
local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, codes, injunctions, permits and governmental agreements relating to human
health and the environment, including, but not limited to,
Hazardous Materials; and the term “Hazardous Material” means all substances or
materials regulated as hazardous, toxic, explosive, dangerous, flammable or radioactive
under any Environmental Law including, but not limited to: (i) petroleum, asbestos, or
polychlorinated biphenyls and (ii) in the United States, all substances defined as Hazardous
Substances, Oils, Pollutants or Contaminants in the National Oil and Hazardous Substances
Pollution Contingency Plan.

5.21. Intellectual Property Matters.

(a) “Intellectual Property” means any and all of the following arising under the laws
of the United States, any other jurisdiction or any treaty regime: (i) all inventions
(whether patentable or unpatentable and whether or not reduced to practice), all
improvements thereon, and all patents, patent applications and patent disclosures, together
with all reissuances, continuations, continuations-in-part, revisions, extensions and
reexaminations thereof, (ii) all trademarks, service marks, trade dress, logos, trade names
and corporate names, together with all translations, adaptations, derivations and
combinations thereof and including all goodwill associated therewith, and all applications,
registrations and renewals in connection therewith, (iii) all copyrightable works, all
copyrights and all applications, registrations and renewals in connection therewith, (iv)
all trade secrets and confidential business information (including, without limitation,
ideas, research and development, know-how, formulas, compositions, manufacturing and
production processes and techniques, technical data, designs, drawings, specifications,
customer and supplier lists, pricing and cost information and business and marketing plans
and proposals), (v) all computer software (including, without limitation, data and related
documentation and except for any commercial “shrink-wrapped” software) and source codes
(other than open source codes), (vi) all other proprietary rights, (vii) all copies and
tangible embodiments of the foregoing (in whatever form or medium) and (viii) all licenses
or agreements in connection with the foregoing. “Company Intellectual Property” means all
Intellectual Property which is used in connection with, and is material to, the business of
the Company or any Subsidiary and all Intellectual Property owned by the Company or any
Subsidiary, provided that any Intellectual Property that is licensed by the Company or any
Subsidiary shall be included within the meaning of Company Intellectual Property only within
the scope of use by the Company or such Subsidiary or in connection with the Company’s or
such Subsidiary’s business.

(b) Except as set forth on Schedule 5.21(b), with respect to each item of
Company Intellectual Property that is material to the Company’s business:

	 	(i)	 	The Company and each Subsidiary possesses all
rights, titles and interests in and to the item if owned by the Company
or any Subsidiary, as applicable, free and clear of any Encumbrance,
license or other restriction, and possesses all rights necessary in the
case of a licensed item to use such item in the manner in which it
presently uses the item or reasonably contemplates using such item, and
the Company or such Subsidiary, as applicable, has taken
or caused to be taken reasonable and prudent steps to protect its
rights in and to, and the validity and enforceability of, the item
owned by the Company or such Subsidiary;

 

16

 

	 	(ii)	 	the item if owned by the Company or any
Subsidiary is not, and if licensed, to the knowledge of the Company or
any Subsidiary is not, subject to any outstanding injunction, judgment,
order, decree, ruling or charge naming the Company or a Subsidiary;

	 	(iii)	 	no action, suit, proceeding, hearing,
investigation, charge, complaint, claim or demand is pending or, to the
knowledge of the Company or any Subsidiary, has been or is being
threatened which challenges the legality, validity, enforceability, use
or ownership of the item;

	 	(iv)	 	to the knowledge of the Company and each
Subsidiary, the item if owned by the Company or a Subsidiary does not
infringe upon any valid and enforceable Intellectual Property right or
other right of any third party;

	 	(v)	 	to the knowledge of the Company and each
Subsidiary, no third party has infringed upon or misappropriated the
Company’s intellectual property rights in the item;

	 	(vi)	 	neither the Company nor any Subsidiary is party
to any option, license, sublicense or agreement of any kind covering
the item that it is in breach or default thereunder, and to the
knowledge of the Company and no event has occurred which, with notice
or lapse of time, would constitute such a breach or default or permit
termination, modification or acceleration thereunder; and

	 	(vii)	 	each option, license, sublicense or agreement
of any kind covering the item is legal, valid, binding, enforceable and
in full force and effect.

The Company has provided to the Holder Representative (as defined in the Notes) a list
of all patents, copyrights, trademarks and services marks of the Company included in the
Company Intellectual Property that are registered with or issued by or pending before the
U.S. or any foreign patent, trademark or copyright office as of the date of the Initial
Closing (the “IP Summary”). All registered patents, copyrights, trademarks and
service marks included on the IP Summary (x) if owned by the Company or any Subsidiary and
(y) if licensed, to the knowledge of the Company, are valid and subsisting and are not
subject to any claims, Encumbrances, taxes or other fees except for periodic filing, annuity
and maintenance fees. Except as set forth on the IP Summary, the Company and its
Subsidiaries have not infringed upon or misappropriated any valid and enforceable
Intellectual Property rights of third parties, and there is no pending or, to the knowledge
of the Company, threatened claim or litigation against the Company or any
Subsidiary contesting the right to use any third party’s Intellectual Property rights,
asserting the misuse of any thereof, or asserting the infringement or other violation
thereof.

 

17

 

(c) All domain names owned by the Company or its Subsidiaries, and material to the
business of the Company and its Subsidiaries (the “Domain Names”) are listed on Schedule
5.21(c) and have been and are duly registered with GoDaddy.com, Inc. (“GoDaddy”) through
GoDaddy’s registration procedures, and are operating, accessible Domain Names. The Company
or a Subsidiary owns and has not waived or granted and, to the best of the Company’s
knowledge and, as applicable, such Subsidiary’s knowledge, each prior owner of such Domain
Names has not waived, forfeited or granted to any third parties, any rights, title or
interest in or to the Domain Names including without limitation any benefits, entitlements
or rights of renewal with respect to the Domain Names. GoDaddy has not notified the Company
or any Subsidiary that any of the Domain Names have been placed on “hold” or are otherwise
subject to a dispute or potential dispute pursuant to GoDaddy’s dispute resolution policy.

(d) None of the Key Employees of the Company or any Subsidiary are obligated under any
contract (including, without limitation, licenses, covenants, or commitments of any nature)
or other agreement, or subject to any judgment, decree, or order of any court or
administrative agency, that would interfere with the use of his or her reasonable diligence
to promote the interests of the Company or such Subsidiary or that would conflict with the
Company’s or such Subsidiary’s businesses as presently conducted. Neither the execution,
delivery or performance of this Agreement, nor the carrying on of the Company’s or such
Subsidiary’s businesses by the employees of the Company such Subsidiary, nor the conduct of
the Company’s or such Subsidiary’s businesses as presently conducted, will violate or result
in a breach of the terms, conditions or provisions of, or constitute a default under, any
contract, covenant, or instrument under which any such Key Employee is obligated, and which
violation, breach or default would be materially adverse to the Company.

(e) Except as set forth on Schedule 5.21(e), the Company has entered into
confidentiality and proprietary information and assignment of inventions agreements,
substantially in the form previously provided to Costa Brava and Griffin, with the executive
officers of the Company. The Company is not aware of any violation by any such executive
officers of such agreements.

(f) Except as set forth on Schedule 5.21(f), no stockholder, member, director,
officer or employee of the Company or any Subsidiary has any interest, right, title or
interest in any of the Company Intellectual Property.

(g) To the knowledge of the Company, it is not, nor will it be, necessary to utilize
any inventions, trade secrets or proprietary information of any of its employees made prior
to their employment by the Company or a Subsidiary, except for valid and enforceable
inventions, trade secrets or proprietary information that have been assigned to the Company
or a Subsidiary.

 

18

 

(h) Except as set forth on Schedule 5.21(h), the Company and its Subsidiaries
are not subject to any “open source” or Restrictive Open Source obligations or otherwise
required to make generally available, or make any public disclosure of, any source code
either used or developed by the Company or any Subsidiary.

(i) The Company and its Subsidiaries, taken as a whole, maintain policies and
procedures regarding data security, privacy and data use that are commercially reasonable
and, in any event, comply with the Company’s obligations to its customers and applicable
laws, rules and regulations. To the knowledge of the Company, there have not been, and the
transaction contemplated under this Agreement will not result in, any security breaches of
any security policy, data use restriction or privacy breach under any such policies or any
applicable laws, rules or regulations.

5.22. Related-Party Transactions. Except as contemplated in the Employment Agreements
or as set forth on Schedule 5.22 or in the SEC Reports in the Company’s proxy statement for
its September 27, 2009 annual meeting under the caption “Certain Relationships and Related Person
Transactions — Related Party Transactions,” no stockholder who is known by the Company to
beneficially own 5% or more (on a fully-diluted basis) of any class of equity securities, and no
officer or director of the Company or any Subsidiary or member of his or her immediate family is
currently indebted to the Company or any Subsidiary, nor is the Company or any Subsidiary indebted
(or committed to make loans or extend or guarantee credit) to any of such individuals. Except as
set forth on Schedule 5.22 hereto or in the SEC Reports under the caption “Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”, as of the
date hereof, no stockholder known by the Company to beneficially own 5% or more (on a fully-diluted
basis) of any class of equity securities, officer or director of the Company and no member of the
immediate family of any stockholder known by the Company to beneficially owns 5% or more (on a
fully-diluted basis) of any class of equity securities, officer or director of the Company, is a
party to any contract with the Company.

5.23. Title to Property and Assets. Neither the Company nor any Subsidiary owns any
real property. Except as set forth on Schedule 5.23 hereto, the Company and its
Subsidiaries own or have legally enforceable rights to use or hold for use their personal property
and assets free and clear of all Encumbrances except liens for taxes not yet due and payable,
purchase-money security interests entered into in the ordinary course of business and such other
Encumbrances, if any, that individually or in the aggregate, do not and would not detract from the
value of any asset or property of the Company and its Subsidiaries or interfere with the use or
contemplated use of any personal property of the Company and its Subsidiaries. With respect to any
real property, neither the Company nor any Subsidiary is in violation in any material respect of
any of its leases. All machinery, equipment, furniture, fixtures and other personal property that
is material to the Company’s business and all buildings, structures and other facilities, if any,
including, without limitation, office or other space used by the Company and its Subsidiaries in
the conduct of their business and material to the Company’s business, are in good operating
condition and fit for operation in the ordinary course of business (subject to normal wear and
tear) except for any defects which will not interfere with the conduct of normal operations of the
Company and its Subsidiaries. The Company has delivered to the Purchaser true and complete
copies of any leases related to the real property used by the Company and its Subsidiaries in
the conduct of their business.

 

19

 

5.24. Disclosure. The Company understands and confirms that the Purchasers will rely
on the foregoing representations in effecting transactions in securities of the Company. No
representation or warranty by the Company contained in this Agreement contains any untrue statement
of a material fact or omits to state any material fact necessary in order to make the statements
made therein, in light of the circumstances under which they were made, not misleading. The
Company acknowledges and agrees that the Purchasers do not make and have not made any
representations or warranties with respect to the transactions contemplated hereby other than those
specifically set forth in Section 4 hereof.

5.25. Absence of Changes. Since the date of the latest audited financial statements
included in the SEC Reports, except as set forth in Schedule 5.25 or as contemplated by, or
in connection with, this Agreement or the other Transaction Documents or the Employment Agreements,
there has not been:

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

(b) any amendment of any term of any outstanding security of the Company;

(c) any transaction or commitment made, or any contract, agreement or settlement
entered into, by (or judgment, order or decree affecting) the Company relating to its assets
or business (including the acquisition or disposition of any material amount of assets) or
any relinquishment by the Company or any Subsidiary of any contract or other right, other
than transactions, commitments, contracts, agreements or settlements (excluding settlements
of litigation and tax proceedings) in the ordinary course of business;

(d) any (A) grant of any severance or termination pay to (or amendment to any such
existing arrangement with) any director, officer or employee of the Company or any
Subsidiary, (B) entering into of any employment, deferred compensation, supplemental
retirement or other similar agreement (or any amendment to any such existing agreement) with
any director, officer or employee of the Company or any Subsidiary, (C) increase in, or
accelerated vesting and/or payment of, benefits under any existing severance or termination
pay policies or employment agreements or (D) increase in or enhancement of any rights or
features related to compensation, bonus or other benefits payable to directors, officers or
senior employees of the Company or any Subsidiary, in each case, other than in the ordinary
course of business consistent with past practice; or

(e) any material tax election made or changed, any audit settled or any amended tax
returns filed;

(f) any Material Adverse Effect or any event or events that individually or in the
aggregate would have a Material Adverse Effect;

 

20

 

(g) any damage, destruction or loss (whether or not covered by insurance) materially
and adversely affecting the Company’s and its Subsidiaries’ properties or assets when taken
as a whole;

(h) any sale, assignment or transfer, or any agreement to sell, assign or transfer, any
material asset, liability, property, obligation or right of the Company to any Person,
including, without limitation, the Purchasers and their Affiliates, in each case, other than
in the ordinary course of business;

(i) any obligation or liability incurred, or any loans or advances made, by the Company
to any of its Affiliates, other than expenses allowable in the ordinary course of business
of the Company;

(j) any purchase or acquisition of, or agreement, plan or arrangement to purchase or
acquire, any material property, rights or assets other than in the ordinary course of
business of the Company;

(k) any assignment, lease or other transfer or disposition, or any other agreement or
arrangement therefor by the Company or any Subsidiary of any property or equipment having a
value in excess of $50,000 except in the ordinary course of business;

(l) any waiver of any rights or claims of the Company or any Subsidiary, except for
such waivers which would not have a Material Adverse Effect;

(m) any agreement or commitment by the Company or any Subsidiary to do any of the
foregoing or any material transaction by the Company or any Subsidiary outside the ordinary
course of business of the Company; or

(n) any lien upon, or adversely affecting, any property or other assets of the Company
or any Subsidiary, except for such liens which would not have a Material Adverse Effect.

5.26. Illegal Payments. Neither the Company, any Subsidiary, nor, to the best
knowledge of the Company, any director, officer, agent or employee of the Company or any Subsidiary
has paid, caused to be paid, or agreed to pay, directly or indirectly, in connection with the
business of the Company or such Subsidiary: (a) to any government or agency thereof, any agent or
any supplier or customer, any bribe, kickback or other similar payment; (b) any contribution to any
political party or candidate (other than from personal funds of directors, officers or employees
not reimbursed by their respective employers or as otherwise permitted by applicable law); or (c)
intentionally established or maintained any unrecorded fund or asset or made any false entries on
any books or records for any purpose.

5.27. Suppliers and Customers. Except as set forth in Schedule 5.27, the
Company does not have any knowledge of any termination, cancellation or threatened termination or
cancellation or limitation of, or any material dissatisfaction with, the business relationship
between the Company or any Subsidiary and any material supplier, customer, vendor, customer or
client.

 

21

 

5.28. Regulatory Permits. Except as set forth on Schedule 5.28, the Company
and its Subsidiaries possess all material certificates, authorizations and permits issued by the
appropriate federal, state, local or foreign regulatory authorities necessary to conduct their
businesses, taken as a whole, as they are currently being conducted (“Material Permits”), and
neither the Company nor any Subsidiary has received any notice of proceedings relating to the
revocation or modification of any Material Permit.

5.29. Insurance. The Company and its Subsidiaries maintain the insurance policies
set forth on Schedule 5.29. The Company carries directors and officers insurance coverage in the
amount set forth on Schedule 5.29. Neither the Company nor any Subsidiary has any reason
to believe that it will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be necessary to
continue its business without a significant increase in cost.

5.30. Investment Company. The Company is not, and is not an Affiliate of, and
immediately after receipt of payment for the Securities, will not be or be an Affiliate of, an
“investment company” within the meaning of the Investment Company Act of 1940, as amended.

5.31. Securities and Exchange Act Requirements. The Company is required to file
periodic and other reports with the Commission pursuant to Section 12(g) of the Exchange Act, and
the Company has filed all such required reports with the Commission.

5.32. Accountants. Squar, Milner, Peterson, Miranda & Williamson, LLP (“Squar,
Milner”), who expressed their opinion with respect to the consolidated financial statements
included in the SEC Reports, are independent accountants as required by the Securities Act and the
rules and regulations promulgated thereunder. There are no disagreements of any kind presently
existing, or reasonably anticipated by the Company to arise, between the Company and Squar Milner,
and upon completion of the Initial Closing, the Company will be current with respect to any fees
owed to such accounting firm.

5.33. Application of Takeover Protections. The Company and its Board of Directors
have taken all necessary action, if any, in order to render inapplicable any
control share acquisition, business combination, poison pill (including any distribution under
a rights agreement) or other similar anti-takeover provision under the Company’s Charter Documents
or the laws of its state of incorporation (including Section 203 of the Delaware General
Corporation Law) that is or could become applicable to the Purchasers as a result of the Purchasers
and the Company fulfilling their obligations or exercising their rights under the Transaction
Documents, including without limitation as a result of the Company’s issuance of the Securities and
the Purchaser’s ownership of the Securities.

5.34. Stock Options. With respect to stock options issued pursuant to the Company’s
Employee Benefit Plans (i) except as set forth on Schedule 5.34 hereto, each grant of a
stock option was duly authorized no later than the date on which the grant of such stock option was
by its terms to be effective by all necessary corporate action, including, as applicable, approval
by the Board of Directors (or a duly constituted and authorized committee thereof) and any required
stockholder approval by the necessary number of votes or written consents and (ii) each such grant
was made in accordance with the material terms of the Employee Benefit Plans, the Securities Act
and all other applicable laws and regulatory rules or requirements.

 

22

 

5.35. 2010 Nonqualified Stock Option Plan. The Board of Directors has adopted the
2010 Plan, a true and correct copy of which is attached as Exhibit D.

6. Conditions of Parties’ Obligations.

6.1. Conditions of the Purchasers’ Obligations at the Initial Closing and the Milestone
Closing. The obligations of each of the Purchasers under Section 2 hereof are subject to the
fulfillment, prior to the Initial Closing and the Milestone Closing, of all of the following
conditions, any of which may be waived in whole or in part by such Purchaser severally in its
absolute discretion.

(a) Representations and Warranties. The representations and warranties of the
Company contained in this Agreement and in any certificate, if any, or other writing, if
any, delivered by the Company pursuant hereto shall be true and correct (i) on and as of the
Initial Closing Date with the same effect as though such representations and warranties had
been made on and as of the Initial Closing Date (except to the extent expressly made as of
an earlier date in which case as of such earlier date) and (ii) on and as of the Milestone
Closing Date with the same effect as though such representations and warranties had been
made on and as of the Milestone Closing Date (except to the extent expressly made as of an
earlier date in which case as of such earlier date).

(b) Performance. The Company shall have performed and complied in all material
respects with all agreements, obligations and conditions contained in this Agreement that
are required to be performed or complied by it on or before the applicable Closing.

(c) Qualification Under State Securities Laws. All registrations,
qualifications, permits and approvals, if any, required under applicable state securities
laws shall have been obtained for the lawful execution, delivery and performance of this
Agreement or the other Transaction Documents, including without limitation the offer and
sale of the Securities.

(d) Stockholders Agreement. The Company shall have entered into the
Stockholders Agreement, in substantially the form attached as Exhibit E.

(e) Voting Agreement. Each of (i) the Company; and (ii) the Irvine Sensors
Corporation Cash or Deferred & Stock Bonus Plan, shall have entered into the Voting
Agreement, in substantially the form attached as Exhibit F.

(f) Security Agreement. The Company shall have entered into the Security
Agreement, in substantially the form attached as Exhibit B.

 

23

 

(g) Supporting Documents. The Purchasers at each Closing shall have received
the following:

	 	(i)	 	A good standing certificate of the Company;

	 	(ii)	 	An opinion from Dorsey & Whitney LLP, counsel
to the Company, dated as of the date of the applicable Closing, in a
form reasonably satisfactory to the Purchasers;

	 	(iii)	 	Copies of resolutions of the Board of
Directors, certified by the Secretary of the Company, authorizing and
approving the execution, delivery and performance of the Transaction
Documents and all other documents and instruments to be delivered
pursuant hereto and thereto;

	 	(iv)	 	Copy of the certificate of incorporation and
by-laws of the Company, certified by the Secretary of the Company; and

	 	(v)	 	A certificate of incumbency executed by the
Secretary of the Company certifying the names, titles and signatures of
the officers authorized to execute the Transaction Documents.

	 	(vi)	 	A copy of the irrevocable original issue
instructions that the Company has provided to the Company’s transfer
agent, in a form reasonably acceptable to Costa Brava and Griffin,
authorizing the issuance of the shares of Common Stock which each
Purchaser is purchasing at the Initial Closing and in connection with
the Bridge Note Conversion as set forth on Schedule I attached
hereto, registered in the name of such Purchaser, against delivery to
the Company by such Purchaser of a wire transfer in the amount of the
Common Stock Purchase Price therefor as set forth on Schedule I
and such Purchaser’s original Bridge Note.

(h) Consents and Waivers. The Company shall have obtained all consents or
waivers necessary to execute and perform its obligations under this Agreement, the other
Transaction Documents (including consents and waivers listed on Schedule 5.5) and,
except for the Initial Closing, under the Amendment to the Certificate of Incorporation, to
issue the Securities, and to carry out the transactions contemplated hereby and thereby.
All corporate and other action and governmental filings necessary to effectuate the terms of
this Agreement, the other Transaction Documents, the Amendment to the Certificate of
Incorporation (with respect to the Milestone Closing), the Securities, and other agreements
and instruments executed and delivered by the Company in connection herewith shall have been
made or taken, and no Material Adverse Effect has occurred with respect to the operation of
the Company’s business.

(i) Satisfaction of Obligations. Each of the Purchasers shall have
simultaneously complied with their obligations under Section 2 hereof.

 

24

 

(j) Termination of Existing Agreements. Effective at each Closing: (i) any
prior stockholder agreements, voting agreements, co-sale agreements, or agreements relating
to rights of first offer, rights of first refusal or preemptive rights shall have been
terminated and shall be of no further force and effect (other than rights of first refusal
held by Longview Fund, L.P. and Alpha Capital Anstalt, as set forth on Schedule
5.10), and (ii) any prior registration rights agreements shall have been terminated and
shall be of no further force and effect (other than with respect to the holders of Series B
Preferred Stock, as set forth on Schedule 5.10).

(k) Employment Agreements. The Company shall have entered into Employment
Agreements between the Company and: (i) John Carson as Vice Chairman and Chief Strategist;
(ii) Bill Joll, as Chief Executive Officer and President; and (iii) John Stuart, as Chief
Financial Officer, Senior Vice President and Secretary, in substantially the form
attached as Exhibit G, Exhibit H and Exhibit I, respectively.

(l) No Material Adverse Effect.  There
shall have been no Material Adverse Effect with respect to the Company since the date of the
latest audited balance sheet of the Company included in the SEC Reports.

(m) Directors and Officers Insurance. For the Company’s directors and officers
insurance policy, policy number NY10DOL600109IV, with Navigators Insurance Company, the
Company shall have received a waiver of section IX.E. of the policy from Navigators
Insurance Company.

(n) Indemnification Agreement. The Company shall have entered into an
Indemnification Agreement between the Company and each of the Costa Brava Directors and
Griffin Directors in substantially the form attached as Exhibit J.

(o) Fees of Purchaser’s Counsel and Consultants. The Company shall have paid,
in accordance with Section 12.8, the fees, expenses and disbursements of the Purchasers.

(p) Board Representation; Nomination of Chairman of the Board of Directors.
The Company shall have increased the size of its Board of Directors to ten directors and
taken all steps necessary so as to appoint immediately after the Initial Closing, Seth
Hamot, Jay Scollins and Marcus Williams as representatives of Costa Brava to the Board of
Directors (the “Costa Brava Directors”) and Chet White and Scott Reed as representatives
from Griffin to the Board of Directors (“Griffin Directors”), each of whom will be
reimbursed for costs and expenses for attending board meetings. The Company shall have taken
all necessary steps to cause two current directors to resign from the Board of Directors
immediately after the Initial Closing and to cause a majority of the four remaining
directors to elect the five nominees of Costa Brava and Griffin immediately after the
Initial Closing pursuant to Article III, Section 4 of the Company’s bylaws. The Company
shall have taken all necessary steps to cause Seth Hamot to be appointed as Chairman of the
Board of Directors immediately after the Initial Closing.

(q) No Default. No Default (as defined in the Notes) shall be continuing as of
each Closing, after giving effect to the transactions contemplated to occur on each Closing.

 

25

 

(r) Compliance Certificates. The Company shall have provided to the
Purchasers, a Compliance Certificate, executed by the Chief Executive Officer of the
Company, dated as of the Closing, to the effect that the conditions specified in subsections
(a) “Representations and Warranties”, (b) “Performance”, (c) “Qualification Under State
Securities Laws”, (h) “Consents and Waivers”, (i) “Satisfaction of Obligations”, (j)
“Termination of Existing Agreements” and (q) “No Default” of this Section 6.1 have been
satisfied.

(s) Committees of the Board of Directors. The Company shall have taken all
steps necessary to cause the Costa Brava Directors to have representation on all committees
of the Board of Directors as soon as reasonably practicable after the Initial Closing and
shall cause the Costa Brava Directors to make up all the members of the Nominating &
Corporate Governance Committee immediately after the Initial Closing. Each committee will
amend its charter, as necessary, to allow for such representation.

(t) Appointment of Officers. The Company shall have taken all steps necessary
to, immediately after the Initial Closing: (i) change the title of John Carson to Vice
Chairman and Chief Strategist; (ii) appoint Bill Joll as Chief Executive Officer and
President; and (iii) appoint John Stuart as Chief Financial Officer, Senior Vice
President and Secretary.

6.2. Additional Conditions of the Purchasers’ Obligations at the Milestone Closing.
The obligations of each of the Purchasers under Section 2 hereof are subject to the fulfillment of
all of the following conditions at the Milestone Closing, which shall be satisfied by April 30,
2010, in addition to the conditions specified in Section 6.1, any of which may be waived in whole
or in part by such Purchaser severally in its absolute discretion.

(a) Amendment to Certificate of Incorporation. The Company: (i) shall have
obtained stockholder approval to increase the amount of authorized shares of Common Stock to
500,000,000 or such alternative number as shall be approved by the Board of Directors; and
(ii) shall have filed an amendment to its certificate of incorporation, which increases the
number of authorized shares of Common Stock to 500,000,000 or such alternative number as
shall be approved by the Board of Directors (the “Amendment to the Certificate of
Incorporation”), with the Secretary of State of the State of Delaware and the Purchasers,
shall have received confirmation from the Secretary of State of the State of Delaware
reasonably satisfactory to them that such filing has occurred.

(b) Resolutions of the Board of Directors. The Purchasers shall have received
copies of resolutions of the Board of Directors and the stockholders of the Company,
certified by the Secretary of the Company, authorizing and approving the Amendment to the
Certificate of Incorporation and the filing thereof with the Secretary of State of the State
of Delaware.

(c) Optics 1, Inc. There shall have been no material adverse change regarding
the Company’s relationship with Optics 1, Inc.

 

26

 

6.3. Conditions of the Company’s Obligations. The obligations of the Company under
Section 2 hereof are subject to the fulfillment prior to or on each Closing of all of the following
conditions, any of which may be waived in whole or in part by the Company.

(a) Covenants; Representations and Warranties. (i) Each of the Purchasers at
the Closing shall have performed all of its obligations hereunder required to be performed
by it at or prior to the Closing and (ii) the representations and warranties of each of the
Purchasers at the Closing contained in this Agreement shall be true and correct at and as of
the Closing as if made at and as of the Closing (except to the extent expressly made as of
an earlier date, in which case as of such earlier date).

(b) Stockholders Agreement. Each of Costa Brava and Griffin shall have
executed and delivered the Stockholders Agreement, in substantially the form attached as
Exhibit E.

(c) Security Agreement. The Holder Representative (as defined in the Notes)
shall have executed and delivered the Security Agreement, in substantially the form attached
as Exhibit B.

6.4. Conditions of Each Party’s Obligations. The respective obligations of each party
to consummate the transactions contemplated hereunder are subject to the parties being reasonably
satisfied as to the absence of (a) litigation challenging or seeking damages in connection with the
transactions contemplated by this Agreement, any of the other Transaction Documents or the
Amendment to the Certificate of Incorporation, and (b) any
statute, rule, regulation, injunction, order or decree, enacted, enforced, promulgated,
entered, issued or deemed applicable to this Agreement or the transactions contemplated hereby (or
in the case of any statute, rule or regulation, awaiting signature or reasonably expected to become
law), by any court, government or governmental authority or agency or legislative body, domestic,
foreign or supranational, that would, or would reasonably be expected to, prohibit or enjoin the
transactions contemplated by this Agreement.

7. Transfer Restrictions; Restrictive Legend.

7.1. Transfer Restrictions. Each Purchaser understands that the Company may, as a
condition to the transfer of any of the Securities, require that the request for transfer be
accompanied by an opinion of counsel reasonably satisfactory to the Company, to the effect that the
proposed transfer does not result in a violation of the Securities Act, unless such transfer is
covered by an effective registration statement or by Rule 144 or Rule 144A under the Securities
Act; provided, however, that an opinion of counsel shall not be required for a
transfer by a Purchaser that is (A) a partnership transferring to its partners or former partners
in accordance with partnership interests, (B) a corporation transferring to a wholly owned
subsidiary or a parent corporation that owns all of the capital stock of the Purchaser, (C) a
limited liability company transferring to its members or former members in accordance with their
interest in the limited liability company, (D) an individual transferring to the Purchaser’s family
member or trust for the benefit of an individual Purchaser, or (E) transferring its Securities to
any Affiliate of the Purchaser, in the case of an institutional investor, or other

 

27

 

 Person under
common management with such Purchaser; provided, further, that (i) the transferee in each case agrees to be subject to the restrictions in this Section 7 and provides the Company
with a representation letter containing substantially the same representations and warranties set
forth in Section 4 hereof, (ii) the Company satisfies itself that the number of transferees is
sufficiently limited and (iii) in the case of transferees that are partners or limited liability
company members, the transfer is for no consideration. It is understood that the certificates
evidencing any Securities may bear substantially the following legends (in addition to any other
legends as legal counsel for the Company deems necessary or advisable under the applicable state
and federal securities laws or any other agreement to which the Company is a party):

“THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY
APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE
SECURITIES UNDER SUCH ACT OR APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT
TO RULE 144 OR RULE 144A OF SUCH ACT.”

7.2. Unlegended Certificates. The Company shall be obligated to reissue promptly
unlegended certificates at the request of any holder thereof if the holder shall have obtained an
opinion of counsel reasonably acceptable to the Company to the effect that, or the Company is
otherwise satisfied that, the securities proposed to be disposed of may lawfully be so disposed of
without registration, qualification or legend.

8. Registration, Transfer and Substitution of Certificates for Shares.

8.1. Stock Register; Ownership of Securities. The Company will keep at its principal
office a register in which the Company will provide for the registration of transfers of the
Securities (except with respect to the Common Stock, the register of which is kept by the Company’s
transfer agent). The Company may treat the Person in whose name any of the Securities are
registered on such register as the owner thereof and the Company shall not be affected by any
notice to the contrary. All references in this Agreement to a “holder” of any Securities shall
mean the Person in whose name such Securities are at the time registered on such register.

8.2. Replacement of Certificates. Upon receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction or mutilation of any certificate representing
Securities, and, in the case of any such loss, theft or destruction, upon delivery of an indemnity
agreement reasonably satisfactory to the Company or, in the case of any such mutilation, upon
surrender of such certificate for cancellation at the office of the Company maintained pursuant to
Section 8.1 hereof, the Company at its expense will execute and deliver, in lieu thereof, a new
certificate representing Securities of like tenor.

9. Definitions. Unless the context otherwise requires, the terms defined in this
Section 9 shall have the meanings specified for all purposes of this Agreement.

 

28

 

Except as otherwise expressly provided, all accounting terms used in this Agreement, whether
or not defined in this Section 9, shall be construed in accordance with GAAP. If and so long as
the Company has one or more Subsidiaries, such accounting terms shall be determined on a
consolidated basis for the Company and each of its Subsidiaries, and the financial statements and
other financial information to be furnished by the Company pursuant to this Agreement shall be
consolidated and presented with consolidating financial statements of the Company and each of its
Subsidiaries.

“2006 Incentive Plan” has the meaning assigned to it in Section 5.1 hereof.

“2010 Omnibus Plan” has the meaning assigned to it in Section 5.1(a) hereof.

“2010 Plan” means the 2010 Nonqualified Stock Option Plan in the form attached hereto as
Exhibit D.

“Affiliate” shall have the meaning ascribed to such term in Rule 12b-2 of the General Rules
and Regulations under the Exchange Act.

“Agreement” has the meaning assigned to it in the introductory paragraph hereof.

“Amendment to the Certificate of Formation” has the meaning assigned to it in Section 6.2(a).

“Board of Directors” has the meaning assigned to it in Section 3.1 hereof.

“Bridge Closings” has the meaning assigned to it in the recitals hereof.

“Bridge Conversion Documents” has the meaning assigned to it Section 3.4 hereof.

“Bridge Financing” has the meaning assigned to it in the recitals hereof.

“Bridge Note Conversion” has the meaning assigned to it in the recitals hereof.

“Bridge Note Holder” has the meaning assigned to it in the recitals hereof.

“Bridge Notes” has the meaning assigned to it in the recitals hereof.

“Bridge Notice” has the meaning assigned to it in Section 3.4 hereof.

“Charter Documents” has the meaning assigned to it in Section 5.8 hereof.

“Closing” has the meaning assigned to it in Section 3.1 hereof.

“Code” means the Internal Revenue Code of 1986, as amended.

“Commission” means the Securities and Exchange Commission.

“Commitment Amount” has the meaning assigned to it in the recitals hereof.

 

29

 

“Common Stock” has the meaning assigned to it in Section 1 hereof.

“Common Stock Purchase Price” has the meaning assigned to it in Section 2 hereof.

“Company” has the meaning assigned to it in the introductory paragraph.

“Company Intellectual Property” has the meaning assigned to it in Section 5.21(a) hereof.

“Conversion Shares” has the meaning assigned to it in Section 1 hereof.

“Costa Brava” has the meaning assigned to it in the introductory paragraph.

“Costa Brava Directors” has the meaning assigned to it in Section 6.1(p).

“Disclosure Schedule” has the meaning assigned to it in Section 5 hereof.

“Domain Names” has the meaning assigned to it in Section 5.21(c) hereof.

“Employee Benefit Plan” has the meaning assigned to it in Section 5.17(b) hereof.

“Employment Agreements” means the Employment Agreements in substantially the forms attached
hereto as Exhibit G, Exhibit H, and Exhibit I.

“Encumbrances” has the meaning assigned to it in Section 5.2 hereof.

“Environmental Laws” has the meaning assigned to it in Section 5.20(b) hereof.

“ERISA” has the meaning assigned to it in Section 5.17(a) hereof.

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

“GAAP” means U.S. generally accepted accounting principles consistently applied.

“GoDaddy” has the meaning assigned to it in Section 5.21(c) hereof.

“Governmental Entity” means any national, federal, state, municipal, local, territorial,
foreign or other government or any department, commission, board, bureau, agency, regulatory
authority or instrumentality thereof, or any court, judicial, administrative or arbitral body or
public or private tribunal.

“Griffin” has the meaning assigned to it in the introductory paragraph.

“Griffin Directors” has the meaning assigned to it in Section 6.1(p) hereof.

“Hazardous Material” has the meaning assigned to it in Section 5.20(b) hereof.

 

30

 

“Holder Representative” has the meaning assigned to it in Section 1 hereof.

“Indemnification Agreement” means the Indemnification Agreement in substantially the form
attached hereto as Exhibit J.

“Initial Closing” has the meaning assigned to it in Section 3.1 hereof.

“Initial Closing Date” has the meaning assigned to it in Section 3.1 hereof.

“Intellectual Property” has the meaning assigned to it in Section 5.21(a) hereof.

“IP Summary” has the meaning assigned to it in Section 5.21(b) hereof.

“Key Employee” has the meaning assigned to it in Section 5.17(e) hereof.

“Knowledge” by a Person of a particular fact or other matter means the following: (a) if the
Person is an individual, that such individual is actually aware or reasonably should be
aware by virtue of such person’s office, of such fact or other matter; and (b) if the Person
is an Entity, any executive officer of such Person is actually aware of such fact or other matter.

“Material Adverse Effect” means any (i) adverse effect on the issuance or validity of the
Securities or the transactions contemplated hereby or on the ability of the Company to perform its
obligations under this Agreement or the other Transaction Documents, or (ii) material adverse
effect on the condition (financial or otherwise), properties, assets, liabilities, business or
operations of the Company and its Subsidiaries taken as a whole.

“Material Contract” means all written and oral contracts, agreements, deeds, mortgages,
leases, subleases, licenses, instruments, notes, commitments, commissions, undertakings,
arrangements and understandings (i) which by their terms involve, or would reasonably be expected
to involve, aggregate payments by or to the Company during any twelve month period in excess of
$50,000, (ii) the breach of which by the Company or any of its Subsidiaries would reasonably be
expected to have a Material Adverse Effect or (iii) which are required to be filed as exhibits by
the Company with the SEC pursuant to Items 601(b)(4) and 601(b)(10) of Regulation S-K promulgated
by the SEC.

“Material Permits” has the meaning assigned to it in Section 5.28 hereof.

“Milestone Closing” has the meaning assigned to it in Section 3.2 hereof.

“Milestone Closing Date” has the meaning assigned to it in Section 3.2 hereof.

“Milestone Conditions” has the meaning assigned to it in Section 3.2 hereof.

“Milestone Note Purchase Price” has the meaning assigned to it in Section 2 hereof.

“Milestone Notes” has the meaning assigned to it in Section 3.2 hereof.

“Note Purchase Price” has the meaning assigned to it in Section 2 hereof.

 

31

 

“Notes” has the meaning assigned to it in Section 1 hereof.

“Person” means and includes all natural persons, corporations, business trusts, associations,
companies, partnerships, joint ventures, limited liability companies and other entities and
governments and agencies and political subdivisions.

“Preferred Stock” has the meaning assigned to it in Section 5.1 hereof.

“Purchaser” and “Purchasers” have the meaning assigned to them in the introductory paragraph
of this Agreement and shall include any Affiliates of the Purchasers.

“Restrictive Open Source” means any software licensed under terms potentially requiring any of
the following if such software were used in combination with, distributed as a component of or
with, or used in connection with the development of, Company software: (i) the licensing or
distribution of any Company software source code to anyone, (ii) the prohibition or
restriction of receipt of payment or other consideration in connection with sublicensing or
distributing any Company software, (iii) except as specifically permitted by applicable law, the
licensing of or acquiescence to the decompilation, disassembly, or reverse engineering of any
Company software, (iv) the contribution of any Company software to the public domain, or (v) the
licensing of or acquiescence to, the use of any Company software by any persons other than a Group
Company for the purpose of making derivative works.

“SEC Reports” has the meaning assigned to it in Section 5.13(a) hereto.

“Securities” has the meaning assigned to it in Section 1 hereof.

“Series A-1 Preferred Stock” has the meaning assigned to it in Section 5.1(a) hereof.

“Series A-2 Preferred Stock” has the meaning assigned to it in Section 5.1(a) hereof.

“Series B Preferred Stock” has the meaning assigned to it in Section 5.1(a) hereof.

“Series C Preferred Stock” has the meaning assigned to it in Section 5.1(a) hereof.

“Squar, Milner” has the meaning assigned to it in Section 5.32 hereof.

“Stockholders Agreement” means the Stockholders Agreement in substantially the form attached
hereto as Exhibit E.

“Subsidiary” means any corporation, association trust, limited liability company, partnership,
joint venture or other business association or entity (i) at least 50% of the outstanding voting
securities of which are at the time owned or controlled directly or indirectly by the Company or
(ii) with respect to which the Company possesses, directly or indirectly, the power to direct or
cause the direction of the affairs or management of such Person.

“Total Bridge Note Amount” has the meaning assigned to it in the recitals hereof.

 

32

 

“Trading Market” means the following markets or exchanges on which the Common Stock is listed
or quoted for trading on the date in question: the American Stock Exchange, the Nasdaq Capital
Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange or
the OTC Bulletin Board.

“Transaction Documents” means this Agreement, the Stockholders Agreement, the Voting
Agreement, and the Security Agreement.

“Voting Agreement” means the Voting Agreement in substantially the form attached hereto as
Exhibit F.

10. Enforcement.

10.1. Cumulative Remedies. None of the rights, powers or remedies conferred upon the
Purchasers on the one hand or the Company on the other hand shall be mutually exclusive, and each
such right, power or remedy shall be cumulative and in addition to every other right, power or
remedy, whether conferred by this Agreement, any of the other Transaction Documents or now or
hereafter available at law, in equity, by statute or otherwise.

10.2. No Implied Waiver. Except as expressly provided in this Agreement, no course of
dealing between the Company and the Purchasers or any other holder of shares of Common Stock and no
delay in exercising any such right, power or remedy conferred hereby or by any of the other
Transaction Documents or now or hereafter existing at law in equity, by statute or otherwise, shall
operate as a waiver of, or otherwise prejudice, any such right, power or remedy.

11. Confidentiality. Except as otherwise agreed in writing by the Company, each
Purchaser agrees that it will use reasonable care to keep confidential and not disclose, divulge,
or use for any purpose (other than to monitor its investment in the Company) any confidential
information obtained from the Company pursuant to the terms of the Transaction Documents (including
notice of the Company’s intention to file a registration statement), unless such confidential
information (a) is known or becomes known to the public in general (other than as a result of a
breach of this Section 12 by such Purchaser), (b) is or has been independently developed or
conceived by such Purchaser without use of the Company’s confidential information, (c) is or has
been made known or disclosed to such Purchaser by a third party without a breach of any obligation
of confidentiality such third party may have to the Company or (d) was known to such Purchaser
prior to disclosure to such Purchaser by the Company; provided, however, that such
Purchaser may disclose confidential information (i) to its attorneys, accountants, consultants, and
other professionals to the extent necessary to obtain their services in connection with monitoring
its investment in the Company provided that such Purchaser informs such person that such
information is confidential and directs such person to maintain the confidentiality of such
information; (ii) to any prospective purchaser of any Securities from such Purchaser, if such
prospective purchaser agrees to be bound by the provisions of this Section 12; (iii) to any
Affiliate, partner, member, stockholder or advisor of such Purchaser in the ordinary course of
business, provided that such Purchaser informs such person that such information is confidential
and directs such person to maintain the confidentiality of such information; or (iv) as may
otherwise be required by law, provided that such Purchaser promptly notifies the Company of such
disclosure and, if requested by the Company, reasonably cooperates with the Company at the
Company’s expense to minimize the extent of any such required disclosure. Notwithstanding anything
to the contrary herein, the confidentiality obligations of this Section 12 shall survive the
termination of this Agreement.

 

33

 

12. Miscellaneous.

12.1. Waivers and Amendments. Upon the approval of the Company and the written
consent of a Purchaser, the obligations of the Company and the rights of such Purchaser under this
Agreement may be waived (either generally or in a particular instance, either retroactively or
prospectively and either for a specified period of time or indefinitely). Neither this Agreement,
nor any provision hereof, maybe changed, waived, discharged or terminated orally or by course of
dealing, but only by an instrument in writing executed by the Company and the holders of a majority
of the shares of Common Stock issued in all of the Closings, including all such shares issuable
upon conversion of the Notes and Milestone Notes.

12.2. Notices. All notices, requests, consents, and other communications under this
Agreement shall be in writing and shall be deemed delivered (a) when delivered, if delivered
personally, (b) four business days after being sent by registered or certified mail, return receipt
requested, postage prepaid; (c) one business day after being sent via a reputable nationwide
overnight courier service guaranteeing next business day delivery, or (d) when receipt is
acknowledged, in the case of facsimile, in each case to the intended recipient as set forth below:

If to Costa Brava, at its address set forth on Schedule I hereto

with a copy to:

Ropes & Gray LLP

One International Place

Boston, MA 02110

Attention: Jeffrey Katz

Facsimile No.: (617) 235-0617

If to Griffin, at its address set forth on Schedule I hereto

If to the Company:

Irvine Sensors Corporation

3001 Red Hill Avenue

Building 4, Suite 108

Costa Mesa, CA 92626

Attention: John J. Stuart, Jr.

Facsimile No.: (714) 444-8773

with a copy to:

Dorsey & Whitney LLP

38 Technology Drive, Suite 100

Irvine, CA 92618

Attention: Ellen Bancroft, Esq.

Facsimile No: (949) 932-3601

 

34

 

or at such other address as the Company or the Purchasers each may specify by written notice to the
other parties hereto in accordance with this Section 12.2.

12.3. Indemnification. The Company shall indemnify, save and hold harmless each
Purchaser and its directors, officers, employees, partners, representatives and agents from and
against (and shall promptly reimburse such indemnified persons for) any and all liability, loss,
cost, damage, reasonable attorneys’ and accountants’ fees and expenses, court costs and all other
out-of-pocket expenses incurred in connection with or arising from claims, actions, suits,
proceedings or similar claims by any Person or entity (other than such Purchaser) associated or
relating to the execution, delivery and performance of this Agreement, any of the other Transaction
Documents or the transactions contemplated hereby or thereby or the exercise by such Purchaser of
its rights thereunder. This indemnification provision shall be in addition to the rights of each
Purchaser to bring an action against the Company for breach of any term of this Agreement or the
other Transaction Documents.

12.4. No Waivers. No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any
rights or remedies provided by law.

12.5. Successors and Assigns. All the terms and provisions of this Agreement shall be
binding upon and inure to the benefit of and be enforceable by the respective parties hereto, the
successors and permitted assigns of each Purchaser and the successors of the Company, whether so
expressed or not. None of the parties hereto may assign its rights or obligations under Section 2
hereof without the prior written consent of the Company, except that each Purchaser may, without
the prior consent of the Company, assign its rights to purchase the Securities hereunder to any of
its Affiliates (provided such Affiliate agrees to be bound by the terms of this Agreement and makes
the same representations and warranties set forth in Section 4 hereof). This Agreement shall not
inure to the benefit of or be enforceable by any other Person.

12.6. Headings. The headings of the Sections and paragraphs of this Agreement have
been inserted for convenience of reference only and do not constitute a part of this Agreement.

12.7. Governing Law. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York without regard to its conflict of law principles.

 

35

 

12.8. Expenses.

(a) Upon consummation of each Closing pursuant to this Agreement or in the event that
the Company elects to terminate this Agreement, the Company shall pay, reimburse and hold
the Purchasers harmless from liability for the payment of all reasonable fees and expenses
incurred by them in connection with the preparation and negotiation of the Transaction
Documents and the consummation of the transactions contemplated hereby. The reasonable fees
and expenses of the Purchasers may include, without limitation:

	 	(i)	 	the reasonable fees and expenses of counsel,
consultants and accountants and out of pocket expenses, including
diligence and travel expenses, of the Purchasers arising in connection
with the preparation, negotiation and execution of the Transaction
Documents and the consummation of the transactions contemplated
thereby,

	 	(ii)	 	the fees and expenses incurred with respect to
any amendments to the Transaction Documents proposed by the Company
(whether or not the same become effective),

	 	(iii)	 	the fees and expenses incurred in connection
with any requested waiver of the right of any holder of Securities or
the consent of any holder of Securities to contemplated acts of the
Company not otherwise permissible by the terms of the Transaction
Documents,

	 	(iv)	 	stamp and other taxes, excluding income taxes,
which may be payable with respect to the execution and delivery of the
Transaction Documents or the Amendment to the Certificate of
Incorporation, or the issuance, delivery or acquisition of the
Securities, and

	 	(v)	 	all costs of the Company’s performance and
compliance with the Transaction Documents and the Amendment to the
Certificate of Incorporation.

12.9. Jurisdiction. Any suit, action or proceeding seeking to enforce any provision
of, or based on any matter arising out of or in connection with, this Agreement or the transactions
contemplated hereby shall be brought in any federal or state court located in the State of New
York, and each of the parties hereby consents to the jurisdiction of such courts (and of the
appropriate appellate courts therefrom) in any such suit, action or proceeding and irrevocably
waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to
the laying of the venue of any such suit, action or proceeding in any such court or that any such
suit, action or proceeding which is brought in any such court has been brought in an inconvenient
forum. Process in any such suit, action or proceeding may be served on any
party anywhere in the world, whether within or without the jurisdiction of any such court.
Without limiting the foregoing, each party agrees that service of process on such party as provided
in Section 12.2 shall be deemed effective service of process on such party.

 

36

 

12.10. Waiver of Jury Trial. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH
CANNOT BE WAIVED, THE PURCHASERS AND THE COMPANY HEREBY WAIVE AND COVENANT THAT NEITHER THE COMPANY
NOR THE PURCHASERS WILL ASSERT, ANY RIGHT TO TRIAL BY JURY ON ANY ISSUE IN ANY PROCEEDING, WHETHER
AS PLAINTIFF, DEFENDANT OR OTHERWISE, IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, ANY OTHER AGREEMENT OR THE SUBJECT MATTER
HEREOF OR THEREOF OR IN ANY WAY CONNECTED WITH, RELATED OR INCIDENTAL TO THE DEALINGS OF THE
PURCHASERS AND THE COMPANY HEREUNDER OR THEREUNDER, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER
ARISING AND WHETHER IN TORT OR CONTRACT OR OTHERWISE. The Company acknowledges that it has been
informed by the Purchasers that the provisions of this Section 12.10 constitute a material
inducement upon which the Purchasers are relying and will rely in entering into this Agreement.
Any Purchaser or the Company may file an original counterpart or a copy of this Section 12.10 with
any court as written evidence of the consent of the Purchasers and the Company to the waiver of the
right to trial by jury.

12.11. Counterparts; Effectiveness. This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, with the same effect as if
all parties had signed the same document. All such counterparts (including counterparts delivered
by facsimile or other electronic format) shall be deemed an original, shall be construed together
and shall constitute one and the same instrument. This Agreement shall become effective when each
party hereto shall have received counterparts hereof signed by all of the other parties hereto.

12.12. Entire Agreement. The Transaction Documents contain the entire agreement among
the parties hereto with respect to the subject matter hereof and thereof and such agreements
supersede and replace all other prior agreements, written or oral, among the parties hereto with
respect to the subject matter hereof and thereof.

12.13. Severability. If any provision of this Agreement shall be found by any court
of competent jurisdiction to be invalid or unenforceable, the parties hereby waive such provision
to the extent that it is found to be invalid or unenforceable. Such provision shall, to the
maximum extent allowable by law, be modified by such court so that it becomes enforceable, and, as
modified, shall be enforced as any other provision hereof, all the other provisions hereof
continuing in full force and effect.

12.14. Exculpation Among Purchasers; Attorney. Each
Purchaser acknowledges that it is not relying upon any Person, firm or corporation, other than
the Company and its officers, in making its investment or decision to invest in the Company. Each
Purchaser agrees that no Purchaser nor the respective controlling persons, officers, directors,
partners, agents, or employees of any Purchaser shall be liable to any other Purchaser for any
action heretofore or hereafter taken or omitted to be taken by any of them in connection with the
purchase of the Securities. Each Purchaser, other than Costa Brava, acknowledges and agrees that
Ropes & Gray LLP is only representing Costa Brava in connection with the transactions contemplated
hereby and is not representing any other Purchaser. Each Purchaser, acknowledges and agrees that
Dorsey & Whitney LLP is only representing the Company and is not representing any Purchaser or any
other Person in connection with the transactions contemplated hereby.

[Signature Pages Follow.]

 

37

 

IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be
duly executed as of the day and year first written above.

	 	 	 	 	 	 	 	 	 
	 	 	THE COMPANY	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	IRVINE SENSORS CORPORATION	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	By:	 	/s/ John C. Carson	 	 
	 	 	 	 	 	 	 
	 

	 	 	 	Name:	 	John C. Carson	 	 
	 

	 	 	 	Title:	 	President & CEO	 	 

Securities Purchase Agreement

 

 

 

	 	 	 	 	 	 	 	 	 
	 	 	THE PURCHASERS	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	COSTA BRAVA PARTNERSHIP III L.P.	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	By:	 	Roark, Rearden & Hamot, LLC,	 	 
	 	 	 	 	its General Partner	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	By:	 	/s/ Seth W. Hamot	 	 
	 	 	 	 	 	 	 
	 

	 	 	 	Name:
	 	Seth W. Hamot	 	 
	 

	 	 	 	Title:
	 	President	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	THE GRIFFIN FUND LP	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	By:	 	Griffin Partners, LLC,	 	 
	 	 	 	 	its General Partner	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	By:	 	/s/ Chester White	 	 
	 	 	 	 	 	 	 
	 

	 	 	 	Name:	 	Chester White	 	 
	 

	 	 	 	Title:	 	Managing Partner	 	 

Securities Purchase Agreement

 

 

 

SCHEDULE I

Initial Closing and Milestone Closing

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Shares of	 	 	Common	 	 	 	 	 	 	 	 
	 	 	Common	 	 	Stock	 	 	 	 	 	 	 	 
	 	 	Stock	 	 	Purchase	 	 	 	 	 	 	Milestone Note	 
	 	 	Purchased	 	 	Price	 	 	Note Purchase	 	 	Purchase Price	 
	 	 	(Initial	 	 	(Initial	 	 	Price	 	 	(Milestone	 
	Purchaser	 	Closing)	 	 	Closing)	 	 	(Initial Closing)	 	 	Closing)	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Costa Brava Partnership III LP.

222 Berkeley Street, 17th floor 
Boston, MA 02116

Attention: Seth Hamot 

Fax: (617) 267-6785
	 	 	39,522,857	 	 	$	2,766,600	 	 	$	5,933,400	 	 	$	900,000	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	The Griffin Fund LP

c/o Griffin Partners, LLC 

447 Battery Street, Suite 230

San Francisco, CA 94111

Attention: Chet White 

Fax: (415) 986-2214
	 	 	12,265,714	 	 	$	858,600	 	 	$	1,841,400	 	 	$	300,000	 

Initial Bridge Closing

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	Shares of	 	 	Principal	 
	 	 	Principal	 	 	Accrued	 	 	Common Stock	 	 	Amount of Note	 
	 	 	Amount of	 	 	Interest of	 	 	Received after	 	 	Received After	 
	Purchaser	 	Bridge Notes	 	 	Bridge Notes	 	 	Conversion	 	 	Conversion	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Costa Brava Partnership III LP.

222 Berkeley Street, 17th floor 
Boston, MA 02116

Attention: Seth Hamot 

Fax: (617) 267-6785
	 	$	289,300	 	 	$	1,499.07	 	 	 	1,321,058	 	 	$	198,324.96	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	The Griffin Fund LP

c/o Griffin Partners, LLC 

447 Battery Street, Suite 230

San Francisco, CA 94111

Attention: Chet White 

Fax: (415) 986-2214
	 	$	289,300	 	 	$	1,156.60	 	 	 	1,319,502	 	 	$	198,091.40	 

Securities Purchase AgreementExhibit 10.2

Exhibit 10.2

Execution Version

SUBORDINATED SECURED CONVERTIBLE NOTE

NEITHER THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH SUCH
SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR
ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM,
THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 UNDER
SAID ACT.

Irvine Sensors Corporation

Subordinated Secured Convertible Note

			
	 	 	 
	Issuance Date:
 _____ 

	 	Principal: U.S. $_____ 

FOR VALUE RECEIVED, IRVINE SENSORS CORPORATION, a Delaware corporation (the “Company”), hereby
promises to pay to
 _____ 

or its registered assigns (“Holder”) the amount set out above
opposite the caption “the Principal” (as such amount may be increased or reduced from time to time
pursuant to the terms hereof, whether through the payment of PIK Interest (as defined below) or
through redemption, conversion or otherwise, the “Principal”) when due, whether upon the Maturity
Date (as defined below), acceleration, redemption or otherwise (in each case, in accordance with
the terms hereof) and to pay Interest (as defined below) on the outstanding Principal at the
rates, in the manner and at the times set forth herein. This Subordinated Secured Convertible Note
(including all Subordinated Secured Convertible Notes issued in exchange, transfer or replacement
hereof, this “Note”) is one of an issue of Subordinated Secured Convertible Notes issued pursuant
to the Securities Purchase Agreement (as defined below) (collectively, the “Notes” and such other
Subordinated Secured Convertible Notes, the “Other Notes”). Certain capitalized terms used herein
are defined in Section 31. Capitalized terms used herein but not defined shall have the meaning
given to such terms in the Securities Purchase Agreement.

(1) PAYMENTS OF PRINCIPAL. On the Maturity Date, the Holder shall surrender this Note
to the Company and the Company shall pay to the Holder in cash an amount equal to the outstanding
Principal (if any) and accrued and unpaid Interest thereon. The “Maturity Date” shall be December
23, 2015.

(2) INTEREST. Simple interest (“Interest”) shall accrue on the outstanding Principal
at the Interest Rate from and including the date set forth above opposite the caption “Issuance
Date” (the “Issuance Date”) until the Principal is paid in full, shall be computed on the basis of
a 365-day year and actual days elapsed and, subject to the right of the Holder to include accrued
and unpaid Interest in the Conversion Amount (as defined below) in accordance with Section
3(b)(i) below, shall be payable in arrears for each Interest Period no later than the date
that is ten (10) Business Days after the last day of the applicable Interest Period (each, an
“Interest Payment Date”).

 

 

 

(a) Payment of Interest. Interest shall be payable on each Interest Payment Date to
the record holder of this Note as of the last day of the applicable Interest Period, subject to
Section 2(b), (i) in cash (“Cash Interest”) or (ii) prior to the Mandatory Conversion Eligibility
Date, at the option of the Company, either (x) entirely as Cash Interest, (y) in the form of shares
of Company Common Stock (“Interest Shares”) or (z) in a combination of Cash Interest and Interest
Shares, provided that the Interest may be payable in Interest Shares pursuant to this clause (ii)
if, and only if, the Company delivers written notice (each an “Interest Election Notice”) of such
election to each holder of the Notes on or prior to the tenth (10th) Company Trading Day
prior to the Interest Payment Date (each, an “Interest Election Date”). Each Interest Election
Notice must specify the amount of Interest that shall be paid as Cash Interest or PIK Interest, if
any, and the amount of Interest that shall be paid in Interest Shares. Interest to be paid on an
Interest Payment Date in Interest Shares shall be paid in a number of fully paid and nonassessable
shares (rounded to the nearest whole share in accordance with Section 3(a)) of Company Common Stock
equal to the quotient of (a) the amount of Interest payable to the Holder on such Interest Payment
Date less any Cash Interest or PIK Interest paid and (b) the Interest Conversion Price. If any
Interest Shares are to be paid on an Interest Payment Date, then the Company shall issue and
deliver within two (2) business days after the applicable Interest Payment Date, to the address set
forth in the register maintained by the Company for such purpose pursuant to the Securities
Purchase Agreement or to such address as specified by the Holder in writing to the Company at least
two (2) Business Days prior to the applicable Interest Payment Date, a certificate, registered in
the name of the Holder or its designee, for the number of Interest Shares to which the Holder shall
be entitled. The Company shall pay any and all taxes that may be payable by the Holder with
respect to the issuance and delivery of Interest Shares; provided that the Company shall
not be required to pay any tax that may be payable in respect of any issuance of Interest Shares to
any Person other than the Holder or with respect to any income tax due by the Holder with respect
to such Interest Shares. Notwithstanding the foregoing, unless the Required Holders otherwise
agree in writing, the Company shall not be entitled to pay Interest in Interest Shares and shall
instead, subject to Section 2(b), be required to pay all accrued and unpaid Interest in the form of
Cash Interest on the applicable Interest Payment Date if, during the period commencing on the
applicable Interest Election Date through the applicable Interest Payment Date the Equity
Conditions have not been satisfied.

(b) Restrictions on Cash Interest Payments. Notwithstanding the foregoing, in the
event that the Company would otherwise be required under this Section 2 to pay Interest in the form
of Cash Interest but is not permitted to do so pursuant to Section 33 hereof, the Company shall
instead pay such Interest through the addition of the amount of such Interest to the then
outstanding Principal (any Interest paid in such manner, “PIK Interest”). Interest that is paid in
the form of PIK Interest shall be considered paid or duly provided for, for all purposes under this
Note, and shall not be considered overdue.

 

2

 

(3) CONVERSION OF NOTES. This Note shall be convertible into shares of the Company’s
common stock, par value $.01 per share (the “Company Common Stock”), on the terms and conditions
set forth in this Section 3.

(a) Conversion Right. At any time or times on or after the later of (i) the Issuance
Date and (ii) the Amendment to the Certificate of Incorporation, the Holder shall be entitled to
convert any portion of the outstanding Principal and accrued and unpaid Interest thereon, in
multiples of $10,000 (or, if less, any remaining Principal and accrued and unpaid Interest
thereon), into fully paid and nonassessable shares of Company Common Stock in accordance with
Section 3(c), at the Conversion Rate (as defined below). The Company shall not issue any fraction
of a share of Company Common Stock upon any conversion. If the issuance would otherwise result in
the issuance of a fraction of a share of Company Common Stock, the Company shall round such
fraction of a share of Company Common Stock down to the nearest whole share and pay to the Holder
such fractional share in cash. The Company shall pay any and all taxes that may be payable with
respect to the issuance and delivery of Company Common Stock upon conversion of any Conversion
Amount; provided that the Company shall not be required to pay any tax that may be payable
in respect of any transfer involved in the issue and delivery of Company Common Stock to any Person
other than the Holder or with respect to any income tax due by the Holder with respect to such
Company Common Stock issued upon conversion.

(b) Conversion Rate. The number of shares of Company Common Stock issuable upon
conversion of any Conversion Amount pursuant to Section 3(a) shall be determined by dividing (x)
such Conversion Amount by (y) the Conversion Price (as defined below) (the “Conversion Rate”).

	 	(i)	 	“Conversion Amount” means the sum of (A) the portion of the Principal to be
converted, redeemed or otherwise with respect to which this determination is being
made, and (B) accrued and unpaid Interest with respect to such portion of the
Principal.

	 	(ii)	 	“Conversion Price” means as of any Conversion Date (as defined below) or other
date of determination during the period beginning on the Issuance Date and ending on
and including the Maturity Date, the Fixed Conversion Price.

	 	(iii)	 	“Fixed Conversion Price” means $0.07, subject to adjustment as provided
herein.

 

3

 

(c) Mechanics of Conversion.

	 	(i)	 	Optional Conversion. To convert any Conversion Amount into shares of
Company Common Stock on any date (a “Conversion Date”), the Holder shall (A) transmit
by facsimile (or otherwise deliver), for receipt on or prior to 5:00 p.m., Pacific
Time, on such date, a copy of an executed notice of conversion in the form attached
hereto as Exhibit I (the “Conversion Notice”) to the Company and (B) if
required by Section 3(c)(iii), surrender this Note to a common carrier
for delivery to the Company as soon as practicable on or following such date (or an
indemnification undertaking with respect to this Note in the case of its loss, theft
or destruction). On or before the second (2st) Business Day following
the date of receipt of a Conversion Notice, the Company shall transmit by facsimile
a confirmation of receipt of such Conversion Notice to the Holder and the Transfer
Agent. On or before the third (3nd) Business Day following the date of
receipt of a Conversion Notice (the “Share Delivery Date”), the Company shall issue
and deliver to the address as specified in the Conversion Notice, a certificate,
registered in the name of the Holder or its designee, for the number of shares of
Company Common Stock to which the Holder shall be entitled. If this Note is
physically surrendered for conversion as required by Section 3(c)(iii) and the
outstanding Principal of this Note is greater than the portion of the Conversion
Amount constituting principal, then the Company shall as soon as practicable and in
no event later than three Business Days after receipt of this Note (the “Note
Delivery Date”) and at its own expense, issue and deliver to the holder a new Note
(in accordance with Section 21(d)) representing the outstanding Principal not
converted. The Person or Persons entitled to receive the shares of Company Common
Stock issuable upon a conversion of this Note shall be treated for all purposes as
the record holder or holders of such shares of Company Common Stock on the
Conversion Date to the extent permitted by applicable law.

	 	(ii)	 	Company’s Failure to Timely Convert. If the Company shall fail to
issue a certificate to the Holder for the number of shares of Company Common Stock to
which the Holder is entitled upon conversion of any Conversion Amount on or prior to
the date which is five (5) Business Days after the Conversion Date (a “Conversion
Failure”), then (A) the Company shall pay damages in cash to the Holder for each date
of such Conversion Failure in an amount equal to 1.5% of the product of (I) the sum of
the number of shares of Company Common Stock not issued to the Holder on or prior to
the Share Delivery Date and to which the Holder is entitled, and (II) the Closing Sale
Price of the Company Common Stock on the Share Delivery Date and (B) the Holder, upon
written notice to the Company, may void its Conversion Notice with respect to, and
retain or have returned, as the case may be, any portion of this Note that has not been
converted pursuant to such Conversion Notice; provided that the voiding of a Conversion
Notice shall not affect the Company’s obligations to make any payments which have
accrued prior to the date of such notice pursuant to this Section 3(c)(ii) or
otherwise. At the Holder’s option in lieu of the foregoing, if within three (3)
Company Trading Days after the Company’s receipt of the facsimile copy of a Conversion
Notice the Company shall fail to issue and deliver a certificate to the Holder for the
number of shares of Company Common Stock to which the Holder is entitled upon such
holder’s conversion of any Conversion Amount, and if on or after such Trading Day the
Holder purchases (in an open market transaction or otherwise) Company Common Stock to
deliver in satisfaction of a sale by the Holder of Company Common Stock issuable upon
such conversion that the Holder anticipated receiving from the Company (a “Company
Common Stock Buy-In”), then the Company shall, within three (3) Business Days after the
Holder’s request (which shall include written evidence of a Company Common Stock
Buy-In) and in the Holder’s discretion, either (i) pay cash to the Holder in an
amount equal to the Holder’s total purchase price (including brokerage commissions,
if any) for the shares of Company Common Stock so purchased (the “Company Common
Stock Buy-In Price”), at which point the Company’s obligation to deliver such
certificate (and to issue such Company Common Stock) shall terminate, or (ii)
promptly honor its obligation to deliver to the Holder a certificate or certificates
representing such Company Common Stock and pay cash to the Holder in an amount equal
to the excess (if any) of the Company Common Stock Buy-In Price over the product of
(A) such number of shares of Company Common Stock, times (B) the Closing Bid Price
on the Conversion Date.

 

4

 

	 	(iii)	 	Book-Entry. Notwithstanding anything to the contrary set forth herein,
upon conversion of any portion of this Note in accordance with the terms hereof, the
Holder shall not be required to physically surrender this Note to the Company unless
(A) the full Principal represented by this Note is being converted, together with all
accrued and unpaid Interest thereon, or (B) the Holder has provided the Company with
prior written notice (which notice may be included in a Conversion Notice) requesting
reissuance of this Note upon physical surrender of this Note. The Holder and the
Company shall maintain records showing the portion of Principal and Interest converted
and the dates of such conversions or shall use such other method, reasonably
satisfactory to the Holder and the Company, so as not to require physical surrender of
this Note upon conversion.

	 	(iv)	 	Pro Rata Conversion; Disputes. In the event that the Company receives
a Conversion Notice from more than one holder of Notes for the same Conversion Date and
the Company can convert some, but not all, of such portions of the Notes submitted for
conversion, the Company shall convert from each holder of Notes electing to have a
portion of its Notes converted on such date a pro rata amount of such holder’s portion
of its Notes submitted for conversion based on the principal portion submitted for
conversion on such date by such holder relative to the aggregate principal portions of
all Notes submitted for conversion on such date. In the event of a dispute as to the
number of shares of Company Common Stock issuable to the Holder in connection with a
conversion of this Note, the Company shall issue to the Holder the number of shares of
Company Common Stock not in dispute and resolve such dispute in accordance with Section
26.

(4) [Reserved]

(5) EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT.

(a) Events of Default. Each of the following events (so long as it is continuing)
shall constitute an “Event of Default”:

	 	(i)	 	the Company’s (A) failure to cure a Conversion Failure with respect to any of
the Notes by delivery of the required number of shares of Company Common Stock within
ten (10) Business Days after the applicable Conversion Date or (B) notice, written or
oral, to any holder of the Notes, including by way of public announcement or through
any of its agents, at any time, of its intention not to comply with a request for
conversion of any Notes into shares of Company Common Stock that is tendered for
conversion in compliance with the provisions of the Notes and applicable securities
laws;

	 	(ii)	 	the Company’s failure to pay to any Holder any amount of Principal, premium (if
any), Interest, or other amounts when and as due under this Note (including, without
limitation, the Company’s failure to pay any redemption payments hereunder), any other
Transaction Document or any other agreement, document, certificate or other instrument
delivered in connection with the transactions contemplated hereby and thereby to which
such Holder is a party, provided, that in the case of a failure to pay Interest when
and as due, such failure shall constitute an Event of Default only if such failure
continues for a period of at least five (5) Business Days;

 

5

 

	 	(iii)	 	any event of default under, redemption of or acceleration prior to maturity of
any Indebtedness of the Company or any of its Subsidiaries (as defined in Section 5.4
of the Securities Purchase Agreement) (other than the Notes) in an aggregate principal
amount in excess of $500,000;

	 	(iv)	 	the Company or any of its Subsidiaries (other than Optex Systems, Inc.
(“Optex”)) pursuant to or within the meaning of Title 11, U.S. Code, or any similar
Federal, foreign or state law for the relief of debtors (collectively, “Bankruptcy
Law”), (A) commences a voluntary case, (B) consents to the entry of an order for relief
against it in an involuntary case, (C) consents to the appointment of a receiver,
trustee, assignee, liquidator or similar official (a “Custodian”), (D) makes a general
assignment for the benefit of its creditors or (E) admits in writing that it is
generally unable to pay its debts as they become due;

	 	(v)	 	a court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that (A) is for relief against the Company or any of its Subsidiaries
(other than Optex) in an involuntary case, (B) appoints a Custodian of the Company or
any of its Subsidiaries (other than Optex) or (C) orders the liquidation of the Company
or any of its Subsidiaries (other than Optex);

	 	(vi)	 	other than a judgment in connection with the pending litigation between the
Company and FirstMark for which summary judgment has been granted in favor of
FirstMark, but only to the extent the judgment does not exceed $1,731,900, a final
judgment or judgments for the payment of money aggregating in excess of $500,000 are
rendered against the Company or any of its Subsidiaries and which judgments are not,
within sixty (60) days after the entry thereof, bonded,
discharged or stayed pending appeal, or are not discharged within sixty (60) days
after the expiration of such stay; provided, however, that any judgment which is
covered by insurance or an indemnity from a creditworthy party shall not be included
in calculating the $500,000 amount set forth above so long as the Company provides
the Holder Representative with a written statement from such insurer or indemnity
provider (which written statement shall be reasonably satisfactory to the Holder
Representative) to the effect that such judgment is covered by insurance or an
indemnity and the Company will receive the proceeds of such insurance or indemnity
within thirty (30) days of the issuance of such judgment or such later date as
provided by the terms of such insurance policy;

 

6

 

	 	(vii)	 	any representation or warranty made by the Company in any Transaction Document
shall prove to be materially false or misleading as of the date made or deemed made;

	 	(viii)	 	the Company shall breach any covenant or other term or condition of any Transaction
Document and, in the case of a breach of a covenant or term or condition which is
curable, such breach continues for a period of at least ten (10) consecutive Business
Days;

	 	(ix)	 	any material provision of any Transaction Document ceases to be of full force
and effect other than by its terms, or the Company contests in writing (or supports any
other person in contesting) the validity or enforceability of any provision of any
Transaction Document;

	 	(x)	 	the Security Agreement shall for any reason (other than pursuant to the terms
thereof) cease to create a valid and perfected lien, with the priority required by the
Security Agreement, on, and security interest in, any material portion of the
Collateral purported to be covered thereby, subject to Permitted Liens and the Liens
securing the Existing Secured Note; or

	 	(xi)	 	any Event of Default (as defined in the Other Notes) occurs with respect to any
Other Notes.

(b) Redemption Right. Upon the occurrence and during the continuance of an Event of
Default, but subject to Section 33, the Holder Representative may and, at the request of the
Required Holders, shall, take either or both of the following actions: (i) declare all or any part
of the outstanding Principal, accrued and unpaid Interest and any other amounts outstanding under
this Note (the aggregate of such amounts, the “Outstanding Note Obligations”) and the Other Notes
to be immediately due and payable, in each case together with the Event of Default Premium;
provided, however, that if an Event of Default shall occur under either clause (iv) or
clause (v) of Section 5(a), the outstanding Principal, accrued and unpaid Interest and any other
amounts outstanding under the Notes shall automatically become immediately due and payable, and
(ii) exercise of behalf of itself and the other Holders all rights and remedies available to it
under the Security Agreement, the other Transaction Documents and applicable law. Notwithstanding
the foregoing, to the extent that the Holder Representative declares the Notes to
be immediately due and payable (or the Notes become due and payable following an Event of
Default under clauses (iv) or (v) of Section 5(a)) and the (x) the sum of the Outstanding Note
Obligations plus the Event of Default Premium (if any) (the sum of such amounts, the “Event
of Default Redemption Price”) is less than (y) the product of (A) the Conversion Rate that would
have been applicable to the Outstanding Note Obligations if the Holder’s Note had been submitted
for conversion into shares of Company Common Stock on the date immediately preceding such Event of
Default and (B) the Closing Sale Price of the Company Common Stock on the date immediately
preceding such Event of Default (the product of such amounts, the “Alternative Event of Default
Redemption Price”), the Company shall pay to the Holder in cash, in lieu of the Event of Default
Redemption Price, the Alternative Event of Default Redemption Price. The Company shall pay the
Event of Default Redemption Price or the Alternative Event of Default Redemption Price, as
applicable, to the Holder within five (5) Business Days after the date that the Outstanding Note
Obligations are declared due and payable, and upon full payment, the Notes shall be extinguished.

 

7

 

(6) RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.

(a) Assumption. The Company shall not enter into or be party to a Fundamental
Transaction unless (i) the Successor Entity assumes in writing all of the obligations of the
Company under this Note and the other Transaction Documents in accordance with the provisions of
this Section 6(a) pursuant to written agreements in form and substance satisfactory to the Required
Holders and approved by the Required Holders (such approval not to be unreasonably withheld or
delayed) prior to such Fundamental Transaction, including agreements to deliver to each holder of
Notes in exchange for such Notes a security of the Successor Entity evidenced by a written
instrument substantially similar in form and substance to the Notes, including, without limitation,
having a principal amount and interest rate equal to the principal amounts and the interest rates
of the Notes held by such holder and having similar ranking to the Notes, and satisfactory to the
Required Holders (any such approval not to be unreasonably withheld or delayed) and (ii) the
Successor Entity (including its Parent Entity) is a publicly traded corporation whose common stock
is quoted on or listed for trading on an Eligible Market. Upon the occurrence of any Fundamental
Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after
the date of such Fundamental Transaction, the provisions of this Note referring to the “Company”
shall refer instead to the Successor Entity), and may exercise every right and power of the Company
and shall assume all of the obligations of the Company under this Note with the same effect as if
such Successor Entity had been named as the Company herein. Upon consummation of the Fundamental
Transaction, the Successor Entity shall deliver to the Holder Representative confirmation that
there shall be issued upon conversion or redemption of this Note at any time after the consummation
of the Fundamental Transaction, in lieu of the shares of the Company Common Stock (or other
securities, cash, assets or other property) purchasable upon the conversion or redemption of the
Notes prior to such Fundamental Transaction, such shares of stock, securities, cash, assets or any
other property whatsoever (including warrants or other purchase or subscription rights) which the
Holder would have been entitled to receive upon the happening of such Fundamental Transaction had
this Note been converted immediately prior to such Fundamental Transaction, as adjusted in
accordance with the provisions of this Note. The provisions of this Section shall apply similarly
and equally
to successive Fundamental Transactions and shall be applied without regard to any limitations
on the conversion or redemption of this Note.

 

8

 

(b) Holder Redemption Right. No later than ten (10) days prior to the consummation of
a Change of Control, the Company shall deliver written notice thereof via facsimile and overnight
courier to the Holder (a “Change of Control Notice”). Subject to Section 33, at any time during
the period beginning after the Holder’s receipt of a Change of Control Notice and ending on the
date of the consummation of such Change of Control (or, in the event a Change of Control Notice is
not delivered at least ten (10) days prior to a Change of Control, at any time on or after the date
which is ten (10) days prior to a Change of Control and ending ten (10) days after the consummation
of such Change of Control), the Holder may require the Company to redeem all or any portion of this
Note in cash by delivering written notice thereof (“Holder Change of Control Redemption Notice”) to
the Company, which Holder Change of Control Redemption Notice shall indicate the Conversion Amount
the Holder is electing to redeem. The portion of this Note subject to redemption pursuant to this
Section 6 shall be redeemed by the Company at a price equal to the greater of (i) the product of
(x) the Conversion Amount being redeemed and (y) the quotient determined by dividing (A) the
Closing Sale Price of the Company Common Stock immediately following the public announcement of
such proposed Change of Control by (B) the Conversion Price and (ii) 125% of the Conversion Amount
being redeemed (the “Holder Change of Control Redemption Price”). Redemptions required by this
Section 6(b) shall be made in accordance with the provisions of Section 14 and shall have priority
to payments to common stockholders in connection with a Change of Control. Notwithstanding
anything to the contrary in this Section 6(b), until the Holder Change of Control Redemption Price
(together with any interest thereon) is paid in full, the Conversion Amount submitted for
redemption under this Section 6(b) (together with any interest thereon) may be converted, in whole
or in part, by the Holder into Company Common Stock pursuant to Section 3.

(7) RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.

(a) [Reserved].

(b) Other Corporate Events. Subject to Section 6(a) hereof, in addition to and not in
substitution for any other rights hereunder, prior to the consummation of any Fundamental
Transaction pursuant to which holders of shares of Company Common Stock are entitled to receive
securities or other assets with respect to or in exchange for shares of Company Common Stock (a
“Corporate Event”), the Company shall make appropriate provision to insure that the Holder will
thereafter have the right to receive upon a conversion of this Note, (i) in addition to the shares
of Company Common Stock receivable upon such conversion, such securities or other assets to which
the Holder would have been entitled with respect to such shares of Company Common Stock had such
shares of Company Common Stock been held by the Holder upon the consummation of such Corporate
Event (without taking into account any limitations or restrictions on the convertibility of this
Note) or (ii) in lieu of the shares of Company Common Stock otherwise receivable upon such
conversion, such securities or other assets received by the holders of shares of Company Common
Stock in connection with the consummation of such
Corporate Event in such amounts as the Holder would have been entitled to receive had this
Note initially been issued with conversion rights for the form of such consideration (as opposed to
shares of Company Common Stock) at a conversion rate for such consideration commensurate with the
Conversion Rate. Provision made pursuant to the preceding sentence shall be in a form and
substance satisfactory to the Required Holders. The provisions of this Section shall apply
similarly and equally to successive Corporate Events and shall be applied without regard to any
limitations on the conversion or redemption of this Note.

 

9

 

(8) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

(a) Pro Rata Distributions. If the Company, at any time while this Note is
outstanding, distributes to all holders of Company Common Stock (i) evidences of its indebtedness,
(ii) any security (other than a distribution of Shares covered by the preceding paragraph), (iii)
rights or warrants to subscribe for or purchase any security, or (iv) any other asset (in each case
“Distributed Property”), then, unless taken into account pursuant to Section 8(b) below, upon any
conversion of this Note that occurs after such record date, the Holder shall be entitled to
receive, in addition to the shares of Company Common Stock otherwise issuable upon such conversion,
the Distributed Property that the Holder would have been entitled to receive in respect of such
number of shares of Company Common Stock immediately prior to such record date.

(b) Adjustment of Fixed Conversion Price upon Subdivision or Combination of Company Common
Stock. If the Company at any time on or after the Subscription Date subdivides (by any stock
split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares
of Company Common Stock into a greater number of shares, the Fixed Conversion Price in effect
immediately prior to such subdivision will be proportionately reduced. If the Company at any time
on or after the Subscription Date combines (by combination, reverse stock split or otherwise) one
or more classes of its outstanding shares of Company Common Stock into a smaller number of shares,
the Fixed Conversion Price in effect immediately prior to such combination will be proportionately
increased.

(c) Adjustment of Conversion Price upon Lower Price Issuance. If the Company at any
time on or after the Subscription Date issues or agrees to issue additional shares of Company
Common Stock or rights, warrants, options or other securities or debt convertible, exercisable or
exchangeable for shares of Common Stock or otherwise entitling any Person to acquire shares of
Common Stock (or modify any of the foregoing which may be outstanding) to any person or entity at
an effective price per share or conversion or exercise price per share that is less than the
Conversion Price in effect at such time, then the Conversion Price shall automatically be reduced
to such other lower price. For purposes of the issuance and adjustment described in this section
the issuance of any security of the Corporation carrying the right to convert such security into
shares of Common Stock or of any warrant, right or option to purchase Common Stock shall result in
the adjustments described above upon the sooner of the agreement to issue or actual issuance of
such convertible security, warrant, right or option and again at any time upon any subsequent
issuances of shares of Common Stock upon exercise of such conversion or purchase rights if such
issuance is at a price lower than the Conversion Price in effect upon such issuance. This Section
8(c) shall not apply to Excluded Securities.

 

10

 

(9) [Reserved]

(10) [Reserved]

(11) COMPANY’S RIGHT OF MANDATORY CONVERSION.

(a) Mandatory Conversion. If at any time from and after the two year anniversary of
the Initial Closing Date (the “Mandatory Conversion Eligibility Date”), (i) the Volume Weighted
Average Price of the Company Common Stock for thirty (30) consecutive trading days equals or
exceeds $0.25 (subject to appropriate adjustments for stock splits, stock dividends, stock
combinations and other similar transactions after the Initial Closing Date) following the Mandatory
Conversion Eligibility Date (the “Mandatory Conversion Measuring Period”), and (ii) the Equity
Conditions have been satisfied (or waived in writing by the Holder), during the period commencing
on the Mandatory Conversion Notice Date through the applicable Mandatory Conversion Date (each, as
defined below), the Company shall have the right to require the Holder to convert all, but not less
than all, of the Conversion Amount then remaining under this Note as designated in the Mandatory
Conversion Notice (as defined below) into fully paid, validly issued and nonassessable shares of
Company Common Stock in accordance with Section 3(c) hereof at the Conversion Rate as of the
Mandatory Conversion Date (as defined below) (a “Mandatory Conversion”). The Company may exercise
its right to require conversion under this Section 11(a), by delivering within not more than five
(5) Company Trading Days following the end of such Mandatory Conversion Measuring Period a written
notice thereof by facsimile and overnight courier to all, but not less than all, of the holders of
Notes and the Transfer Agent (the “Mandatory Conversion Notice” and the date all of the holders
received such notice by facsimile is referred to as the “Mandatory Conversion Notice Date”). The
Mandatory Conversion Notice shall be irrevocable. The Mandatory Conversion Notice shall state (i)
the Company Trading Day selected for the Mandatory Conversion in accordance with Section 11(a),
which Company Trading Day shall be at least twenty (20) Business Days but not more than sixty (60)
Business Days following the Mandatory Conversion Notice Date (the “Mandatory Conversion Date”),
(ii) the aggregate Conversion Amount of the Notes subject to mandatory conversion from all of the
holders of the Notes pursuant to this Section 11(a) (and analogous provisions under the Other
Notes) and (iii) the number of shares of Company Common Stock to be issued to such Holder on the
Mandatory Conversion Date.

(b) Pro Rata Conversion Requirement. If the Company elects to cause a conversion of
any Conversion Amount of this Note pursuant to Section 11(a), then it must simultaneously take the
same action with respect to the Other Notes. All Conversion Amounts converted by the Holder after
the Mandatory Conversion Notice Date shall reduce the Conversion Amount of this Note required to be
converted on the Mandatory Conversion Date. If the Company has elected a Mandatory Conversion, the
mechanics of conversion set forth in Section 3(c) shall apply, to the extent applicable, as if the
Company and the Transfer Agent had received from the Holder on the Mandatory Conversion Date a
Conversion Notice with respect to the Conversion Amount being converted pursuant to the Mandatory
Conversion.

 

11

 

(12) NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company will
not, by amendment of its Certificate of Incorporation, Bylaws or through any
reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution,
issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Note, and will at all times in good faith carry out all
of the provisions of this Note and take all action as may be required to protect the rights of the
Holder of this Note.

(13) RESERVATION OF AUTHORIZED SHARES.

(a) Reservation. Immediately following Amendment to the Certificate of Incorporation,
the Company shall reserve out of its authorized and unissued Company Common Stock a number of
shares of Company Common Stock for each of the Notes equal to 100% of the number of shares of
Company Common Stock as shall be necessary to effect the conversion of all of the Notes then
outstanding as of the Issuance Date at the Conversion Price and any other shares issuable under the
Transaction Documents (the “Required Reserve Amount”). Thereafter, so long as any of the Notes are
outstanding, the Company shall take all action necessary to reserve and keep available out of its
authorized and unissued Company Common Stock, solely for the purpose of effecting the conversion of
the Notes, 100% of the number of shares of Company Common Stock as shall from time to time be
necessary to effect the conversion of all of the Notes then outstanding at the Minimum Price. The
initial number of shares of Company Common Stock reserved for conversions of the Notes and each
increase in the number of shares so reserved shall be allocated pro rata among the holders of the
Notes based on the principal amount of the Notes held by each holder at the Initial Closing Date or
increase in the number of reserved shares, as the case may be (the “Authorized Share Allocation”).
In the event that a holder shall sell or otherwise transfer any of such holder’s Notes, each
transferee shall be allocated a pro rata portion of such holder’s Authorized Share Allocation. Any
shares of Company Common Stock reserved and allocated to any Person which ceases to hold any Notes
shall be allocated to the remaining holders of Notes, pro rata based on the principal amount of the
Notes then held by such holders.

(14) HOLDER’S REDEMPTIONS.

(a) Mechanics. Subject to Section 33, if the Holder has submitted a Holder Change of
Control Redemption Notice in accordance with Section 6(b), the Company shall deliver the Holder
Change of Control Redemption Price to the Holder, concurrently with the consummation of such Change
of Control if such notice is received by the Company at least five (5) Business Days prior to the
consummation of such Change of Control and within seven (7) Business Days after the Company’s
receipt of such notice otherwise. In the event of a redemption of less than all of the Principal of
this Note, the Company shall promptly cause to be issued and delivered to the Holder (after such
original Note has been delivered to the Company) a new Note (in accordance with Section 21(d))
representing the outstanding Principal which has not been redeemed. In the event that the Company
does not pay the Holder Change of Control Redemption Price to the Holder within the time period
required, at any time thereafter and until the Company pays such unpaid Holder Change of Control
Redemption Price in full, the Holder shall have the option, in lieu of redemption, to require the
Company to promptly return to the Holder all or any portion of this Note representing the
Conversion Amount that was submitted for redemption and for which the Holder Change of Control
Redemption Price has not been paid.
Upon the Company’s receipt of such notice, (x) the Holder Change of Control Redemption Notice
shall be null and void with respect to such Conversion Amount and (y) the Company shall immediately
return this Note, or issue a new Note (in accordance with Section 21(d)) to the Holder representing
such Conversion Amount.

 

12

 

(b) Redemption by Other Holders. Upon the Company’s receipt of notice from any of the
holders of the Other Notes for redemption or repayment as a result of an event or occurrence
substantially similar to the events or occurrences described in Section 6(b) (each, an “Other
Redemption Notice”), the Company shall immediately forward to the Holder Representative by
facsimile a copy of such notice. If the Company receives a Holder Change of Control Redemption
Notice and one or more Other Redemption Notices during the seven (7) Business Day period beginning
on and including the date which is three (3) Business Days prior to the Company’s receipt of the
Holder Change of Control Redemption Notice and ending on and including the date which is three (3)
Business Days after the Company’s receipt of the Holder Change of Control Redemption Notice and the
Company is unable to redeem all principal, interest and other amounts designated in such Holder
Change of Control Redemption Notice and such Other Redemption Notices received during such seven
(7) Business Day period, then the Company shall redeem a pro rata amount from each holder of the
Notes (including the Holder) based on the principal amounts of the Notes submitted for redemption
pursuant to such Holder Change of Control Redemption Notice and pursuant to such Other Redemption
Notices received by the Company during such seven Business Day period.

(15) [Reserved]

(16) RIGHTS. Except as otherwise provided for herein, the Holder shall have no rights
as a stockholder of the Company as a result of being a holder of this Note, except as required by
law, including, but not limited to, the General Corporation Law of the State of Delaware, and as
expressly provided in this Note.

(17) COVENANTS.

(a) Incurrence of Indebtedness. So long as this Note is outstanding, the Company
shall not, and the Company shall not permit any of its Subsidiaries (as defined in the Securities
Purchase Agreement) to, directly or indirectly, incur or guarantee, assume or suffer to exist any
Indebtedness, other than (i) the Indebtedness evidenced by this Note and the Other Notes, (ii)
Permitted Indebtedness and (iii) the Existing Secured Note.

(b) Existence of Liens. So long as this Note is outstanding, the Company shall not,
and the Company shall not permit any of its Subsidiaries to, directly or indirectly, allow or
suffer to exist any mortgage, lien, pledge, charge, security interest or other similar encumbrance
upon or in any property or assets (including accounts and contract rights) owned by the Company or
any of its Subsidiaries (collectively “Liens”) other than (i) existing Liens securing the Existing
Secured Note and (ii) Permitted Liens.

 

13

 

(c) Restricted Payments. The Company shall not, and the Company shall not permit any
of its Subsidiaries to, directly or indirectly, redeem, defease, repurchase, repay or
make any payments in respect of, by the payment of cash or cash equivalents (in whole or in
part, whether by way of open market purchases, tender offers, private transactions or otherwise),
all or any portion of any Indebtedness described in clause (A) of the definition of “Permitted
Indebtedness”, whether by way of payment in respect of principal of (or premium, if any) or
interest on such Indebtedness if at the time such payment is due or is otherwise made or, after
giving effect to such payment, an event constituting, or that with the passage of time and without
being cured would constitute, an Event of Default has occurred and is continuing.

(18) [Reserved]

(19) VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote at a meeting
duly called for such purpose or the written consent without a meeting of the Required Holders (or
the Holder Representative acting at the direction of the Required Holders) shall be required for
any amendment or waiver to this Note or the Other Notes or to the Security Agreement (including to
release all or substantially all of the Collateral, in any transaction or series of related
transactions); provided that no such amendment or waiver shall:

(a) postpone (i) the Maturity Date or (ii) any Interest Payment Date, in each case without the
consent of the Holder (it being understood that the Required Holders may waive any increase in the
Interest Rate that would otherwise take effect during the continuance of an Event of Default);

(b) reduce the Principal of, or the Interest Rate or any premiums specified herein on, the
Note, or any other amounts payable hereunder or under any other Note Document to the Holder,
without the consent of the Holder; provided, however, that only the consent of the Required
Holders shall be necessary to alter the amount by which the Interest Rate may be increased during
the continuance of an Event of Default or to waive any of the obligation of the Company to pay such
increased rate during the continuance of an Event of Default); or

(c) change any provision of this Section 19, the definition of “Required Holders” or any other
provision hereof specifying the number or percentage of holders of Notes required to amend, waive
or otherwise modify any rights hereunder or to make any determination or grant any consent
hereunder, without the consent of the Holder and of each of the holders of the Other Notes, in each
case to the extent adversely affected thereby;

and provided further that no amendment, waiver or consent shall, unless in writing and signed by
the Holder Representative in addition to the holders of Notes required above, affect the rights or
duties of the Holder Representative under this Note or any other Transaction Document.

(20) HOLDER REPRESENTATIVE

(a) Appointment of Holder Representative, etc. By acceptance of this Note, the Holder
hereby appoints [_____]1 to serve as Holder Representative. The Holder further
agrees that the Holder Representative may be removed at any time by a vote of the
Required Holders, and that if the Holder Representative is so removed, or if it at any time
resigns or declines to serve as Holder Representative, the successor Holder Representative shall be
the holder of the Notes that at any given time holds Notes in an aggregate

 

	 	 	 
	1	 	To be Costa Brava Partnership III L.P. as of the
Initial Closing Date, and on any subsequent Issuance Date the person appointed
pursuant to the terms of Section 20(a).

 

14

 

principal amount that is
greater than the aggregate principal amount of the Notes held by any other holder of the Notes;
provided, that at any time after the Mandatory Conversion Eligibility Date, the Required
Holders may instead designate as the Holder Representative another Person of their choosing. The
Holder hereby (a) irrevocably authorizes the Holder Representative to (i) enter into the Security
Agreement and (ii) at its discretion, to take or refrain from taking such actions as Holder
Representative and to exercise or refrain from exercising such powers under the Transaction
Documents as are delegated by the terms hereof or thereof, as applicable, together with all powers
reasonably related thereto and (b) agrees and consents to all of the provisions of the Security
Agreement.

(b) Concerning the Holder Representative.

	 	(i)	 	Standard of Conduct. The Holder Representative and its officers,
directors, employees and agents shall be under no liability to the Holder or to any of
its successors or assigns for any action or failure to act taken or suffered in its
capacity as Holder Representative in the absence of gross negligence and willful
misconduct, and any action or failure to act in accordance with an opinion of its
counsel shall conclusively be deemed to be in the absence of gross negligence and
willful misconduct.

	 	(ii)	 	No Implied Duties. The Holder Representative shall have no duties or
responsibilities except as set forth in the Note and the other Transaction Documents,
nor shall it have any fiduciary relationship with the Holder, and no implied covenants,
responsibilities, duties, obligations or liabilities shall be read into the Transaction
Documents or otherwise exist against the Holder Representative.

	 	(iii)	 	Validity. The Holder Representative shall not be responsible to the
Holder or to any of its successors or assigns (a) for the legality, validity,
enforceability or effectiveness of any of the Transaction Documents, (b) for any
recitals, reports, representations, warranties or statements contained in or made in
connection with any of the Transaction Document, (c) for the existence or value of any
assets included in the Collateral, (d) for the effectiveness of any Lien purported to
be created by the Security Agreement, or (e) unless the Holder Representative shall
have failed to comply with sub-paragraph (i) above, for the perfection of the security
interests created by the Security Agreement.

(c) Compliance. The Holder Representative shall not be obligated to ascertain or
inquire as to the performance or observance of any of the terms of this Note.

(d) Employment of Agents and Counsel. The Holder Representative may execute any of
its duties as Holder Representative under this Note by or through employees, agents and
attorneys-in-fact and shall not be responsible to any of the parties hereto for the default or
misconduct of any such agents or attorneys-in-fact selected by the Holder Representative
acting in the absence of gross negligence and willful misconduct. The Holder Representative shall
be entitled to advice of counsel concerning all matters pertaining to the agency hereby created and
its duties hereunder.

 

15

 

(e) Reliance on Documents and Counsel. The Holder Representative shall be entitled to
rely, and shall be fully protected in relying, upon any affidavit, certificate, cablegram, consent,
instrument, letter, notice, order, document, statement, telecopy, telegram, telex or teletype
message or writing reasonably believed in good faith by the Holder Representative to be genuine and
correct and to have been signed, sent or made by the Person in question, including any telephonic
or oral statement made by such Person, and, with respect to legal matters, upon an opinion or the
advice of counsel selected by the Holder Representative.

(f) Holder Representative’s Reimbursement. The Company agrees to indemnify the Holder
Representative for any losses arising from its appointment as Holder Representative or from the
performance of its duties hereunder and to reimburse the Holder Representative for any reasonable
expenses; provided, however, that the Holder Representative shall not be indemnified or
reimbursed for liabilities or expenses to the extent resulting from its own gross negligence, bad
faith or willful misconduct. In addition, if at any time the Holder Representative is a Person
that is not a holder of one or more Notes, such Person shall be entitled to a fee for acting in the
capacity of Holder Representative, in an amount to be agreed between the Holder Representative and
the Required Holders.

(21) REISSUANCE OF THIS NOTE.

(a) Transfer. If this Note is to be transferred in compliance with Section 7 of the
Securities Purchase Agreement, the Holder shall surrender this Note to the Company, whereupon the
Company will forthwith issue and deliver upon the order of the Holder a new Note (in accordance
with Section 21(d)), registered as the Holder may request, representing the outstanding Principal
being transferred by the Holder and, if less then the entire outstanding Principal is being
transferred, a new Note (in accordance with Section 21(d)) to the Holder representing the
outstanding Principal not being transferred. The Holder and any assignee, by acceptance of this
Note, acknowledge and agree that, by reason of the provisions of Section 3(c)(iii), following
conversion or redemption of any portion of this Note, the outstanding Principal represented by this
Note may be less than the Principal stated on the face of this Note.

(b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Note,
and, in the case of loss, theft or destruction, of an indemnification undertaking by the Holder to
the Company, in customary form and, in the case of mutilation, upon surrender and cancellation of
this Note, the Company shall execute and deliver to the Holder a new Note (in accordance with
Section 21(d)) representing the outstanding Principal.

(c) Note Exchangeable for Different Denominations. This Note is exchangeable, upon
the surrender hereof by the Holder at the principal office of the Company, for a new Note or Notes
(in accordance with Section 21(d) and in principal amounts of at least $100,000)
representing in the aggregate the outstanding Principal of this Note, and each such new Note
will represent such portion of such outstanding Principal as is designated by the Holder at the
time of such surrender.

 

16

 

(d) Issuance of New Notes. Whenever the Company is required to issue a new Note
pursuant to the terms of this Note, such new Note (i) shall be of like tenor with this Note, (ii)
shall represent, as indicated on the face of such new Note, the Principal remaining outstanding (or
in the case of a new Note being issued pursuant to Section 21(a) or Section 21(c), the Principal
designated by the Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining outstanding under
this Note immediately prior to such issuance of new Notes), (iii) shall have an issuance date, as
indicated on the face of such new Note which is the same as the Issuance Date of this Note, (iv)
shall have the same rights and conditions as this Note, and (v) shall represent accrued and unpaid
Interest of this Note from the Issuance Date.

(22) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.

(a) The remedies provided in this Note shall be cumulative and in addition to all other
remedies available under this Note and any of the other Transaction Documents, at law or in equity
(including a decree of specific performance and/or other injunctive relief), and, subject to
Section 22(b) and Section 33 below, nothing herein shall limit the Holder’s right to pursue
monetary damages for any failure by the Company to comply with the terms of this Note. Amounts set
forth or provided for herein with respect to payments, conversion and the like (and the computation
thereof) shall be the amounts to be received by the Holder and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the performance thereof).
The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable
harm to the Holder and that the remedy at law for any such breach may be inadequate. The Company
therefore agrees that, in the event of any such breach or threatened breach, the Holder shall be
entitled, in addition to all other available remedies, to an injunction restraining any breach,
without the necessity of showing economic loss and without any bond or other security being
required.

(b) Notwithstanding the foregoing, but subject to Section 22(c), the Holder may not pursue any
remedy with respect to this Note unless:

	 	(i)	 	the Holder has previously given the Holder Representative written notice that
an Event of Default is continuing;

	 	(ii)	 	holders of at least 25% in aggregate principal amount of the total outstanding
Notes have requested the Holder Representative to pursue the remedy;

	 	(iii)	 	such holders of the Notes have offered the Holder Representative security or
indemnity reasonably satisfactory to it against any loss, liability or expense;

 

17

 

	 	(iv)	 	the Holder Representative has not complied with such request within 60 days
after the receipt thereof and the offer of security or indemnity; and

	 	(v)	 	the Required Holders have not given the Holder Representative a direction
inconsistent with such request within such 60-day period.

(c) Notwithstanding the foregoing, but subject to Section 33, the right of the Holder to
receive payment of Principal, premium, if any, and Interest on the Note, on or after the respective
due dates set forth herein (including in connection with a Change of Control), or convert any
portion of the Note into shares of Company Common Stock on the terms and conditions set forth
herein, or to bring suit for the enforcement of any such right to payment or conversion, shall not
be impaired or affected without the consent of the Holder.

(23) PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this Note is placed
in the hands of an attorney for collection or enforcement or is collected or enforced through any
legal proceeding or the Holder otherwise takes action to collect amounts due under this Note or to
enforce the provisions of this Note or (b) there occurs any bankruptcy, reorganization,
receivership of the Company or other proceedings affecting Company creditors’ rights and involving
a claim under this Note, then the Company shall pay the costs incurred by the Holder for such
collection, enforcement or action or in connection with such bankruptcy, reorganization,
receivership or other proceeding, including, but not limited to, reasonable attorneys’ fees and
disbursements.

(24) CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly drafted by the
Company and all the Purchasers and shall not be construed against any person as the drafter hereof.
The headings of this Note are for convenience of reference and shall not form part of, or affect
the interpretation of, this Note.

(25) FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the Holder
in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such power, right or privilege preclude other or
further exercise thereof or of any other right, power or privilege.

(26) DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Closing Bid Price, the Closing Sale Price, the Volume Weighted Average Price, the Weighted Average
Price, the Redemption Price or the arithmetic calculation of the Conversion Rate or the Redemption
Price, the Company shall submit the disputed determinations or arithmetic calculations via
facsimile within one (1) Business Day of receipt, or deemed receipt, of the Conversion Notice or
the Holder Change of Control Redemption Notice or other event giving rise to such dispute, as the
case may be, to the Holder Representative. If the Holder Representative and the Company are unable
to agree upon such determination or calculation of the Redemption Price or the Conversion Rate, as
applicable, within one (1) Business Day of such disputed determination or arithmetic calculation
being submitted to the Holder Representative, then the Company and the Holder Representative shall,
within one (1) Business Day thereafter submit via facsimile (a) the disputed determination of the
Closing Bid Price, the Closing Sale Price, the Volume Weighted Average Price or the Weighted
Average Price to an independent, reputable investment bank selected by the Company and approved by
the Holder Representative or (b) the disputed arithmetic calculation of the Conversion Rate or the
Redemption Price to the Company’s independent, outside accountant. The Company, at the Company’s
expense, shall
cause the investment bank or the accountant, as the case may be, to perform the determinations
or calculations and notify the Company and the Holder Representative of the results no later than
five (5) Business Days from the time it receives the disputed determinations or calculations. Such
investment bank’s or accountant’s determination or calculation, as the case may be, shall be
binding upon all parties absent demonstrable error. To the extent of a good faith dispute by the
Company, any related penalty payments due hereunder shall not be made unless and until such dispute
is resolved against the Company.

 

18

 

(27) NOTICES; PAYMENTS.

(a) Notices. Whenever notice is required to be given under this Note, unless
otherwise provided herein, such notice shall be given in accordance with Section 13.2 of the
Securities Purchase Agreement. The Company shall provide the Holder with prompt written notice of
all actions taken pursuant to this Note, including in reasonable detail a description of such
action and the reason therefore. Without limiting the generality of the foregoing, the Company
will give written notice to the Holder (i)within one (1) Business Day upon any adjustment of the
Conversion Price, setting forth in reasonable detail, and certifying, the calculation of such
adjustment and (ii) at least fifteen (15) days prior to the date on which the Company closes its
books or takes a record (A) with respect to any dividend or distribution upon the Company Common
Stock, (B) with respect to any pro rata subscription offer to holders of Company Common Stock or
(C) for determining rights to vote with respect to any Fundamental Transaction, dissolution or
liquidation, provided in each case that such information shall be made known to the public prior to
or in conjunction with such notice being provided to the Holder.

(b) Payments. Whenever any payment of cash is to be made by the Company to any Person
pursuant to this Note, such payment shall be made in lawful money of the United States of America
by a check drawn on the account of the Company and sent via overnight courier service to such
Person at such address as previously provided to the Company in writing (which address, in the case
of each of the Purchasers shall initially be as set forth on the Schedule of Buyers attached to the
Securities Purchase Agreement); provided that the Holder may elect to receive a payment of cash via
wire transfer of immediately available funds by providing the Company with prior written notice
setting out such request and the Holder’s wire transfer instructions. Whenever any amount
expressed to be due by the terms of this Note is due on any day which is not a Business Day, the
same shall instead be due on the next succeeding day which is a Business Day.

(c) Withholding Taxes. All payments made by the Company hereunder shall be made
without withholding for or on account of any present or future taxes (other than overall net income
taxes imposed on the recipient). If any such withholding is so required, the Company shall make
the withholding, pay the amount withheld to the appropriate authority before penalties attach
thereto or interest accrues thereon and pay to the recipient such additional amount as may be
necessary to ensure that the net amount actually received by the recipient free and clear of such
taxes (including taxes on such additional amount) is equal to the amount that the recipient would
have received had such withholding not been made. If the recipient is required to pay any such
taxes, penalties or interest, the Company shall reimburse the recipient for that payment on demand.
If the Company pays any such taxes, penalties or interest, it shall
deliver official tax receipts or other evidence of payment to the recipient on whose account
such withholding was made on or before the thirtieth day after payment. The Holder agrees to
provide, promptly following the Company’s request therefore, such forms or certifications as it is
legally able to provide to establish an exemption from, or a reduction in, any withholding taxes
that might otherwise apply.

 

19

 

(28) CANCELLATION. After all Principal, accrued Interest and other amounts at any
time owed on this Note have been paid in full, this Note shall automatically be deemed canceled,
shall be surrendered to the Company for cancellation and shall not be reissued.

(29) WAIVER OF NOTICE. To the extent permitted by law, the Company hereby waives
demand, notice, protest and all other demands and notices in connection with the delivery,
acceptance, performance, default or enforcement of this Note and the Securities Purchase Agreement.

(30) GOVERNING LAW. This Note shall be construed and enforced in accordance with, and
all questions concerning the construction, validity, interpretation and performance of this Note
shall be governed by, the internal laws of the State of New York, without giving effect to any
choice of law or conflict of law provision or rule (whether of the State of New York or any other
jurisdictions) that would cause the application of the laws of any jurisdictions other than the
State of New York.

(31) CERTAIN DEFINITIONS. For purposes of this Note, the following terms shall have
the following meanings:

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

(b) “Bankruptcy Code” means Chapter 11 of Title 11 of the United States Code, as amended from
time to time and any successor statute and all rules and regulations promulgated thereunder.

(c) “Bloomberg” means Bloomberg Financial Markets.

(d) “Business Day” means any day other than Saturday, Sunday or other day on which commercial
banks in The City of New York are authorized or required by law to remain closed.

(e) “Contractual Obligation” means, with respect to any Person, any contract, agreement, deed,
mortgage, lease, sublease, license, sublicense or other legally enforceable commitment, promise,
undertaking, obligation, arrangement, instrument or understanding, whether written or oral, to
which or by which such Person is a party or otherwise subject or bound or to which or by which any
property, business, operation or right of such Person is subject or bound.

 

20

 

(f) “Change of Control” means any Fundamental Transaction other than (A) a Fundamental
Transaction in which holders of the Company’s voting power immediately prior to the Fundamental
Transaction continue after the Fundamental Transaction to hold publicly traded securities and,
directly or indirectly, the voting power of the surviving entity or entities necessary to elect a
majority of the members of the board of directors (or their equivalent if other than a corporation)
of such entity or entities, (B) a Fundamental Transaction with any Holder, any Affiliate of any
Holder or any person otherwise related to or associated with a Holder, or (C) pursuant to a
migratory merger effected solely for the purpose of changing the jurisdiction of incorporation of
the Company.

(g) “Closing Bid Price” and “Closing Sale Price” means, for any security as of any date, the
last closing bid price and last closing trade price, respectively, for such security, as reported
by Bloomberg (whether or not such security is trading on an Eligible Market at such time), or, if
the market on which the security is trading begins to operate on an extended hours basis and does
not designate the closing bid price or the closing trade price, as the case may be, then the last
bid price or last trade price, respectively, of such security prior to 4:00:00 p.m., New York Time,
as reported by Bloomberg, or, if the market on which the security is trading is not the principal
securities exchange or trading market for such security, the last closing bid price or last trade
price, respectively, of such security on the principal securities exchange or trading market where
such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the
last closing bid price or last trade price, respectively, of such security in the over-the-counter
market on the electronic bulletin board for such security as reported by Bloomberg, or, if no
closing bid price or last trade price, respectively, is reported for such security by Bloomberg,
the average of the bid prices, or the ask prices, respectively, of any market makers for such
security as reported in the “pink sheets” by Pink Sheets LLC (formerly the National Quotation
Bureau, Inc.). If the Closing Bid Price or the Closing Sale Price cannot be calculated for a
security on a particular date on any of the foregoing bases, the Closing Bid Price or the Closing
Sale Price, as the case may be, of such security on such date shall be the fair market value as
mutually determined by the Company and the Holder Representative. If the Company and the Holder
are unable to agree upon the fair market value of such security, then such dispute shall be
resolved pursuant to Section 26. All such determinations to be appropriately adjusted for any
stock dividend, stock split, stock combination or other similar transaction during the applicable
calculation period.

(h) “Collateral” has the meaning given to such term in the Security Agreement.

(i) “Company Board of Directors” means the board of directors of the Company or any authorized
committee of the board of directors.

(j) “Company Trading Day” means any day on which the Company Common Stock is traded on the
principal securities exchange or securities market on which the Company Common Stock is then
traded; provided that “Company Trading Day” shall not include any day on which the Company Common
Stock is scheduled to trade on such exchange or market for less than 4.5 hours or any day that the
Company Common Stock is suspended from trading during the final hour of trading on such exchange or
market (or if such exchange or market does not
designate in advance the closing time of trading on such exchange or market, then during the
hour ending at 4:00 p.m., New York Time).

 

21

 

(k) “Convertible Securities” means with respect to any issuer, any stock or securities (other
than Options) directly or indirectly convertible into or exercisable or exchangeable for such
issuer’s common stock.

(l) “Distribution” means (i) any payment or distribution made by the Company on account of the
Note, whether in the form of cash, securities or other property, by setoff or otherwise, or (ii)
any redemption, purchase or other acquisition by the Company of all or a portion of the Note, in
each of cases (i) and (ii), other than any payment, distribution, redemption,
purchase or other acquisition made (x) through the conversion or exchange of all or a portion of
the Note into or for (I) equity securities of the Company (including pursuant to the terms hereof)
or (II) debt securities of the Company that (A) are subordinated in right of payment to the
Existing Secured Note to at least the same extent as the Notes are subordinated to the Existing
Secured Note, (B) do not have the benefit of any obligation of any Person (whether as issuer,
guarantor or otherwise) unless the Existing Secured Note has at least the same benefit of the
obligation of such Person and the obligation of such Person to the Holder is subordinated to the
obligations of such Person to the Existing Secured Note Holder to at least the same extent that
this Note is subordinated to the Existing Secured Note and (C) is either unsecured or secured by
liens that are subordinated to the liens securing the Existing Secured Note, (y) at any time that
no “Default” (as defined in the Existing Secured Note) has occurred and is continuing under Section
6(a) or 6(c) of the Existing Secured Note or (z) through the accrual and addition to principal of
capitalized interest in the amounts and at the times specified in this Note.

(m) “Eligible Market” means a national security exchange that has registered with the SEC
under Section 6 of the Securities Exchange Act of 1934.

(n) “Equity Conditions” means each of the following conditions: (i) during the period
beginning fifteen (15) Company Trading Days prior to the applicable date of determination and
ending on and including the applicable date of determination (the “Equity Conditions Measuring
Period”), the Company shall have delivered Conversion Shares upon conversion of the Notes on a
timely basis as set forth in Section 3(c)(i) hereof (and analogous provisions under the Other
Notes); (ii) on each day during the Equity Conditions Measuring Period, any applicable shares of
Company Common Stock to be issued in connection with the event requiring determination may be
issued in full without violating the rules or regulations of the applicable Eligible Market, if
applicable; (iii) during the Equity Conditions Measuring Period, the Company shall not have failed
to timely make any payments within five (5) Business Days of when such payment is due pursuant to
any Transaction Document; (iv) during the Equity Conditions Measuring Period, there shall not have
occurred either (A) the public announcement of a pending, proposed or intended Fundamental
Transaction which has not been abandoned, terminated or consummated, or (B) an Event of Default;
(v) during the period commencing on the Interest Election Date or the Mandatory Conversion Notice
Date, as applicable, and ending on the Interest Payment Date or the Mandatory Conversion Date, as
applicable, an event that with the passage of time or giving of notice would constitute an Event of
Default; (vi) during the Equity Conditions Measuring Period, the Company shall have no knowledge of
any fact that
would cause any shares of Company Common Stock issuable upon conversion of the Notes not to be
eligible for resale without restriction pursuant to Rule 144 and any applicable state securities
laws; (vii) during the Equity Conditions Measuring Period, the Company otherwise shall have been in
compliance with and shall not have breached any provision, covenant, representation or warranty of
any Transaction Document to the extent that such breach would have a Material Adverse Effect (as
defined in Section 10 of the Securities Purchase Agreement); (viii) prior to the Mandatory
Conversion Eligibility Date the Company Common Stock shall be relisted on an Eligible Market; (ix)
prior to the Mandatory Conversion Eligibility Date the Company shall have timely filed each of its
required reports under the Securities Exchange Act of 1934, as amended; and (x) prior to the
Mandatory Conversion Eligibility Date any shares required for the Mandatory Conversion have been
duly authorized and shall be upon issuance fully-paid and validly issued.

 

22

 

(o) “Event of Default Premium” means 25% of the Outstanding Note Obligations.

(p) “Existing Secured Debt” means all obligations, liabilities and indebtedness of every
nature of the Company from time to time owed to the Existing Secured Note Holder under the Existing
Secured Note, including, without limitation, the principal amount of all debts, claims and
indebtedness, accrued and unpaid interest and all costs and expenses, whether primary, secondary,
direct, contingent, fixed or otherwise, heretofore, now and from time to time hereafter owing, due
or payable, whether before or after the filing of a Proceeding under the Bankruptcy Code together
with any interest accruing thereon after the commencement of a Proceeding, without regard to
whether or not such interest is an allowed claim.

(q) “Existing Secured Note” means the Secured Promissory Note, dated April 14, 2010, issued by
the Company to Timothy Looney, as in effect as of the date hereof.

(r) “Existing Secured Note Holder” means Timothy Looney or any of his successors or assigns as
the Payee of the Existing Secured Note (as such term is defined therein).

(s) “Fundamental Transaction” means that the Company shall, directly or indirectly, in one or
more related transactions, (i) consolidate or merge with or into (whether or not the Company is the
surviving corporation) another Person, or (ii) sell, assign, transfer, convey or otherwise dispose
of all or substantially all of the assets of the Company to another Person, or (iii) allow another
Person to make a purchase, tender or exchange offer that is accepted by the holders of more than
the 50% of the outstanding shares of Company Common Stock (not including any shares of Company
Common Stock held by the Person or Persons making or party to, or associated or affiliated with the
Persons making or party to, such purchase, tender or exchange offer), or (iv) consummate a stock
purchase agreement or other business combination (including, without limitation, a reorganization,
recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person
acquires more than the 50% of the outstanding shares of Company Common Stock (not including any
shares of Company Common Stock held by the other Person or other Persons making or party to, or
associated or affiliated with the other Persons making or party to, such stock purchase agreement
or other business combination), or (v) reorganize, recapitalize or reclassify its Company Common
Stock.
A Fundamental Transaction shall not include any transaction with any Holder, any Affiliate of
any Holder, or any Person otherwise related to or associated with a Holder.

 

23

 

(t) “Guarantee” means, with respect to any Person, (a) any guarantee of the payment or
performance of, or any contingent obligation in respect of, any Indebtedness or other Liability of
any other Person, (b) any other arrangement whereby credit is extended to any obligor (other than
such Person) on the basis of any promise or undertaking of such Person (i) to pay the Indebtedness
or other Liability of such obligor, (ii) to purchase any obligation owed by such obligor, (iii) to
purchase or lease assets under circumstances that are designed to enable such obligor to discharge
one or more of its obligations or (iv) to maintain the capital, working capital, solvency or
general financial condition of such obligor and (c) any liability as a general partner of a
partnership or as a venturer in a joint venture in respect of Indebtedness or other Liabilities of
such partnership or venture.

(u) “Holder Representative” means, as of the Initial Closing Date, Costa Brava Partnership III
L.P. and at any time thereafter, the Person most recently appointed to act as Holder Representative
pursuant to Section 20(a).

(v) “Indebtedness” means, with respect to any Person, and without duplication, all
Liabilities, including all obligations in respect of principal, accrued interest, penalties, fees
and premiums, of such Person (a) for borrowed money (including amounts outstanding under overdraft
facilities), (b) evidenced by notes, bonds, debentures or other similar Contractual Obligations,
(c) in respect of “earn-out” obligations and other obligations for the deferred purchase price of
property, goods or services (other than trade payables or accruals incurred in the ordinary course
of business), (d) for the capitalized liability under all capital leases of such Person (determined
in accordance with GAAP), (e) in respect of letters of credit and bankers’ acceptances, (f) for
Contractual Obligations relating to interest rate protection, swap agreements and collar
agreements, in each case, to the extent payable if such Contractual Obligation is terminated at the
Closing, and (g) in the nature of Guarantees of the obligations described in clauses (a) through
(f) above of any other Person.

(w) “Initial Closing Date” shall have the meaning set forth in the Securities Purchase
Agreement, which date is the date the Company initially issued Notes pursuant to the terms of the
Securities Purchase Agreement.

(x) “Interest Conversion Price” means, with respect to any Interest Payment Date, the price
computed as the Weighted Average Price of the Company Common Stock on each of the twenty (20)
consecutive Company Trading Days ending on the second (2nd) Company Trading Day
immediately preceding such Interest Payment Date. All such determinations to be appropriately
adjusted for any stock split, stock dividend, stock combination or other similar transaction during
such period.

(y) “Interest Period” means, initially, the period beginning on and including the Issuance
Date and ending on and including March 31, 2011 and each successive period for each year until the
Maturity Date as follows: the period beginning on and including April 1 and ending on and including
June 30; the period beginning on and including July 1 and ending on
and including September 30; the period beginning on and including October 1 and ending on and
including December 31; the period beginning on and including January 1 and ending on and including
March 31.

 

24

 

(z) “Interest Rate” means twelve percent (12.0%) per annum; provided that upon the
occurrence and during the continuance of an Event of Default, the Interest Rate shall be increased
to twenty percent (20.0%) per annum. In the event that such Event of Default is subsequently cured
or waived, the Interest Rate shall be reduced to twelve percent (12.0%) per annum as of the date of
such cure or waiver, it being understood, however, that unless the Required Holders otherwise agree
in writing, such reduction shall not apply retroactively to the period when such Event of Default
was continuing.

(aa) “Issuance Date” has the meaning set forth in Section 2 hereof.

(bb) “Liability” means, with respect to any Person, any liability or obligation of such Person
whether known or unknown, whether asserted or unasserted, whether determined, determinable or
otherwise, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or
unliquidated, whether directly incurred or consequential, whether due or to become due and whether
or not required under GAAP to be accrued on the financial statements of such Person.

(cc) “Options” means with respect to any issuer, any rights, warrants or options to subscribe
for or purchase such issuer’s common stock or such issuer’s Convertible Securities.

(dd) “Outstanding Note Obligations” shall have the meaning given to such term in Section 5(b).

(ee) “Parent Entity” of a Person means an entity that, directly or indirectly, controls the
applicable Person and whose common stock or equivalent equity security is quoted or listed on an
Eligible Market, or, if there is more than one such Person or Parent Entity, the Person or Parent
Entity with the largest public market capitalization as of the date of consummation of the
Fundamental Transaction.

(ff) “Permitted Indebtedness” means (A) Indebtedness incurred by the Company that is made
expressly subordinate in right of payment to the Indebtedness evidenced by this Note, as reflected
in a written agreement reasonably acceptable to the Holder Representative and approved by the
Holder Representative in writing, and which Indebtedness does not provide at any time for (1) the
payment, prepayment, repayment, repurchase or defeasance, directly or indirectly, of any principal
or premium, if any, thereon until ninety-one (91) days after the Maturity Date or later and (2)
total interest and fees at a rate in excess of six percent (6%) per annum, (B) Indebtedness secured
by Permitted Liens, (C) Indebtedness to trade creditors or for professional services incurred in
the ordinary course of business, (D) any Bridge Notes, (E) Indebtedness owing to or held by Summit
Financial Resources, L.P. incurred by the Company (but in the case of any such obligations in
respect of principal, limited to Indebtedness incurred prior to the Initial Closing Date) to factor
or finance its accounts receivable and (F) extensions,
refinancings and renewals of any items of Permitted Indebtedness described in clauses (A)
through (D) above, provided that the principal amount is not increased or the terms modified to
impose more burdensome terms upon the Company or its Subsidiary, as the case may be.

 

25

 

(gg) “Permitted Liens” means (i) any Lien for taxes not yet due or delinquent or being
contested in good faith by appropriate proceedings for which adequate reserves have been
established in accordance with GAAP, (ii) any statutory Lien arising in the ordinary course of
business by operation of law with respect to a liability that is not yet due or delinquent, (iii)
any Lien created by operation of law, such as materialmen’s liens, mechanics’ liens and other
similar liens, arising in the ordinary course of business with respect to a liability that is not
yet due or delinquent or that are being contested in good faith by appropriate proceedings, (iv)
Liens securing the Company’s obligations under the Notes, (v) Liens (A) upon or in any equipment
acquired or held by the Company or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the acquisition or lease of
such equipment, or (B) existing on such equipment at the time of its acquisition, provided that the
Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of
such equipment, (vi) Liens incurred in connection with the extension, renewal or refinancing of the
indebtedness secured by Liens of the type described in clauses (i) through (v) above, provided that
any extension, renewal or replacement Lien shall be limited to the property encumbered by the
existing Lien and the principal amount of the Indebtedness being extended, renewed or refinanced
does not increase, (vii) leases or subleases and licenses and sublicenses granted to others in the
ordinary course of the Company’s business, not interfering in any material respect with the
business of the Company and its Subsidiaries taken as a whole, (viii) Liens in favor of customs and
revenue authorities arising as a matter of law to secure payments of custom duties in connection
with the importation of goods, and (ix) Liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default under Section 5(a)(vi).

(hh) “Person” means an individual, a limited liability company, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization, any other entity and a government
or any department or agency thereof.

(ii) “Proceeding” means any voluntary or involuntary insolvency, bankruptcy, receivership,
custodianship, liquidation, dissolution, reorganization, assignment for the benefit of creditors,
appointment of a custodian, receiver, trustee or other officer with similar powers or any other
proceeding for the liquidation, dissolution or other winding up of a Person.

(jj) “Redemption Price” means any of an Event of Default Redemption Price, Alternative Event
of Default Redemption Price or Holder Change of Control Redemption Price.

(kk) “Registration Rights Agreement” means that certain registration rights agreement dated as
of the Subscription Date by and among the Company and the initial holders of the Notes relating to
among other things, the registration of the resale of Company Common Stock issuable upon conversion
of the Notes and exercise of the Warrants.

 

26

 

(ll) “Required Holders” means the holders of Notes representing at least a majority of the
aggregate principal amount of the Notes then outstanding.

(mm) “SEC” means the United States Securities and Exchange Commission.

(nn) “Securities Purchase Agreement” means that certain securities purchase agreement dated as
of the Subscription Date by and among the Company and the initial holders of the Notes pursuant to
which the Company issued the Notes.

(oo) “Subscription Date” means December 23, 2010.

(pp) “Successor Entity” means the Person, which may be the Company, formed by, resulting from
or surviving any Fundamental Transaction or the Person with which such Fundamental Transaction
shall have been made, provided that if such Person is not a publicly traded entity whose common
stock or equivalent equity security is quoted or listed for trading on an Eligible Market,
Successor Entity shall mean such Person’s Parent Entity.

(qq) “Transaction Documents” has the meaning ascribed to such term in the Securities Purchase
Agreement.

(rr) “Volume Weighted Average Price” for a period of days means the quotient of (i) the sum of
(a) the Weighted Average Price for a particular day multiplied by the trading volume for such day,
plus (b) the same calculation for each successive day in the period, divided by (ii) the sum of the
trading volume for the entire period.

(ss) “Warrants” shall mean those warrants listed on Schedule 5.1(c) of the Securities Purchase
Agreement, and shall include all warrants issued in exchange therefor or replacement thereof.

(tt) “Weighted Average Price” means, for any security as of any date, the dollar
volume-weighted average price for such security on the Principal Market during the period beginning
at 9:30:01 a.m., New York Time (or such other time as the Principal Market publicly announces is
the official open of trading), and ending at 4:00:00 p.m., New York Time (or such other time as the
Principal Market publicly announces is the official close of trading) as reported by Bloomberg
through its “Volume at Price” functions, or, if the foregoing does not apply, the dollar
volume-weighted average price of such security in the over-the-counter market on the electronic
bulletin board for such security during the period beginning at 9:30:01 a.m., New York Time (or
such other time as such market publicly announces is the official open of trading), and ending at
4:00:00 p.m., New York Time (or such other time as such market publicly announces is the official
close of trading) as reported by Bloomberg, or, if no dollar volume-weighted average price is
reported for such security by Bloomberg for such hours, the average of the highest closing bid
price and the lowest closing ask price of any of the market makers for such security as reported in
the “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If the
Weighted Average Price cannot be calculated for a security on a particular date on any of the
foregoing bases, the Weighted Average Price of such security on such date shall be the fair market
value as mutually determined by the Company and the Holder Representative. If the Company and the
Holder Representative are unable to agree upon the fair
market value of such security, then such dispute shall be resolved pursuant to Section 26.
All such determinations to be appropriately adjusted for any stock dividend, stock split, stock
combination or other similar transaction during the applicable calculation period.

 

27

 

(32) SECURITY. The Notes shall be secured by and to the extent provided in the
Security Agreement.

(33) SUBORDINATION. It is a requirement of the Existing Secured Note that any secured
Indebtedness of the Company, including this Note, be subordinated in right of payment to the
Existing Secured Note. Accordingly, each of the Company and, by acceptance of this Note, the
Holder and each of its successors and assigns hereby covenants and agrees that for so long (but
only for so long) as the Outstanding Note Obligations are secured by any of the assets of the
Company, the following provisions of this Section 33 shall apply:

(a) Subordination of Note to Existing Secured Debt. Notwithstanding anything to the
contrary set forth herein or in any of the Transaction Documents, this Note shall be subordinated
in right and time of payment, to the extent and in the manner set forth in this Section 33, to the
prior indefeasible payment in full in cash of the Existing Secured Debt.

(b) Payment Restrictions. The Company hereby agrees that it may not make, and the
Holder hereby agrees that it will not accept, any Distribution with respect to this Note until the
earlier of (a) the date that is one (1) day following the date the Existing Secured Debt is
indefeasibly paid in full in cash and (b) in the event that the Existing Secured Note Holder has
acknowledged in writing that the Existing Secured Debt has been indefeasibly paid in full in cash,
the date of such payment and acknowledgment in writing.

(34) Registered Obligation. The Company shall establish and maintain a record of
ownership (the “Register”) in which it will register by book entry the interest of the
initial Holder and of each subsequent assignee in this Note, and in the right to receive any
payments of principal and interest or any other payments hereunder, and any assignment of any such
interest. Notwithstanding anything herein to the contrary, this Note is intended to be treated as
a registered obligation for federal income tax purposes and the right, title, and interest of the
Holder and its assignees in and to payments under this Note shall be transferable only upon
notation of such transfer in the Register. This Section shall be construed so that the Note is at
all times maintained in “registered form” within the meaning of Sections 163(f), 871(h)(2) and
881(c)(2) of the Internal Revenue Code and any related regulations (or any successor provisions of
the Code or such regulations).

[Signature Page Follows]

 

28

 

IN WITNESS WHEREOF, the Company has caused this Note to be duly executed as of the Issuance
Date set out above.

	 	 	 	 	 
	 	IRVINE SENSORS CORPORATION

 	 
	 	By:  	/s/ John C. Carson	 
	 	 	Name:  	John C. Carson	 
	 	 	Title:  	President & CEO	 
	 

Note

 

 

EXHIBIT I

IRVINE SENSORS CORPORATION

CONVERSION NOTICE

TO BE EXECUTED BY THE REGISTERED HOLDER TO CONVERT THIS NOTE 

INTO COMMON STOCK

Reference is made to the Subordinated Secured Convertible Note (the “Note”) issued to the
undersigned by Irvine Sensors Corporation (the “Company”). In accordance with and pursuant to the
Note, the undersigned hereby elects to convert the Conversion Amount (as defined in the Note) of
the Note indicated below into shares of Company Common Stock, par value $.01 per share (the
“Company Common Stock”), of the Company as of the date specified below. The undersigned hereby
makes the representations and warranties set forth in Section 4 of the Securities Purchase
Agreement.

	 	 	 	 	 
	Date of Conversion:

	 	 	 	 

	 	 	 	 	 
	Aggregate Conversion Amount to be converted:

	 	 	 	 

Please confirm the following information:

	 	 	 	 	 
	Conversion Price:

	 	 	 	 

	 	 	 	 	 
	Number of shares of Company Common Stock to be issued:

	 	 	 	 

Please issue the Company Common Stock into which the Note is being converted in the following name
and to the following address:

	 	 	 	 	 
	Issue to:

	 	 	 	 
	 
	 	 	 	 
	 

	 	 

	 	 
	 
	 	 	 	 
	 

	 	 

	 	 

	 	 	 	 	 
	Facsimile Number:

	 	 	 	 

	 	 	 	 	 
	Authorization:

	 	 	 	 

	 	 	 	 	 	 	 
	By:
	 	 	 	 	 	 
	 	 	 	 	 
	 

	 	Title:	 	 	 	 
	 

	 	 	 	 

	 	 

	 	 	 	 	 
	Dated:
	 	 	 	 
	 

	 	 

	 	 

	 	 	 	 	 
	Account Number:
	 	 	 	 
	(if electronic book entry transfer)

	 	 

	 	 	 	 	 
	Transaction Code Number:
	 	 	 	 
	(if electronic book entry transfer)
	 	 

 

 

ACKNOWLEDGMENT

The Company hereby acknowledges this Conversion Notice and hereby directs
 _____, the Company’s transfer agent (the “Transfer Agent”), to issue the above
indicated number of shares of Company Common Stock in accordance with the Transfer Agent
Instructions dated _____ __, 20_____ from the Company and acknowledged and agreed to by Transfer
Agent.

	 	 	 	 	 
	 	IRVINE SENSORS CORPORATION

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:

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