Document:

Unassociated Document

    EXHIBIT
      10.48

    

    ACORN
      FACTOR, INC.

    PLACEMENT
      AGENT AGREEMENT

     

    Dated
      as
      of March 8, 2007

    

     

    First
      Montauk Securities Corp.

    Parkway
      109 Office Center

    328
      Newman Springs Road

    Red
      Bank,
      New Jersey 07701

    

    Re:
      Proposed Private Placement

    

    Ladies
      and Gentlemen:

     

    Acorn
      Factor, Inc., a Delaware corporation (the “Company” or “Acorn”), proposes to
      offer for sale (the "Offering") in a private offering pursuant to Section 4(2)
      of the Securities Act of 1933, as amended (the "Act"), and/or Regulation D
      promulgated thereunder, convertible redeemable subordinated debentures
      (“Debentures”) convertible into shares of its Common Stock, par value $.01 per
      share (“Shares”) and (ii) warrants to purchase a number of share equal to 25% of
      the Shares issuable upon conversion of 100 % of the initial principal amount
      of
      the Debentures (“Warrants”). The Debentures and Warrants to be offered and sold
      are sometimes referred to herein as the “Securities”. The Offering is being
      conducted on a “best efforts, all or none” basis for a minimum of $2,000,000 of
      gross proceeds (the “Minimum Offering”)
      and up
      to $6,000,000 of gross proceeds (the “Maximum Offering”). The Maximum Offering
      is subject to an increase of 15%, or $950,000 upon the agreement of the Company
      and the Placement Agent (as defined below) for an aggregate Maximum Offering
      of
      $6,950,000 (the “Over-Allotment Amount.”) Offers and sales of the Securities
      shall be made solely to Accredited Investors (as defined in Regulation D).
      This
      letter agreement shall confirm our agreement concerning First Montauk Securities
      Corp. acting as our placement agent (the “Placement Agent” or “First Montauk”)
      in connection with the sale of the Securities. 

    

    l.
      Appointment of Placement Agent.

    

    On
      the
      basis of the representations and warranties contained herein, and subject to
      the
      terms and conditions set forth herein, the Company hereby appoints First Montauk
      as its Placement Agent and grants to First Montauk the exclusive right to offer,
      as its agent, the Securities through the Offering Period (as defined below).
      The
      Company expressly acknowledges and agrees that First Montauk's obligations
      hereunder are not on a firm commitment basis and that the execution of this
      Agreement does not constitute a commitment by First Montauk to purchase the
      Securities and does not ensure the successful placement of the Securities or
      any
      portion thereof. Further, First Montauk's obligation to use its best efforts
      to
      assist the Company in the Offering is subject to the completion of a due
      diligence review of the Company, the industry and the market for such securities
      generally, as well as general market conditions. On the basis of such
      representations and warranties, and subject to such conditions, First Montauk
      hereby accepts such appointment and agrees to use its reasonable commercial
      efforts to secure subscriptions for the purchase of Securities up to the Maximum
      Offering. 

    

    2. Terms
      of
      the Offering. 

    

    (a)
      The
      Company has prepared and delivered to the Placement Agent copies of a
      Confidential Private Placement Memorandum (as may be amended from time to time,
      and including the exhibits thereto, the “Memorandum”), relating to, among other
      things, the business of the Company, its financial condition, the Securities
      and
      the terms of Offering. 

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    (b)
       
      Pursuant
      to the Offering as further described in the Memorandum the Company intends
      to
      offer Debentures with an aggregate purchase price of $6,000,000, exclusive
      of
      the over-allotment option for an additional $950,000 of gross proceeds. The
      minimum subscription amount per purchaser shall be $25,000. Each Debenture
      will
      be convertible into Shares at a price of $3.80 per Share in accordance with
      the
      terms thereof. From the date of issuance to, and including, the first
      anniversary of the Final Closing Date (as defined below) (the “First Anniversary
      Date”) each Debenture shall be convertible as to the lesser of (i) 50% of the
      original principal amount stated on the face thereof on the date of issuance,
      or
      (ii) the principal amount of such Debenture then outstanding. Following the
      First Anniversary Date and up to and including the maturity thereof, each
      Debenture shall be convertible as to the principal amount then outstanding.
      The
      Debentures shall be subordinated to other debt of the Company and may be
      redeemed by the Company, respectively, in the manner described in the
      Memorandum. In addition, each purchaser in the Offering will receive Warrants
      equal to 25% of the Shares issuable upon conversion of 100 % of the initial
      principal amount of the Debentures (“Warrants”). The Warrants will have a term
      of five (5) years and will be exercisable at an exercise price of $4.50 per
      Share. The Warrants are callable at the option of the Company in the manner
      described therein. The investors shall be entitled to such “registration
      rights”, anti-dilution protection, and other rights as are described in the
      Offering Documents (as defined below).

    

    (c)
       The
      Offering shall commence on the date hereof and shall expire at 3:00 p.m., New
      York time, on March 30, 2007; provided however, that if the Minimum Offering
      has
      not been deposited into escrow on or before March 30, 2007, the Company and
      Placement Agent may agree to extend the Offering until April 16, 2007, and
      provided further that if subscriptions representing the Minimum Offering have
      been deposited into escrow on or before March 30, 2007, or April 16, 2007,
      as
      the case may be, then the offering period may be extended at the option of
      the
      Placement Agent and the Company until May 30, 2007. Such period, as the same
      may
      be so extended, shall hereinafter be referred to as the “Offering Period.”

    

    (d)
       Each
      prospective investor (“Prospective Investor”) who desires to purchase Securities
      shall deliver to the Placement Agent a fully executed Subscription Agreement,
      Investor Questionnaire , and such other agreements as are required to be signed
      in connection with the Offering (together with the Memorandum, Subscription
      Agreement, Investor Questionnaire, and other exhibits thereto, the “Offering
      Documents”) along with payment in the form of immediately available funds in the
      amount of the principal amount of the Debenture that such Prospective Investor
      desires to purchase. Upon receipt of the executed Offering Documents, the
      Placement Agent shall forward such documents to the Company for review, keeping
      a copy of such documents for its records. The Placement Agent shall not have
      any
      obligation to independently verify the accuracy or completeness of any
      information contained in any Subscription Agreement or the authenticity,
      sufficiency, or validity of any check delivered by any Prospective Investor
      in
      payment for Securities.

    

    (e)
       The
      Placement Agent shall deliver all subscription funds received from a Prospective
      Investor to Signature Bank for deposit in a segregated escrow account pursuant
      to an escrow deposit agreement among the Company, Placement Agent and Signature
      Bank, as escrow agent, and shall deliver the executed copies of the Subscription
      Agreement received from such Prospective Investor to the Company. All funds
      shall be held in the segregated non-interest-bearing account pending acceptance
      of the subscription and no funds shall be released without execution of a
      written notice by the Company and the Placement Agent. The Company shall notify
      the Placement Agent promptly of the acceptance or rejection or any
      subscription.

    

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

    (f)
       Subject
      to the approval of the Company and the conditions set forth herein, which
      approval shall not be unreasonably withheld, First Montauk may engage other
      persons selected by First Montauk to assist First Montauk in the Offering (each
      such broker/dealers being hereinafter referred to as a “Selling Group Member”)
      and First Montauk may allow such Selling Group Member such part of the
      compensation and payment of expenses payable to First Montauk under Section
      5
      hereof as First Montauk shall determine. Any such Selling Group Member shall
      be
      a member firm in good standing as a broker-dealer under the rules of the NASD.
      The Company hereby agrees to make such representations and warranties to, and
      covenants and agreements with, any Selling Group Member (including an agreement
      to indemnify such Selling Group Member on terms substantially similar to Section
      12 hereof) as provided herein.

    

    3.
      Closings: Release of Funds.

    

    (a)
       The
      date
      that cleared funds representing the Minimum Offering together with completed
      subscription agreements are received by the parties (including the funds held
      in
      escrow), or reasonably soon thereafter, the parties shall hold an initial
      closing for acceptance of subscriptions by the Company and the release of funds
      from the escrow account (the “Initial Closing”). At least one (1) day prior to
      the release of funds, the Company and the Placement Agent shall send written
      notice to each other, which notice shall state the amount of funds to be
      released, the name and address of each subscriber whose subscription has been
      accepted by the Company, and the amount of each subscription.

    

    (b) At
      any
      time prior to the expiration of the Offering Period following the Initial
      Closing and after acceptance by the Company of subscriptions for the sale of
      additional Securities up to the Maximum Offering (or the Over Allotment Amount,
      as the case may be), one or more closings (each an "Interim Closing") shall
      take
      place in the manner herein set forth with respect to the Initial Closing. The
      final Interim Closing to be held in accordance herewith shall be deemed the
      “Final Closing” and the date thereof shall be the ”Final Closing Date”.
      References herein to a "Closing" shall mean the Initial Closing, any Interim
      Closing or the Final Closing, as the context requires, and the date thereof
      shall be referred to as a ”Closing Date”. Prior to each Closing, Placement Agent
      will furnish to the Company appropriate records indicating the name and address
      of each person subscribing in the Offering and a copy of the executed
      Subscription Agreement for each subscriber. The Company shall have discretion
      as
      to whether or not to accept any Subscription Agreement; provided,
      however
      any rejection of a subscription shall be in good faith on the basis of a
      reasonable business purpose 

    

    4. Representations
      and Warranties of the Placement Agent.

    

    The
      Placement Agent represents, warrants to and agrees with the Company as
      follows:

    

    (a) The
      Placement Agent is duly incorporated and validly existing and in good standing
      under the laws of the State of New York.

    

    (b) The
      Placement Agent is, and at the time of each Closing will be, duly registered
      as
      a broker/dealer pursuant to the Securities Exchange Act of 1934, as amended
      (the
“Exchange Act”) and a member in good standing of the NASD, and each of the
      Placement Agent's representatives is, and at the time of each Closing will
      be,
      registered as an agent or salesman of the Placement Agent and in good standing
      with the NASD.

    

    (c) Sales
      of
      Securities by the Placement Agent will only be made in such jurisdictions in
      which the Placement Agent is a registered broker-dealer or where an applicable
      exemption from such registration exists.

    

    
      
        
        

      

      
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    (d) Offers
      and sales of Securities by the Placement Agent will be made only in accordance
      with this Agreement and in compliance with the provisions of Rule 506 of
      Regulation D (it being understood and agreed that the Placement Agent shall
      be
      entitled to rely upon the information and statements provided by the Prospective
      Investors in the Subscription Agreement and Investor Questionnaires), and the
      Placement Agent will furnish to each Prospective Investor a copy of the Offering
      Documents prior to the receipt thereby of any Subscription Agreement from such
      Prospective Investor.

    

    (e) During
      the course of the Offering, the Placement Agent and its representatives will
      not
      make any untrue statement of a material fact or omit to state a material fact
      required to be stated, or necessary to make any statement made, by the Placement
      Agent or its representatives, not misleading concerning the Offering or any
      matters set forth in or contemplated by the Offering Documents (it being
      understood that the statements made in the Offering Documents are deemed to
      be
      made by the Company and not the Placement Agent, except for information set
      forth therein based upon written information provided by, or on behalf of,
      the
      Placement Agent or any of its representatives for inclusion
      therein).

    

    (f) Neither
      the Placement Agent nor any of its representatives or affiliates, has engaged
      or
      will engage, directly or indirectly, in any act or activity that may jeopardize
      the status of the Offering and sale of the Securities as an exempt transaction
      under the Act or under all applicable federal and/or state securities or blue
      sky laws of any jurisdiction in which the Securities may be offered or
      sold.

    

    5.
      Placement Agent Compensation; Future Financing. 

    

    (a) The
      Placement Agent shall be entitled, on each Closing Date, as compensation for
      its
      services as Placement Agent under this Agreement, to (i) selling commissions
      equal to 7% of the gross proceeds received by the Company from the sale of
      the
      Debentures (ii) a management fee of 3% of the gross proceeds received by the
      Company from the sale of the Debentures and (iii) a non-accountable expense
      allowance equal to 2% of the gross proceeds received by the Company from the
      sale of the Debentures. All payments hereunder shall be effected at each Closing
      in immediately available funds. 

    

    (b)
       In
      addition to the forgoing cash compensation, the Placement Agent will be entitled
      to receive placement agent warrants to purchase a number of Shares equal 10%
      of
      the shares issuable upon the conversion of the original principal amount of
      Debentures based upon $3.80 per share (“Agent Warrants”). The Agent Warrants
      shall be on the same terms as the Investor Warrants except that the Agent
      Warrants shall contain provisions for “cashless exercise” on the same basis as
      available to investors and shall not be redeemable for a period equal to nine
      (9) months after effectiveness of the registration statement be filed by the
      Company on behalf of the investors in the Offering and provided the registration
      statement is effective at the time of redemption. The shares underlying the
      agent Warrants shall be included in the registration statement to be filed
      by
      the Company on behalf of the investors in the Offering. The Placement Agent
      shall have the right, at its option, to request that the Agent Warrants be
      issued in the names of its officers, employees and registered
      representatives.

    

    (c)
       For
      a
      period of 18 months following the end of the Exclusive Period, the Company
      agrees to pay to Placement Agent at each closing of any other equity financing,
      convertible debt financing or any instrument convertible into Shares from any
      Source contacted by Placement Agent on the Company’s behalf and disclosed to the
      Company in writing: (i) a cash transaction fee in the amount of 10% of the
      amount of the gross proceeds received by the Company from any such financing,
      (ii) a non-accountable expense allowance of 1% of the amount of gross proceeds
      received by the Company from any such financing and (iii) additional Agent
      Warrants (reflective of 10% of the equity securities issued or equity underlying
      any convertible securities) . As
      used
      in this Agreement, the term “Source” shall be broadly interpreted to include,
      without limitation, any corporation, company, institution, partnership,
      individual and all of the Source’s affiliates that are directly or indirectly
      contacted by Placement Agent for the purpose of investing in the Offering.
      Placement Agent will periodically provide the Company with a written list of
      all
      Sources contacted by Placement Agent.

    

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

    (d)
       The
      Placement Agent shall also be entitled to receive, during the term of the
      Warrants, a warrant solicitation fee (“Solicitation Fee”) equal to five percent
      (5%) of the exercise price of the Warrants, which fee shall be payable within
      five business days of receipt by the Company of the exercise price from a holder
      of the Warrants. The Solicitation Fee shall be payable in accordance with the
      applicable rules of the NASD and the form of warrants issuable to investors
      shall disclose shall include appropriate disclosure regarding the payment of
      the
      Solicitation Fee upon terms acceptable to the Placement Agent. The Company
      shall
      not hire any other broker dealer firm other than the Placement Agent to assist
      it in connection with the solicitation of the exercise of the
      Warrants.

    

    (e) The
      Placement Agent shall not be entitled to additional compensation with respect
      to
      any investment in this Offering by investors in the private placement offering
      completed in July 31, 2006, it being understood and agreed that the sole
      compensation for an investment from these prior investors shall be determined
      in
      accordance with this Section 5. The Company hereby agrees that it shall not
      call
      for redemption the warrants held by the Placement Agent (and its associated
      persons) which were issued in connection with the private placement offering
      completed in July 2006 prior to June 20, 2006 

     

    6.
      Representations and Warranties of the Company. The Company represents and
      warrants to, and agrees with, the Placement Agent that as of the date hereof
      and
      as of each Closing Date (except as disclosed in the Memorandum or contemplated
      therein):

    

    (a)
       Assuming
      the accuracy of the representations and warranties of the Prospective Investors
      set forth in the Subscription Agreement and Investor Questionnaire and the
      representations and warranties of the Placement Agent set forth herein, the
      Offering Documents (including, without limitation, the Company Documents as
      defined in clause (c) below) (i) contain at all times during the period from
      the
      date hereof to and including each Closing Date, all information required to
      be
      contained therein, if any, pursuant to a private offering to all “accredited
      investors“ under Rule 506 of Regulation D and all applicable federal and/or
      state securities and blue sky laws, and (ii) do not, and during such period
      will
      not, contain any untrue statement of a material fact or omit to state any
      material fact necessary in order to make the statements made therein, in the
      light of the circumstances in which they were made, not misleading. Each
      contract, agreement, instrument, lease, license, or other document required
      to
      be described in the Offering Documents shall be, and have been, accurately
      described therein in all material respects. 

    

    (b)
       The
      Offering Documents do not and shall not contain any untrue statement of a
      material fact or omit to state any material fact necessary to make the
      statements made therein, in the light of the circumstances in which they were
      made, not misleading. 

    

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

    (c)
 The
      authorized capital stock of the Company consists of 20,000,000 Shares. As of
      the
      date hereof, 9,412,259 shares of Common Stock are issued and outstanding, and
      all such shares are, duly authorized, validly issued, fully paid and
      nonassessable and not subject to preemptive rights. In addition, there are
      (i)
      warrants outstanding to acquire an aggregate of approximately 614,039 shares
      of
      Common Stock and (ii) options outstanding to acquire an aggregate of
      approximately 2,049,035
      shares
      of Common Stock. The Securities, when issued in accordance with the terms of
      the
      Offering, will be validly issued, fully paid and nonassessable and not subject
      to preemptive or any other similar rights and no personal liability will attach
      to the ownership thereof. The Shares, when issued in accordance with the terms
      of the Debentures and/or Warrants, will be validly issued, fully paid and
      nonassessable and not subject to preemptive or any other similar rights and
      no
      personal liability will attach to the ownership thereof . The outstanding
      options, warrants and other convertible securities of the Company are as set
      forth in the Memorandum and the Company’s filings with the SEC under the
      Exchange Act attached as exhibits to the Memorandum (sometimes collectively
      referred to as the “Company Documents”).
      Except
      as set forth in the warrants issued, and subscription agreements entered into,
      in connection with Company’s offering completed on July 31, 2006 (the “Prior
      Offering”), neither the Company nor any Subsidiary is a party to an agreement,
      instrument or understanding which calls for, and no securities of the Company
      or
      any Subsidiary contain provisions relating to, the
      resetting or repricing
      of any debt or equity security instrument of the Company or any Subsidiary.
      The
      issuance of the Securities or the consummation of the Offering will not trigger
      any resetting or repricing of any debt or equity security instrument of the
      Company or any Subsidiary and will not result in any preemptive rights to
      acquire securities of the Company in favor of any third party.

     

    (d) Each
      statute, regulation, legal and governmental proceeding, contract, agreement,
      instrument, lease, license, or other document required to be described in the
      Offering Documents has been accurately described therein in all material
      respects.

    

    (e) All
      prior
      offerings of the Company’s securities complied in all respects with the Act and
      the rules and regulations promulgated thereunder and all applicable blue sky
      laws. There are no existing claims, to the knowledge of the Company, which
      would
      require the Company to rescind or offer to rescind and outstanding securities
      of
      the Company. 

    

    (f) The
      Company and its Controlled Subsidiaries, are (a) corporations duly organized,
      validly existing and in good standing under the laws of the respective state
      of
      their incorporation, each have full power and authority to own or lease all
      of
      the assets owned or leased by each of them and to conduct their respective
      business as described in the Offering Documents and (b) are duly qualified
      to do
      business and in good standing as a foreign corporation in all jurisdictions
      in
      which the nature of the activities conducted or the character of the assets
      owned or leased makes such qualification necessary, except where the failure
      to
      be so qualified would not have a material adverse effect on the Company's
      presently conducted business (taken as a whole with the business of the
      Controlled Subsidiaries). Complete and correct copies of the certificate of
      incorporation and of the by-laws of the Company and its Controlled Subsidiaries
      as in effect on the date hereof have been delivered to First Montauk, and no
      changes therein will be made on or subsequent to the date hereof and prior
      to
      the Final Closing Date except as may be disclosed in the Offering Documents
      or
      required pursuant to this Agreement. The term “Controlled Subsidiaries” means
      any corporation or other organization in which the Company owns, directly or
      indirectly, (i) an equity or other ownership interest equal to or greater than
      50 % or (ii) the right to vote more than 50% of the outstanding voting stock
      or
      to elect or appoint a majority of the members of the board of
      directors.

    

    (g)
       Since
      the
      dates as of which information is given in the Offering Documents, other than
      as
      set forth or contemplated therein, (A) there has not been any material adverse
      change in the business, prospects, properties, management, financial condition
      or results of operations of the Company or its Controlled Subsidiaries, (B)
      the
      Company has not and will not have paid or declared any dividends or other
      distributions on its capital stock and (C) there has not been any change in
      the
      capital stock of the Company or any material change in the short-term or
      long-term debt of the Company or its Controlled Subsidiaries. 

    

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

    (h) The
      consolidated financial statements, together with related notes and schedules
      of
      the Company and its Controlled Subsidiaries, included as part of the Offering
      Documents (including the financial statements contained in the Company
      Documents), present fairly the financial position of the Company and its
      Controlled Subsidiaries in all material respects as of the respective dates
      and
      for the periods indicated therein. All audited financial statements, and related
      notes and schedules, of the Company have been prepared in conformity with United
      States generally accepted accounting principles applied on a consistent basis
      and the rules of the SEC through the entire period involved. Except as stated
      in
      the Offering Documents, the unaudited statements contained in the Offering
      Documents are consistent with, and have been prepared from the books and records
      kept by the Company in a manner consistent with past practice and fairly and
      accurately represent the financial condition of the Company.

    

    (i) Except
      as
      described in the Offering Documents, there is no action, suit, investigation
      or
      proceeding pending or, to the Company's knowledge, threatened before or by
      any
      Federal or state court, commission, regulatory body, administrative agency
      or
      other governmental body, domestic or foreign, or arbitrator to which the Company
      or its Controlled Subsidiaries is or may become a party or of which any property
      of the Company or its Controlled Subsidiaries is subject or affected that (i)
      might affect the consummation of the transactions contemplated under this
      Agreement, including the issuance or validity of the Securities offered or
      (ii)
      would have a material adverse effect on the financial condition, properties,
      results of operations or businesses of the Company and its Controlled
      Subsidiaries, taken as a whole (“Material Adverse Effect”).

    

    (j) The
      Company and its Controlled Subsidiaries have all approvals, licenses,
      franchises, authorizations and permits (collectively, “permits”) necessary under
      all applicable statutes, codes, rules, regulations, orders and decrees of
      governments or governmental bodies (collectively, “laws”), which are material to
      the ownership, lease or use of their respective properties or the conduct of
      their respective businesses as described in the Offering Documents. Neither
      the
      Company nor its Controlled Subsidiaries has received notice of any proceedings
      relating to the revocation or modification of any such permits which, singly
      or
      in the aggregate, would have a Material Adverse Effect, and each of the Company
      and its Controlled Subsidiaries is in all material respects in compliance with
      such permits and laws.

    

    (k) The
      Company and its Controlled Subsidiaries own or are licensed to use all patents,
      patent applications, inventions, trademarks, trade names, applications for
      registration of trademarks, copyrights, know-how, trade secrets, licenses and
      rights in any thereof (“Proprietary Rights”) which are material to the business
      of the Company and its Controlled Subsidiaries taken as a whole as now conducted
      and as proposed to be conducted, in each case as described in the Offering
      Documents. Except as described in the Offering Documents:

    

    (i)
      the
      Company and its Controlled Subsidiaries do not have any knowledge of, and the
      Company and its Controlled Subsidiaries have not given or received any notice
      of
      any pending conflict with or infringement of, the rights of others with respect
      to any Proprietary Rights or with respect to any license of Proprietary
      Rights;

    

    (ii)
      no
      action, suit, arbitration, or legal, administrative or other proceeding, or
      domestic or foreign governmental investigation is pending or, to the best of
      the
      Company's knowledge, threatened, which involves any Proprietary Rights and
      would
      have a Material Adverse Effect;

    

    (iii)
      neither the Company nor its Controlled Subsidiaries is subject to any judgment,
      order, writ, injunction or decree of any court or any Federal, state, local,
      foreign or other governmental department, commission, board, bureau, agency
      or
      instrumentality, domestic or foreign, or any arbitrator, which restricts or
      impairs the use of any such Proprietary Rights in a manner which would have
      a
      Material Adverse Effect on the use of any of the Proprietary
      Rights;

    

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

    (iv)
      no
      Proprietary Rights used by the Company or its Controlled Subsidiaries and no
      services or products sold by the Company or its Controlled Subsidiaries,
      conflict with or infringe upon, to the knowledge of the Company and its
      Controlled Subsidiaries, any proprietary rights available to any third
      party;

    

    (v)
      neither the Company nor its Controlled Subsidiaries has entered into any
      consent, indemnification, forbearance to sue or settlement agreement with
      respect to Proprietary Rights other than in the ordinary course of
      business;

    

    (vi)
      to
      the best knowledge of the Company, no claims have been asserted by any person
      with respect to the validity of or the Company's or its Controlled Subsidiaries'
      ownership of or right to use the Proprietary Rights and, to the best knowledge
      of the Company, there is no reasonable basis for any such claim;

    

    (vii)
      to
      the best knowledge of the Company, the Proprietary Rights are valid and
      enforceable and no registration relating thereto has lapsed, expired or been
      abandoned or canceled or is the subject of cancellation or other adversarial
      proceedings which would have a Material Adverse Effect, and any applications
      therefore are pending and are in good standing;

    

    (viii)
      the Company and its Controlled Subsidiaries have complied, in all material
      respects, with their respective contractual obligations relating to the
      protection of the Proprietary Rights used pursuant to licenses; and

    

    (ix)
      to
      the best knowledge of the Company, no person is infringing on or violating
      the
      Proprietary Rights owned or used by the Company or its Controlled
      Subsidiaries.

    

    (l)
       Except
      as
      described in the Offering Documents, there are no contracts, agreements or
      understandings between the Company and any person granting such person the
      right
      to require the Company to file a registration statement under the Act with
      respect to any securities of the Company owned or to be owned by such person
      or
      to require the Company to include such securities in the securities being
      registered pursuant to any registration statement filed by the Company under
      the
      Act.

    

    (m) All
      offers and sales of securities of the Company issued during the three year
      period prior to the date hereof were at all relevant times duly registered
      or
      exempt from the registration requirements of the Act and the rules and
      regulations thereunder and were duly registered or the subject of an available
      exemption from the registration requirements of the applicable state securities
      or Blue Sky laws. The Company has not, directly or indirectly, solicited any
      offer to buy or offered to sell any securities during the twelve-month period
      ending on the date hereof which, to the knowledge of the Company, would be
      integrated with the Offering. 

    

    (n) Neither
      the Company nor its Controlled Subsidiaries are (i) in violation of its
      certificate of incorporation or by-laws, (ii) to the best knowledge of the
      Company, in violation of any statute, law, rule, code, administrative
      regulation, ordinance, judgment, order or decree of any government, governmental
      instrumentality, court, domestic or foreign, or arbitration panel or other
      body
      applicable to it where such violation would have a Material Adverse Effect
      or
      (iii) to the best knowledge of the Company, in default in the performance or
      observance of any obligation, agreement, covenant or condition contained in
      any
      indenture, mortgage, deed of trust, voting agreement, voting trust agreement,
      loan agreement, bond, debenture, note or other evidence of indebtedness, lease,
      sublease, license agreement, contract or other agreement or instrument to which
      it is a party or by which it or any of its respective properties are bound
      or
      affected (“Contracts”), where such defaults, singly or in the aggregate, would
      have a Material Adverse Effect. To the knowledge of the Company, no other party
      under any Contract is in default in any material respect thereunder which
      affects the Company.

    

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

    (o) The
      Company has all requisite power and authority to execute, deliver and perform
      its obligations under this Agreement, the Securities and the Subscription
      Agreement. This Agreement, the Debentures and Warrants and the Subscription
      Agreement have been or will be duly and validly authorized, executed and
      delivered by the Company, and each such agreement constitutes a legal, valid
      and
      binding agreement of the Company enforceable against the Company in accordance
      with its respective terms, except as rights to indemnity and contribution
      hereunder and thereunder may be limited by the securities laws and public policy
      of the United States and except as such enforceability may be limited by
      bankruptcy, insolvency, reorganization or similar laws or equitable principles
      affecting the enforcement of creditors' rights generally;

    

    (p) The
      issuance of the Securities and the execution, delivery and performance of this
      Agreement and the Subscription Agreement, and the consummation of the
      transactions contemplated hereby and thereby, do not and will not conflict
      with
      or result in a material breach or violation of any of the terms or provisions
      of, or constitute a material default under, or give rise to rights of
      termination under, or result in the acceleration of any obligation under, or
      result in the creation or imposition of any lien, charge or encumbrance upon
      any
      material property or assets of the Company or any of its Controlled Subsidiaries
      pursuant to the terms of any indenture, mortgage, deed of trust, voting
      agreement, voting trust agreement, loan agreement, bond, debenture, note or
      other evidence of indebtedness or result in a material breach or violation
      of
      any of the terms or provisions of, or constitute a material default under any
      lease, sublease, contract or other agreement or instrument to which the Company
      or any of its Controlled Subsidiaries are a party, or by which the Company,
      its
      Controlled Subsidiaries, or any of the Company’s or its Controlled
      Subsidiaries’respective properties or assets are bound or affected, nor will
      such action result in any violation of the provisions of the certificate of
      incorporation or by-laws of the Company or its Controlled Subsidiaries or a
      material violation of any applicable statute, law, rule, code, administrative
      regulation, ordinance, judgment, order or decree of any government, governmental
      instrumentality or court, domestic or foreign, or arbitration panel or other
      body, having jurisdiction over the Company, its Controlled Subsidiaries, or
      any
      of the Company’s or its Controlled Subsidiaries’ respective properties or
      obligations.

    

    (q) No
      consent, approval, authorization, license or order of or from, or registration,
      qualification, declaration or filing with, federal, state, local, foreign or
      other governmental authority or any person or court, administrative agency,
      or
      other body is required for the consummation of the transactions contemplated
      in
      this Agreement, or the Offering Documents, except as may have been made, are
      required to be made prior to the Initial Closing, or may be required to be
      obtained under any state securities or blue sky laws or pursuant to Regulation
      D.

    

    (r) The
      Company is in compliance in all material respects with all applicable federal,
      state and local environmental laws and regulations (collectively, the
“Environmental Laws”), except for any material noncompliance as may be described
      in the Offering Documents, and to the best of the Company's knowledge, there
      are
      no circumstances that would prevent, interfere with, or materially increase
      the
      cost of such compliance in the future. Except as set forth in the Offering
      Documents, there is no claim under any Environmental Law, including common
      law
      (“Environmental Claim”), pending or, to the knowledge of the Company, threatened
      against or affecting the Company or its Controlled Subsidiaries and, to the
      best
      of the Company's knowledge, there are no past or present actions, activities,
      circumstances, events or incidents, including, without limitation, releases
      of
      any material into the environment, that could form the basis of any
      Environmental Claim against or affecting the Company or its Controlled
      Subsidiaries.

    

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

    (s) Each
      of
      the Company and its Controlled Subsidiaries has good and marketable title to
      all
      property owned by it, in each case free and clear of all liens, charges,
      encumbrances or restrictions except as described in the Offering Documents
      or
      such as do not materially affect the value of such property and do not interfere
      with the use made and proposed to be made of such property by the Company.
      Except as described in the Offering Documents, all material Contracts to which
      the Company or its Controlled Subsidiaries is a party or by which the Company
      or
      its Controlled Subsidiaries or any of their respective properties or assets
      are
      bound are valid, subsisting and enforceable and are in full force and
      effect.

    

    (t) The
      Company and its Controlled Subsidiaries (A) has paid all federal, state, local
      and foreign taxes for which it is liable and has furnished all information
      returns it is required to furnish pursuant to the Internal Revenue Code of
      1986,
      as amended, (B) has established adequate reserves for such taxes which are
      not
      due and payable and (C) does not have any tax deficiency or claims outstanding,
      proposed or assessed against it.

    

    (u) The
      Company and its Controlled Subsidiaries maintain insurance of the types and
      in
      amounts which it deems adequate for its business taken as a whole, all of which
      are in full force and effect.

    

    (v) Other
      than as set forth herein or in the Offering Documents, there are no claims,
      payments, issuances, arrangements or understandings, whether oral or written,
      for services in the nature of a finder's or origination fee with respect to
      the
      sale of the Securities.

    

    (w) Neither
      the Company nor its Controlled Subsidiaries, nor to the best of the Company’s
      knowledge any of the Company’s officers, employees, agents or any other person
      acting on behalf of, at the direction of or for the benefit of the Company
      has,
      directly or indirectly, given or agreed to give any money, gift or similar
      benefit (other than legal price concessions to customers in the ordinary course
      of business) to any customer, supplier, employee or agent of a customer or
      supplier, or official or employee of any governmental agency (domestic or
      foreign) or instrumentality of any government (domestic or foreign) or any
      political party or candidate for office (domestic or foreign) or other person
      who was, is, or may be in a position to help or hinder the business of the
      Company (or assist the Company in connection with any actual or proposed
      transaction) which (a) might subject the Company or any other such person to
      any
      damage or penalty in any civil, criminal or governmental litigation or
      proceeding (domestic or foreign), (b) if not given in the past, might have
      had a
      Material Adverse Effect or (c) if not continued in the future, might result
      in a
      Material Adverse Effect. The Company's internal accounting controls are
      sufficient to cause the Company to comply with the Foreign Corrupt Practices
      Act
      of 1977, as amended. 

    

    (x) To
      the
      best knowledge of the Company, during the past five years, none of the current
      officers or directors of the Company have been:

    

    (i) The
      subject of a petition under the federal bankruptcy laws or any state insolvency
      law filed by or against them, or by a receiver, fiscal agent or similar officer
      appointed by a court for their business or property, or any partnership in
      which
      any or them was a general partner at or within two years before the time of
      such
      filing, or any corporation or business association of which any of them was
      an
      executive officer at or within two years before the time of such
      filing;

    

    (ii) Convicted
      in a criminal proceeding or a named subject of a pending criminal proceeding
      (excluding traffic violations and other minor offenses);

    

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

    (iii) The
      subject of any order, judgment, or decree not subsequently reversed, suspended
      or vacated, of any court of competent jurisdiction, permanently or temporarily
      enjoining any of them from, or otherwise limiting, any of the following
      activities:

    

    (iv) acting
      as
      a futures commission merchant, introducing broker, commodity trading advisor,
      commodity pool operator, floor broker, leverage transaction merchant, any other
      person regulated by the Commodity Futures Trading Commission, or an associated
      person of any of the foregoing, or as an investment adviser, underwriter, broker
      or dealer in securities, or as an affiliated person, director or employee of
      any
      investment company, bank, savings and loan association or insurance company,
      or
      engaging in or continuing any conduct or practice in connection with any such
      activity;

    

    (v)
       engaging
      in any type of business practice; or

    

    (vi) engaging
      in any activity in connection with the purchase or sale of any security or
      commodity or in connection with any violation of federal or state securities
      law
      or federal commodity laws.

    

    (vii) the
      subject of any order, judgment or decree, not subsequently reversed, suspended
      or vacated of any federal or state authority barring, suspending or otherwise
      limiting for more than sixty (60) days their right to engage in any activity
      described in paragraph (c)(i) above, or be associated with persons engaged
      in
      any such activity;

    

    (viii) found
      by
      any court of competent jurisdiction in a civil action or by the Securities
      and
      Exchange Commission to have violated any federal or state securities law, and
      the judgment in such civil action or finding by the Commission has not been
      subsequently reversed, suspended or vacated; or

    

    (ix) found
      by
      a court of competent jurisdiction in a civil action or by the Commodity Futures
      Trading Commission to have violated any federal commodities law, and the
      judgment in such civil action or finding by the Commodity Futures Trading
      Commission has not been subsequently reversed, suspended or
      vacated.

    

    (x) found
      by
      a court or an administrative agency to have or is alleged to have violated
      any
      foreign securities laws.

    

    (y) Neither
      the Company nor, to the knowledge of the Company, any of its affiliates has,
      directly or through any agent, sold, offered for sale or solicited offers to
      buy
      any security of the Company, nor will any of the foregoing directly buy any
      security of the Company.

    

    (z) Neither
      the Company nor any of its officers, directors, or affiliates, has engaged
      or
      will engage, directly or indirectly, in any act or activity that may jeopardize
      the status of the Offering and sale of the Securities as an exempt transaction
      under the Act or under all applicable federal and/or state securities or blue
      sky laws of any jurisdiction in which the Securities may be offered or sold.
      

    

    (aa) The
      Company and the Subsidiaries maintain a system of internal accounting and other
      controls sufficient to provide reasonable assurances that: (i) transactions
      are
      executed in accordance with management’s general or specific authorizations,
      (ii) transactions are recorded as necessary to permit preparation of reliable
      financial statements in conformity with United States generally accepted
      accounting principles and to maintain accountability for assets, (iii) access
      to
      assets is permitted only in accordance with management’s general or specific
      authorization, and (iv) the recorded accounting for assets is compared with
      existing assets at reasonable intervals and appropriate action is taken with
      respect to any material differences. 

    

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

    (bb) Neither
      the Company nor any of its Subsidiaries has violated or is currently in
      violation of any provisions of: (a) any federal or state environmental law,
      (b)
      Employee Retirement Income Security Act of 1974, as amended, including the
      regulations and published interpretations thereunder (“ERISA”), (c) the Bank
      Secrecy Act, as amended, (d) the Money Laundering Control Act of 1986, as
      amended, (e) the Foreign Corrupt Practices Act, or (f) the Uniting and
      Strengthening of America by Providing Appropriate Tools Required to Intercept
      and Obstruct Terrorism (“USA Patriot Act”) Act of 2001, and the rules and
      regulations promulgated under any such law, or any successor law, except for
      such violations which, singly or in the aggregate, would not have a Material
      Adverse Effect.

    

    (cc) So
      long
      as the Common Stock and the Warrants (including the Common Stock receivable
      upon
      the exercise thereof) are “restricted securities” within the meaning of Rule
      144(a)(3) under the Securities Act, the Company, during any period in which
      it
      is not subject to and in compliance with Section 13 or 15(d) of the Exchange
      Act, or is not exempt from such reporting requirements pursuant to and in
      compliance with Rule 12g3-2b under the Exchange Act, provide to each holder
      of
      Common Stock and to each prospective purchaser (as designated by such holder)
      of
      Common Stock upon the request of such holder or prospective holder, any
      information required to be provided by Rule 144A(d)(4) under the Securities
      Act.

     

    (dd) 
      The
      Company is not and, at all times up to and including consummation of the
      transactions contemplated by this Agreement, , will not be, subject to
      registration as an “investment company” under the Investment Company Act of
      1940, as amended (the “1940
      Act”),
      and
      is not and will not be an entity “controlled” by an “investment company” within
      the meaning of the 1940 Act; provided that it is acknowledged that the Company
      may be determined to be a “transient investment company” under Rule 3a-2 of the
      1940 Act after the Final Closing Date. 

     

    (ee) The
      Company will (i) utilize the proceeds of the Placement in accordance with the
      “Use of Proceeds” section of the Memorandum and (ii) initially utilize the
      proceeds of the Placement and all other funds of the Company in such a manner
      so
      as to cause the Company not to be subject to the 1940 Act, and will thereafter
      use its best efforts to avoid the Company’s becoming subject to the 1940
      Act.

     

    (ff) The
      Company is in compliance with applicable requirements of the Sarbanes-Oxley
      Act
      of 2002 and applicable rules and regulations promulgated by the Commission
      thereunder in effect as of the date of this Agreement, except where such
      noncompliance could not be reasonably expected to have, individually or in
      the aggregate, a material adverse effect upon the Company.

    

    7. Covenants
      of the Company. 

    

    The
      Company covenants that it will: 

    

    (a)
      Notify First Montauk immediately, and confirm such notice in writing, (i) when
      any event shall have occurred during the period commencing on the date hereof
      and ending on the Final Closing Date, as a result of which the Offering
      Documents would include any untrue statement of a material fact or omit to
      state
      any material fact necessary to make the statements made therein, in the light
      of
      the circumstances under which they were made, not misleading, and (ii) of the
      receipt of any notification with respect to the modification, rescission,
      withdrawal, or suspension of the qualification or registration of the
      Securities, or of an exemption from such registration or qualification, in
      any
      jurisdiction. The Company will use its reasonable best efforts to prevent the
      issuance of any such modification, rescission, withdrawal, or suspension, and
      at
      Placement Agent's request, to use reasonable best efforts to obtain the lifting
      thereof as promptly as possible.

    

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

    (b)
      Not
      make any supplement or amendment to the Offering Documents unless such
      supplement or amendment complies with the requirements of the Act and Regulation
      D and the applicable federal and/or state securities and blue sky laws and
      unless the Placement Agent shall have approved of such supplement or amendment.
      If, at any time during the period commencing on the date hereof and ending
      on
      the Final Closing Date, any event shall have occurred as a result of which
      the
      Offering Documents contain any untrue statement of a material fact or omit
      to
      state any material fact necessary to make the statements made therein, in the
      light of the circumstances in which they were made, not misleading, or if,
      in
      the reasonable opinion of counsel to the Company or counsel to the Placement
      Agent, it is necessary at any time to supplement or amend the Offering Documents
      to comply with the Act, Regulation D, or any applicable securities or blue
      sky
      laws, the Company will promptly prepare an appropriate supplement or amendment
      (in form and substance satisfactory to the Placement Agent) which will correct
      such statement or omission or which will effect such compliance.

    

    (c)
      Deliver without charge to the Placement Agent such number of copies of the
      Offering Documents and any supplement or amendment thereto as may reasonably
      be
      requested by the Placement Agent.

    

    (d)
      Not,
      directly or indirectly, solicit any offer to buy from, or offer to sell to
      any
      person any Securities, or any other securities (whether debt or equity) of
      the
      Company except through the Placement Agent.

    

    (e)
      Use
      its best efforts to establish an exemption from qualification and registration
      under the securities or blue sky laws of the jurisdictions as may be required
      by
      the Placement Agent in connection with the offer and sale of the Securities
      and
      retain counsel in making any required filings; provided, however, that the
      Company will not be obligated to qualify to do business or register as a dealer
      in securities, or otherwise subject itself to general service of process, in
      any
      jurisdiction in which it is not so qualified. The Company shall cooperate with
      its counsel to make a Form 99 (if necessary) and State Notice filing with the
      State of New York prior to the commencement of the Offering and timely file
      a
      Form D and such other required notice with all state blue sky authorities and
      the SEC related to the Offering. 

    

    (f)
      At
      all times during the period commencing on the date hereof and ending on the
      Final Closing Date, provide to each Prospective Investor or his Purchaser
      Representative (as defined in Regulation D), if any, on request, such
      information (in addition to that contained in the Offering Documents) concerning
      the Offering, the Company and any other relevant matters, as it possesses or
      can
      acquire without unreasonable effort or expense, and to extend to each
      Prospective Investor or his Purchaser Representative, if any, the opportunity
      to
      ask questions of, and receive answers from, the President or other executive
      officers of the Company concerning the terms and conditions of the Offering
      and
      the business of the Company and to obtain any other additional information,
      to
      the extent it possesses the same or can acquire it with reasonable effort or
      expense, and in conformity with existing laws and regulations of federal and
      state and other regulatory bodies and agencies as such Prospective Investor
      or
      Purchaser Representative may consider necessary in making an informed investment
      decision or in order to verify the accuracy of the information furnished to
      such
      Prospective Investor or Purchaser Representative, as the case may be.
      Notwithstanding, anything in this Section 7(f) to the contrary, the Prospective
      Investor and/or his Purchaser Representative, as the case may be, shall only
      rely on such information in making an investment decision, to the extent it
      has
      been provided to them in the Offering Documents or otherwise provided by the
      Company in writing.

    

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

    (g) So
      long
      as the Debentures and the Warrants (including the Shares receivable upon the
      respective conversion or exercise thereof) are “restricted securities” within
      the meaning of Rule 144(a)(3) under the Securities Act, the Company, during
      any
      period in which it is not subject to and in compliance with Section 13 or 15(d)
      of the Exchange Act, or is not exempt from such reporting requirements pursuant
      to and in compliance with Rule 12g3-2b under the Exchange Act, provide to each
      holder of Debentures and to each prospective purchaser (as designated by such
      holder) of Debentures upon the request of such holder or prospective holder,
      any
      information required to be provided by Rule 144A(d)(4) under the Securities
      Act.
      In addition, the Company shall cause to be provided, at its cost and expense,
      opinions of counsel necessary to allow for any transfers or sales of the
      Securities (including the Shares receivable upon the respective conversion
      or
      exercise thereof) pursuant to Rule 144 and the Company shall pay any and all
      transfer agent fees. 

    

    (h)
      Not,
      directly or indirectly, engage in any act or activity which may jeopardize
      the
      status of the offering and sale of the Securities as exempt transactions under
      the Act or under the securities or blue sky laws of any jurisdiction in which
      the Offering maybe made. Without limiting the generality of the foregoing,
      and
      notwithstanding anything contained herein to the contrary, the Company shall
      not, directly or indirectly, engage in any offering of securities which, if
      integrated with the Offering in the manner prescribed by Rule 502(a) of
      Regulation D and applicable releases of the Commission, may jeopardize the
      status of the offering and sale of the Securities as exempt transactions under
      Regulation D.

    

    (i)
      Apply
      the net proceeds from the sale of the Securities in a manner consistent with,
      in
      all material respects, the description as set forth in the Offering Documents.
      

    

    (j)
      Not,
      during the period commencing on the date hereof and ending on the Final Closing
      Date, issue any press release or other communication, or hold any press
      conference with respect to the Company, its financial condition, results of
      operations, business, properties, assets, or liabilities, or the Offering,
      without First Montauk prior written consent, not to be unreasonably withheld,
      except as required by applicable securities laws and except as may be related
      to
      the marketing and sale of its products in the normal course of business. The
      foregoing shall not prohibit the Company from holding informational meetings
      with accredited investors who have a pre-existing relationship with the Company
      during which the materials and information disseminated will be limited to
      the
      information contained in the Offering Documents or from making disclosures
      required by law. 

    

    (k)
      Within 60 days of the date hereof, the Company shall obtain a “key man” life
      insurance policy upon the life of John Moore, with an insurance company rated
      at
      least B plus, in an amount equal to at least $3,000,000. The Company shall
      be
      the sole beneficiary of such policy and shall retain such policy for not less
      than two (2) years.

    

    (l)
      Within 30 days from the Initial Closing, the Company and John A. Moore shall
      execute an employment agreement regarding John A. Moore’s employment as Chief
      Executive Officer, on terms agreeable to both parties; provided, however, that
      such employment agreement shall be for a period of not less than three (3)
      years. 

    

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

    8.
      Payment of Expenses. The Company hereby agrees to pay all fees, charges, and
      expenses incident to the performance by the Company of its obligations
      hereunder, including, without limitation, all fees, charges, and expenses in
      connection with: (i) the preparation, printing, copying and mailing of the
      Offering Documents; (ii) the purchase, sale, and delivery of the Securities,
      and
      any supplements or amendments thereto; (iii) the issuance, sale, transfer,
      and
      delivery of the Securities, including any transfer or other taxes payable
      thereon and the fees of any transfer agent or registrar; (iv) the filing fees
      for the offer and sale under the securities laws of such states and other
      jurisdictions as Placement Agent may designate; (v) Placement Agent's counsel
      fees for services rendered in connection with the Offering, in an amount equal
      to $35,000, of which $10,000 has previously been paid prior to the date hereof;
      (vi) the expense of the escrow account which expenses shall equal $3,500 and
      be
      payable to the escrow agent in advance; (vii) the filing fees payable to the
      NASD for any filings made pursuant to NASD Rule 2710 as well as the expenses
      of
      the Placement Agent’s counsel in the amount of $15,000 for review of the
      registration statement to be filed after the Offering and the required filing
      under NASD Rule 2710,which fees shall be paid prior to filing of the
      registration statement. To the extent that Placement Agent wishes to incur
      any
      such costs or fees on the Company’s behalf, with the exception of NASD Rule
      2710, blue sky filing fees, and counsel fees as provided for in the preceding
      sentence, all such expenses must be approved by Company prior to their
      incurrence. 

     

    9. Conditions
      of Placement Agent's Obligations.

    

    The
      obligations of the Placement Agent pursuant to this Agreement shall be subject,
      in its discretion, to the continuing accuracy in all material respects of the
      representations and warranties of the Company contained herein and in each
      certificate and document contemplated under this Agreement to be delivered
      to
      the Placement Agent, as of the date hereof and as of each Closing Date, with
      respect to the performance in all material respects by the Company of its
      obligations hereunder, and to the following conditions:

    

    (a)
      At
      the Initial Closing and each additional Closing, the Placement Agent shall
      have
      received the favorable opinion ( or a bringdown opinion for subsequent closings)
      of Eilenberg Krause & Paul LLP, counsel for the Company, dated each Closing
      Date, addressed to the Placement Agent, and in form and scope reasonably
      satisfactory to counsel for the Placement Agent, substantially to the effect
      that: 

    

    (i)
      the
      Company is a corporation duly organized, validly existing, and in good standing
      under the laws of the State of Delaware, with the requisite corporate power
      to
      own and operate its properties and assets, and to carry on its business as
      described in the Offering Documents and is duly qualified to do business and
      is
      in good standing as a foreign corporation in those jurisdictions where the
      failure to so qualify would have a Material Adverse Effect on the business
      of
      the Company;

    

    (ii)
      the
      Company has, as of the date hereof, an authorized, and, to such counsel's
      knowledge based on the records of the Company, outstanding, capitalization
      as
      set forth in the Memorandum. To such counsel's knowledge, each of the issued
      and
      outstanding shares of the Company’s Common Stock is validly issued, fully paid,
      and nonassessable. Except as set forth in the Offering Documents, and in
      connection with the Prior Offering, to such counsel's knowledge, there are
      no
      preemptive rights, options or warrants or other conversion privileges or rights
      presently outstanding to purchase any of the authorized but unissued stock
      of
      the Company; 

    

    (iii)
      to
      such counsel's knowledge there is no litigation, arbitration, claim,
      governmental or other proceeding (formal or informal), or investigation pending
      or threatened with respect to the Company or any of its operations, businesses,
      properties, or assets except as described in the Offering Documents or such
      as
      individually or in the aggregate have, or could reasonably be expected to have
      a
      material adverse effect upon the operations, business, properties, or assets
      of
      the Company or which could materially adversely affect the transactions or
      other
      acts contemplated by this Agreement or the validity or enforceability of this
      Agreement;

    

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

    (iv)
      the
      Company has all requisite corporate power and authority to execute, deliver,
      and
      perform this Agreement, and to consummate the transactions contemplated hereby.
      All necessary corporate proceedings of the Company have been taken to authorize
      the execution, delivery, and performance by the Company of this Agreement,
      and
      the consummation of the transactions contemplated hereby. This Agreement has
      been duly authorized, executed, and delivered by the Company, is the legal,
      valid, and binding obligation of the Company, and is enforceable against the
      Company in accordance with its terms, except as such enforceability may be
      limited by applicable bankruptcy, insolvency, reorganization, moratorium and
      other laws of general application now or hereafter in effect relating to or
      affecting the enforcement of creditors' right generally and the application
      of
      general equitable principles in any action, legal or equitable and then except,
      as to those provisions relating to indemnity or contribution, such opinion
      shall
      be limited as effected by any Federal or state securities laws regarding
      indemnity and/or contribution; 

    

    (v)
      upon
      receipt of payment therefore in accordance with the Offering Documents, the
      Securities shall be validly authorized, validly issued, fully paid, and
      nonassessable;

    

    (vi)
      assuming that (i) the Offering was made in the manner and by the means
      contemplated by the Offering Documents, (ii) a proper Form D is filed in
      accordance with Rule 503 of Regulation D, (iii) that the offer and sale of
      the
      Securities by the Placement Agent was made in accordance with Regulation D
      and
      the Offering Documents including, but not limited to, only accredited investors
      in compliance with Rule 506 of Regulation D without any advertising and/or
      general solicitation, (iv) the Placement Agent's representations, warranties
      and
      covenants set forth herein are true and correct, (v) the Company's
      representations, warranties and covenants set forth herein are true and correct,
      and (vi) the representations of the Prospective Investors in the Subscription
      Agreements and Investors Questionnaire signed by them are true and correct
      (which facts will not be independently verified by such counsel), the sale
      of
      Securities in the Offering is exempt from registration under the
      Act.

    

    (vii)
      the
      execution and delivery of this Agreement, the consummation of the transactions
      contemplated hereunder and the issuance of the Securities will not result in
      any
      material violation of, or material conflict with, or constitute a material
      default under (i) the certificate of incorporation or by-laws of the Company,
      (ii) to such counsel's knowledge, any material contract, instrument, agreement
      or document to which the Company is a party, or by which the assets or
      properties of the Company are bound; or (iii) to such counsel's knowledge,
      any
      statute, rule or regulation of Delaware or New York corporate law, or any
      judgment or order to which the Company is a party.

    

    In
      rendering such opinion, counsel for the Company may (A) base such opinions
      on
      such assumptions, qualifications, limitations and conditions as required by
      the
      opinion committee of such counsel, (B) rely as to matters of fact, on
      certificates of responsible officers of the Company; (C) to the extent they
      deem
      proper, upon written statements or certificates of officers of departments
      of
      various jurisdictions having custody of documents respecting the corporate
      existence or good standing of the Company, provided that copies of any such
      statements or certificates shall be delivered to counsel for the Placement
      Agent; and (D) rely upon such other opinions of other counsel to the Company
      as
      it deems necessary.

    

    (b)
      On or
      prior to the Initial Closing the Placement Agent shall have been furnished
      such
      information, documents, certificates, and opinions as it may reasonably require
      for the purpose of enabling it to review the matters referred to in Section
      6,
      and in order to evidence the accuracy, completeness, or satisfaction of any
      of
      the representations, warranties, covenants, agreements, or conditions herein
      contained, or as it may otherwise reasonably request.

    

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

    (c)
      At
      the Initial Closing and at each additional Closing, the Placement Agent shall
      have received one or more certificates of the chief executive officer and of
      the
      chief financial officer of the Company, dated the applicable Closing Date to
      the
      effect that, as of the date of this Agreement and as of the applicable Closing
      Date the representations and warranties of the Company contained herein were
      and
      are accurate, and that as of the Closing Date the obligations to be performed
      by
      the Company hereunder on or prior thereto have been fully performed. In
      addition, the parties shall deliver such other certificates or closing documents
      as are customarily used by the Placement Agent in offerings of this
      nature.

    

    (d)
      All
      proceedings taken in connection with the issuance, sale, and delivery of the
      Securities shall be satisfactory in form and substance to First Montauk and
      First Montauk’s counsel.

    

    (e)
      The
      Company shall file with the SEC, by 8:00 am eastern standard time on the trading
      day immediately following the Initial Closing and the final Closing, a Form
      8-K
      related to the Offering, including such disclosures in accordance with SEC
      Rule
      135(c), and in substance reasonably acceptable to the Placement
      Agent

    

    (f)
      Any
      certificate or other document signed by any officer of the Company and delivered
      to First Montauk or to First Montauk counsel at a Closing shall be deemed a
      representation and warranty by the Company hereunder as to the statements made
      therein. If any condition to First Montauk obligations hereunder has not been
      fulfilled as and when required to be so fulfilled, First Montauk may terminate
      this Agreement or, if First Montauk so elects, in writing waive any such
      conditions which have not been fulfilled or extend the time for their
      fulfillment. In the event that First Montauk elects to terminate this Agreement,
      First Montauk shall notify the Company of such election in writing. Upon such
      termination, neither party shall have any further liability or obligation to
      the
      other except as provided in Section 11 hereof.

    

    10. Conditions
      of Company's Obligations. 

    

    The
      obligations of the Company pursuant to this Agreement shall be subject, in
      its
      discretion in good faith, to the performance by the Placement Agent in all
      material respects of its obligations hereunder. 

    

    11. Termination.

    

    If
      subscriptions for the Offering are not received into escrow during the Offering
      Period, or Placement Agent has committed a material breach of this Agreement,
      the Company may terminate the Agreement and the agency relationship created
      hereby upon prior written notice to First Montauk. First Montauk may terminate
      this Agreement and the agency created hereby for any reason upon written notice
      to the Company. In either case, neither party shall have any liability or
      continuing obligation to the other except that, regardless of which party elects
      to terminate, (i) the Company agrees to reimburse First Montauk for, or
      otherwise pay and bear, the expenses and fees to be paid and borne by the
      Company as provided for in Section 8 above and, subject to the Company's
      pre-approval for any expenses in excess of $350 individually, to reimburse
      First
      Montauk for the full amount of its actual out-of-pocket expenses (which shall
      include, without limitation, the fees and disbursements of First Montauk's
      counsel (up to the limits set forth in Section 8), travel and lodging expenses,
      mailing, printing and reproduction expenses, less amounts previously paid to
      First Montauk in reimbursement for such expenses, and (ii) the provisions of
      paragraph 8 and the Indemnification Provisions in Section 12 shall remain in
      full force and effect. Upon any such termination, the Company agrees to cease
      to
      use any Offering materials that represent First Montauk as placement agent.
      In
      the event that any Securities are sold, Sections 5, 8, 12, 13 and 14 shall
      survive the termination of this Agreement. Furthermore, notwithstanding anything
      to the contrary in this Agreement, in the event that the Company refuses to
      accept subscriptions during the Offering Period without a reasonable basis
      related to the subscriber or to the Offering generally, or otherwise refuses
      to
      complete the Offering without any failure of the condition set forth in Section
      10, then First Montauk shall be entitled to a fee of $200,000 which shall be
      deemed liquidated damages.

    

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

    12. Indemnification
      and Contribution. 

    

    (a)
      The
      Company agrees to indemnify and hold harmless the Placement Agent, its officers,
      directors, partners, employees, agents, and counsel, and each person, if any,
      who controls the Placement Agent within the meaning of Section 15 of the Act
      or
      Section 20(a) of the Exchange Act , against any and all loss, liability, claim,
      damage, and expense whatsoever (which shall include, for all purposes of this
      Section 12, but not be limited to, reasonable attorneys' fees and any and all
      reasonable expense whatsoever incurred in investigating, preparing, or defending
      against any litigation, commenced or threatened, or any claim whatsoever and
      any
      and all amounts paid in settlement of any claim or litigation) as and when
      incurred arising out of, based upon, or in connection with (i) any untrue
      statement or alleged untrue statement of a material fact contained in the
      Offering Documents or in any document delivered or written statement made
      pursuant to Section 7(f), or in any application or other document or
      communication (it being understood that neither the Company nor any officer,
      director or employee shall provide any information to any Prospective Investor
      which is not contained or referred to in the Offering Documents) (in this
      Section 12 collectively called an "application") executed by or on behalf of
      the
      Company or based upon written information furnished by or on behalf of the
      Company filed in any jurisdiction in order to register or qualify the Securities
      under the blue sky or securities laws thereof or in order to secure an exemption
      from such registration or qualification or filed with the Commission; or any
      omission or alleged omission to state a material fact necessary to make the
      statements made therein, in the light of the circumstances in which they were
      made, not misleading, unless such statement or omission was made in reliance
      upon and in conformity with written information furnished to the Company as
      stated in Section 12(b) with respect to the Placement Agent expressly for
      inclusion in the Offering Documents or in any application, as the case may
      be;
      and (ii) any breach of any representation, warranty, covenant, or agreement
      of
      the Company contained in this Agreement.
      The
      foregoing agreement to indemnify shall be in addition to any liability the
      Company may otherwise have, including liabilities arising under this Agreement.
      

    

    If
      any
      action is brought against the Placement Agent or any of its officers, directors,
      partners, employees, agent, or counsel, or any controlling persons of the
      Placement Agent (an "indemnified party"), in respect of which indemnify may
      be
      sought against the Company pursuant to the foregoing paragraph, such indemnified
      party or parties shall promptly notify the Company (the "indemnifying party")
      in
      writing of the institution of such action (but the failure so to notify shall
      not relieve the indemnifying party from any liability it may have unless the
      indemnifying party is prejudiced by such failure) and the indemnifying party
      shall promptly assume the defense of such action, including the employment
      of
      counsel (reasonably satisfactory to such indemnified party or parties) and
      payment of expenses. Such indemnified party shall have the right to employ
      its
      own counsel in any such case, but the fees and expense of such counsel shall
      be
      at the expense of such indemnified party unless the employment of such counsel
      shall have been authorized in writing by the indemnifying party in connection
      with the defense of such action, in which event such fees and expenses shall
      be
      borne by the indemnifying party. Anything in this paragraph to the contrary
      notwithstanding, the indemnifying party shall not be liable for any settlement
      of any such claim or action effected without its written consent. The Company
      agrees promptly to notify the Placement Agent of the commencement of any
      litigation or proceedings against the Company or any of its officers or
      directors in connection with the sale of the Securities, the Offering Documents,
      or any application. 

    

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

    (b)
      The
      Placement Agent agrees to indemnify and hold harmless the Company, its officers,
      directors, employees, agents, and counsel, and each other person, if any, who
      controls the Company within the meaning of Section 15 of the Act or Section
      20(a) of the Exchange Act, to the same extent as the foregoing indemnity from
      the Company to the Placement Agent in Section 12(a), with respect to any and
      all
      loss, liability, claim, damage, and expense whatsoever (which shall include,
      for
      all purposes of this Section 12, but not be limited to, attorneys' fees and
      any
      and all expense whatsoever incurred in investigating, preparing, or defending
      against any litigation, commenced or threatened, or any claim whatsoever and
      any
      and all amounts paid in settlement of any claim or litigation) as and when
      incurred arising out of, based upon, or in connection with (i) statements or
      omissions, if any, made in the Offering Documents in reliance upon and in
      conformity with written information furnished to the Company by or on behalf
      of
      Placement Agent expressly for inclusion in the Offering Documents; (ii) the
      failure of the Placement Agent or its representatives to comply with the
      provisions of Section 4(c) hereof or with the federal, blue sky or securities
      laws of the jurisdictions in which the Placement Agent solicits offers to buy
      or
      offers to sell any Securities; or (iii) any breach of any representation,
      warranty, covenant or agreement of the Placement Agent contained in this
      Agreement. If any action shall be brought against the Company or any other
      person indemnified under this Section 12(b) in respect of which indemnity may
      be
      sought against the Placement Agent pursuant to this Section 12, the Placement
      Agent shall have the rights and duties given to the indemnifying party, and
      the
      Company and each other person so indemnified shall have the rights and duties
      given to the indemnified parties, by the provisions of Section 12(a)
      hereof.

    

    (c)
      To
      provide for just and equitable contribution, if (i) an indemnified party makes
      a
      claim for indemnification pursuant to Section 12(a) or 12(b) hereof but it
      is
      found in a final judicial determination, not subject to further appeal, that
      such indemnification may not be enforced in such case, even though this
      Agreement expressly provides for indemnification in such case, or (ii) any
      indemnified or indemnifying party seeks contribution under the Act, the Exchange
      Act, or otherwise, then the Company (including for this purpose any contribution
      made by or on behalf of any officer, director, employee, agent, or counsel
      of
      the Company, or any controlling person of the Company), on the one hand, and
      the
      Placement Agent (including for this purpose any contribution by or on behalf
      of
      an indemnified party), on the other hand, shall contribute to the losses,
      liabilities, claims, damages, and expenses whatsoever to which any of them
      may
      be subject, in such proportions as are appropriate to reflect the relative
      benefits received by the Company, on the one hand, and the Placement Agent,
      on
      the other hand; provided, however, that if applicable law does not permit such
      allocation, then other relevant equitable considerations such as the relative
      fault of the Company and the Placement Agent in connection with the facts which
      resulted in such losses, liabilities, claims, damages, and expenses shall also
      be considered. The relative benefits received by the Company, on the one hand,
      and the Placement Agent, on the other hand, shall be deemed to be in the same
      proportion as (x) the total proceeds from the Offering (net of compensation
      payable to the Placement Agent pursuant to Section 5 hereof but before deducting
      expenses) received by the Company, and (y) the compensation received by the
      Placement Agent pursuant to Section 5 (a) hereof. 

    

    The
      relative fault, in the case of an untrue statement, alleged untrue statement,
      omission, or alleged omission, shall be determined by, among other things,
      whether such statement, alleged statement, omission, or alleged omission relates
      to information supplied by the Company or by the Placement Agent, and the
      parties' relative intent, knowledge, access to information, and opportunity
      to
      correct or prevent such statement, alleged statement, omission, or alleged
      omission. The Company and the Placement Agent agree that it would be unjust
      and
      inequitable if the respective obligations of the Company and the Placement
      Agent
      for contribution were determined by pro rata or per capita allocation of the
      aggregate losses, liabilities, claims, damages, and expenses or by any other
      method of allocation that does not reflect the equitable considerations referred
      to in this Section 12(c). In no case shall the Placement Agent be responsible
      for a portion of the contribution obligation in excess of the compensation
      received by it pursuant to Section 5 hereof. No person guilty of a fraudulent
      misrepresentation shall be entitled to contribution from any person who is
      not
      guilty of such fraudulent misrepresentation. For purposes of this Section 12(c),
      each person, if any, who controls the Placement Agent within the meaning of
      Section 15 of the Act or Section 20(a) of the Exchange Act and each officer,
      director, partners, employee, agent, and counsel of the Placement Agent, shall
      have the same rights to contribution as the Placement Agent, and each person,
      if
      any, who controls the Company within the meaning of Section 15 of the Act or
      Section 20(a) of the Exchange Act and each officer, director, partner, employee,
      agent, and counsel of the Company, shall have the same rights to contribution
      as
      the Company, subject in each case to the provisions of this Section 12(c).
      Anything in this Section 12(c) to the contrary notwithstanding, no party shall
      be liable for contribution with respect to the settlement of any claim or action
      effected without its written consent. This Section 12(c) is intended to
      supersede any right to contribution under the Act, the Exchange Act, or
      otherwise.

    

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

    13.
      Solicitation Prohibition. 

    

    The
      Company agrees that, for a period of 18 months from end of the Offering Period,
      it shall not, directly or indirectly, (A) solicit offers to buy or sell any
      securities of the Company or any other entity from or to any person first
      introduced to the Company by First Montauk who purchases Securities in
      connection with the Offering, or (B) provide the name of any such person to
      any
      other securities broker or dealer or selling agent, without paying to First
      Montauk an amount equal to 10% of the aggregate purchase price of the securities
      so purchased or consideration received by such person and warrants to purchase
      shares of Common Stock equal to 10% of the equity (or securities convertible
      into equity) sold to such persons.

    

    14.
      Representations and Agreements to Survive Delivery.

    

    All
      representations, warranties, covenants, and agreements contained in this
      Agreement shall be deemed to be representations, warranties, covenants, and
      agreements at the Closing Date and, such representations, warranties, covenants,
      and agreements, including the indemnification and contribution agreements
      contained in Section 12, shall remain operative and in full force and effect
      regardless of any investigation made by or on behalf of the Placement Agent
      or
      any indemnified person, or by or on behalf of the Company or any person or
      entity which is entitled to be indemnified under Section 12(b), and shall
      survive termination of this Agreement or the issuance, sale, and delivery of
      the
      Securities. In addition, notwithstanding any election hereunder or any
      termination of this Agreement, and whether or not the terms of this Agreement
      are otherwise carried out, in the event any Securities are sold, the provisions
      of Sections 5, 8, 11, 12, 13 and 14 shall survive termination of this Agreement
      and shall not be affected in any way by such election or termination or failure
      to carry out the terms of this Agreement or any part thereof.

    

    15.
      Notices.

    

    All
      communications hereunder, except as may be otherwise specifically provided
      herein, shall be in writing and, if sent to the Placement Agent, shall be mailed
      by certified mail, hand delivered, or sent by overnight courier service, to
      First Montauk Securities Corp., Parkway 109 Office Center, 328 Newman Springs
      Road, Red Bank, New Jersey 07701 Attention: Ernest Pellegrino, with a copy
      to
      Ellenoff Grossman & Schole LLP, 370 Lexington Avenue, 19th
      Floor,
      New York, New York 10017, Attention: Brian C. Daughney, Esq.; or if sent to
      the
      Company to Acorn Factor, Inc. 200 Route 17, Mahwah, NJ 07430, Attention: John
      A.
      Moore, Chief Executive Officer, with a copy to Eilenberg Krause & Paul LLP,
      17 East 44th Street, New York, NY 10017, Attention: Sheldon Krause, Esq. All
      notices hereunder shall be effective upon delivery to the party to which it
      is
      addressed.

    

    16.
      Parties.

    

    This
      Agreement shall inure solely to the benefit of, and shall be binding upon,
      the
      Placement Agent and the Company and the persons and entities referred to in
      Section 12 who are entitled to indemnification or contribution, and their
      respective successors, legal representatives, and assigns (which shall not
      include any purchaser, as such, of Securities), and no other person shall have
      or be construed to have any legal or equitable right remedy, or claim under
      or
      in respect of or by virtue of this Agreement or any provision herein contained.
      

    

    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

    

    17.
      Governing Law. Submission to Jurisdiction.

    

    The
      validity and interpretation of this Agreement shall be governed by the laws
      of
      the State of New York applicable to agreements made and to be fully performed
      therein. Each of First Montauk and the Company (a) agrees that any legal suit,
      action or proceeding arising out of or relating to this Agreement shall be
      instituted exclusively in New York State Supreme Court, County of New York,
      or
      in the United States District Court for the Southern District of New York,
      (b)
      waives any objection which the Company may have now or hereafter to the venue
      of
      any such suit, action or proceeding, and (c) irrevocably consents to the
      jurisdiction of the foregoing named courts in any such suit, action or
      procedure. Each of the Company and First Montauk further agrees to accept and
      acknowledge service of any and all process which may be served in any suit,
      action or proceeding in the foregoing courts, and agrees that service of process
      upon the Company or First Montauk mailed by certified mail to the address set
      forth in Section 16 hereof shall be deemed in every respect effective service
      of
      process upon the Company in any such suit, action or proceeding. In the event
      of
      litigation between the parties arising hereunder, the prevailing party shall
      be
      entitled to costs and reasonable attorney's fees.

    

    

    [remainder
      of page intentionally left blank]

     

     

     

     

     

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

    

    [signature
      page to Placement Agent Agreement]

    

    18.
      Counterparts.

    

    This
      Agreement may be executed in counterparts, each of which shall constitute an
      original and all of which, when taken together, shall constitute one agreement.
      The
      parties hereto agree to accept a facsimile transmission copy of their respective
      actual signatures as evidence of their actual signatures to this
      Agreement

    

    If
      the
      foregoing correctly sets forth the understanding between us, please so indicate
      in the space provided below for that purpose, whereupon this letter shall
      constitute a binding agreement among us. 

     

    
      	 	 	 
	 	
              Very
                truly yours, 

               

              ACORN
                FACTOR, INC.

            
	 
 	 
 	 
 
	Date: 	By:  	/s/ John
              A.
              Moore
	 	
              
                

              

              Name: John A. Moore

              Title: Chief Executive Officer

            
	 	 

    

    
 

     

    Accepted
      as of the date

    first
      above written:

    

    FIRST
      MONTAUK SECURITIES CORP.

    

    

    

    By: /s/
      Victor K. Kurylak 

    Name:
      Victor K. Kurylak

    Title:
      President/CEO

    

    
      
        
        

      

      
        22Exhibit
        10.1

       

    

    
      

      

    

    CONVERTIBLE
      NOTES PURCHASE AGREEMENT

     

    Dated
      as
      of April 10, 2007

     

    between

     

    CHINA
      GOLD, LLC

     

    as
      Purchaser

     

    and

     

    WITS
      BASIN PRECIOUS MINERALS INC. 

     

     as
      Issuer

     

    
      

      

    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    TABLE
      OF CONTENTS

    

    
      	 	 	 	 	
              Page

            
	
              Section
                1.

            	 	
              Definitions
                and Related Matters

            	 	
              1

            
	
              1.1

            	 	
              Definitions

            	 	
              1

            
	
              1.2

            	 	
              Accounting
                Principles

            	 	
              9

            
	
              1.3

            	 	
              Other
                Interpretive Matters

            	 	
              9

            
	
              Section
                2.

            	 	
              Authorization,
                Issuance and Closing

            	 	
              10

            
	
              2.1

            	 	
              Authorization
                of the Notes

            	 	
              10

            
	
              2.2

            	 	
              Purchase
                and Sale of the Initial Note at the Initial Closing

            	 	
              10

            
	
              2.3

            	 	
              Purchase
                and Sales of the Additional Notes

            	 	
              10

            
	
              2.4

            	 	
              The
                Initial Closing

            	 	
              11

            
	
              Section
                3.

            	 	
              Conditions
                of Purchaser’s Obligation at the Initial Closing

            	 	
              11

            
	
              3.1

            	 	
              Representations,
                Warranties and Covenants; No Event of Default

            	 	
              11

            
	
              3.2

            	 	
              Governing
                Documents

            	 	
              11

            
	
              3.3

            	 	
              Guaranty
                and Security Agreement

            	 	
              11

            
	
              3.4

            	 	
              Stock
                Pledge Agreement

            	 	
              11

            
	
              3.5

            	 	
              Securities
                Law Compliance

            	 	
              12

            
	
              3.6

            	 	
              Closing
                Fees and Expenses

            	 	
              12

            
	
              3.7

            	 	
              Opinion
                of Issuer’ Counsel

            	 	
              12

            
	
              3.8

            	 	
              Closing
                Documents

            	 	
              12

            
	
              3.9

            	 	
              Other
                Items

            	 	
              12

            
	
              3.10

            	 	
              Waiver

            	 	
              12

            
	
              3.11

            	 	
              Additional
                Conditions of Purchase Obligations after the Initial
                Closing

            	 	
              13

            
	
              Section
                4.

            	 	
              Covenants

            	 	
              13

            
	
              4.1

            	 	
              Financial
                Statements and Other Information

            	 	
              13

            
	
              4.2

            	 	
              Attendance
                at Board Meetings; Board Seat; Management Fees

            	 	
              15

            
	
              4.3

            	 	
              Affirmative
                Covenants

            	 	
              15

            
	
              4.4

            	 	
              Negative
                Covenants

            	 	
              17

            
	
              4.5

            	 	
              Compliance
                with Securities Laws

            	 	
              20

            
	
              4.6

            	 	
              Public
                Disclosures

            	 	
              20

            
	
              4.7

            	 	
              Further
                Assurances

            	 	
              20

            
	
              Section
                5.

            	 	
              Registration
                Rights

            	 	
              20

            
	
              Section
                6.

            	 	
              Representations
                and Warranties of the Issuer

            	 	
              21

            
	
              6.1

            	 	
              Organization,
                Corporate Power and Licenses

            	 	
              21

            
	
              6.2

            	 	
              Capitalization
                and Related Matters

            	 	
              21

            
	
              6.3

            	 	
              Authorization;
                No Breach

            	 	
              21

            
	
              6.4

            	 	
              Absence
                of Undisclosed Liabilities

            	 	
              22

            
	
              6.5

            	 	
              No
                Material Adverse Change

            	 	
              22

            
	
              6.6

            	 	
              Assets

            	 	
              22

            
	
              6.7

            	 	
              Tax
                Matters

            	 	
              23

            
	
              6.8

            	 	
              Contracts
                and Commitments

            	 	
              23

            

    

     

    
      
        
        

      

      
        i

        
          

        

      

      
        
        

      

    

     

    
      	
              6.9

            	 	
              Intellectual
                Property Rights

            	 	
              23

            
	
              6.10

            	 	
              Litigation,
                etc

            	 	
              23

            
	
              6.11

            	 	
              Brokerage

            	 	
              24

            
	
              6.12

            	 	
              Governmental
                Consent, etc.

            	 	
              24

            
	
              6.13

            	 	
              Insurance

            	 	
              24

            
	
              6.14

            	 	
              Employees

            	 	
              24

            
	
              6.15

            	 	
              ERISA

            	 	
              24

            
	
              6.16

            	 	
              Compliance
                with Laws

            	 	
              25

            
	
              6.17

            	 	
              Affiliated
                Transactions

            	 	
              25

            
	
              6.18

            	 	
              Investment
                Company

            	 	
              25

            
	
              6.19

            	 	
              Margin
                Regulations

            	 	
              25

            
	
              6.20

            	 	
              Public
                Utility Holding Company Act

            	 	
              25

            
	
              6.21

            	 	
              Disclosure

            	 	
              26

            
	
              6.22

            	 	
              On-Going
                Negotiations

            	 	
              26

            
	
              6.23

            	 	
              Closing
                Date

            	 	
              26

            
	
              Section
                7.

            	 	
              Events
                of Default

            	 	
              26

            
	
              7.1

            	 	
              Definition

            	 	
              26

            
	
              7.2

            	 	
              Consequences
                of Events of Default

            	 	
              29

            
	
              Section
                8.

            	 	
              Miscellaneous

            	 	
              30

            
	
              8.1

            	 	
              Expenses

            	 	
              30

            
	
              8.2

            	 	
              Remedies

            	 	
              31

            
	
              8.3

            	 	
              Usury

            	 	
              31

            
	
              8.4

            	 	
              Purchaser’s
                Investment Representations

            	 	
              31

            
	
              8.5

            	 	
              Amendments
                and Waivers

            	 	
              32

            
	
              8.6

            	 	
              Survival
                of Agreement

            	 	
              32

            
	
              8.7

            	 	
              No
                Setoffs, etc.

            	 	
              33

            
	
              8.8

            	 	
              Successors
                and Assigns

            	 	
              33

            
	
              8.9

            	 	
              Aggregation

            	 	
              33

            
	
              8.10

            	 	
              Severability

            	 	
              33

            
	
              8.11

            	 	
              Counterparts

            	 	
              33

            
	
              8.12

            	 	
              Descriptive
                Headings

            	 	
              33

            
	
              8.13

            	 	
              Governing
                Law

            	 	
              33

            
	
              8.14

            	 	
              Notices

            	 	
              34

            
	
              8.15

            	 	
              Construction

            	 	
              35

            
	
              8.16

            	 	
              Complete
                Agreement; No Modifications

            	 	
              35

            
	
              8.17

            	 	
              Indemnification

            	 	
              36

            
	
              8.18

            	 	
              Payment
                Set Aside

            	 	
              36

            
	
              8.19

            	 	
              Jurisdiction
                and Venue

            	 	
              37

            
	
              8.20

            	 	
              Waiver
                of Right to Jury Trial

            	 	
              37

            
	
              8.21

            	 	
              Certain
                Waivers

            	 	
              38

            
	
              8.22

            	 	
              Transfer
                of Note; Several Liability of Purchaser

            	 	
              38

            
	
              8.23

            	 	
              Confidentiality

            	 	
              38

            
	
              8.24

            	 	
              Sole
                and Absolute Discretion of Purchaser

            	 	
              39

            

    

     

    
      
        
        

      

      
        ii

        
          

        

      

       

    

     

    
      Exhibit
        10.1

       

    

    CONVERTIBLE
      NOTES PURCHASE AGREEMENT

     

    THIS
      CONVERTIBLE NOTES PURCHASE AGREEMENT
      (“Agreement”)
      is
      made as of April 10, 2007, between WITS BASIN PRECIOUS MINERALS INC., a
      Minnesota corporation, (the “Issuer”),
      and
      CHINA GOLD, LLC, a Kansas limited liability company, its successors and assigns
      (together with its successors and assigns “Purchaser”).
      Issuer and Purchaser hereby agree as follows:

     

    Section
      1. Definitions
      and Related Matters

     

    1.1 Definitions.
      When
      used in this Agreement the following terms shall have the following meanings
      (terms defined in the singular to have the same meaning when used in the plural
      and vice versa):

     

    “Additional
      Closing”
has
      the
      meaning set forth in Section 3.11 of this Agreement.

     

    “Affiliate”
means,
      with respect to any Person, any other Person that directly or indirectly
      controlling, controlled by, or under direct or indirect common control with
      such
      specified Person and, if such Person is an individual, any member of the
      immediate family (including parents, spouse, children and siblings) of such
      individual and any trust whose principal beneficiary is such individual or
      one
      or more members of such immediate family and any Person who is controlled by
      any
      such member or trust. For the purposes of this definition, “control” when used
      with respect to any specified Person, means the power to direct the management
      and policies of such Person, directly or indirectly, whether through the
      ownership of voting securities, by contract or otherwise; and the terms
“controlling” and “controlled” have meanings correlative to the
      foregoing.

     

    “Affiliated
      Group”
means
      any affiliated group as defined in Code §1504 that has filed a consolidated
      return for federal income tax purposes (or any similar group under state, local
      or foreign law, statute, rule or regulation) for a period during which Issuer
      was a member.

     

    “Business
      Day”
means
      any day other than a Saturday, Sunday or public holiday under the laws of the
      State of Kansas or other day on which banking institutions are authorized or
      obligated to close in Overland Park, Kansas.

     

    “Capital
      Expenditures”
means
      all expenditures which, in accordance with GAAP would be required to be
      capitalized and shown on the consolidated balance sheet of Issuer but excluding
      expenditures made in connection with the replacement, substitution or
      restoration of assets to the extent financed: (a) from insurance proceeds (or
      similar recoveries) paid on account of the loss of or damage to the assets
      being
      replaced or restored; (b) with awards of compensation arising from the taking
      by
      eminent domain or condemnation of the assets being replaced; or (c)
      substantially concurrently with the proceeds from the sale of similar
      assets.

     

    “Capitalized
      Lease”
means
      a
      lease under which the obligations of the lessee should, in accordance with
      GAAP,
      be included in determining total liabilities as shown on the liability side
      of a
      balance sheet of the lessee.

     

    
      
        
        

      

      
        
        

        
          

        

      

       

    

     

    “Change
      in Control”
means:
      (a) any sale, transfer or issuance or series of sales or issuances of Issuer’s
      Equity Interests by Issuer or any holder or holders thereof, or any merger,
      consolidation or other transaction involving Issuer, immediately after which
      (i)
      the holder or holders of Issuer’s Equity Interests immediately prior to such
      transaction or transactions no longer possess the voting power to elect a
      majority of Issuer’s board of directors (or similar governing body) or (ii) the
      holder or holders of Issuer’s Equity Interests immediately prior to such
      transaction or transactions no longer hold record and beneficial ownership
      of at
      least 50% of Issuer’s voting Equity Interests; (b) any sale of all or
      substantially all of Issuer’s assets on a consolidated basis; or (c) after any
      Closing, any Person or group of Persons (within the meaning of Section 13 or
      14
      of the Securities Exchange Act that did not hold any of Issuer’s Equity
      Interests at Closing (other than the Purchaser and its Affiliates and
      transferees) shall acquire beneficial ownership (within the meaning of Rule
      13d-3 promulgated under the Securities Exchange Act) of more than 50% of
      Issuer’s Equity Interests (on a fully diluted basis and taking into account any
      Equity Interests of Issuer having voting rights in the election of members
      of
      the board of directors (or similar governing body) under normal
      circumstances.

     

    “Closing,”
means
      either an Initial Closing or an Additional Closing.

     

    “Closing
      Date”
      means,
      with respect to the purchase of the Initial Note, the Initial Closing Date
      and,
      with respect to the purchase of any Additional Notes, the date of the Additional
      Closing for such purchase. 

     

    “Code”
means
      the Internal Revenue Code of 1986, as amended, modified, supplemented, or
      replaced from time to time, and any reference to any particular Code section
      shall be interpreted to include any revision of or successor to that section
      regardless of how numbered or classified.

     

    “Collateral”
means
      all personal and real property, including a Property, with respect to which
      a
      Lien has been granted, or subsequently is granted, to or for the benefit of
      Purchaser pursuant to any of the Security Documents or other Investment
      Documents, or which otherwise secures the payment or performance of any of
      the
      Obligations, including pursuant to the Security Documents.

     

    “Convertible
      Securities”
of
      a
      Person means any securities (directly or indirectly) convertible into or
      exchangeable for any Equity Interest of such Person, including all warrants,
      options and other rights to acquire any Equity Interests of such
      Person.

     

    “Dividend”
means
      any distribution by a Person with respect to its ownership interests whether
      in
      cash, securities (including common and preferred equity) or other property,
      including distributions upon any liquidation, dissolution or winding up of
      such
      Person.

     

    “Environmental
      and Safety Requirements”
means
      all federal, state, local and foreign statutes, regulations, ordinances and
      similar provisions having the force or effect of law, all judicial and
      administrative orders and determinations, all contractual obligations and all
      common law, in each case concerning public health and safety, worker health
      and
      safety and pollution or protection of the environment (including all those
      relating to the presence, use, production, generation, handling, transportation,
      treatment, storage, disposal, distribution, labeling, testing, processing,
      discharge, Release, threatened Release, control or cleanup of any hazardous
      or
      otherwise regulated materials, substances or wastes, chemical substances or
      mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum
      products or byproducts, asbestos, polychlorinated biphenyls, noise or
      radiation), each as amended, modified, supplemented, or replaced from time
      to
      time and as now or hereafter in effect.

     

    
      
        
        

      

      
        2

        
          

        

      

       

    

     

    “Equity
      Interests”
means
      all of the equity or other ownership interests in a Person (including
      Convertible Securities and other rights containing phantom or other equity
      participation features).

     

    “ERISA”
means
      the Employee Retirement Income Security Act of 1974 (or any successor
      legislation thereto), as amended, modified, supplemented, or replaced from
      time
      to time, or any similar federal law then in force.

     

    “ERISA
      Affiliate”
means,
      with respect to Issuer, any trade or business (whether or not incorporated)
      under common control with such Person within the meaning of §414(b) or (c) of
      the Code (or §414(m) or (o) of the Code for purposes of provisions relating to
§412 of the Code).

     

    “ERISA
      Event”
means,
      as to Issuer or any ERISA Affiliate: (a) a Reportable Event as defined in §4043
      of ERISA and the regulations issued thereunder (other than a Reportable Event
      for which notice has been waived by regulation); (b) the withdrawal of Issuer,
      any Subsidiary thereof or any ERISA Affiliate from a Pension Plan in which
      it
      was a “substantial employer” as defined in §4001(a)(2) of ERISA or was deemed a
“substantial employer” under §4062(e) of ERISA; (c) the termination of a Pension
      Plan, the filing of notice of intent to terminate a Pension Plan or the
      treatment of a Pension Plan amendment as a termination under §4041 of ERISA; (d)
      the institution of proceedings to terminate a Pension Plan by the PBGC; (e)
      the
      partial or complete withdrawal of Issuer or any ERISA Affiliate from a
      Multiemployer Plan, (f) the imposition of a lien on Issuer or any ERISA
      Affiliate pursuant to §412 of the Code or Section 302 of ERISA; (g) any event or
      condition which results in the reorganization or insolvency of a Multiemployer
      Plan to which Issuer or any ERISA Affiliate has any liability under §4241 or
§4245 of ERISA, respectively; and (h) any event or condition which results in
      the termination of a Multiemployer Plan, or the institution by the PBGC of
      proceedings to terminate a Multiemployer Plan to which Issuer or any ERISA
      Affiliate has any liability under §4041A of ERISA or §4042 of ERISA,
      respectively.

     

    “Federal
      Bankruptcy Code”
means
      Title 11 of the United States Code, as amended, modified, supplemented, or
      replaced from time to time.

     

    “GAAP”
means
      generally accepted accounting principles as promulgated by the Financial
      Accounting Standards Board or any other governing body or boards having
      jurisdiction, authority or responsibility for promulgating accounting standards,
      as in effect from time to time. Except as otherwise expressly stated herein,
      all
      references to GAAP shall be deemed to mean GAAP as consistently
      applied.

     

    “Governing
      Documents”
of
      a
      Person means such Person’s (a) certificate or articles of incorporation,
      formation or organization and operating agreements or bylaws, (b) any documents
      comparable to those described in preceding clause (a) as may be applicable
      pursuant to any Law, and (c) any amendment or modification to any of the
      foregoing.

     

    
      
        
        

      

      
        3

        
          

        

      

       

    

     

    “Governmental
      Body”
means
      any federal, state, local, foreign or other government or quasi-governmental
      authority or any department, agency, subdivision, court or other tribunal of
      any
      of the foregoing.

     

    “Guaranty”
means
      any guarantee, including the Guaranty Agreement, of the payment or performance
      of any Indebtedness or other obligation and any other arrangement whereby credit
      is extended (or continued) to one obligor on the basis of any promise of another
      Person, whether that promise is expressed in terms of an obligation to: (a)
      pay
      the Indebtedness or other liabilities of such obligor; (b) purchase an
      obligation owed by such obligor; (c) purchase goods and services from such
      obligor pursuant to a take-or-pay contract; (d) maintain the capital, working
      capital, solvency or general financial condition of such obligor; or (e)
      otherwise assure any creditor of such obligor against loss (including by way
      of
      an agreement to repurchase or reimburse), whether or not any such arrangement
      is
      listed on the balance sheet of such other Person or referred to in a footnote
      thereto, but shall not include endorsements of items for collection in the
      ordinary course of business. The amount of any Guaranty shall be equal to the
      amount of the obligation so guaranteed or otherwise supported, or, if not a
      fixed or determined amount, the maximum amount guaranteed or
      supported.

     

    “Guaranty
      Agreement”
has
      the
      meaning set forth in Section
      3.3
      of this
      Agreement.

     

    “Hazardous
      Material”
means
      any substance, product, waste, pollutant, material, chemical contaminant,
      constituent, or other material which is or becomes listed, regulated, or
      addressed under any Environmental and Safety Regulations. “Hazardous Materials”
shall not include commercially reasonable amounts of such materials used in
      the
      ordinary course of operation of an Issuer’s property that are used and stored in
      accordance with all applicable Environmental and Safety
      Requirements.

     

    “Indebtedness”
means
      at a particular time, without duplication: (a) any indebtedness for borrowed
      money or issued in substitution for or exchange of indebtedness for borrowed
      money; (b) any indebtedness evidenced by any note, bond, debenture or other
      debt
      instrument; (c) any indebtedness for the deferred purchase price of property
      or
      services with respect to which a Person is liable, contingently or otherwise,
      as
      obligor or otherwise (other than trade payables and other current liabilities
      incurred in the ordinary course of business, consistent with past practice
      unless the same are being contested in good faith by appropriate proceedings
      and
      with respect to which a Person has set aside adequate reserves therefore in
      accordance with GAAP); (d) any commitment by which a Person assures a creditor
      against loss (including contingent reimbursement obligations with respect to
      letters of credit); (e) any obligations for which a Person is obligated pursuant
      to a Guaranty; (f) any obligations under Capitalized Leases with respect to
      which a Person is liable, contingently or otherwise, as obligor, guarantor
      or
      otherwise, or with respect to which obligations a Person assures a creditor
      against loss; (g) any indebtedness secured by a Lien on a Person’s assets; (h)
      any unsatisfied obligation for Withdrawal Liability to a Multiemployer Plan;
      (i)
      all indebtedness of any partnership of which such Person is a general partner
      or
      in which such Person may incur liability as if such Person was a general
      partner; and (j) all indebtedness of a Person for which such Person may become
      liable as a fiduciary or otherwise.

     

    
      
        
        

      

      
        4

        
          

        

      

       

    

     

    “Initial
      Closing Date”
has
      the
      meaning set forth in Section
      2.4
      of this
      Agreement.

     

    “Initial
      Note”
has
      the
      meaning set forth in Section
      2.1
      of this
      Agreement.

     

    “Intellectual
      Property Rights”
means
      all: (a) patents, patent applications, patent disclosures and inventions; (b)
      trademarks, service marks, trade dress, trade names, internet domain names,
      logos and corporate names and registrations and applications for registration
      thereof, together with all of the goodwill associated therewith; (c) copyrights
      (registered or unregistered) and copyrightable works and registrations and
      applications for registration thereof; (d) mask works and registrations and
      applications for registration thereof; (e) computer software, data, data bases
      and documentation thereof; (f) trade secrets and other confidential information
      (including ideas, formulas, compositions, inventions (whether patentable or
      unpatentable and whether or not reduced to practice), know-how, manufacturing
      and production processes and techniques, research and development information,
      drawings, specifications, designs, plans, proposals, technical data,
      copyrightable works, financial and marketing plans and customer and supplier
      lists and information); (g) other intellectual property rights; and (h) copies
      and tangible embodiments thereof (in whatever form or medium).

     

    “Investment”
as
      applied to any Person means: (a) any direct or indirect purchase or other
      acquisition by such Person of any notes, obligations, instruments, Equity
      Interests and other securities of any other Person; and (b) any capital
      contribution by such Person to any other Person.

     

    “Investment
      Documents”
means
      this Agreement, the agreements and instruments evidencing the Securities and
      any
      Equity Interests for which Securities are exchanged or converted, the Security
      Documents, and each of the other agreements, documents and instruments expressly
      contemplated by this Agreement or otherwise relating to the
      Securities.

     

    “IRS”
means
      the United States Internal Revenue Service.

     

    “Issuer”
has
      the
      meaning set forth in the preamble of this Agreement.

     

    “Knowledge”
or
      “Aware”
means
      and includes for Issuer (a) the actual knowledge or awareness of the Designated
      Persons and (b) the knowledge or awareness of the Designated Persons that a
      prudent business person would have obtained in the conduct of his business
      after
      making reasonable inquiry and reasonable diligence with respect to the
      particular matter in question. For the purposes of this definition, the term
      “Designated
      Person”
means
      and includes, for Issuer, the chief executive officer and the chief financial
      officer of Issuer.

     

    “Law”
means
      any federal, state, local, foreign or other law, statute, ordinance, regulation,
      rule, regulatory or administrative guidance, order, constitution, treaty,
      principle of common law or other restriction of any Governmental
      Body.

     

    “Lien”
means
      any mortgage, pledge, security interest, encumbrance, lien, charge or other
      restriction of any kind whatsoever (including any conditional sale or other
      title retention agreement or lease in the nature thereof), any sale of
      receivables with recourse against Issuer or Affiliate of Issuer, any filing
      or
      agreement to file a financing statement as debtor under the Uniform Commercial
      Code or any similar statute other than to reflect ownership by a third party
      of
      property leased to Issuer under a lease which is not in the nature of a
      conditional sale or title retention agreement.

     

    
      
        
        

      

      
        5

        
          

        

      

       

    

     

    “Material”
means
      any matter that, in the aggregate with all other matters, has resulted or has
      a
      reasonable likelihood of resulting in costs, liabilities, expenses, damages
      or
      prospects of or to, or claims by or against Issuer involving $300,000.00 or
      more.

     

    “Material
      Adverse Effect”
means
      any matter or matters which would, alone or in the aggregate, have a materially
      adverse effect on: (a) the assets, properties, liabilities, operations,
      financial condition or business of Issuer taken as a whole; (b) the ability
      of
      the Issuer collectively to repay the Notes; or (c) the ability of Issuer taken
      as a whole to perform any of its obligations under the Securities or any of
      the
      Investment Documents. Notwithstanding the foregoing, for purposes of this
      Agreement, “Material Adverse Effect” shall not include any change or effect if
      it is a result of transaction expenses actually incurred by Issuer in connection
      with the transactions contemplated hereby.

     

    “Multiemployer
      Plan”
shall
      mean a “multiemployer plan” as defined in §4001(a)(3) of ERISA, and to which
      Issuer or any ERISA Affiliate makes, is making, or is obligated to make
      contributions on behalf of participants who are or were employed by any of
      them
      or to which such person has any current or potential liability.

     

    “Note
      Proceeds”
has
      the
      meaning set for in Section 4.4(q) of this Agreement.

     

    “Notes”
has
      the
      meaning set forth in Section
      2.1
      of this
      Agreement.

     

    “Obligations”
means
      all advances, debts, liabilities, obligations, covenants and duties owing,
      arising, due or payable from Issuer, or any Project Subsidiary of Issuer, to
      Purchaser of any kind or nature, existing or future, whether or not evidenced
      by
      any note, letter of credit, reimbursement agreement, or other instrument or
      document, arising under this Agreement or any of the other Investment Documents
      and whether direct or indirect (including those acquired by assignment),
      absolute or contingent, primary or secondary, due or to become due, existing
      on
      or after any Closing Date and however acquired, and all amendments, renewals,
      restatements, replacements, consolidations or other modifications of the
      foregoing from time to time. The term includes all principal, interest, fees,
      expenses and any other sums chargeable to Issuer under any of the Investment
      Documents.

     

    “Officer’s
      Certificate”
means
      a
      certificate signed by the chief executive officer of Issuer (or any of them)
      on
      behalf of Issuer, stating that: (a) the officer signing such certificate has
      made or has caused to be made such investigations as are necessary in order
      to
      permit him to verify the accuracy of the information set forth in such
      certificate; and (b) such certificate does not misstate any material fact and
      does not omit to state any fact necessary to make the certificate not
      misleading.

     

    “PBGC”
shall
      mean the Pension Benefit Guaranty Corporation or any successor
      thereto.

     

    
      
        
        

      

      
        6

        
          

        

      

       

    

     

    “Pension
      Plan”
means
      a
“pension plan”, as such term is defined in Section 3(2) of ERISA, which is
      subject to Title IV of ERISA (other than a multiemployer plan as defined in
      §4001(a)(3) of ERISA), and to which Issuer or any ERISA Affiliate may have
      liability, including any liability by reason of having been a substantial
      employer within the meaning of §4063 of ERISA at any time during the preceding 5
      years, or by reason of being deemed to be a contributing sponsor under §4069 of
      ERISA.

     

    “Permitted
      Acquisitions”
means
      any acquisition by Issuer or any Subsidiary of Issuer of any Person or the
      assets of any Person if (1) the Person will convey a Property in the
      transaction, (2) at least 10 days prior to the date of consummation of such
      acquisition the Issuer provides the Purchaser with a Proceeds Notice, (3) in
      the
      event of a merger or consolidation the Issuer or a Subsidiary of the Issuer
      is
      the surviving entity, and (4) the acquisition would not otherwise result in
      an
      Event of Default under this Agreement.

     

    “Permitted
      Business Combination”
means
      a
      merger of Issuer into Easyknit Holdings Enterprises Holdings Limited, a Bermuda
      incorporated company and listed on the Stock Exchange of Hong Kong Limited.
      

     

    “Person”
means
      an individual, a partnership, a corporation, a limited liability company, an
      association, a joint stock company, a trust, a joint venture, an unincorporated
      organization, a Governmental Body.

     

    “Pioneer”
means
      Pioneer Holdings, LLC, a Kansas limited liability company.

     

    “Plan”
shall
      mean as required by the context at any time, an employee benefit plan, as
      defined in §3(3) of ERISA, which Issuer or any ERISA Affiliate maintains,
      contributes to or has an obligation to contribute to on behalf of participants
      who are or were employed by any of them.

     

    “Potential
      Event of Default”
means
      any event or occurrence that, with the passage of time or the giving of notice
      or both, would constitute an Event of Default.

     

    “Prime
      Rate”
means
      the “prime rate” published in the “Money Rates” section of The Wall Street
      Journal, as such “prime rate” may change from time to time. If The Wall Street
      Journal ceases to publish the “prime rate”, then Purchaser, in its sole
      discretion, shall select an equivalent publication that publishes such “prime
      rate”; and if such “prime rate” is no longer generally published, then Purchaser
      shall select a comparable interest rate index. In either case, such selection
      shall be made by Purchaser in its discretion.

     

    “Proceeds
      Notice”
has
      the
      meaning set forth in Section 4.4(q) of this Agreement.

     

    “Project
      Subsidiary”
has
      the
      meaning set forth in Section 4.4(q) of this Agreement.

     

    “Prohibited
      Transaction”
means
      any transaction set forth in Section 406 of ERISA or Section 4975 of the
      Code.

     

    “Property”
has
      the
      meaning set forth in Section 4.4(q) of this Agreement.

     

    
      
        
        

      

      
        7

        
          

        

      

       

    

     

    “Purchaser”
has
      the
      meaning set forth in the preamble of this Agreement.

     

    “Qualified
      Plan”
means
      an employee pension benefit plan, as defined in §3(2) of ERISA, which is
      intended to be tax-qualified under §401(a) or §403(a) of the Code, and which an
      Issuer or any ERISA Affiliate maintains, contributes to or has an obligation
      to
      contribute to on behalf of participants who are or were employed by any of
      them.

     

    “Release”
has
      the
      meaning set forth in CERCLA.

     

    “Reportable
      Event”
means
      any of the events listed in §4043(c)(1), (2), (3), (5), (6), (8) or (9) of
      ERISA.

     

    “Restricted
      Securities”
means
      the Securities issued hereunder and any securities issued with respect to the
      Securities by way of a Dividend or split or in connection with a combination
      of
      Equity Interests, recapitalization, merger, consolidation or other
      reorganization. As to any particular Restricted Securities, such securities
      shall cease to be Restricted Securities when they have (a) been effectively
      registered, under the Securities Act and disposed of in accordance with the
      registration statement covering them, (b) become eligible for sale pursuant
      to
      Rule 144(k) (or any similar provision then in force) under the Securities Act,
      (c) become eligible to be sold to the public through a broker, dealer or market
      maker in any 90-day period pursuant to Rule 144 of the Securities Act without
      volume restrictions limiting the sale of such Securities (or any successor
      provision then in effect) under the Securities Act, or (d) been otherwise
      transferred and new certificates for them not bearing any legend regarding
      the
      Securities Act have been delivered pursuant to the Issuer’ Governing Documents.
      Whenever any particular securities cease to be Restricted Securities, the holder
      thereof (except for clause (c) above whereby the holder must be the transferee)
      shall be entitled to receive from the Issuer, without expense, new securities
      of
      like tenor not bearing a Securities Act legend.

     

    “Securities”
has
      the
      meaning set forth in Section
      2.1
      of this
      Agreement.

     

    “Securities
      Act”
means
      the Securities Act of 1933, as amended, modified, supplemented, or replaced
      from
      time to time, or any similar federal law then in force.

     

    “Securities
      and Exchange Commission”
means
      the Securities and Exchange Commission and any Governmental Body succeeding
      to
      the functions thereof.

     

    “Securities
      Exchange Act”
means
      the Securities Exchange Act of 1934, as amended, modified, supplemented, or
      replaced from time to time, or any similar federal law then in
      force.

     

    “Security
      Agreement”
means
      the Security Agreement executed by Issuer or any Subsidiary of Issuer in favor
      of Purchaser dated on or about the date of any Additional Closing, together
      with
      any amendments, restatements, replacements, consolidations or other
      modifications thereof from time to time.

     

    “Security
      Documents”
means
      the Security Agreement, the Guaranty Agreement, the Stock Pledge Agreement,
      and
      every other security agreement, document, financing statement and instrument
      necessary to grant a valid and perfected security interest in the Collateral
      from time to time.

     

    
      
        
        

      

      
        8

        
          

        

      

       

    

     

    “Stock
      Pledge Agreement”
has
      the
      meaning set forth in Section
      3.4
      of this
      Agreement.

     

    “Subsidiary”
means,
      with respect to any Person, any corporation, limited liability company,
      partnership, association or other business entity of which: (a) if a
      corporation, a majority of the total voting power of shares of stock entitled
      (without regard to the occurrence of any contingency) to vote in the election
      of
      directors, managers or trustees thereof is at the time owned or controlled,
      directly or indirectly, by that Person or one or more of the other Subsidiaries
      of that Person or a combination thereof; or (b) if a limited liability company,
      partnership, association or other business entity, a majority of the partnership
      or other similar ownership interest thereof is at the time owned or controlled,
      directly or indirectly, by any Person or one or more Subsidiaries of that Person
      or a combination thereof. For purposes hereof, a Person or Persons shall be
      deemed to have a majority ownership interest in a limited liability company,
      partnership, association or other business entity if such Person or Persons
      shall be allocated a majority of limited liability company, partnership,
      association or other business entity gains or losses or shall be or control
      (or
      have the power to be or control) a managing director, manager or general partner
      of such limited liability company, partnership, association or other business
      entity.

     

    “Tax”
means
      any federal, state, county, local, foreign or other income, gross receipts,
      ad
      valorem, franchise, profits, sales or use, transfer, registration, excise,
      utility, environmental, communications, real or personal property, capital
      stock, license, payroll, wage or other withholding, employment, social security,
      severance, stamp, occupation, alternative or add-on minimum, estimated and
      other
      taxes of any kind whatsoever (including deficiencies, penalties, additions
      to
      tax, and interest attributable thereto) whether disputed or not.

     

    “Tax
      Return”
means
      any return, information report or filing with respect to Taxes, including any
      schedules attached thereto and including any amendment thereof.

     

    “Title
      IV Plan”
means
      a
      Pension Plan that is covered by Title IV of ERISA.

     

    “Uniform
      Commercial Code”
means
      the Uniform Commercial Code as in effect in the State of Kansas or such other
      state as is applicable to the parties to this Agreement or the Collateral from
      time to time, as the same may be amended, modified, supplemented, or replaced
      from time to time.

     

    “Withdrawal
      Liability”
means,
      at any time, the aggregate amount of the liabilities, if any, pursuant to §4201
      of ERISA, and any increase in contributions pursuant to §4243 of ERISA with
      respect to all Multiemployer Plans.

     

    1.2 Accounting
      Principles.
      The
      classification, character and amount of all assets, liabilities, capital
      accounts and reserves and of all items of income and expense to be determined,
      and any consolidation or other accounting computation to be made, and the
      interpretation of any definition containing any financial term, pursuant to
      this
      Agreement shall be determined and made in accordance with GAAP.

     

    1.3 Other
      Interpretive Matters.
      In each
      of the Investment Documents, unless a clear contrary intention appears: (a)
      the
      singular number includes the plural number and vice versa; (b) reference to
      any
      Person includes such Person’s successors and assigns but, if applicable, only if
      such successors and assigns are permitted by such Investment Document, and
      reference to a Person in a particular capacity excludes such Person in any
      other
      capacity or individually; (c) reference to any gender includes each other
      gender; (d) reference to any agreement (including this Agreement and the
      Schedules and Exhibits and the Appendices hereto), document or instrument means
      such agreement, document or instrument as amended, modified, supplemented,
      or
      replaced from time to time in accordance with the terms thereof and, if
      applicable, the terms hereof (and without giving effect to any amendment or
      modification that would not be permitted in accordance with the terms hereof);
      (e) reference to any applicable law, statute, rule or regulation means such
      applicable law, statute, rule or regulation as amended, modified, codified
      or
      reenacted, in whole or in part, and in effect from time to time, including
      rules
      and regulations promulgated thereunder and reference to any particular provision
      of any applicable law, statute, rule or regulation shall be interpreted to
      include any revision of or successor to that provision regardless of how
      numbered or classified; (f) reference to any Article, Section, Schedule, Exhibit
      or Appendix means such Article or Section hereof or such Schedule, Exhibit
      or
      Appendix hereto; (g) “hereunder,” “hereof,” “hereto” and words of similar import
      shall be deemed references to this Agreement as a whole and not to any
      particular Section or other provision hereof; (h) the terms “include”,
“including” and similar terms shall be construed as if followed by the phrase
“without being limited to”; (i) the term “or” has, except where otherwise
      indicated, the inclusive meaning represented by the phrase “and/or”; (j)
      relative to the determining of any period of time, “from” means “from and
      including” and “to” and “through” mean “to and including”; (k) “or”, “either”
and “any” are not exclusive; and (l) references to any Subsidiary of a Person
      shall be given effect only at such times as such Person has one or more
      Subsidiaries. An Event of Default shall “continue” or be “continuing” until such
      Event of Default has been fully cured or waived in writing by the
      Purchaser.

     

    
      
        
        

      

      
        9

        
          

        

      

       

    

     

    Section
      2. Authorization,
      Issuance and Closing.

     

    2.1 Authorization
      of the Notes.
      Issuer
      shall authorize the issuance and sale to the Purchaser of an initial 8.25%
      Secured Convertible Note in the principal amount of $3,000,000.00 (the
“Initial
      Note”)
      and
      within 12 months from the Initial Closing Date may authorize the issuance and
      sale to the Purchaser of one or more additional 8.25% Secured Convertible Notes
      in a minimum aggregate principal amount of $9,000,000 and a maximum aggregate
      principal amount of $22,000,000.00, with each such 8.25% Secured Convertible
      Note containing the terms and conditions and in the form set forth in
Exhibit
      A
      attached
      hereto and with all such 8.25% Secured Convertible Notes, including the Initial
      Note, not to exceed a total aggregate principal amount of $25,000,000.00 (each
      a
“Note”
and
      collectively, together with any notes issued by any Person with respect to
      the
      purchase of Securities, the “Notes”).
      The
      Notes authorized for sale to Purchaser other than the Initial Note are
      collectively the “Additional
      Notes”.
      The
      Notes are sometimes referred to herein as the “Securities.”

     

    2.2 Purchase
      and Sale of the Initial Note at the Initial Closing.
      At the
      Initial Closing specified in Section
      2.4,
      Issuer
      shall issue and sell to Purchaser and, subject to the terms and conditions
      set
      forth in this Agreement, Purchaser shall purchase from the Issuer the Initial
      Note at a price equal to $3,000,000.00. 

     

    2.3 Purchase
      and Sales of the Additional Notes.
      Within
      12 months of the Initial Closing Date, Issuer shall direct, by written notice,
      that Purchaser purchase one or more Additional Notes in an aggregate principal
      amount not to exceed $9,000,000 authorized in accordance with Section 2.1.
      Within 5 days of its receipt of such notice, and, subject to the terms and
      conditions set forth in this Agreement, Purchaser shall purchase from the Issuer
      one or more Additional Notes in an aggregate principal amount not to exceed
      $9,000,000 at a purchase price equal to the principal amount of the Additional
      Note or Additional Notes being purchased by wire transfer of immediately
      available funds against delivery of the Additional Notes or Additional Notes.
      From time to time but within 12 months of the Initial Closing, at Issuer’s
      request by written notice to Purchaser that Purchaser purchase one or more
      Additional Notes in an aggregate amount of up to an additional $13,000,000,
      Purchaser may purchase, at its discretion, Additional Notes in an aggregate
      amount of up to an additional $13,000,000. 

     

    
      
        
        

      

      
        10

        
          

        

      

       

    

     

    2.4 The
      Initial Closing.
      The
      closing of the purchase and sale of the Initial Note (the “Initial Closing”)
      shall
      take place at the offices of Polsinelli Shalton Flanigan Suelthaus PC in
      Overland Park, Kansas at 10:00 a.m. Central Standard Time on April 10, 2007
      or
      at such other place or on such other date as may be mutually agreeable to Issuer
      and Purchaser (the “Initial Closing
      Date”).
      At
      the Initial Closing, (a) Issuer shall deliver to Purchaser instruments
      evidencing the Initial Note, issued in the name of Purchaser or its nominee,
      and
      (b) Purchaser will pay the purchase price thereof by wire transfer of
      immediately available funds to an account specified by Issuer in the aggregate
      amount of $3,000,000.00.

     

    Section
      3. Conditions
      of Purchaser’s Obligation at the Initial Closing.
      The
      obligation of Purchaser to purchase and pay for the Initial Note at the Initial
      Closing is subject to the fulfillment as of the Initial Closing Date of the
      following conditions to Purchaser’s satisfaction in its sole
      discretion:

     

    3.1 Representations,
      Warranties and Covenants; No Event of Default.
      The
      representations and warranties contained in Section
      6
      of this
      Agreement shall be true, complete and correct at and as of the Initial Closing
      Date (both immediately prior to and immediately after giving effect to the
      transactions contemplated by the Investment Documents) as though then made
      and
      Issuer shall have performed all of the covenants required to be performed by
      it
      under the Investment Documents that are to be complied with or performed by
      Issuer on or prior to the Initial Closing Date (unless that same shall have
      been
      waived by Purchaser), and there shall not exist any Event of Default or
      Potential Event of Default.

     

    3.2 Governing
      Documents.
      The
      Governing Documents (and all amendments thereto) of Issuer shall be in form
      and
      substance satisfactory to Purchaser and shall be in full force and effect as
      of
      the Initial Closing Date, the receipt and sufficiency of which are hereby
      acknowledged by Purchaser.

     

    3.3 Guaranty
      and Security Agreement.
      Wits-China Acquisition Corp. (“Wits-China”)
      has
      duly authorized, executed and delivered a guaranty agreement in the form
      attached hereto as Exhibit
      B
      (the
“Guaranty
      Agreement”),
      and
      the Guaranty Agreement shall be in full force and effect as of the Initial
      Closing Date.

     

    3.4 Stock
      Pledge Agreement.
      Issuer
      has duly authorized, executed and delivered the Stock Pledge Agreement, in
      the
      form attached hereto as Exhibit
      C
      (the
“Stock
      Pledge Agreement”),
      and
      the Stock Pledge Agreement shall be in full force and effect as of the Initial
      Closing Date

     

    
      
        
        

      

      
        11

        
          

        

      

       

    

     

    3.5 Securities
      Law Compliance.
      Issuer
      shall have made all filings under all applicable federal and state securities
      laws necessary to consummate the issuance of the Securities pursuant to this
      Agreement in compliance with such laws.

     

    3.6 Closing
      Fees and Expenses.
      Issuer
      shall have: (a) paid to Pioneer a fee in the amount of $60,000; and (b)
      reimbursed Purchaser for the fees and expenses as provided in Section
      8.1
      of this
      Agreement.

     

    3.7 Opinion
      of Issuer’ Counsel.
      Purchaser shall have received from Maslon Edelman Borman & Brand, LLP,
      counsel for Issuer, an opinion with respect to the matters set forth in
Exhibit
      D
      attached
      hereto, which shall be addressed to Purchaser, dated the date of the Initial
      Closing Date.

     

    3.8 Closing
      Documents.
      Issuer
      shall have delivered to Purchaser all of the following documents:

     

    (a) the
      Initial Note in the principal amount of $3,000,000.00 duly authorized, executed
      and delivered by the Issuer;

     

    (b) an
      Officer’s Certificate of Issuer in the form of Exhibit
      E
      attached
      hereto dated as of the Initial Closing Date;

     

    (c) certified
      copies of the resolutions duly adopted by the board of directors of Issuer,
      authorizing the execution, delivery and performance of each of the Investment
      Documents to which it is a party, the issuance and sale of the Initial Note
      and
      the consummation of all other transactions contemplated by the Investment
      Documents;

     

    (d) certificates
      of the secretaries of Issuer in the form of Exhibit
      F
      attached
      hereto dated as of the Initial Closing Date;

     

    (e) copies
      of
      all third party and governmental consents, approvals and filings required in
      connection with the consummation of the transactions under the Investment
      Documents (including all blue sky law filings and waivers of all preemptive
      rights, rights of first refusal and all other similar rights); and

     

    (f) a
      solvency certificate executed by the chief executive officer and chief financial
      officer of Issuer in the form of Exhibit
      G
      attached
      hereto dated as of the Initial Closing Date. 

     

    3.9 Other
      Items.
      Such
      other agreements, documents, certificates, verifications, and assurances as
      Purchaser may request in connection with the transactions described in or
      contemplated by the Investment Documents.

     

    3.10 Waiver.
      Any
      condition specified in this Section may only be waived in writing by
      Purchaser.

    
      
        
        

      

      
        12

        
          

        

      

       

    

     

    3.11 Additional
      Conditions of Purchase Obligations after the Initial Closing.
      Any
      obligation of the Purchaser to purchase from the Issuer any Additional Notes
      within 12 months after the Initial Closing Date pursuant to Section
      2.3
      of this
      Agreement shall be further subject to the fulfillment as of the date of such
      purchase (each an “Additional
      Closing”)
      of the
      following conditions to the Purchaser’s satisfaction in its sole
      discretion:

     

    (a) The
      representations and warranties of the Issuer contained in the Investment
      Documents (including those contained in Section
      6
      of this
      Agreement) shall be true and correct as though made on and as of the date of
      such purchase; 

     

    (b) No
      Event
      of Default or Potential Event of Default exists, nor would any Event of Default
      or Potential Event of Default result from such purchase; 

     

    (c) The
      Issuer shall pay Pioneer a fee equal to 2% of the Additional Notes being
      purchased, payable at the Additional Closing for such Additional
      Notes;

     

    (d) Purchaser
      shall receive Security Documents, in a form and substance satisfactory to
      Purchaser and Issuer, granting Purchaser in all of the assets acquired from
      the
      use of proceeds from the sale of the Additional Notes;

     

    (e) A
      certified copy of Issuer’s articles of incorporation, as in effect at the
      Initial Closing and a certificate of good standing, dated not more than 15
      days
      prior to the date of the Initial Closing, of Issuer issued by its jurisdiction
      of incorporation and from each jurisdiction in which it is qualified to conduct
      business;

     

    (f) Issuer
      shall have reserved for issuance such number of authorized and unissued shares
      of Issuer common stock to permit the conversion of the Additional Note or
      Additional Notes being then purchased and the Initial Note; and

     

    (g) The
      foregoing notwithstanding, Purchaser shall have no obligation to Purchase any
      Additional Note if such purchase, coupled with its purchase of the Initial
      Note
      and all other Additional Notes, would cause Purchaser to beneficially own,
      or an
“as converted” basis, more than 9.99% of the total then outstanding shares of
      common stock of Issuer.

     

    Section
      4. Covenants.

     

    4.1 Financial
      Statements and Other Information.
      So long
      as any of the Notes or any notes issued in exchange for any Securities remain
      outstanding and prior to the indefeasible payment in full of all amounts due
      and
      owing thereunder, the Issuer shall deliver to Purchaser, subject to the
      confidentiality provisions set forth in Section
      8.23:

     

    (a) Annual
      Financial Statements.
      Upon
      request of Purchaser, for fiscal years ending December 31, 2007 and thereafter,
      (i) a copy of the annual financial statements of Issuer for such fiscal year
      containing, on a consolidated and consolidating basis, balance sheets and
      statements of income, retained earnings, and cash flow at the end of such fiscal
      year and for the 12-month period then ended, in each case setting forth in
      comparative form the figures for the preceding fiscal year, all in reasonable
      detail and audited by independent certified public accountants of recognized
      standing acceptable to Purchaser, certified to the effect that such financial
      information has been prepared in accordance with GAAP and containing no material
      qualifications or limitations on scope; and (ii) a copy of the annual financial
      statements of Issuer for such fiscal year containing, on a consolidated and
      consolidating basis, balance sheets and statements of income, retained earnings,
      and cash flow as at the end of such fiscal year and for the 12-month period
      then
      ended, in each case setting forth in comparative form the figures for the
      preceding fiscal year, all in reasonable detail and prepared in accordance
      with
      GAAP and certified by the chief executive officer, chief financial officer
      or
      president of Issuer to have been prepared in accordance with GAAP;

     

    
      
        
        

      

      
        13

        
          

        

      

       

    

     

    (b) Quarterly
      Financial Statements.
      Upon
      request of Purchaser, for the fiscal quarter ending June 30, 2007 and
      thereafter, a copy of the quarterly financial statements of Issuer for such
      fiscal quarter containing, on a consolidated and consolidating basis, balance
      sheets and statements of income, retained earnings, and cash flow at the end
      of
      such fiscal quarter and for the 3-month period then ended;

     

    (c) Notice
      of Litigation.
      Promptly after receipt of service of process and in any event within 10 Business
      Days after receipt of service of process, notice of all actions, suits, and
      proceedings before any governmental authority or arbitrator affecting Issuer
      which, if determined adversely to Issuer, has had or could reasonably be
      expected to have a Material Adverse Effect;

     

    (d) Notice
      of Default.
      As soon
      as possible (but in any event within 10 Business Days) after (i) the discovery
      or receipt of notice of any Event of Default or Potential Event of Default,
      (ii)
      any default under any Investment Document, (iii) notice of any material
      investigation, notice, proceeding or adverse determination from any governmental
      or regulatory authority or agency, or (iv) immediately (notwithstanding the
      reference to 10 days stated above) after the receipt of notice (or written)
      of
      the acceleration of any Material Indebtedness, an Officer’s Certificate
      specifying the nature and period of existence thereof and what actions Issuer
      has taken and proposes to take with respect thereto;

     

    (e) ERISA
      Reports.
      As soon
      as possible and in any event within 5 days after Issuer knows or has reason
      to
      know that any ERISA Event or Prohibited Transaction has occurred with respect
      to
      any Pension Plan or that the PBGC or Issuer has instituted or will institute
      proceedings under Title IV of ERISA to terminate any Pension Plan, a certificate
      of the chief financial officer of Issuer setting forth the details as to such
      ERISA Event or Prohibited Transaction or Pension Plan termination and the action
      that Issuer proposes to take with respect thereto;

     

    (f) Notice
      of Material Adverse Change.
      As soon
      as possible and in any event within 10 Business Days after the occurrence
      thereof, written notice of (i) any matter that has had a Material Adverse
      Effect, or (ii) any condition or event that has resulted in any material
      liability under any Environmental and Safety Requirements;

     

    (g) General
      Information.
      Promptly, such other information concerning Issuer as Purchaser may from time
      to
      time reasonably request;

    
      
        
        

      

      
        14

        
          

        

      

       

    

     

    (h) Insurance
      Reports.
      As soon
      as possible (but in any event within 10 days) after becoming Aware of any
      cancellation or Material change in any insurance maintained by Issuer, written
      notice thereof which describes the same and the intended course of action of
      Issuer with respect thereto; and

     

    (i) Acceleration
      of Indebtedness.
      Promptly upon notice (oral or written) of the acceleration of any Material
      Indebtedness.

     

    4.2 Attendance
      at Board Meetings; Board Seat; Management Fees.
      So long
      as any of the Securities or notes issued in exchange for any Securities remain
      outstanding and prior to the indefeasible payment in full of all amounts due
      and
      owing thereunder, Issuer shall give Purchaser written notice of each meeting,
      whether in person, telephonic, or by video transmission, of its board of
      directors and each committee thereof at the same time notice is delivered to
      each such director or committee member in accordance with Issuer’s respective
      Governing Documents, and Issuer shall permit at least one representative of
      Purchaser to attend as observers all meetings of its board of directors and
      all
      committees thereof. In the case of telephonic meetings conducted in accordance
      with Issuer’s Governing Documents Purchaser’s representatives shall be given the
      opportunity to listen to such telephonic meetings. Purchaser shall be entitled
      to receive all written materials and other information (including copies of
      meeting minutes) given to directors in connection with such meetings at the
      same
      times such materials and information are given to the directors. If an Issuer
      proposes to take any action by written consent in lieu of a meeting of its
      board
      of directors or of any committee thereof, Issuer shall give written notice
      thereof to Purchaser as soon as reasonably possible describing in reasonable
      detail the nature and substance of such action. Issuer shall pay the reasonable
      out-of-pocket expenses of the representative of Purchaser incurred in connection
      with attending all such meetings. 

     

    4.3 Affirmative
      Covenants.
      So long
      as any of the Notes or any notes issued in exchange for any Securities remain
      outstanding and prior to the indefeasible payment in full of all amounts due
      and
      owing thereunder, Issuer shall comply with each of the following
      covenants:

     

    (a) Maintenance
      of Existence; Conduct of Business.
      Issuer
      shall preserve and maintain its existence and all of its leases, privileges,
      licenses, permits, franchises, qualifications, and rights that are materially
      necessary or desirable in the ordinary conduct of its business. Issuer will
      conduct its business in an orderly and efficient manner in accordance with
      good
      business practices. Without limitation, Issuer shall not make any material
      change in its credit collection policies if such change would materially impair
      the collectibility of any material account owing to Issuer, nor will it rescind,
      cancel or modify any material account owing to Issuer except in the ordinary
      course of business;

     

    (b) Maintenance
      of Properties and Intellectual Property Rights.
      Issuer
      shall (i) maintain, keep, and preserve all of its properties (real, personal,
      tangible and intangible) necessary or useful in the proper conduct of its
      business in good working order and condition, and (ii) possess and maintain
      all
      Material Intellectual Property Rights necessary to the conduct of its businesses
      and own all right, title and interest in and to, or have a valid license for,
      all such Intellectual Property Rights;

     

    
      
        
        

      

      
        15

        
          

        

      

       

    

     

    (c) Taxes
      and Claims.
      Issuer
      shall pay or discharge at or before maturity or before becoming delinquent
      (i)
      all taxes, levies, assessments, and governmental charges imposed on it or its
      income or profits or any of its property, and (ii) all lawful claims for labor,
      material, and supplies, which, if unpaid, might become a Lien upon any of its
      property; provided,
      however,
      that
      Issuer shall not be required to pay or discharge any tax, levy, assessment,
      or
      governmental charge which is being contested in good faith by appropriate
      proceedings diligently pursued, and for which adequate reserves have been
      established;

     

    (d) Insurance.
      Issuer
      shall maintain insurance with financially sound and reputable insurance
      companies in such amounts and covering such risks as is usually carried by
      corporations engaged in similar businesses and owning similar properties in
      the
      same general areas in which Issuer operates, provided
      that in
      any event Issuer shall maintain workmen’s compensation insurance, property
      insurance, hazard insurance, and comprehensive general liability insurance,
      satisfactory to Purchaser. Each insurance policy covering Collateral shall,
      if
      reasonably practicable, name Purchaser as loss payee and shall provide that
      such
      policy will not be cancelled or reduced without 30 days prior written notice
      to
      Purchaser. In the event of failure by Issuer to provide and maintain insurance
      as herein provided, Purchaser may, at its option, provide such insurance and
      charge the amount thereof to Issuer. Issuer shall furnish Purchaser with
      certificates of insurance and policies evidencing compliance with the foregoing
      insurance provision;

     

    (e) Inspection
      Rights.
      At any
      reasonable time and from time to time, Issuer shall permit representatives
      of
      Purchaser to examine the Collateral and conduct Collateral audits, to examine,
      copy, and make extracts from its books and records, to visit and inspect its
      properties, and to discuss its business, operations, and financial condition
      with its officers, employees, and independent certified public
      accountants;

     

    (f) Keeping
      Books and Records.
      Issuer
      shall maintain proper books of record and account in which full, true, and
      correct entries in conformity with GAAP shall be made of all dealings and
      transactions in relation to its business and activities;

     

    (g) Compliance
      with Laws.
      Issuer
      shall, and shall cause each Subsidiary thereof to, comply in all material
      respects with all applicable laws, rules, regulations, orders, and decrees
      of
      any governmental authority or arbitrator, the failure to comply with which
      could
      reasonably be expected to have a Material Adverse Effect;

     

    (h) Compliance
      with Agreements.
      Issuer
      shall (i) comply in all material respects with all agreements, contracts, and
      instruments binding on it or affecting its properties or business where the
      failure to comply could reasonably be expected to have a Material Adverse
      Effect, and perform and (ii) observe all of its obligations: (A) to each holder
      of the Notes and any other notes issued in exchange for any Securities and
      all
      of its obligations to each holder of any Equity Interest for which Securities
      are converted or exchanged set forth in the Investment Documents and the
      Governing Documents with respect to which any such Equity Interest was issued;
      and (B) under each of the Investment Documents;

     

    (i) Use
      of
      Proceeds.
      Issuer
      shall not use any proceeds from the sale of the Securities hereunder, directly
      or indirectly, for the purposes of purchasing or carrying any “margin
      securities” within the meaning of Regulation U promulgated by the Board of
      Governors of the Federal Reserve Board or for the purpose of arranging for
      the
      extension of credit secured, directly or indirectly, in whole or in part by
      collateral that includes any “margin securities.”

     

    
      
        
        

      

      
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    (j) Authorization
      to File Financing Statements; Further Assurances; Additional
      Subsidiaries.

     

    (i) Issuer,
      with respect to any Collateral in which it has an interest, hereby irrevocably
      authorizes Purchaser at any time and from time to time to file in any
      jurisdiction any initial financing statements and amendments thereto that (A)
      indicate the Collateral as the collateral covered thereby, regardless of whether
      any particular asset comprised in the Collateral falls within the scope of
      Article 9 of the Uniform Commercial Code of the applicable jurisdiction, and
      (B)
      contain any other information required by Part 5 of Article 9 of the applicable
      Uniform Commercial Code for the sufficiency or filing office acceptance of
      any
      financing statement or amendment, including (I) whether Issuer is an
      organization, the type of organization and any organization identification
      number issued to Issuer and, (II) in the case of a financing statement filed
      as
      a fixture filing, a sufficient description of real property to which the
      Collateral relates. Issuer agrees to furnish any such information to Purchaser
      promptly upon request. Issuer also ratifies its authorization for Purchaser
      to
      have filed in any jurisdiction any like initial financing statements or
      amendments thereto if filed prior to the date of this Agreement to the extent
      such financing statements are consistent with this Agreement; and

     

    (ii) Issuer
      shall execute and deliver such further agreements and instruments and take
      such
      further action as may be reasonably requested by Purchaser to carry out the
      provisions and purposes of this Agreement and the other Investment Documents
      and
      to create, preserve, and perfect the Liens of Purchaser in the Collateral,
      and
      (ii) with respect to any new Project Subsidiary of Issuer established with
      the
      consent of Purchaser after the Closing Date, the Issuer shall promptly cause
      such new Project Subsidiary: (A) to become a party to this Agreement; (B) to
      deliver to the Purchaser the same documents required to be delivered by the
      Issuer pursuant to Section
      3
      for such
      new Project Subsidiary; and (C) to take such other actions and execute and
      deliver such other agreements and instruments as the Purchaser may determine
      are
      reasonably necessary or appropriate; 

     

    (k) ERISA.
      Issuer
      shall comply with all minimum funding requirements, and all other material
      requirements, of ERISA, if applicable, so as not to give rise to any liability
      thereunder;

     

    4.4 Negative
      Covenants.
      So long
      as any of the Notes or any notes issued in exchange for any Securities remain
      outstanding and prior to the indefeasible payment in full of all amounts due
      and
      owing thereunder, the Issuer shall not do any of the following, without the
      prior written consent of Purchaser, except with respect to the Permitted
      Business Combination:

     

    (a) Additional
      Indebtedness.
      Create,
      incur, assume or suffer to exist any Indebtedness or any Liens on any Property
      that will have a priority or pari
      passu
      in right
      of payment or security interest of Purchaser in such Property;

     

    
      
        
        

      

      
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    (b) Merger
      or Consolidation.
      Other
      than in connection with a Permitted Business Combination or a Permitted
      Acquisition, become a party to a merger or consolidation which would constitute
      a Change of Control, or wind-up, dissolve, or liquidate;

     

    (c) Dividends
      or Distributions.
      Declare
      or pay any Dividends or make any other payment or distribution (in cash,
      property, or obligations) on account of its Equity Interests, or redeem,
      purchase, retire, or otherwise acquire any Equity Interests, or permit any
      of
      its Subsidiaries to purchase or otherwise acquire any Equity Interest of Issuer,
      or set apart any money for a sinking or other analogous fund for any Dividend
      or
      other distribution on its Equity Interests or for any redemption, purchase,
      retirement, or other acquisition of any of its Equity Interests without
      Purchaser’s prior written consent;

     

    (d) Affiliated
      Transactions.
      Except
      as set forth on Schedule 4.4, enter into any transaction, including the
      purchase, sale, or exchange of property or the rendering of any service, with
      any Affiliate of Issuer, except in the ordinary course of and pursuant to the
      reasonable requirements of Issuer’s business and upon fair and reasonable terms
      no less favorable to Issuer than would be obtained in a comparable arm’s-length
      transaction with a Person not an Affiliate of Issuer;

     

    (e) Transfer
      of Assets.
      Neither
      Issuer nor any Project Subsidiaries or Guarantors thereof shall sell, exchange
      or permanently dispose of any of its Intellectual Property Rights or sell,
      lease
      or otherwise transfer all or any part of any Property other than (1) the sale
      of
      inventory in the ordinary course of such Person’s business, consistent with past
      practice, (2) transfers of assets in the ordinary course of business, and (3)
      the disposition of obsolete equipment or unprofitable assets;

     

    (f) Capital
      Expenditures.
      Issuer
      shall not make Capital Expenditures during any fiscal year in excess of
      $1,000,000 in the aggregate.

     

    (g) Prepayment
      of Indebtedness.
      Prepay,
      redeem, purchase, defeat or otherwise satisfy in any manner any principal or
      interest on any Indebtedness other than the Notes and any notes issued in
      exchange for any Securities;

     

    (h) Hazardous
      Materials.
      Use (or
      permit any tenant to use) any of its properties or assets for the handling,
      processing, storage, transportation, or disposal of any Hazardous Material,
      generate any Hazardous Material, conduct any activity that is likely to cause
      a
      Release or threatened Release of any Hazardous Material, or otherwise conduct
      any activity or use any of their respective properties or assets in any manner
      that is likely to violate any Environmental and Safety Requirements for which
      Issuer or any Subsidiary thereof would be responsible;

     

    (i) Accounting
      Changes.
      Make
      any change (i) in accounting treatment or reporting practices, except in
      accordance with GAAP and disclosed to Purchaser, or (ii) in tax reporting
      treatment, except as required by law and disclosed to Purchaser;

     

    
      
        
        

      

      
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    (j) Certain
      Security Matters.
      Enter
      into or permit to exist any arrangement or agreement, other than pursuant to
      this Agreement or any Investment Document, which directly or indirectly
      prohibits Issuer from creating or incurring a Lien on any of its assets other
      than assets that are subject to a purchase money security interest or an
      Operating Lease as contemplated by this Agreement;

     

    (k) Phantom
      Equity Plans.
      Directly or indirectly redeem, purchase or make, or to redeem, purchase or
      make
      any payments with respect to any equity appreciation rights, phantom equity
      plans, profits interest plans or similar rights or plans;

     

    (l) Business
      Organization.
      Convert
      to any other type of business entity;

     

    (m) Additional
      Agreements.
      Enter
      into, become subject to, amend, modify or waive any agreement or instrument
      which by its terms would (under any circumstances) restrict (i) the right of
      Issuer to make loans or advances or pay or make Dividends to, transfer property
      to, or repay any Indebtedness owed to, Issuer or (ii) Issuer’s right to perform
      any of the provisions of any of the Investment Documents and instruments entered
      into in connection with the same or otherwise evidencing the Note or its
      Governing Documents, except in any such case for amending, modifying or
      supplementing such agreement in accordance with its terms;

     

    (n) Compensation.
      Increase any compensation (including salary, bonuses and other forms of current
      and deferred compensation) payable, directly or indirectly, to any of its
      Affiliates in excess of 5% per year;

     

    (o) Additional
      Project Subsidiaries.
      Establish or acquire any Project Subsidiaries not owned as of the Closing Date
      unless such Project Subsidiary executes and delivers a guaranty and a security
      agreement in form and substance satisfactory to Purchaser and Issuer and
      operates in the same line of business as one of the Issuer;

     

    (p) Equity
      Incentive Plans.
      Amend
      or modify any equity incentive plan or employee equity ownership plan as in
      existence as of the Closing Date or adopt any new equity incentive plan or
      employee equity ownership plan or issue any of its Equity Interests to its
      employees or its Subsidiaries’ employees other than pursuant to the existing
      equity incentive plans and employee equity ownership plans;

     

    (q) Use
      of
      Proceeds.
      Issuer
      shall use the proceeds from the sale of the Notes (the “Note
      Proceeds”)
      for
      the purpose of acquiring prospective and producing mineral properties (each
      property thus acquired a “Property”);
      provided that, Issuer may use the Note Proceeds from the sale of Initial Note
      for general and administrative expenses. With the exception of Note Proceeds
      from the Initial Note, Issuer will provide Purchaser written notice of its
      use,
      or intended use, of the Note Proceeds (“Proceeds
      Notice”),
      such
      notice to include reasonable detail relating to the acquisition of the Property
      for which the Note Proceeds are to be used and, if reasonably available,
      information relating to the assets to be acquired by Issuer pursuant to the
      acquisition of such Property. The Company further agrees that, to the extent
      practicable, the acquisition and production of mineral properties is to be
      completed through one or more newly created subsidiary entities of Wits-China
      or
      other subsidiary of Issuer created for the purpose of such acquisition (each,
      a
“Project
      Subsidiary”).

     

    
      
        
        

      

      
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    (r) Amendment
      to Governing Documents.
      Make
      any amendment to its Governing Documents, directly or indirectly, whether by
      merger, conversion, operation of law or otherwise, or file any resolution of
      its
      board of managers (or similar governing body) with its jurisdiction of
      incorporation, formation or organization (as applicable);

     

    (s) Separateness
      from Affiliates.
      Commingle the funds and other assets of Issuer with those of any Affiliate
      or
      any other Person, keep Issuer’ funds in bank accounts that are separate and
      apart from those of any Affiliate or other Person and keep Issuer’s other assets
      separately identifiable and distinguishable from assets of any Affiliates or
      any
      other Persons; and

     

    (t) Take
      or Pay Contracts.
      Enter
      into or be a party to any contract or agreement for the purchase of materials,
      supplies or other property or services if such contract or agreement requires
      that a payment be made by Issuer regardless of whether delivery is ever made
      of
      such materials, supplies or other property or services. 

     

    (u) Other
      Business Ventures.
      Cease
      to own or manage assets or property or otherwise operate in the business of
      mineral exploration and development. 

     

    4.5 Compliance
      with Securities Laws.
      Issuer
      shall at all times comply with all applicable provisions of the Securities
      Act,
      the Securities Exchange Act, and all applicable rules and regulations of the
      Securities Exchange Commission.

     

    4.6
      Public
      Disclosures.
      Issuer
      shall not disclose Purchaser’s name or identity as an investor in Issuer in any
      press release or other public announcement or in any document or material filed
      with any governmental entity, without the prior written consent, of such
      Purchaser unless such disclosure is required by law, statute, rule or regulation
      or by order of a court of competent jurisdiction, in which case prior to making
      such disclosure Issuer shall use its best efforts to give written notice to
      such
      Purchaser describing in reasonable detail the proposed content of such
      disclosure and to permit Purchaser to review and comment upon the form and
      substance of such disclosure.

     

    4.7
      Further
      Assurances.
      At any
      time and from time to time, upon the request of Purchaser, Issuer shall, deliver
      and acknowledge or cause to be executed, delivered and acknowledged, such
      further documents and instruments and do such other acts and things as so
      requested in order to fully effect the purposes of this Agreement, the other
      Investment Documents and any other agreements, instruments and documents
      delivered pursuant hereto or in connection with the Securities and any notes
      issued in exchange for any Securities. In addition, if requested by the
      Purchaser, Issuer shall obtain and promptly furnish to Purchaser evidence of
      all
      governmental approvals as may be required to enable Issuer comply with its
      Obligations under the Investment Documents and to continue in business as
      conducted on the date hereof without Material interruption or
      interference.

     

    Section
      5. Registration
      Rights.
      The
      Purchaser shall be entitled to the registration rights contained in Appendix
      1
      to this
      Agreement, the terms of which are incorporated herein by reference.

     

    
      
        
        

      

      
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    Section
      6. Representations
      and Warranties of the Issuer.
      As a
      material inducement to Purchaser to enter into this Agreement and purchase
      the
      Securities hereunder, Issuer hereby represents and warrants to Purchaser as
      follows: 

     

    6.1
      Organization,
      Corporate Power and Licenses.
      Issuer is a corporation, duly incorporated, validly existing and in good
      standing under the laws of the state of Minnesota, and is qualified to do
      business in every jurisdiction in which its ownership of property or conduct
      of
      business requires it to qualify. Issuer possesses all requisite corporate power
      and authority and all licenses, permits and authorizations necessary to own
      and
      operate its properties, to carry on its businesses as now conducted and
      presently proposed to be conducted and to carry out the transactions
      contemplated by the Investment Documents where the failure to possess such
      licenses, permits, or authorizations could reasonably be expected to have a
      Material Adverse Effect. The copies of Issuer’s Governing Documents which have
      been furnished to Purchaser reflect all amendments made thereto at any time
      prior to the date of this Agreement and are correct and complete. Issuer has
      delivered to the Purchaser true and complete copies of its articles of
      incorporation and bylaws, as the case may be and will promptly notify the
      Purchaser of any amendment or changes thereto. The exact name of Issuer is
      set
      forth in the preamble of this Agreement. Issuer has not been known by any other
      corporate, limited liability company or partnership name in the past five (5)
      years except as set forth in the Issuer’s public filings with the Securities and
      Exchange Commission (the “Public Filings”),
      nor
      has Issuer been the surviving corporation of a merger or consolidation or
      acquired all or substantially all of the assets of any Person during the
      preceding five (5) years except as set forth in the Public Filings.

     

    6.2
      Capitalization
      and Related Matters.
      i)
      The
      attached Capitalization
      Schedule
      accurately sets forth the following information with respect to Issuer’s
      capitalization as of the Closing Date (i) the authorized Equity Interests of
      Issuer, (ii) the number of shares of each class of Equity Interests or Issuer
      issued and outstanding, and (iii) the number of shares of each class of Equity
      Interests of Issuer reserved for issuance upon exercise of any Convertible
      Securities. As of the Closing Date, Issuer does not have outstanding any of
      its
      Equity Interests, except for the Securities and except as set forth on the
      Capitalization
      Schedule.
      As of
      the Closing Date, Issuer is not subject to any obligation (contingent or
      otherwise) to repurchase or otherwise acquire or retire any of its Equity
      Interests, except as set forth on the Capitalization
      Schedule
      and
      except pursuant to the terms of the Securities. As of the Closing Date, all
      of
      the outstanding Equity Interests of Issuer shall be validly issued, fully paid
      and nonassessable.

     

    (b) There
      are
      no statutory or, to Issuer’s Knowledge, contractual equity holders’ preemptive
      rights or rights of refusal with respect to the issuance of the Securities
      hereunder. Issuer has not violated and will not violate any applicable federal
      or state securities laws in connection with the offer, sale or issuance of
      any
      of its Equity Interests, and the offer, sale and issuance of the Securities
      hereunder does not require registration under the Securities Act or any
      applicable state securities laws. To Issuer’s Knowledge, there are no agreements
      between the holders of Issuer’s Equity Interests with respect to the voting,
      transfer or other control of Issuer’ Equity Interests.

     

    6.3
      Authorization;
      No Breach.
      The
      execution, delivery and performance of each of the Investment Documents and
      all
      other agreements and instruments contemplated hereby and thereby to which Issuer
      is a party have been duly authorized by Issuer. Each of the Investment
      Documents, Issuer’s Governing Documents and all other agreements and instruments
      contemplated hereby and thereby to which Issuer is a party constitutes a valid
      and binding obligation of Issuer, enforceable in accordance with its terms,
      except to the extent that enforceability may be limited by applicable
      bankruptcy, insolvency, reorganization, receivership, moratorium and other
      similar laws relating to or affecting the rights and remedies of creditors
      generally and by general principles of equity. Except as set forth on the
      attached Restrictions
      Schedule,
      the
      execution and delivery by Issuer of the Investment Documents and all other
      agreements and instruments contemplated hereby and thereby to which it is a
      party, the offering, sale and issuance of the Securities hereunder and the
      fulfillment of and compliance with the respective terms hereof and thereof
      by
      Issuer, does not and shall not: (a) conflict with or result in a breach of
      the
      terms, conditions or provisions of; (b) constitute a default under; (c) result
      in the creation of any Lien upon Issuer’s Equity Interests or assets pursuant
      to; (d) give any third party the right to modify, terminate or accelerate any
      obligation under; (e) result in a violation of; or (f) require any
      authorization, consent, approval, exemption or other action by or notice or
      declaration to, or filing with, any court or administrative or governmental
      body
      or agency pursuant to, the Governing Documents of Issuer, or any law, statute,
      rule or regulation to which Issuer is subject (including any usury laws
      applicable to the Notes), or any agreement, instrument, order, judgment or
      decree to which Issuer is subject. Except as set forth on the Restrictions
      Schedule,
      Issuer
      is not subject to any restrictions upon making loans or advances or paying
      Dividends to, transferring property to, or repaying any Indebtedness owed to
      Issuer.

     

    
      
        
        

      

      
        21

        
          

        

      

       

    

     

    6.4
      Absence
      of Undisclosed Liabilities.
      Exhibit
      H contains Issuer’s unaudited balance sheet dated as of December 31, 2006 (the
“Balance
      Sheet”).
      To
      Issuer’s Knowledge, except as set forth in its Public Filings, it has no
      obligation or liability (whether accrued, absolute, contingent, unliquidated
      or
      otherwise, whether or not known to Issuer, whether due or to become due and
      regardless of when asserted) arising out of transactions entered into at or
      prior to the Closing, or any action or inaction at or prior to the Closing,
      or
      any state of facts existing at or prior to the Closing other than: (a)
      liabilities set forth on the Balance Sheet) (including any notes thereto);
      and
      (b) other liabilities and obligations expressly disclosed on the attached
Liabilities
      Schedule.

     

    6.5
      No
      Material Adverse Change.
      Except
      as set forth in its Public Filings as of the date hereof or set forth on the
      Liabilities Schedule, since the date of the Balance Sheet, there has been no
      change in the operating results, assets, liabilities, operations, prospects,
      business, condition (financial or otherwise), employee relations, customer
      relations or supplier relations of Issuer, taken as a whole, which has had
      or
      could reasonably be expected to have, a Material Adverse Effect.

     

    6.6
      Assets.
      Except
      as set forth on the attached Assets
      Schedule,
      upon
      Closing Issuer will have good and marketable title to, or a valid leasehold
      interest in the material properties and assets shown on the Balance Sheet,
      free
      and clear of all Liens.

     

    
      
        
        

      

      
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    6.7
      Tax
      Matters.
      Except
      as set forth on the attached Taxes
      Schedule:

     

    (a) Issuer
      has filed all federal and other Material Tax Returns which it is required to
      file under applicable laws and regulations; all such Tax Returns are complete
      and correct in all Material respects and to the Knowledge of Issuer have been
      prepared in compliance with all applicable laws and regulations in all Material
      respects.

     

    (b) Issuer
      has not made an election under §341(f) of the Code. Issuer is not liable for the
      Taxes of another Person (i) other than as set forth on the Taxes
      Schedule
      under
      Treas. Reg. § 1.1502-6 (or comparable provisions of state, local or foreign law,
      statute, rule or regulation), (ii) as a transferee or successor or (iii) by
      contract, indemnity or otherwise. Issuer is not a party to any tax sharing
      agreement. Issuer and each Affiliated Group have disclosed on their federal
      income Tax Returns any position taken for which substantial authority (within
      the meaning of Code §6662(d)(2)(B)(i)) did not exist at the time the return was
      filed. Issuer has not made any payments, is obligated to make payments or is
      a
      party to an agreement that could obligate it to make any payments that would
      not
      be deductible under Code §280G.

     

    (c) Issuer
      has not been a member of an Affiliated Group other than as set forth on the
      Taxes
      Schedule,
      or
      filed or been included in a combined, consolidated or unitary income Tax Return,
      other than as set forth on the Taxes
      Schedule.

     

    6.8
      Contracts
      and Commitments.

     

    (a) Except
      as
      set forth in its Public Filings or documents and agreements described on the
      Contracts Schedule,
      Issuer
      is not: (a) a party to any contract or agreement, or subject to any corporate
      or
      other restriction, that could reasonably be expected to have a Material Adverse
      Effect, (b) a party to any material contract or agreement that restricts the
      right or ability of Issuer to incur Indebtedness, other than this Agreement,
      and
      except for the Liens granted to the Lender, Issuer has not agreed or consented
      to cause or permit in the future (upon the happening of a contingency or
      otherwise) any Lien upon any Property, whether now owned or hereafter
      acquired.

     

    (b) Issuer
      will not be in default under or in breach of nor in receipt of any claim of
      default or breach under any contract, agreement or instrument to which Issuer
      is
      subject where such default or breach could reasonably be expected to have a
      Material Adverse Effect.

     

    6.9
      Intellectual
      Property Rights.
      The
      attached Intellectual
      Property Schedule
      contains
      a complete and accurate list of all material (i) patented or registered
      Intellectual Property Rights owned or used by Issuer, (ii) pending patent
      applications and applications for registrations of other Intellectual Property
      Rights filed by Issuer, (iii) unregistered trade names and corporate names
      used
      by Issuer and (iv) unregistered trademarks, service marks, internet domain
      names, copyrights, mask works and computer software owned or used by
      Issuer.

     

    6.10
      Litigation,
      etc.
      Except
      as set forth on the Litigation
      Schedule,
      there
      are no actions, suits, proceedings, orders, investigations or claims pending
      or,
      to the Issuer’s Knowledge, threatened against or affecting Issuer (or to the
      Issuer’s Knowledge, pending or threatened against or affecting any of the
      officers, directors or employees of Issuer with respect to their businesses
      or
      proposed business activities), or pending or threatened by Issuer against any
      third party, at law or in equity, or before or by any governmental department,
      commission, board, bureau, agency or instrumentality (including any actions,
      suit, proceedings or investigations with respect to the transactions
      contemplated by the Investment Documents), which have had or could reasonably
      be
      expected to have a Material Adverse Effect.

     

    
      
        
        

      

      
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    6.11
      Brokerage.
      Other
      than as set forth in the Broker
      Schedule,
      there
      are no claims for brokerage commissions, finders’ fees or similar compensation
      in connection with the transactions contemplated by the Investment Documents
      based on any arrangement or agreement binding upon Issuer. Issuer shall pay,
      and
      hold Purchaser harmless against, any liability, loss or expense (including
      reasonable attorneys’ fees and out-of-pocket expenses) arising in connection
      with any such claim.

     

    6.12
      Governmental
      Consent, etc..
      Except
      for the filings and recordings in connection with the Investment Documents,
      no
      permit, consent, approval or authorization of, or declaration to or filing
      with,
      any governmental authority is required in connection with the execution,
      delivery and performance by Issuer of the Investment Documents and the other
      agreements contemplated hereby and thereby, except for state and federal
      securities law filings that in any event need not be filed prior to
      Closing.

     

    6.13
      Insurance.
      Effective as of the Closing Date, Issuer has no insurance.

     

    6.14
      Employees.
      Issuer
      is not Aware that any executive or key employee of Issuer or any group of
      employees of Issuer have any plans to terminate employment with Issuer. Issuer
      has complied in all material respects with all laws, statutes, rules and
      regulations relating to the employment of labor (including provisions thereof
      relating to wages, hours, equal opportunity, collective bargaining and the
      payment of social security and other taxes), and Issuer is not Aware that Issuer
      has any material labor relations problems (including any union organization
      activities, threatened or actual strikes or work stoppages or material
      grievances). To Issuer’s Knowledge, neither Issuer nor any of its employees is
      subject to any noncompete, nondisclosure, confidentiality, employment,
      consulting or similar agreements relating to, affecting or in conflict with
      the
      present or proposed business activities of Issuer, except for agreements between
      Issuer and their respective present and former employees.

     

    6.15 ERISA.

     

    (a) Issuer
      does not have any obligation to contribute to (or any other liability, including
      current or potential withdrawal liability with respect to) any “multiemployer
      plan” (as defined in §3(37) of ERISA.

     

    (b) Issuer
      does not have any obligation to contribute to (or any other liability with
      respect to) any plan or arrangement whether or not terminated, which provides
      medical, health, life insurance or other welfare-type benefits for current
      or
      future retired or terminated employees (except for limited continued medical
      benefit coverage required to be provided under Section 4980B of the Code or
      as
      required under applicable state law).

     

    (c) Issuer
      does not maintain, contribute to or have any liability under (or with respect
      to), any employee plan which is a tax-qualified “defined benefit plan” (as
      defined in §3(35) of ERISA), whether or not terminated.

     

    
      
        
        

      

      
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    (d) Issuer
      does not maintain, contribute to or have any liability under (or with respect
      to) any employee plan which is a tax-qualified “defined contribution plan” (as
      defined in §3(34) of ERISA), whether or not terminated.

     

    (e) Issuer
      does not maintain, contribute to, or have any liability under (or with respect
      to) any plan or arrangement providing benefits to current or former employees,
      including any bonus plan, plan for deferred compensation, employee health or
      other welfare benefit plan or other arrangement, whether or not
      terminated.

     

    (f) For
      purposes of this Section, the term “Issuer” includes all organizations
      constituting an ERISA Affiliate of Issuer. 

     

    6.16 Compliance
      with Laws.
      To the
      Issuer’s Knowledge, Issuer has not violated any law, statute, rule or regulation
      which violation has had or could reasonably be expected to have a Material
      Adverse Effect, and Issuer has not received written notice of any such
      violation.

     

    6.17 Affiliated
      Transactions.
      Except
      as set forth in the Public Filings or on the attached Affiliated
      Transactions Schedule,
      no
      officer, manager, director, employee, member, stockholder, partner, limited
      partner, owner, principal or Affiliate of Issuer or any Person related, by
      blood, marriage or adoption to any such Person in which any such Person owns
      any
      beneficial interest, is a party to any agreement, contract, commitment,
      transaction or arrangement with Issuer or has any Material interest in any
      Material property used by Issuer, except for employment arrangements and
      compensation in the ordinary course of business, consistent with past
      practice.

     

    6.18 Investment
      Company.
      Issuer
      is not an “investment company” or an “affiliated person” of, or “promoter” or
“principal underwriter” for, an “investment company,” as such terms are defined
      in the Investment Company Act of 1940, as amended, modified, supplemented,
      or
      replaced from time to time, or is Issuer, directly or indirectly, controlled
      by
      or acting on behalf of any Person which is an “investment company” within the
      meaning of such act. The purchase of the Securities, the application of the
      proceeds and repayment thereof by Issuer and the consummation of the
      transactions contemplated by the Investment Documents will not violate any
      provision of such act or any rule, regulation or order issued by the Securities
      and Exchange Commission.

     

    6.19 Margin
      Regulations.
      Issuer
      does not own any “margin stock,” as the term is defined in Regulation U of the
      Federal Reserve Board, and the proceeds of the sale of the Securities will
      be
      used only for the purposes contemplated hereunder. None of the proceeds of
      the
      sale of the Securities will be used, directly or indirectly, for the purpose
      of
      purchasing or carrying any margin security, for the purpose of reducing or
      retiring any Indebtedness which was originally incurred to purchase or carry
      any
      margin security or for any other purpose which might cause the loans hereunder
      to be considered “purpose credit” within the meaning of Regulations U or X of
      the Federal Reserve Board. The purchase of the Securities will not constitute
      a
      violation of such Regulations U or X.

     

    6.20 Public
      Utility Holding Company Act.
      Issuer
      is not a “holding company,” or a “subsidiary company” of a “holding company,” or
      an “affiliate” of a “holding company,” or an “affiliate” of a “subsidiary
      company” of a “holding company,” within the meaning of the Public Utility
      Holding Company Act of 1935, as amended, modified, supplemented, or replaced
      from time to time.

     

    
      
        
        

      

      
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    6.21 Disclosure.
      Neither
      this Agreement nor any of the schedules, attachments, written statements,
      documents, certificates or other items prepared or supplied to Purchaser by
      or
      on behalf of Issuer with respect to the transactions contemplated hereby contain
      any untrue statement of a Material fact or omit a Material fact necessary to
      make each statement contained herein or therein not misleading. There is no
      fact
      that Issuer has disclosed to Purchaser in writing and of which it is Aware
      (other than general economic conditions) which, taken as a whole, has had or
      could reasonably be expected to have a Material Adverse Effect.

     

    6.22 On-Going
      Negotiations.
      Negotiations with respect to the Permitted Business Combination, as announced
      in
      the press release of Issuer dated February 10, 2007, are on-going, and to
      Issuer’s Knowledge, no events have occurred that would indicate that such
      Permitted Business Combination will not occur on terms substantially similar
      to
      those contemplated in the press release.

     

    6.23 Closing
      Date.
      The
      representations and warranties of Issuer contained in this Agreement and
      elsewhere in the Investment Documents and all information contained in any
      exhibit, schedule or attachment hereto or thereto or in any certificate or
      other
      writing delivered by, or on behalf of, Issuer to Purchaser is and shall be
      complete and correct as of any Closing of the purchase of the Initial Note
      or
      Additional Notes as the case may be (both immediately prior to and immediately
      after giving effect to the transactions contemplated by the Investment
      Documents).

     

    Section
      7. Events
      of Default.

    

    7.1 Definition.
      An
“Event
      of Default”
shall
      be deemed to have occurred if:

     

    (a) Failure
      to Make Payments.
      Issuer
      fails to pay when due and payable (whether at maturity or otherwise), after
      giving effect to all applicable notice and grace periods and, if no such grace
      periods are provided, a grace period of 5 Business Days (without notice), the
      full amount of interest then accrued on any Notes or any notes issued in
      exchange for any Securities, or the full amount of any principal payment
      (together with any applicable premium) on any Notes or any notes issued in
      exchange for any Securities or any other amounts payable under the Securities
      or
      the Investment Documents;

     

    (b) Failure
      to Observe Covenants.
      Issuer:

     

    (i) breaches,
      fails to perform or observe any of the covenants contained in Section
      4
      (and
      such failure continues uncured for 10 Business Days); or

     

    (ii) breaches,
      fails to perform or observe any other provision contained in the Investment
      Documents and such failure has had a Material Adverse Effect and such failure
      continues uncured for 15 Business Days;

    
      
        
        

      

      
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    (c) Representations.
      Any
      representation, warranty or information contained herein or required to be
      furnished to any holder of the Securities pursuant to the Investment Documents,
      or any writing furnished by Issuer to any holder of the Notes, is false or
      misleading in any material respect on the date made, repeated or
      furnished;

     

    (d) Insolvency.
      Issuer
      makes an assignment for the benefit of creditors or admits in writing its
      inability to pay its debts generally as they become due, or an order, judgment,
      decree or injunction is entered adjudicating Issuer bankrupt or insolvent or
      requiring the dissolution or split up of Issuer or preventing Issuer from
      conducting all or any part of its business; or any order for relief with respect
      to Issuer is entered under the Federal Bankruptcy Code; or Issuer petitions
      or
      applies to any tribunal for the appointment of a custodian, trustee, receiver
      or
      liquidator of Issuer, or of any substantial part of the assets of Issuer, or
      commences any proceeding (other than a proceeding for the voluntary liquidation
      and dissolution of any of its Subsidiaries) relating to Issuer under any
      bankruptcy reorganization, arrangement, insolvency, readjustment of debt,
      dissolution or liquidation or similar laws of any jurisdiction now or hereafter
      in effect; or any such petition or application is filed, or any such proceeding
      is commenced, against Issuer and either (i) Issuer by any act indicates its
      approval thereof, consent thereto or acquiescence therein or (ii) such petition,
      application or proceeding is not dismissed within 60 days;

     

    (e) Payments
      on Indebtedness.
      Issuer
      shall fail to pay when due any principal of or interest on any Indebtedness
      (other than the Indebtedness owing to Purchaser), which failure could reasonably
      be expected to have a Material Adverse Effect, or the maturity of any such
      Indebtedness shall have been accelerated and could reasonably be expected to
      have a Material Adverse Effect, or any such Indebtedness shall have been
      required to be prepaid prior to the stated maturity thereof and such prepayment
      would have a Material Adverse Effect;

     

    (f) Impairment
      of Security.
      Except
      pursuant to the satisfaction of this Agreement or other Investment Documents,
      as
      applicable, this Agreement or any other Investment Documents shall cease to
      be
      in full force and effect or shall be declared null and void or the validity
      or
      enforceability thereof shall be contested or challenged by Issuer, or any
      Subsidiary or any executive officer, director thereof, or Issuer shall deny
      that
      it has any further liability or obligation under any of the Investment
      Documents, or any Lien created by the Investment Documents in favor of Purchaser
      shall for any reason cease to be a valid, first or second priority (as
      applicable based on the priority intended to be provided to Purchaser under
      the
      Investment Documents) perfected security interest in and Lien upon any of the
      Collateral purported to be covered thereby;

     

    (g) ERISA
      Matters.
      (i)
      With respect to any Pension Plan, a prohibited transaction within the meaning
      of
§4975 of the Code or §406 of ERISA occurs which in the determination of
      Purchaser could result in liability to the Issuer, (ii) with respect to any
      Title IV Plan, the filing of a notice to voluntarily terminate any such plan
      in
      a distress termination, (iii) with respect to any Multiemployer Plan, the Issuer
      or any ERISA Affiliate shall incur any Withdrawal Liability, (iv) with respect
      to any Qualified Plan, Issuer or any ERISA Affiliate shall incur an accumulated
      funding deficiency or request a funding waiver from the IRS, or (v) with respect
      to any Title IV Plan or Multiemployer Plan which has an ERISA Event not
      described in clauses (ii) through (iv) hereof, in the determination of Purchaser
      there is a reasonable likelihood for termination of any such plan by the PBGC;
      provided,
      that
      the events listed in clauses (i) through (v) hereof shall constitute Events
      of
      Default only if the liability, deficiency or waiver request of Issuer or any
      ERISA Affiliate, whether or not assessed, could, in the opinion of Purchaser,
      reasonably be expected to have a Material Adverse Effect;

     

    
      
        
        

      

      
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    (h) Seizure
      of Assets.
      Issuer
      or any of its properties, revenues, or assets in an aggregate amount in excess
      of $500,000.00, shall become subject to an order of forfeiture, seizure, or
      divestiture (whether under RICO or otherwise) and the same shall not have been
      discharged within 30 days from the date of entry thereof;

     

    (i) Attachment
      of Assets.
      Issuer
      shall fail to discharge within a period of thirty 30 days after the commencement
      thereof any attachment, sequestration, or similar proceeding or proceedings
      involving an aggregate amount in excess of $500,000.00 against any of its assets
      or properties;

     

    (j) Change
      in Management.
      Stephen
      King and Clyde Smith are no longer engaged in the management of the Issuer
      and a
      suitable replacement for any such Person acceptable to Purchaser is not made
      within 60 days.

     

    (k) Entry
      of Judgment.
      A final
      judgment or judgments for the payment of money in excess of $500,000.00 in
      the
      aggregate shall be rendered by a court or courts against Issuer and the same
      shall not be discharged (or provision shall not be made for such discharge),
      or
      a stay of execution thereof shall not be procured, within 45 days from the
      date
      of entry thereof and Issuer shall not, within said period of 45 days, or such
      longer period during which execution of the same shall have been stayed, appeal
      therefrom and cause the execution thereof to be stayed during such
      appeal.

     

    (l) Termination
      of Pension Plan.
      The
      institution of any steps by Issuer or any ERISA Affiliate or any other Person
      to
      terminate a Pension Plan if, as a result of such termination, Issuer or any
      such
      ERISA Affiliate could be required to make a contribution to such Pension Plan,
      or could reasonably expect to incur a liability or obligation to such Pension
      Plan, and such contribution, liability or obligation could reasonably be
      expected to have a Material Adverse Effect;

     

    (m) Failure
      to Observe Other Obligations.
      Issuer
      defaults (after giving effect to all applicable grace and cure periods) in
      the
      payment when due, or in performance or observance of, any Material obligation
      of, or condition agreed to by, Issuer with respect to any Material purchase
      or
      lease of goods or services, which defaults are not cured within 5 days after
      written notice from the Purchaser, where such default, singly or in the
      aggregate with all other such defaults, could reasonably be expected to have
      a
      Material Adverse Effect;

     

    (n) Receivership.
      Issuer’s assets are attached, seized, subjected to a writ or distress warrant,
      or are levied upon, or come within the possession of any receiver, trustee,
      custodian or assignee for the benefit of creditors in connection with any
      obligations or liabilities of Issuer and Issuer fails to discharge, release
      or
      terminate such attachment, seizure, warrant, levy or possession within 60 days
      from the creation or commencement thereof and such attachment, seizure, warrant,
      levy or possession could reasonably be expected to have a Material Adverse
      Effect;

     

    
      
        
        

      

      
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    (o) Indictment.
      Issuer
      or executive officer of Issuer is indicted for a state or federal criminal
      charge related to the business of such Issuer;

     

    (p) Change
      in Control.
      A
      Change in Control shall occur; or

     

    (q) Equity
      Agreements.
      Issuer
      breaches any Material provision under a shareholder or similar equity agreement
      to which it is a party and fails to cure such breach within 10 days after
      written notice thereof from Purchaser.

     

    The
      foregoing shall constitute “Events of Default” whatever the reason or cause for
      any such Event of Default and whether it is voluntary or involuntary or is
      effected by operation of law or pursuant to any judgment, decree or order of
      any
      court or any order, rule or regulation of any administrative or governmental
      body.

     

    7.2 Consequences
      of Events of Default.

     

    (a) If
      any
      Event of Default has occurred, then the interest rate on the Notes and any
      notes
      issued in exchange for any Securities shall increase immediately by an increment
      of 3 percentage points. Any increase of the interest rate resulting from the
      operation of this Section
      7.2(a)
      shall
      terminate as of the close of business on the date on which no Events of Default
      exists (subject to subsequent increases pursuant to this Section
      7.2(a)).

     

    (b) If
      an
      Event of Default of the type described in Section
      7.1(d)
      has
      occurred, then the aggregate outstanding principal amount of all of the Notes
      and any notes issued in exchange for any Securities (together with all accrued
      interest thereon and all other amounts due and payable with respect thereto)
      shall become immediately due and payable without any action on the part of
      the
      holders thereof, and Issuer shall immediately pay to the holders of such notes
      all amounts due and payable with respect thereto.

     

    (c) If
      an
      Event of Default (other than under Section
      7.1(d))
      has
      occurred and is continuing, then Purchaser or any other the holder or holders
      of
      Notes representing a majority of the aggregate principal amount of Notes and
      any
      notes issued in exchange for any Securities then outstanding may declare all
      or
      any portion of the outstanding principal amount of the Notes and any notes
      issued in exchange for any Securities (together with all accrued interest
      thereon and all other amounts due and payable with respect thereto) to be
      immediately due and payable and may demand immediate payment of all or any
      portion of the outstanding principal amount of the Notes and any notes issued
      in
      exchange for any Securities (together with all such other amounts then due
      and
      payable) owned by such holder or holders. Issuer shall give prompt written
      notice of any such demand to the other holders of Notes and any notes issued
      in
      exchange for any Securities, each of which may demand immediate payment of
      all
      or any portion of such holder’s Note and any notes issued in exchange for any
      Securities. If any holder or holders of the Notes and any notes issued in
      exchange for any Securities demand immediate payment of all or any portion
      of
      the Notes and any notes issued in exchange for any Securities, Issuer shall
      immediately pay to such holder or holders all amounts due and payable with
      respect thereto.

     

    
      
        
        

      

      
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    (d) If
      an
      Event of Default of the type described in Section
      7.1(a)
      has
      occurred, then Purchaser and any other holder or holders of Notes and any notes
      issued in exchange for any Securities then outstanding may require Issuer to
      defer all payments, other than salaries provided in the then current budget
      approved by Purchaser, to any Person who owns, directly or indirectly, any
      Equity Interest in Issuer.

     

    (e) If
      an
      Event of Default has occurred, then Purchaser and any other holder or holders
      of
      Notes and any notes issued in exchange for any Securities then outstanding
      may
      enforce any and all other rights granted pursuant to the Investment Documents,
      including any proxy, security agreement or pledge agreement.

     

    Section
      8. Miscellaneous.

     

    8.1 Expenses.
      For all
      times prior to the issuance of the Notes and so long as the Notes and any notes
      issued in exchange for Securities remain outstanding, Issuer shall pay, and
      hold
      Purchaser and all noteholders and holders of Securities and any other Equity
      Interests for which Securities are exchanged or converted harmless against
      liability for the payment of, and reimburse on demand as and when incurred
      from
      and against: (a) reasonable and accountable costs and expenses up to $40,000
      incurred by each of them in connection with their due diligence review of
      Issuer, the preparation, negotiation, execution and interpretation of the
      Investment Documents and the Securities and the agreements contemplated hereby
      and thereby, and the consummation of all of the transactions contemplated hereby
      and thereby (including all reasonable fees and expenses of legal counsel,
      consultants and accountants), which costs and expenses shall be payable at
      the
      Closing; (b) all fees and expenses incurred with respect to any amendments
      or
      waivers (whether or not the same become effective) under or in respect of each
      of the Investment Documents, the Governing Documents of Issuer and the other
      agreements and instruments contemplated hereby and thereby; (c) all recording
      and filing fees, stamp and other Taxes which may be payable in respect of the
      execution and delivery of the Investment Documents or the issuance, delivery
      or
      acquisition of any Securities or any other Equity Interests for which Securities
      are exchanged or converted; and (d) the reasonable fees and expenses incurred
      with respect to the enforcement of the rights granted under the Investment
      Documents, the Securities, any other Equity Interests for which Securities
      are
      exchanged or converted, the Governing Documents of Issuer and the agreements
      or
      instruments contemplated hereby and thereby (including costs of collection)
      upon
      an Event of Default and for so long as such Event of Default is continuing.
      If
      Issuer fails to pay when due any amounts due Purchaser or fail to comply with
      any obligations pursuant to this Agreement or any other agreement, document
      or
      instrument executed or delivered in connection herewith, Issuer shall, upon
      demand by Purchaser, pay to Purchaser such further amounts as shall be
      sufficient to cover the cost and expense (including, but not limited to
      reasonable attorneys’ fees) incurred by or on behalf of Purchaser in collecting
      all such amounts due or in otherwise enforcing Purchaser’s rights and remedies
      hereunder. Issuer also agrees to pay to Purchaser all costs and expenses
      incurred, including reasonable compensation to its attorneys for all services
      rendered, in connection with the investigation of any Event of Default and
      enforcement of its rights hereunder or under the other Investment Documents
      upon
      an Event of Default and for so long as such Event of Default is
      continuing.

     

    
      
        
        

      

      
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    8.2 Remedies.
      Each
      holder of Securities and any other Equity Interests for which Securities are
      exchanged or converted shall have all rights and remedies set forth in the
      Investment Documents and the Governing Documents of Issuer and all rights and
      remedies which such holders have been granted at any time under any other
      agreement or contract and all of the rights which such holders have under any
      law, statute, rule or regulation. No remedy hereunder or thereunder conferred
      is
      intended to be exclusive of any other remedy, and each and every such remedy
      shall be cumulative and shall be in addition to every other remedy given
      hereunder or thereunder or now or hereafter existing at law or in equity or
      by
      statute or otherwise. Purchaser having any rights under any provision of the
      Investment Documents shall be entitled to enforce such rights specifically
      (without posting a bond or other security), to recover damages by reason of
      any
      breach of any provision of the Investment Documents and to exercise all other
      rights granted by law, statute, rule or regulation.

     

    8.3 Usury.
      In no
      contingency or event whatsoever will the aggregate of all amounts deemed
      interest under this Agreement or the Notes and charged or collected pursuant
      to
      the terms of this Agreement or any other Investment Document exceed the highest
      rate permissible under any law that a court of competent jurisdiction, in a
      final determination, deems applicable. If such a court determines that Purchaser
      has charged or received interest under this Agreement or any other Investment
      Documents in excess of the highest applicable rate, then Purchaser shall apply
      such excess to any other indebtedness or obligations then due and payable,
      whether for principal, interest, fees or otherwise, and shall refund the
      remainder of such excess interest, if any, to Issuer, and such rate shall
      automatically be reduced to the maximum rate permitted by such law.

     

    8.4 Purchaser’s
      Investment Representations.
      Purchaser hereby represents and warrants that:

     

    (a) Authorization.
      When
      executed and delivered by Purchaser, and assuming execution and delivery by
      Issuer, this Agreement and the Investment Documents constitute its valid and
      legally binding obligations, enforceable in accordance with their
      terms.

     

    (b) Purchase
      Entirely for Own Account.
      This
      Agreement is made with Purchaser in reliance upon Purchaser’s representation to
      Issuer, which by Purchaser’s execution of this Agreement Purchaser hereby
      confirms, that the Restricted Securities will be acquired for investment for
      Purchaser’s own account, not as a nominee or agent, and not with a view to the
      public distribution of any part thereof, and that Purchaser has no present
      intention of distributing the same. Purchaser represents that it has full power
      and authority to enter into this Agreement and the Investment
      Documents.

     

    (c) Investment
      Experience.
      Purchaser is an “accredited investor” as that term is defined in Rule 501 of
      Regulation D promulgated under the Securities Act and has previously invested
      in
      securities of other small businesses and acknowledges that it is able to protect
      its interests, and bear the economic risk of its investment and has such
      knowledge and experience in financial or business matters that it is capable
      of
      evaluating the merits and risks of the investment in the Restricted Securities.
      

     

    
      
        
        

      

      
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    (d) High
      Risk. The
      Securities being purchased are highly speculative in nature and an investment
      herein involves a high degree of risk, including but not limited to losing
      the
      entire investment in such Securities.

     

    (e) No
      Governmental Approval.
      No
      Federal or state agency, including the Commission or the securities commission
      or authority of any state, has approved or disapproved the Securities, passed
      upon or endorsed the merits of the issuance of Securities or the accuracy or
      adequacy of any information provided by the Company, or made any finding or
      determination as to the fairness or fitness of the Securities for
      sale.

     

    (f) No
      Reliance.
      Purchaser has been encouraged to rely upon the advice of its legal counsel,
      accountants or other financial advisors with respect to tax and other
      considerations relating to the purchase of the Securities pursuant hereto.
      Purchaser is not relying upon Issuer with respect to economic considerations
      involved in determining to make an investment in the Securities.

     

    (g) Access
      to Information.
      Purchaser has been given access to full and complete information regarding
      Issuer and has utilized such access to Purchaser’s satisfaction for the purpose
      of obtaining information respecting Issuer. Particularly, Purchaser has been
      given reasonable opportunity to meet with and/or contact Issuer representatives
      for the purpose of asking questions of, and receiving answers from, such
      representatives concerning the terms and conditions of the issuance of the
      Securities and to obtain any additional information, to the extent reasonably
      available, necessary to verify the accuracy of information about the company
      already obtained.

     

    8.5 Amendments
      and Waivers.
      Except
      as otherwise expressly provided herein, the provisions of this Agreement and
      the
      provisions of the Notes may be amended and Issuer may take any action herein
      prohibited, or omit to perform any act herein required to be performed by it,
      only if Issuer has obtained the written consent of Purchaser; provided,
      that if
      the Notes are no longer outstanding, the provisions of this Agreement may be
      amended or waived by Issuer and Issuer may take any action herein prohibited
      only if Issuer has obtained the written consent of the holders of a majority
      of
      the remaining Securities. No other course of dealing between Issuer and the
      holder of any Securities or any other Equity Interest for which Securities
      are
      exchanged or converted or any delay in exercising any rights hereunder or under
      the Note or the Governing Documents of Issuer shall operate as waiver of any
      rights of any such holders. For purposes of this Agreement, the Securities
      or
      any Equity Interests for which Securities are exchanged or converted which
      are
      held by Issuer shall not be deemed to be outstanding. If Issuer pays any
      consideration to any holder of Securities or any other Equity Interest for
      which
      Securities are exchanged or converted for such holder’s consent to any
      amendment, modification or waiver hereunder, such party shall also pay each
      other holder granting its consent hereunder equivalent consideration computed
      on
      a pro rata basis.

     

    8.6 Survival
      of Agreement.
      All
      covenants, representations and warranties contained in the Investment Documents
      or made in writing by Issuer in connection herewith or therewith shall survive
      the execution and delivery of the Investment Documents and the consummation
      of
      the transactions contemplated hereby and thereby, regardless of any
      investigation made by Purchaser or on its behalf. 

     

    
      
        
        

      

      
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    8.7 No
      Setoffs, etc.
      All
      payments hereunder and under the Securities and any notes issued in exchange
      for
      any Securities shall be made by Issuer without setoff, offset, deduction or
      counterclaim, free and clear of all taxes, levies, imports, duties, fees and
      charges, and without any withholding, restriction or conditions imposed by
      any
      governmental authority, unless Issuer shall be required by any law, statute,
      rule or regulation to deduct, setoff or withhold any amount from or in respect
      of any payment to Purchaser hereunder or under the Securities or any notes
      issued in exchange for any Securities. 

     

    8.8 Successors
      and Assigns.
      All
      covenants and agreements contained in this Agreement by or on behalf of any
      of
      the parties hereto shall bind and inure to the benefit of the respective
      successors and assigns of the parties hereto whether or not so expressed;
provided,
      that
      Issuer shall not be permitted to assign or delegate its rights or obligations
      under this Agreement, the Securities or any notes issued in exchange for any
      Securities, other than pursuant to the Permitted Business Combination. Except
      as
      otherwise expressly provided herein, nothing expressed in or implied from any
      Investment Document is intended to give, or shall be construed to give, any
      Person, other than the parties hereto and thereto and their permitted successors
      and assigns, any benefit or legal or equitable right, remedy or claim under
      or
      by virtue of this Agreement or any such other document. Any agreement or
      covenant in any Investment Document obligating Issuer of an Equity Interest
      held
      by a Purchaser or subsequent holder to take any action or to refrain from taking
      any action, shall similarly obligate any other Person into or with which Issuer
      is merged, consolidated, combined or reorganized.

     

    8.9 Aggregation.
      For
      purposes of the Investment Documents, all holdings of Securities and any Equity
      Interest for which Securities are exchanged or converted by Persons who are
      Affiliates of each other shall be aggregated for purposes of meeting any
      threshold tests under the Investment Documents.

     

    8.10 Severability.
      Whenever possible, each provision of this Agreement shall be interpreted in
      such
      manner as to be effective and valid under applicable law, but if any provision
      of this Agreement is held to be prohibited by or invalid under applicable law,
      such provision shall be ineffective only to the extent of such prohibition
      or
      invalidity, without invalidating the remainder of this Agreement and shall
      be
      reformed and enforced to the maximum extent permitted under applicable
      law.

     

    8.11 Counterparts.
      For the
      purpose of facilitating the execution of this Agreement and for other purposes,
      this Agreement may be executed simultaneously in any number of counterparts,
      each of which counterparts shall be deemed to be an original, and such
      counterparts shall constitute but one and the same instrument. A signature
      of a
      party by facsimile or other electronic transmission shall be deemed to
      constitute an original and fully effective signature of such party.

     

    8.12 Descriptive
      Headings.
      The
      descriptive headings of this Agreement and the Securities are inserted for
      convenience only and do not constitute a substantive part of this
      Agreement.

     

    8.13 Governing
      Law.
      All
      issues and questions concerning the construction, validity, enforcement and
      interpretation of this Agreement and the schedules hereto and (except as
      otherwise expressly provided therein) the exhibits hereto shall be governed
      by,
      and construed in accordance with, the laws of the State of Kansas, without
      giving effect to any choice of law or conflict of law rules or provisions
      (whether of the State of Kansas or any other jurisdiction) that would cause
      the
      application of the laws of any jurisdiction other than the State of Kansas.
      In
      furtherance of the foregoing, the internal law of the State of Kansas shall
      control the interpretation and construction of this Agreement (and all schedules
      and exhibits hereto), even though under that jurisdiction’s choice of law or
      conflict of law analysis, the substantive law of some other jurisdiction would
      ordinarily apply.

     

    
      
        
        

      

      
        33

        
          

        

      

       

    

     

    8.14 Notices.
      All
      notices, demands or other communications to be given or delivered under or
      by
      reason of the provisions of this Agreement shall be in writing and shall be
      deemed to have been given when delivered personally to the recipient, sent
      to
      the recipient by reputable overnight courier service (charges prepaid), mailed
      to the recipient by certified or registered mail, return receipt requested
      and
      postage prepaid or sent via facsimile to the number set forth below with a
      copy
      mailed to the recipient as set forth above. Such notices, demands and other
      communications shall be sent to Purchaser and to Issuer at the addresses
      indicated below:

     

    To
      Issuer:

     

    Wits
      Basin Precious Minerals, Inc

    80
      South
      Eight Street, Suite 900

    Minneapolis,
      MN 55402-8773

    Attn:
      Mark Dacko, Chief Financial Officer

    Facsimile:
      (612) 395-5276

     

    With
      a
      copy to:

     

    Maslon
      Edelman Borman & Brand, LLP

    3300
      Wells Fargo Center

    90
      South
      Seventh Street

    Minneapolis,
      Minnesota 55402-4140

    Attn:
      William Mower, Esq.

    Facsimile:
      (612) 642-8358

     

    To
      the
      Purchaser:

     

    China
      Gold, LLC

    7300
      College Blvd., Suite 303

    Overland
      Park, KS 66210

    Attn:
      C.
      Andrew Martin

    Facsimile:
      (913) 339-6086

    
      
        
        

      

      
        34

        
          

        

      

       

    

     

    with
      a
      copy to:

     

    William
      M. Schutte

    Polsinelli
      Shalton Flanigan Suelthaus PC

    6201
      College Boulevard, Suite 500

    Overland
      Park, KS 66211

    Facsimile:
      913-451-6205

     

    or
      to
      such other address or to the attention of such other person as the recipient
      party has specified by prior written notice to the sending party.

     

    8.15
      Construction.
      The
      parties hereto have participated jointly in the negotiation and drafting of
      this
      Agreement. If an ambiguity or question of intent or interpretation arises,
      this
      Agreement shall be construed as if drafted jointly by the parties hereto, and
      no
      presumption or burden of proof shall arise favoring or disfavoring any party
      by
      virtue of the authorship of any of the provisions of this Agreement. The parties
      intend that each representation, warranty and covenant contained herein shall
      have independent significance. If any party has breached any representation,
      warranty or covenant contained herein in any respect or any Event of Default
      shall occur, the fact that there exists another representation, warranty or
      covenant or Event of Default relating to the same subject matter (regardless
      of
      the relative levels of specificity) which such party has not breached shall
      not
      detract from or mitigate the fact that such party is in breach of the first
      representation, warranty or covenant or that the first Event of Default shall
      have occurred.

     

    8.16 Complete
      Agreement; No Modifications.

     

    (a) This
      Agreement and the other Investment Documents collectively: (i) constitute the
      final expression of the agreement between Issuer and Purchaser; (ii) contain
      the
      entire agreement between Issuer and Purchaser with respect to the matters set
      forth herein and in such other Investment Documents; and (iii) may not be
      contradicted by evidence of any prior or contemporaneous oral agreements or
      understandings between Issuer and Purchaser. Neither this Agreement nor any
      of
      the terms hereof may be terminated, amended, supplemented, waived or modified
      orally, except by an agreement or instrument in writing executed by the party
      against which enforcement of the termination, amendment, supplement, waiver
      or
      modification is sought.

     

    (b) If
      there
      is a conflict between or among the terms, covenants, conditions or provisions
      of
      this Agreement and the other Investment Documents, then any term, covenant,
      condition or provision that Purchaser may elect to enforce from time to time
      so
      as to enlarge the interest of Purchaser in its security for the payment and
      performance of the Obligations, afford Purchaser the maximum financial benefits
      or security for the Obligations, or provide Purchaser the maximum assurance
      of
      payment and performance of the of the Obligations in full, shall control. ISSUER
      ACKNOWLEDGES AND AGREES THAT IT HAS BEEN PROVIDED WITH SUFFICIENT AND NECESSARY
      TIME AND OPPORTUNITY TO REVIEW THE TERMS OF THIS AGREEMENT AND EACH OF THE
      INVESTMENT DOCUMENTS WITH ANY AND ALL COUNSEL IT DEEMS APPROPRIATE, AND THAT
      NO
      INFERENCE IN FAVOR OF, OR AGAINST, PURCHASER OR ISSUER SHALL BE DRAWN FROM
      THE
      FACT THAT EITHER SUCH PARTY HAS DRAFTED ANY PORTION OF THIS AGREEMENT OR ANY
      OF
      THE INVESTMENT DOCUMENTS.

     

    
      
        
        

      

      
        35

        
          

        

      

       

    

     

    8.17 Indemnification.
      In
      consideration of Purchaser’s execution and delivery of this Agreement and
      purchase of the Securities hereunder and in addition to Issuer’s other
      obligations under this Agreement and in addition to all other rights and
      remedies available at law or in equity, Issuer shall defend, protect and
      indemnify Purchaser and each other holder of Securities, any notes issued in
      exchange for any Securities or any other Equity Interests for which Securities
      are exchanged or converted and all of its officers, managers, directors,
      stockholders, members, partners, limited partners, Affiliates, employees,
      agents, representatives, successors and assigns (including those retained in
      connection with the transactions contemplated by the Investment Documents)
      (collectively, the “Indemnitees”),
      and
      save and hold each of them harmless from and against, and pay on behalf of
      or
      reimburse), on demand as and when incurred, any and all actions, causes of
      action, suits, claims, losses (including diminutions in value and consequential
      damages), costs, penalties, fees, liabilities and damages and expenses in
      connection therewith (irrespective of whether any such Indemnitee is a party
      to
      the action for which indemnification hereunder is sought), including reasonable
      attorneys’ fees and disbursements, interest and penalties and all amounts paid
      in investigation, defense or settlement of any of the foregoing and claims
      relating to any of the foregoing (the “Liabilities”),
      incurred by the Indemnitees or any of them as a result of, or arising out of,
      or
      relating to: (a) any transaction financed or to be financed in whole or in
      part,
      directly or indirectly, with the proceeds of the issuance of the Securities;
      (b)
      the execution, delivery, performance or enforcement of the Investment Documents,
      any Governing Documents of Issuer and any other instrument, document or
      agreement executed pursuant hereto or thereto of Issuer by any of the
      Indemnitees, except to the extent any such Liabilities are caused by the
      particular Indemnitee’s gross negligence or willful misconduct; and (c) the
      past, present or future environmental condition of any property owned, operated
      or used by Issuer, its predecessors or successors or of any offsite treatment,
      storage or disposal location associated therewith, including the presence on
      or
      under, or the escape, seepage, leakage, spillage, discharge, emission, Release
      or threatened Release into, onto or from, any such property or location of
      any
      toxic, chemical or hazardous substance, material or waste (including any losses,
      liabilities, damages, injuries, penalties, fees, costs, expenses or claims
      asserted or arising under any Environmental and Safety Requirement) regardless
      of whether caused by, or within the control of, Issuer. To the extent that
      the
      foregoing undertaking by Issuer may be unenforceable for any reason, Issuer
      shall make the maximum contribution to the payment and satisfaction of each
      of
      the Liabilities that is permissible under applicable law.

     

    8.18
      Payment
      Set Aside.
      To the
      extent that any payment or payments are made to Purchaser hereunder or under
      the
      Securities, any notes issued in exchange for any Securities or any Equity
      Interests for which Securities are exchanged or converted or such Purchaser
      enforces its rights or exercises its right of setoff hereunder or thereunder,
      and such payment or payments or the proceeds of such enforcement or setoff
      or
      any part thereof are subsequently invalidated, declared to be fraudulent or
      preferential, set aside, recovered from, disgorged by or are required to be
      refunded, repaid or otherwise restored to such payor, a trustee, receiver or
      any
      other Person under any law, statute, rule or regulation (including any
      bankruptcy law, state or federal law, common law or equitable cause of action),
      then to the extent of any such restoration the obligation or part thereof
      originally intended to be satisfied shall be revived and continued in full
      force
      and effect as if such payment had not been made or such enforcement or setoff
      had not occurred.

     

    
      
        
        

      

      
        36

        
          

        

      

       

    

     

    8.19
      Jurisdiction
      and Venue.
      Each of
      the parties: (a) submits to the jurisdiction of any state or federal court
      sitting in the District of Kansas in any legal suit, action or proceeding
      arising out of or relating to this Agreement, the Securities, any notes issued
      in exchange for any Securities or any Equity Interests for which Securities
      are
      exchanged or converted; (b) agrees that all claims in respect of the action
      or
      proceeding may be heard or determined in any such court; and (c) agrees not
      to
      bring any action or proceeding arising out of or relating to this Agreement,
      the
      Securities, any notes issued in exchange for any Securities or any Equity
      Interests for which Securities are exchanged or converted in any other court.
      Each of the parties waives any defense of inconvenient forum to the maintenance
      of any action or proceeding so brought and waives any bond, surety or other
      security that might be required of any other party with respect thereto. Any
      party may make service on any other party by sending or delivering a copy of
      the
      process to the party to be served at the address and in the manner provided
      for
      the giving of notices in Section
      8.14.
      Each
      party agrees that a final judgment in any action or proceeding so brought shall
      be conclusive and may be enforced by suit on the judgment or in any other manner
      provided by law. Nothing herein shall affect the right to serve process in
      any
      other manner permitted by law, statute, rule or regulation or shall limit the
      right of Purchaser or holders of Equity Interests for which Securities are
      exchanged or converted to bring proceedings against Issuer in the courts of
      any
      other jurisdiction. To the extent provided by any law, statute, rule or
      regulation, should Issuer, after being so served, fail to appear or answer
      to
      any summons, complaint, process or papers so served within the number of days
      prescribed by law after the mailing thereof, Issuer shall be deemed in default
      and an order or judgment may be entered by the court against Issuer as demanded
      or prayed for in such summons, complaint, process or papers. The exclusive
      choice of forum for Issuer set forth in this Section
      8.19
      shall
      not be deemed to preclude the enforcement by Purchaser or any holder of
      Securities or notes issued in exchange for any Securities or Equity Interests
      for which Securities are exchanged or converted of any judgment obtained in
      any
      other forum or the taking by such Purchaser or any holder of Securities or
      notes
      issued in exchange for any Securities or Equity Interests for which Securities
      are exchanged or converted of any action to enforce the same in any other
      appropriate jurisdiction, and Issuer hereby waives the right to collaterally
      attack any such judgment or action.

     

    8.20
      Waiver
      of Right to Jury Trial.
      ISSUER,
      ON ITS OWN BEHALF, AND PURCHASER, ON ITS OWN AND ON BEHALF OF EACH HOLDER OF
      SECURITIES AND NOTES ISSUED IN EXCHANGE FOR ANY SECURITIES AND EQUITY INTERESTS
      FOR WHICH SECURITIES ARE EXCHANGED OR CONVERTED, HEREBY WAIVE (TO THE EXTENT
      PERMITTED BY APPLICABLE LAW) TRIAL BY JURY IN ANY LITIGATION IN ANY COURT WITH
      RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF THIS AGREEMENT, THE
      SECURITIES, ANY NOTES ISSUED IN EXCHANGE FOR ANY SECURITIES OR ANY EQUITY
      INTERESTS FOR WHICH SECURITIES ARE EXCHANGED OR CONVERTED, ANY OF THE OTHER
      INVESTMENT DOCUMENTS, OR THE VALIDITY, PROTECTION, INTERPRETATION, COLLECTION
      OR
      ENFORCEMENT THEREOF, OR THE COLLATERAL, THE OBLIGATIONS, OR PURCHASER’S CONDUCT
      WITH RESPECT TO ANY OF THE FOREGOING. ISSUER, ON ITS OWN BEHALF, AGREES THAT
      THIS SECTION IS A SPECIFIC AND MATERIAL ASPECT OF THIS AGREEMENT AND
      ACKNOWLEDGES THAT PURCHASER WOULD NOT PURCHASE THE SECURITIES HEREUNDER IF
      THIS
      SECTION WERE NOT PART OF THIS AGREEMENT.

     

    
      
        
        

      

      
        37

        
          

        

      

       

    

     

    8.21
      Certain
      Waivers.
      Issuer
      hereby waives diligence, presentment, protest and demand and notice of protest
      and demand, dishonor and nonpayment of the Note and any notes issued in exchange
      for any Securities, and expressly agrees that the Note and any notes issued
      in
      exchange for any Securities, or any payment thereunder, may be extended from
      time to time and that the holder thereof may accept security for the Note and
      any notes issued in exchange for any Securities or release security for the
      Note
      and any notes issued in exchange for any Securities, all without in any way
      affecting the liability of Issuer thereunder.

     

    8.22
      Transfer
      of Note; Several Liability of Purchaser.
      Issuer
      hereby consents to Purchaser’s participation, sale, assignment, transfer or
      other disposition, at any time or times on or after the Closing Date, at
      Purchaser’s option, of all or any portion of its interest in this Agreement and
      any of the other Investment Documents (including Purchaser’s rights, title,
      interests, remedies, powers and duties hereunder or thereunder) to a purchaser,
      participant, any syndicate, or any other Person (each, a “Note
      Purchaser”).
      In
      connection with any such disposition (and thereafter), Purchaser may disclose
      any financial information Purchaser may have concerning Issuer to any such
      Note
      Purchaser or potential Note Purchaser. 

     

    8.23
      Confidentiality.
      

     

    (a) Issuer
      and Purchaser hereby acknowledge that each may have received, or may receive
      in
      the future, certain confidential or non-public information relating to the
      other
      (collectively, the “Confidential
      Information”).
      “Confidential Information” shall include, without limitation, all books, papers,
      and records relating to the assets, stock, properties, operations, obligations
      and liabilities of such party and its subsidiaries, including, without
      limitation, all books of account, tax records, minute books of directors’ and
      stockholders’ meetings, organizational documents, bylaws, contracts and
      agreements, filings with any regulatory authority, accountants’ work papers,
      litigation files (including, without limitation, legal research memoranda),
      attorney’s audit response letters, documents relating to assets and title
      thereto (including, without limitation, abstracts, title insurance policies,
      surveys, environmental reports, opinions of title and other information relating
      to the real and personal property), plans affecting employees, securities
      transfer records and stockholder lists, and other non-public information of
      such
      party. 

     

    (b) The
      receiving party and any representatives and agents of the receiving party shall
      keep all Confidential Information confidential, and shall not disclose any
      Confidential Information without the prior written consent of the disclosing
      party; provided, however, that any of such information may be disclosed to
      receiving party’s representatives or agents who need to know such information
      for the purpose of performing such services required to be performed hereunder
      (it being understood that such party shall inform such representatives and
      agents of the confidential nature of the Confidential Information and shall
      direct such representatives and agents to treat such information
      confidentially). Receiving party shall be responsible for any breach of this
      provision by its representatives or agents. 

     

    
      
        
        

      

      
        38

        
          

        

      

       

    

     

    (c) For
      the
      purposes of this Agreement, the definition of “Confidential Information” shall
      not include information which (A) had been made previously available to the
      public by the disclosing party; (B) is or becomes generally available to the
      public, unless the information being made available to the public results in
      a
      breach of this provision; (C) prior to disclosure to the receiving party or
      its
      representatives or agents, was already rightfully in any such person’s
      possession outside of its negotiation and discussions with the disclosing party
      or (D) is obtained by receiving party or its representatives or agents from
      a
      third party who is lawfully in possession of such information, and not in
      violation of any contractual, legal or fiduciary obligation to the other party
      hereto.

     

    (d)
       This
      provision shall not prohibit the disclosure of information required to be made
      under federal or state securities laws. If any disclosure is so required, the
      party making such disclosure shall consult with the other party prior to making
      such disclosure, and the parties shall use all reasonable efforts, acting in
      good faith, to agree upon a text for such disclosure which is satisfactory
      to
      both parties.

     

    (e)
      Each
      party acknowledges and agrees that the obligations under this Section 8.23
      shall
      survive indefinitely. Notwithstanding the foregoing, Issuer consents to
      disclosure by Purchaser of any summary financial or other information of Issuer
      and each of its Project Subsidiaries of the type which is customarily disclosed
      by venture capital companies to the stockholders, partners, board members,
      advisory board members or legal, accounting, insurance, or investment banking
      advisers of Purchaser, and as and to the extent required by Law, to any
      Governmental Body and may make a public announcement of its investment in
      Issuer, provided that Purchaser will obtain from any such party adequate
      safeguards regarding the continued confidentiality of such information of
      Issuer, in a form satisfactory to Issuer. 

     

    8.24
      Sole
      and Absolute Discretion of Purchaser.
      Whenever pursuant to this Agreement (a) Purchaser exercises any right given
      to
      it to consent, approve or disapprove, (b) any arrangement, document, item or
      term is to be satisfactory to Purchaser, or (c) any other decision or
      determination is to be made by Purchaser, the decision of Purchaser to consent,
      approve or disapprove, all decisions that arrangements, documents, items, or
      terms are satisfactory or not satisfactory and all other decisions and
      determinations made by Purchaser, shall be in the sole and absolute discretion
      of Purchaser and shall be final and conclusive, except as may be otherwise
      expressly and specifically provided in this Agreement.

     

    [Remainder
      of page intentionally left blank; signature page follows.]

     

    
      
        
        

      

      
        39

        
          

        

      

      
        
        

      

    

     

    IN
      WITNESS WHEREOF,
      the
      parties hereto have executed this Agreement on the date first written
      above.

     

    
      	 	 	 
	ISSUERS:	WITS
              BASIN
              PRECIOUS MINERALS INC.,
              
              a
                Minnesota corporation

            
	 
 	 
 	 
 
	
            	By:
              /s/ Mark D.
              Dacko
	 	
              
                

              
Name: Mark D. Dacko
	 	
              
                

              
Title: Chief Financial Officer  
	 	
              
                

              

            

    

     

    
      
        	 	 	 
	PURCHASER:	CHINA
                GOLD, LLC,
                a
                  Kansas limited liability company

              
	 	 
	 
 	
                By: Pioneer
                  Holdings, LLC

                Its: Manager

              
	 	 
	 	 
	
              	By: /s/
                Cory
                Lagerstrom 
	 	
                
                  

                

                Name:
                  Cory Lagerstrom

              
	 	
                Title: Manager

              

      

       

      [SIGNATURE
        PAGE TO CONVERTIBLE NOTES PURCHASE AGREEMENT]

    

    
      
        
        

      

      
        
        

        
          

        

      

       

    

     

    
      Exhibit
        10.1

       

    

    APPENDIX
      1

     

    REGISTRATION
      RIGHTS

     

    Section
      1. REGISTRATION

     

    1.1 Demand
      Registration.

     

    (a) Request
      for Registration.
      If
      Issuer shall receive from Initiating Holders a written request that Issuer
      effect a registration with respect to all or a part of the Registrable
      Securities, Issuer shall (i) promptly give written notice of the proposed
      registration (the “Registration Notice”) to all other Holders and (ii) as soon
      as practicable thereafter, use its reasonable efforts to effect registration
      of
      the Registrable Securities specified in such request, together with any
      Registrable Securities of any Holder specified in a written request given within
      15 days after the Registration Notice is delivered. Issuer shall not be
      obligated to take any action to effect any such registration pursuant to this
      Section 1.1(a) after Issuer has effected one such registration pursuant to
      this
      Section 1.1(a) and such registration has been declared effective under the
      Securities Act. Notwithstanding the preceding sentence, Issuer shall be
      obligated to effect up to three registrations if registration on Form S-3 or
      any
      similar short-form registration form is available for a registration by Issuer.
      Issuer shall include in the Registration Statement such number, if any, of
      the
      Registrable Securities requested to be included as may, in the judgment of
      the
      underwriters, be included in the offering without adversely affecting the
      offering; provided, however, that if for any reason the underwriters permit
      less
      than 60% of the Registrable Securities requested by all Holders to be included
      in such Registration Statement, such registration shall not count as a demand
      hereunder or cause a reduction in the number of registrations available pursuant
      to this Section 1.1(a). If the total number of Registrable Securities to be
      included in such Registration Statement is limited, the number of Registrable
      Securities to be included will be allocated on a pro rata basis among the
      Holders who have requested inclusion of their Registrable Securities in the
      offering, based on the number of Registrable Securities each has requested
      to
      have included. Issuer will not include any other securities in such registration
      without the written consent of all of the Holders requesting registration.
      Notwithstanding the foregoing, the Issuer shall be further entitled to reduce
      the number of Registrable Securities of the Holders on a pro rata basis as
      and
      when Issuer deems necessary or appropriate to respond to or comply with the
      rules, regulations, guidance or comments of the Commission for the purposes
      of
      obtaining the effectiveness of such registration statement, however, that if
      for
      this reason the Issuer permits less than 60% of the Registrable Securities
      requested by all Holders to be included in the Registration Statement, such
      registration shall not count as a demand hereunder or cause a reduction in
      the
      number of registrations available pursuant to this Section 1.1(a).

     

    (b) Right
      of Deferral of or Suspension of Registration.
      If
      Issuer shall furnish to all such Holders who joined in the request a certificate
      signed by the President of Issuer stating that, in the good faith judgment
      of
      the Board of Directors, the immediate filing of a Registration Statement (or
      the
      sale of securities under an already-filed Registration Statement) would
      materially interfere with or materially and adversely affect the negotiation
      or
      completion of any transaction that is then being contemplated by Issuer (whether
      or not a final decision has been made to undertake such transaction) or would
      otherwise be detrimental to Issuer, then Issuer shall have the right to defer
      the filing of a Registration Statement with respect to such offering (or suspend
      the use of a Registration Statement) for a period not to exceed 120 days after
      delivery of such certificate to such Holders. If, after a Registration Statement
      becomes effective, Issuer advises the Holders of Registrable Securities that
      Issuer considers it appropriate for the Registration Statement to be
      supplemented or amended, the Holders of such Registrable Securities shall
      suspend any further sales of their Registrable Securities until Issuer advises
      them that the Registration Statement has been supplemented or amended; provided,
      however, that Issuer shall use all reasonable efforts to effect such amendment
      or supplementation as soon as practicable; and provided further that Issuer
      may
      postpone such amendment or supplementation for a period of time not to exceed
      90
      days if in the good faith judgment of the Board of Directors, such amendment
      or
      supplementation, if effected immediately, would materially interfere with or
      materially and adversely affect the negotiation or completion of any transaction
      that is then being contemplated by Issuer (whether or not a final decision
      has
      been made to undertake such transaction) or would otherwise be detrimental
      to
      Issuer. Issuer may delay a demand registration under this Section 1.1 only
      once
      in any 12-month period.

     

    
      
        
        

      

      
        
        

        
          

        

      

       

    

     

    (c) Underwriting
      in Demand Registration.

     

    (i) Notice
      of Underwriting.
      If the
      Initiating Holders intend to distribute the Registrable Securities covered
      by
      their request by means of an underwriting, they shall so advise Issuer as a
      part
      of their request made pursuant to this Section 1.1. 

     

    (ii) Selection
      of Underwriter and Underwriting Agreement.
      If the
      Initiating Holders intend to distribute the Registrable Securities covered
      by
      their request by means of an underwriting, the holders of a majority of the
      Registrable Securities initially requesting registration will have the right
      to
      select the investment banker(s) for the offering, subject to Issuer’s approval.
      In such event, Issuer (together with all Holders proposing to distribute their
      Registrable Securities through such underwriting) shall enter into an
      underwriting agreement in customary form with the Underwriter. 

     

    (d) Right
      of Withdrawal.
      If any
      Holder of Registrable Securities disapproves of the terms of the underwriting,
      such Holder may elect to withdraw its Registrable Securities therefrom by
      written notice to Issuer, the Underwriters’ Representative and the Initiating
      Holders delivered at least seven Business Days prior to the effective date
      of
      the Registration Statement. The Registrable Securities so withdrawn shall also
      be withdrawn from the Registration Statement. If one or more Holders decide
      to
      withdraw Registrable Securities after commencement by Issuer of preparation
      of a
      Registration Statement and, as a result, the aggregate offering price likely
      will be less than $10,000,000, Issuer may withdraw the Registration Statement
      and cancel the offering, in which event (a) the Holders who had requested that
      their Registrable Securities be included in the registration shall be jointly
      and severally liable to reimburse Issuer for the Registration Expenses incurred
      in connection with such Registration Statement and (b) the total number of
      demand registrations available pursuant to Section 1.1(a) shall be reduced
      by
      one, unless the reason for withdrawal was the inability of the underwriters
      to
      sell more than 80% of the Registrable Securities referenced on the cover page
      of
      the prospectus included in such withdrawn Registration Statement within the
      price range set forth on the cover page of such Prospectus.

    
      
        
        

      

      
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    1.2 Piggyback
      Registration.

     

    (a) Notice
      of Piggyback Registration and Inclusion of Common Stock Owned by
      Holders.
      Upon
      the terms and subject to the conditions set forth in this Agreement, if Issuer
      decides to register Equity Interests under the Securities Act in connection
      with
      a Public Offering of such shares solely for cash (either for its own account
      or
      for the account of a security holder or holders, other than any of the Holders
      exercising demand registration rights under Section 1.1 hereof) (other than
      on
      Form S 8 or Form S 4 or any comparable or successor forms of the Commission),
      Issuer shall: (i) promptly give each Holder of Registrable Securities written
      notice thereof (which shall include a list of any jurisdictions in which Issuer
      intends at such time to attempt to qualify such securities under the applicable
      state securities laws) and (ii), subject to Section 1.2(b)(ii) hereof, include
      in such registration (and any related qualification under applicable state
      securities laws or other compliance) and in any underwriting involved therein,
      all the Registrable Securities specified in a written request delivered to
      Issuer by any Holder within 15 days after delivery of such written notice from
      Issuer. Notwithstanding the foregoing, the Issuer shall be further entitled
      to
      reduce the number of Registrable Securities of the Holders on a pro rata basis
      as and when Issuer deems necessary or appropriate to respond to or comply with
      the rules, regulations, guidance or comments of the Commission for the purposes
      of obtaining the effectiveness of such registration statement.

     

    (b) Underwriting.

     

    (i) Conditions
      to Participation.
      If the
      registration of which Issuer gives notice is for a Public Offering involving
      an
      underwriting, Issuer shall so advise the Holders as a part of the written notice
      given pursuant to Section 1.2(a). In such event, the right of any Holder to
      participate in such registration shall be conditioned upon such Holder’s entry
      into an underwriting agreement in customary form with the Underwriters’
Representative for such offering. 

     

    (ii) Marketing
      Limitation in Piggyback Registration.
      In the
      event the Underwriters’ Representative advises the Holders seeking registration
      of Registrable Securities pursuant to this Section 1.2 in writing that market
      factors (including, without limitation, the aggregate number of outstanding
      Registrable Securities requested to be registered, the general condition of
      the
      market, and the status of the Persons proposing to sell shares of Common Stock
      pursuant to the registration) require a limitation of the number of shares
      to be
      underwritten, the Underwriter’s Representative may limit the number of
      Registrable Securities to be included in the registration and underwriting,
      or
      may exclude Registrable Securities entirely from such registration and
      underwriting. Notwithstanding the foregoing, the underwriter may not limit
      the
      amount of Registrable Securities included in such registration and underwriting
      to less than an amount equal to 20% of the amount of all of Issuer’s securities
      included in such registration and underwriting.

     

    
      
        
        

      

      
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    (iii) Allocation
      of Shares in Piggyback Registration.
      In the
      event that the Underwriters’ Representative limits the number of Registrable
      Securities to be included in a registration pursuant to Section 1.2(b)(ii),
      the
      number of Registrable Securities to be included in such registration shall
      be
      allocated (subject to Section 1.2(b)(ii) hereof), among all Holders requesting
      to include Registrable Securities in such registration, in proportion, as nearly
      as practicable, to the respective number of Registrable Securities each has
      requested to have included in such registration. No Registrable Securities
      excluded from the underwriting by reason of Section 1.2(b)(ii) or this Section
      1.2(b)(iii) shall be included in such Registration Statement.

     

    (iv) Withdrawal
      in Piggyback Registration.
      If any
      Holder entitled (upon request) to have Registrable Securities included in such
      registration, disapproves of the terms of any such underwriting, such Holder
      may
      elect to withdraw therefrom by written notice to Issuer and the Underwriter’s
      Representative delivered at least seven Business Days prior to the effective
      date of the Registration Statement. Any Registrable Securities excluded or
      withdrawn from such underwriting shall be withdrawn from such
      registration.

     

    (c) Right
      of Deferral of or Suspension of Piggyback Registration.
      If
      Issuer shall furnish to all Holders requesting to include Registrable Securities
      in a registration under this Section 1.2 a certificate signed by the President
      of Issuer stating that, in the good faith judgment of the Board of Directors,
      the immediate filing of a Registration Statement (or the sale of securities
      under an already-filed Registration Statement) would materially interfere with
      or materially and adversely affect the negotiation or completion of any
      transaction that is then being contemplated by Issuer (whether or not a final
      decision has been made to undertake such transaction) or would otherwise be
      detrimental to Issuer, then Issuer shall have the right to defer the filing
      of a
      Registration Statement with respect to such offering (or suspend the use of
      a
      Registration Statement) for a period not to exceed 120 days after delivery
      of
      such certificate to such Holders. If, after a Registration Statement becomes
      effective, Issuer advises the Holders that Issuer considers it appropriate
      for
      the Registration Statement to be supplemented or amended, the Holders shall
      suspend any further sales of Registrable Securities until Issuer advises them
      that the Registration Statement has been supplemented or amended; provided,
      however, that Issuer shall use all reasonable efforts to effect such amendment
      or supplementation as soon as practicable; and provided further that Issuer
      may
      postpone such amendment or supplementation for a period not to exceed 90 days
      if
      in the good faith judgment of the Board of Directors, such amendment or
      supplementation, if effected immediately, would materially interfere with or
      materially and adversely affect the negotiation or completion of any transaction
      that is then being contemplated by Issuer (whether or not a final decision
      has
      been made to undertake such transaction) or would otherwise be detrimental
      to
      Issuer.

     

    
      
        
        

      

      
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    1.3 Compliance
      with Other Securities Laws.
      In the
      event of any registration of Registrable Securities pursuant to Section 1.1
      or
      this Section 1.2, Issuer shall use all reasonable efforts to comply with such
      other securities laws of such jurisdictions as shall be reasonably appropriate
      for the distribution of such securities to the extent that such laws are
      applicable and not preempted by federal law; provided, however, that (a) Issuer
      shall not be required to qualify to do business or to file a general consent
      to
      service of process in any such states or jurisdictions or to subject itself
      to
      any tax in any such jurisdiction where it is not then so subject, and (b)
      notwithstanding anything in this Agreement to the contrary, if any jurisdiction
      in which the securities shall be qualified imposes a non-waivable requirement
      that expenses incurred in connection with the qualification of the securities
      be
      borne by selling security holders, such expenses shall be payable pro rata
      by
      the selling security holders.

     

    1.4 Expenses
      of Registration.
      Except
      as set forth in Section 1.1(d) and Section 1.3, all Registration Expenses
      incurred in connection with all registrations pursuant to Sections 1.1 and
      1.2
      shall be borne by Issuer. Issuer shall not be required to pay the Selling
      Expenses related to the Registrable Securities. Such expenses shall be paid
      by
      the selling security holders, pro rata on the basis of the number of shares
      registered for each of them.

     

    1.5 Registration
      Procedures.
      Issuer
      shall keep each Holder whose Registrable Securities are included in any
      registration pursuant to this Section 1 reasonably advised as to the initiation
      and completion of such registration. Issuer shall: (a) prepare and file with
      the
      Commission a registration statement with respect to such Registrable Securities,
      and use all reasonable efforts to cause the Registration Statement to become
      effective and remain effective for a period of 180 days or until the Holder
      or
      Holders have completed the distribution described in the Registration Statement
      relating thereto, whichever first occurs; provided, however, that to the extent
      Issuer has exercised its rights pursuant to Section 1.1(b) or Section 1.2(c)
      to
      suspend the use of a Registration Statement, this period shall be extended
      one
      day for each day that the use of a Registration Statement is suspended; (b)
      furnish such number of prospectuses (including preliminary prospectuses) and
      other documents as a Holder from time to time may reasonably request; (c)
      prepare and file with the Commission amendments and supplements to such
      Registration Statement and the prospectus used in connection with such
      Registration Statement as may be reasonably necessary to comply with the
      provisions of the Securities Act with respect to the disposition of all
      Securities covered by such Registration Statement; (d) notify each holder of
      Registrable Securities registered under such Registration Statement of the
      effectiveness of such Registration Statement and any amendments thereto; (e)
      enter into such customary agreements and take all such other action in
      connection therewith as the Holders of more than 50% of the Registrable
      Securities being registered reasonably request in order to expedite or
      facilitate the disposition of such Registrable Securities; (f) furnish to each
      prospective seller a signed counterpart, addressed to the prospective sellers,
      of an opinion of counsel for Issuer, dated the effective date of the
      registration statement, and a “comfort” letter signed by the independent public
      accountants who have certified Issuer’s financial statements included in the
      registration statement, covering substantially the same matters with respect
      to
      the registration statement (and the prospectus included therein) and (in the
      case of the “comfort” letter) with respect to events subsequent to the date of
      the financial statements, as are covered in connection with the opinion of
      Issuer’s counsel and “comfort” letter delivered to the underwriters in
      connection with the offering of securities; and (g) notify each Holder of
      Registrable Securities covered by such Registration Statement at any time when,
      to the knowledge of Issuer, a prospectus relating thereto is required to be
      delivered under the Securities Act, of the happening of any event as a result
      of
      which the prospectus included in such Registration Statement, as then in effect,
      includes an untrue statement of a material fact or omits to state a material
      fact required to be stated therein or necessary to make the statements therein
      not misleading in the light of the circumstances then existing.

     

    
      
        
        

      

      
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    1.6 Information
      Furnished by Holder.
      It
      shall be a condition precedent of Issuer’s obligations under this Section 1 that
      each Holder of Registrable Securities included in any registration (a) agrees
      to
      sell such Holder’s Registrable Securities on the basis provided in any
      underwriting agreement executed in connection with such arrangement, (b)
      completes and executes all questionnaires, powers of attorney, indemnities,
      underwriting agreements and other documents required under the terms of such
      underwriting arrangements or reasonably requested by Issuer, (c) furnishes
      to
      Issuer such information regarding itself, the Registrable Securities held by
      it,
      and the intended method of disposition of such Registrable Securities as may
      be
      required to effect the registration of such Registrable Securities or as may
      otherwise be reasonably requested by Issuer, and (d) otherwise participates
      and
      cooperates in the underwriting and the registration process as requested by
      Issuer or the Underwriters’ Representative.

     

    1.7 Indemnification.

     

    (a) Company’s
      Indemnification of Holders.
      Issuer
      shall indemnify each Holder, each of such Holder’s officers, directors and
      general partners, and each Person controlling such Holder, with respect to
      any
      registration of Registrable Securities (and any related compliance with other
      securities laws under Section 1.3) effected pursuant to this Agreement, against
      all claims, losses, damages, liabilities or expenses (or actions in respect
      thereof) incurred by an Indemnified Party (collectively “Losses”) arising out of
      or based upon (i) any untrue statement (or alleged untrue statement) of a
      material fact contained in any prospectus or in any amendment or supplement
      thereof or in any preliminary prospectus or other document (including any
      related Registration Statement) incident to any such registration or compliance,
      (ii) any omission (or alleged omission) to state therein a material fact
      required to be stated therein or necessary to make the statements therein not
      misleading, or (iii) any violation by Issuer of the Securities Act, the Exchange
      Act, or any other securities law, or any rule or regulation promulgated under
      the Securities Act, the Exchange Act or any state securities law, applicable
      to
      Issuer and relating to action or inaction required of Issuer in connection
      with
      any such registration or compliance; and Issuer shall reimburse each such
      Indemnified Party for any expenses (including, without limitation, attorneys’
fees) reasonably incurred in connection with investigating or defending any
      such
      Losses; provided, however, that the indemnity contained in this Section 1.7(a)
      shall not apply to amounts paid in settlement of any Losses if settlement is
      effected without the consent of Issuer (which consent shall not unreasonably
      be
      withheld); and provided, further, that Issuer shall not be liable in any such
      case to the extent that any such Losses arise out of or are based upon any
      untrue statement (or alleged untrue statement) or omission (or alleged omission)
      based upon information furnished to Issuer in writing by such Holder or any
      of
      its officers, directors, general partners, or controlling Persons for use in
      connection with the offering of securities of Issuer; and provided, further,
      that Issuer shall not be liable in any such case to the extent any such Losses
      arise out of or are based upon the failure of such Holder to comply with the
      prospectus delivery requirements of the Securities Act; and provided, further,
      that Issuer shall not be liable for legal fees incurred by any Indemnified
      Party
      after Issuer assumes the defense of the action in accordance with Section
      1.7(c), except to the extent that such Indemnified Party hires separate counsel
      as a result of a conflict described in Section 1.7(c).

     

    
      
        
        

      

      
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    (b) Holder’s
      Indemnification of Company.
      To the
      extent permitted by law, each Holder shall, if Registrable Securities owned
      by
      such Holder are registered pursuant to this Agreement, indemnify Issuer, each
      of
      its shareholders, directors and officers, each underwriter, if any, of such
      securities, each Person who controls Issuer or such underwriter within the
      meaning of the Securities Act, and each other such Holder, each of its officers,
      directors and general partners and each Person controlling such other Holder,
      against all Losses arising out of or based upon (i) any untrue statement (or
      alleged untrue statement) of a material fact contained in any prospectus, any
      amendment or supplement thereof, or any preliminary prospectus or other document
      (including any related Registration Statement) incident to any such registration
      or any related compliance with other securities laws under Section 1.3, (ii)
      any
      omission (or alleged omission) to state therein a material fact required to
      be
      stated therein or necessary to make the statements therein not misleading,
      or
      (iii) any violation by such Holder of the Securities Act, the Exchange Act
      or
      any other securities law, or any rule or regulation promulgated under the
      Securities Act, the Exchange Act or any other securities law, applicable to
      such
      Holder and relating to action or inaction required of such Holder in connection
      with any such registration or compliance; and such Holder will reimburse each
      such Indemnified Party for any expenses (including, without limitation,
      attorneys’ fees) reasonably incurred in connection with investigating or
      defending any such Losses; provided, however, that in the case of a misstatement
      or omission, such obligation shall apply only to the extent that such untrue
      statement (or alleged untrue statement) or omission (or alleged omission) is
      made in such prospectus, amendment, supplement, preliminary prospectus or other
      document in reliance upon and in conformity with information furnished to Issuer
      in writing by such Holder or any of its officers, directors, general partners
      or
      controlling persons; and provided, further, that the indemnity contained in
      this
      Section 1.7(b) shall not apply to amounts paid in settlement of any such Losses
      if settlement is effected without the consent of the Holder which consent shall
      not unreasonably be withheld); provided, further, that the Holder shall not
      be
      liable for legal fees incurred by any Indemnified Party after the Holder assumes
      the defense of the action in accordance with Section 1.7(c), except to the
      extent that any Indemnified Party hires separate counsel as a result of a
      conflict described in Section 1.7(c). 

     

    (c) Indemnification
      Procedure.
      Promptly after receipt by an Indemnified Party under this Section 1.7 of notice
      of the commencement of any action, such Indemnified Party shall, if a claim
      in
      respect thereof is to be made against an Indemnifying Party under this Section
      1.7, notify the Indemnifying Party in writing of the commencement thereof and
      generally summarize such action. The Indemnifying Party shall have the right
      to
      participate in and to assume the defense of such claim, jointly with any other
      Indemnifying Party similarly noticed; provided, however, that the Indemnifying
      Party shall be entitled to select counsel for the defense of such claim with
      the
      approval of any parties entitled to indemnification, which approval shall not
      be
      unreasonably withheld; and provided, further, that if in the opinion of counsel
      to the Indemnified Party there is a legal conflict between the positions of
      the
      Indemnifying Party and the Indemnified Party in conducting the defense of such
      action, suit or proceeding, then the Indemnified Party may retain separate
      counsel to conduct the defense to the extent reasonably determined by such
      counsel to be necessary to protect the interest of the Indemnified Party. The
      failure to notify an Indemnifying Party promptly of the commencement of any
      such
      action, if prejudicial to the ability of the Indemnifying Party to defend such
      action, shall relieve such Indemnifying Party, to the extent so prejudiced,
      of
      any liability to the Indemnified Party under this Section 1.7, but the omission
      so to notify the Indemnifying Party will not relieve such party of any liability
      that such party may have to any Indemnified Party otherwise than under this
      Section 1.7. The reimbursement required by this Section 1.7 shall be made in
      periodic payments during the course of the investigation or defense, as and
      when
      bills are received or expenses incurred.

     

    
      
        
        

      

      
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    (d) Meaning
      of “Indemnified Party” and “Indemnifying Party.”
As
      used in this Section 1.7, the term “Indemnified Party” refers to a Person
      entitled to indemnity under Section 1.7(a) or 1.7(b) and the term “Indemnifying
      Party” means a Person obligated to indemnify another Person pursuant to Section
      1.7(a) or 1.7(b).

     

    (e) Contribution
      in Lieu of Indemnification.
      If the
      indemnification provided for in Section 1.7 hereof is unavailable to a party
      that would have been an Indemnified Party under any such section in respect
      of
      any Losses, then each party that would have been an Indemnifying Party
      thereunder shall, in lieu of indemnifying such Indemnified Party, contribute
      to
      the amount paid or payable by such Indemnified Party as a result of such Losses
      in such proportion as is appropriate to reflect the relative fault of the
      Indemnifying Party on the one hand and the Indemnified Party on the other in
      connection with the statements or omissions that result in such Losses, as
      well
      as other relevant equitable considerations. The relative fault shall be
      determined by reference to, among other things, whether the untrue or alleged
      untrue statement of a material fact or the omission or alleged omission to
      state
      a material fact relates to information supplied by the Indemnifying Party or
      such Indemnified Party and the parties’ relative intent, knowledge, access to
      information and opportunity to correct or prevent such statement or omission.
      Issuer agrees that it would not be just and equitable if contribution pursuant
      to this Section 1.7(e) were determined by pro rata allocation or by any other
      method of allocation which does not take account of the equitable considerations
      referred to above in this Section 1.7(e). The amount paid or payable by an
      Indemnified Party as a result of the Losses referred to above in this Section
      1.7(e) shall include any legal or other expenses reasonably incurred by such
      indemnified party in connection with investigating or defending any such action
      or claim. No Person guilty of fraudulent misrepresentation (within the meaning
      of Section 11(f) of the Securities Act) shall be entitled to contribution from
      any Person who was not guilty of such fraudulent misrepresentation.

     

    1.8 Transfer
      of Rights.
      Subject
      to compliance with the transfer restrictions on the Notes and the Registrable
      Securities, the registration rights set forth in Sections 1.1 and 1.2 may be
      assigned by any Holder to a transferee or assignee acquiring Registrable
      Securities that have not been sold to the public; provided, however, that Issuer
      must receive, at least five Business Days prior to said transfer, a written
      notice stating the name and address of said transferee or assignee and
      identifying the Registrable Securities with respect to which such registration
      rights are being assigned and a written agreement by such transferee to be
      bound
      by the provisions hereof.

     

    
      
        
        

      

      
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    1.9 Market
      Stand-off.
      Each
      Investor agrees, and shall cause each assignee of its rights under this Section
      1 to agree, that if so requested by the Underwriters’ Representative (s) in
      connection with any firm commitment underwritten Public Offering of securities
      by Issuer, such Investor (or such assignee) shall not sell, or make any short
      sale of, any shares of Common Stock or other securities of Issuer, without
      the
      prior written consent of the Underwriters’ Representative(s), for such period of
      time not to exceed 7 days before the effective date of the Registration
      Statement and 90 days after the effective date of the Registration Statement
      as
      may be requested by the Underwriters’ Representative; provided, however, that
      all officers and directors of Issuer and substantially all holders of 5% or
      more
      of the outstanding shares of Common Stock are subject to a substantially similar
      obligation.

     

    1.10 Rule
      144 Compliance.
      Until
      such time as Issuer files a notice on Form 15 (or a successor form) of the
      Commission providing notice of its termination of registration under Section
      12
      of Exchange Act, Issuer will make every effort in good faith to make publicly
      available and available to the Holders of Registrable Securities, pursuant
      to
      Rule 144, such information as shall be necessary to enable the Holders of
      Registrable Securities to make sales of Registrable Securities pursuant to
      that
      rule. Issuer will furnish to any Holder of Registrable Securities, upon request
      made by such Holder at any time after the undertaking of Issuer in the preceding
      sentence shall have first become effective, a written statement signed by
      Issuer, addressed to such Holder, describing briefly the action Issuer has
      taken
      or proposes to take to comply with the current public information requirements
      of Rule 144. Issuer will, at the request of any Holder of Registrable
      Securities, upon receipt from such Holder of a certificate certifying (i) that
      such Holder has held such Registrable Securities for a period of not less than
      two (2) consecutive years, (ii) that such Holder has not been an affiliate
      (as
      defined in Rule 144) of Issuer for more than the preceding three (3) months,
      and
      (iii) as to such other matters as may be appropriate in accordance with such
      Rule, remove from the stock certificates representing such Registrable
      Securities that portion of any restrictive legend which relates to the
      registration provisions of the Securities Act.

     

    Section
      2. DEFINITIONS

     

    As
      used
      herein, the following capitalized terms shall have the meanings
      indicated:

     

    “Board”
means
      the Board of Directors of Issuer.

     

    “Business
      Day”
means
      any day except Saturday, Sunday and any day which shall be a legal holiday
      or a
      day on which banking institutions in the State of Kansas generally are
      authorized or required by law or other government action to remain
      closed.

     

    “Commission”
means
      the Securities and Exchange Commission. 

     

    “Common
      Stock”
means
      the $ .01 par value common stock of Issuer.

    
      
        
        

      

      
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    “Exchange
      Act”
means
      The Securities Exchange Act of 1934, as amended, or any successor federal
      statute, and the rules and regulations promulgated thereunder, all as the same
      shall be in effect from time to time.

     

    “Holder”
means
      any holder of outstanding Registrable Securities that have not been sold to
      the
      public, but only if such holder is an Investor or an assignee or transferee
      of
      registration rights as permitted by Section 1.8 hereof.

     

    “Indemnified
      Parties”
and
      “Indemnifying
      Parties”
have
      the meanings ascribed to such terms in Section 1.7(d) hereof.

     

    “Initiating
      Holders”
shall
      mean Holders of Registrable Securities that have not been sold to the public
      who
      in the aggregate hold at least 50% of the aggregate number of outstanding
      Registrable Securities that have not been sold to the public. 

     

    “Investor”
means
      China Gold, Inc. and each other holder of Registrable Securities who becomes
      a
      party to the Purchase Agreement.

     

    “Losses”
has
      the
      meaning ascribed to such term in Section 1.7 hereof.

     

    “Public
      Offering”
means
      an offering of Common Stock or other equity securities by Issuer, or by any
      successor to Issuer, that is registered under the Securities Act.

     

    “Purchase
      Agreement”
means
      that certain Convertible Notes Purchase Agreement by and between Issuer and
      China Gold, LLC, of even date herewith.

     

    “Qualified
      Offering”
means
      a
      Public Offering in which Issuer or its successor, as applicable, is valued
      on a
      pre-offering basis at $25,000,000 or more and in which Issuer or its successor
      receives net proceeds of at least $10,000,000.

     

    “Registrable
      Securities”
means
      (i) any shares of Common Stock issuable upon conversion of the Notes, and (ii)
      any additional shares of Common Stock issued pursuant stock splits, in-kind
      dividends and similar distributions with respect to the stock described in
      the
      foregoing clause, but does not include any such shares, which, at the time
      the
      identity of the Registrable Securities is to be determined, previously have
      been
      sold pursuant to a registration or Rule 144, including Rule 144(k) or Rule
      144A.

     

    “Registration
      Expenses”
means
      all reasonable out-of-pocket expenses (other than Selling Expenses) actually
      incurred in complying with Section 1.1 or Section 1.2 hereof, including, without
      limitation, all required federal and state registration, qualification and
      filing fees, printing expenses, fees and disbursements of counsel for Issuer
      and
      reasonable fees and disbursements of one counsel for all of the selling security
      holders.

     

    “Registration
      Statement”
means
      a
      registration statement prepared by Issuer in connection with any registration
      contemplated by Section 1 hereof.

     

    “Rule
      144”
means
      Rule 144 promulgated under the Securities Act or any successor or complementary
      rule, all as the same shall be in effect from time to time.

     

    “Securities
      Act”
means
      the Securities Act of 1933, as amended, or any successor federal statute, and
      the rules and regulations promulgated thereunder, all as the same shall be
      in
      effect from time to time.

     

    “Selling
      Expenses”
means
      all underwriting discounts and selling commissions and any transfer taxes
      resulting from sales of Registrable Securities pursuant to Section 1
      hereof.

     

    “Underwriters’
      Representative”
means
      the representative or representatives of the underwriters selected by the
      Initiating Holders for an underwriting under Section 1.1(c) or by Issuer for
      an
      underwriting under Section 1.2(b).

     

    
      
        
        

      

      
        10

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