FIRST CHINA PHARMACEUTICAL GROUP, INC. SECURITIES PURCHASE AGREEMENT

A.           The Company desires to obtain funds from each Purchaser in order to provide working capital, marketing acquisition and expansion and to further the operations of the Company.

B.           The Company is offering Units (the “Units”), each Unit comprised of (i) 27,778 shares of its common stock, $0.001 par value per share (the “Common Stock” and, the shares of Common Stock offered herein, being sometimes referred to herein as the “Shares”), (ii) warrants in the form as annexed hereto as Exhibit A-1 (the “Series A-1 Warrants ”), to purchase 27,778 shares of Common Stock at an exercise price of $1.25 per share (the “Series A-1 Warrant Shares”), and (iii) warrants in the form as annexed hereto as Exhibit A-2 (the “Series A-2 Warrants”), to purchase 27,778 shares of Common Stock at an exercise price of $2.00 per share (the “Series A-2 Warrant Shares”), at a purchase price of $25,000 per Unit.  The Series A-1 Warrants and the Series A-2 Warrants are sometimes collectively referred to herein as the “Warrants,” the Series A-1 Warrant Shares and the Series A-2 Warrant Shares are sometimes collectively referred to herein as the “Warrant Shares,” and the Shares, Warrants and Warrant Shares are sometimes collectively referred to herein as the “Securities”.  The Shares and Warrants are provided, among other rights, weighted-average anti dilution rights for lower priced issuances of common stock, as more specifically described herein.

C.           Purchasers understand that there is a great deal of risk, illiquidity and uncertainty in the Purchase of the Units herein and that no assurance can be made that the Company will complete its business plans or, if completed, that it will be successful in doing so.  Purchasers have received and examined all of the Company’s SEC Reports (as defined in Section 3.7.1), including, without limitation, any risk factors therein, and a Private Placement Memorandum dated as of March 11, 2011 (the “PPM”) containing such information as, among other things, a description of this offering and understand that an investment herein entails a high degree of risk and illiquidity, including loss of Purchaser’s entire investment.

D.           The offering of Units is being made directly by the Company through the Placement Agent (as hereinafter defined), to accredited investors only, under Rule 506 of Regulation D of the Securities Act, as amended, on a “best efforts, $2,000,000 minimum, $7,000,000 maximum” basis, wherein a minimum of 80 Units or 2,222,240 Shares, 2,222,240 Series A-1 Warrants and 2,222,240 Series A-2 Warrants, and maximum of 280 Units, or 7,777,840 Shares, 7,777,840 Series A-1 Warrants and 7,777,840 Series A-2 Warrants may be sold.

E.           Placement Agent and the Company have consented to the appointment of Manufacturers and Traders Trust Company as independent Escrow Agent (the “Escrow Agent”), pursuant to the terms of the Escrow Deposit Agreement (the “Escrow Agreement”) annexed hereto as Exhibit B.  All funds will be held in a non-interest bearing money market or other account with Escrow Agent.  The Purchasers acknowledge and agree that their subscriptions are irrevocable and binding commitments on the part of the Purchaser and that once their funds have been tendered to escrow with the appropriate subscription documents and the minimum offering amount of $2,000,000 (80 Units) has been raised in accepted funds and subscriptions, the Escrow Agent may, at the request of the Placement Agent and Company together, disburse funds from escrow and conduct a Closing without any consent of or notice to Purchasers.  The Placement Agent or Company may reject any subscriptions in whole or in part or elect not to close, for any reason or for no reason and shall cause the Escrow Agent to return funds to the Purchaser to the extent of funds tendered for subscriptions which have not been accepted, or, retain the right to hold the same in escrow for acceptance at a future Closing, until termination of the offering, at which time, any unused subscription funds shall be returned to Purchaser.  The offering will remain open through the earliest to occur of (i) a closing on the aggregate maximum offering amount of $7,000,000, (ii) termination of the offering by the Company or Placement Agent, or (iii) April 1, 2011, unless extended for 30 days at the sole discretion of the Placement Agent and Company (which extension may be made without consent of Purchasers whose moneys may be in escrow).

3.3         Authorization.  The Company and each Subsidiary has full power and authority and has taken all requisite action on the part of the Company, its officers, directors and stockholders necessary for (i) the authorization, execution and delivery of this Agreement, the Warrants and the Escrow Agreement and any other transaction documents relating to this Agreement (collectively the “Transaction Documents”), (ii) the authorization of the performance of all obligations of the Company hereunder or thereunder, and (iii) the authorization, issuance (or reservation for issuance) and delivery of the Shares hereby or the Warrant Shares upon exercise of the Warrants.  The Transaction Documents constitute the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability, relating to or affecting creditors’ rights generally.

(iii)         any material damage, destruction or loss, whether or not covered by insurance, to any assets, licenses, government permits, self regulatory agency permit or license, or properties of the Company or its subsidiaries;

(iv)         any waiver, not in the ordinary course of business, by the Company or any subsidiary of a material right or of a material debt owed to it;

(v)          any satisfaction or discharge of any lien, claim or encumbrance or payment of any obligation by the Company or a subsidiary, except in the ordinary course of business and which has not had a Material Adverse Effect;

(vi)         any change or amendment to the Company Documents, or material change to any material contract or arrangement by which the Company or any subsidiary is bound or to which any of their respective assets or properties is subject;

(vii)        any material labor difficulties, labor disputes, non-compete or similar disputes, or labor union organizing activities with respect to employees of the Company or any subsidiary;

(viii)       any material transaction entered into by the Company or a subsidiary other than in the ordinary course of business;

(ix)         the loss of the services of any key employee, salesperson, or material change in the composition or duties of the senior management of the Company or any subsidiary;

(x)           the loss or threatened loss of any customer which has had or could reasonably be expected to have a Material Adverse Effect;

(xi)         any default of any indebtedness or, to the knowledge of the Company, breach of contract agreement, in each case with aggregate liabilities of greater than $50,000.

(xi)         any other event or condition of any character that has had or could reasonably be expected to have a Material Adverse Effect.

3.7         SEC Reports and Financial Statements.

3.7.1      The Company has delivered or made available to each Purchaser accurate and complete copies (excluding copies of exhibits) of each report, registration statement, and definitive proxy statement filed by the Company with the United States Securities and Exchange Commission (“SEC”) since March 31, 2010 (collectively, the “SEC Reports”).  All statements, reports, schedules, forms and other documents required to have been filed by the Company with the SEC have been so filed.  As of the time it was filed with the SEC (or, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing): (i) each of the SEC Reports complied in all material respects with the applicable requirements of the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934 (the “1934 Act”), as amended; and (ii) none of the SEC Reports contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.

Except as set forth in Schedule 3.11 (for purposes of this section 3.11 and 3.12, the term Company shall be utilized to include First China HK and Kun Ming):

3.20      Third Party Beneficiaries. The Company acknowledges that Placement Agent, its representatives, and other selling agents (if any),  are direct intended beneficiaries of the representations and warranties made hereby in respect of all of the Placement Agent Shares or Warrants issued to them or their affiliates, and, are also deemed third party beneficiaries to the representations and warranties made hereby to the Purchasers.

4.2         Due Execution.  The execution and performance of the terms under this Agreement and the Accredited Investor Questionnaire commencing Page SP-2 appended at the end of this Agreement (the “Questionnaire”) and Purchaser Signature Page hereto, have been duly authorized, if such Purchaser is a corporation, partnership, limited liability company, trust or fiduciary, executed and delivered by such Purchaser, and, upon due execution and delivery by the Company, this Agreement will be a valid and binding agreement of such Purchaser.

4.3         Access to Information.  Each Purchaser understands that an investment in the Securities involves a high degree of risk and illiquidity, including, risk of loss of their entire investment.  Each Purchaser represents that such Purchaser has been given full and complete access to the Company for the purpose of obtaining such information as such Purchaser or its qualified representative has reasonably requested in connection with the decision to purchase the Shares.  Each Purchaser represents that such Purchaser has received and reviewed copies of the SEC Reports and PPM.  Each Purchaser represents that such Purchaser has been afforded the opportunity to ask questions of the officers of the Company regarding its business prospects and the Shares, all as such Purchaser or such Purchaser’s qualified representative have found necessary to make an informed investment decision to purchase the Shares.

4.4         Restricted Securities.

4.4.1       Each Purchaser has been advised that none of the Securities have been registered under the Securities Act or any other applicable securities laws and that Shares are being offered and sold pursuant to Section 4(2) of the Securities Act and/or Rule 506 of Regulation D and/or Regulation S thereunder, and that the Company’s reliance upon Section 4(2) and/or Rule 506 of Regulation D and/or Regulation S is predicated in part on such Purchaser representations as contained herein (including, for avoidance of doubt, the Questionnaire).  Each Purchaser acknowledges that the Securities will be issued as “restricted securities” as defined by Rule 144 promulgated pursuant to the Securities Act.  None of the Securities may be resold in the absence of an effective registration thereof under the Securities Act and applicable state securities laws unless, in the opinion of counsel reasonably satisfactory to the Company, an applicable exemption from registration is available.

4.4.2       Each Purchaser represents that such Purchaser is acquiring the Shares for such Purchaser’s own account, and not as nominee or agent, for investment purposes only and not with a view to, or for sale in connection with, a distribution, as that term is used in Section 2(11) of the Securities Act, in a manner which would require registration under the Securities Act or any state securities laws.

4.4.3       Each Purchaser understands and acknowledges that the certificates representing the Shares, Warrants and, if issued, the Warrant Shares, will bear substantially the following legend:

“THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE LAW, AND NO INTEREST THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS (i) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS COVERING ANY SUCH TRANSACTION INVOLVING SAID SECURITIES, (ii) THE COMPANY RECEIVES AN OPINION OF LEGAL COUNSEL REASONABLY SATISFACTORY TO THE COMPANY STATING THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION, OR (iii) THE COMPANY OTHERWISE SATISFIES ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION.”

4.7         Independent Investigation.  Each Purchaser in making his decision to purchase the Units herein, has relied solely upon an independent investigation made by him and his legal, tax and/or financial advisors and, is not relying upon any oral representations of the Company or the Placement Agent.

4.8         No Advertising.  Each Purchaser has not received any general solicitation or advertising regarding the offer of the Units.

4.9         Certain Trading Activities.  Each Purchaser has not directly or indirectly, nor has any person acting on behalf of or pursuant to any understanding with such Purchaser, engaged in any transactions in the securities of the Company (including, without limitation, any short sales involving the Company’s securities) since the time that such Purchaser was first contacted by the Company or the Placement Agent regarding the investment in the Company contemplated by this Agreement.  Each Purchaser covenants that neither it nor any person acting on its behalf or pursuant to any understanding with it will engage in any transactions in the securities of the Company (including short sales) prior to the time that the transactions contemplated by this Agreement are publicly disclosed.

4.10       Placement Agent Review.  Each Purchaser acknowledges that neither Sandgrain Securities, Inc., as “Placement Agent” nor any of its representatives or their affiliates, has made a purchase recommendation, research report or provided a rating, opinion, buy or sell recommendation, or, independently verified the accuracy, completeness, materiality or otherwise, of any information, representation or warranty contained in this Purchase Agreement, the SEC Reports, or any offering materials provided, that such placement agent related entities and their principals shall have no liability for any representation (express or implied) contained in, or for any omissions from, the Purchase Agreement or any offering documents provided or any other written or oral communications transmitted to the recipient in the course of his or her evaluation of the investment, and that it is understood that each prospective investor will make an independent investigation and analysis of a potential investment in the Company with its legal, tax or financial advisors, and will be relying upon same in making any such investment.

4.11       Regulation S; Non-U.S. Person Status.  For purposes of compliance with the Regulation S exemption for the offer and sale of the Securities to non-U.S. Persons, if the Purchaser is not a “U.S. Person,” as such term is defined in Rule 902(k) of Regulation S,1 the Purchaser represents and warrants they are a person or entity that is outside the United Sates, and further represents and warrants as follows:

4.11.1   The Purchaser is not acquiring the Securities for the account or benefit of a U.S. Person.

4.11.2   If the Purchaser is a legal entity, it has not been formed specifically for the purpose of investing in the Company.

4.11.3   The Purchaser hereby represents that he, she or it has satisfied and fully observed the laws of the jurisdiction in which he, she or it is located or domiciled, in connection with the acquisition of the Securities, including (i) the legal requirements of the Purchaser’s jurisdiction for the acquisition of the Securities, (ii) any foreign exchange restrictions applicable to such acquisition, (iii) any governmental or other consents that may need to be obtained, and (iv) the income tax and other tax consequences, if any, which may be relevant to the holding, redemption, sale, or transfer of the Securities; and further, the Purchaser agrees to continue to comply with such laws as long as he, she or it shall hold the Investment Securities.

4.11.4   To the knowledge of the Purchaser, without having made any independent investigation, neither the Company nor any person acting for the Company, has conducted any “directed selling efforts” in the United States as the term “directed selling efforts” is defined in Rule 902 of Regulation S, which, in general, means any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the marketing in the United States for any of the Securities being offered. Such activity includes, without limitation, the mailing of printed material to investors residing in the United States, the holding of promotional seminars in the United States, and the placement of advertisements with radio or television stations broadcasting in the United States or in publications with a general circulation in the United States, which discuss the offering of the Investment Securities.  To the knowledge of the Purchaser, the Securities were not offered to the undersigned through, and the undersigned is not aware of, any form of general solicitation or general advertising, including without limitation, (i) any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio, and (ii) any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.

4.11.5   The Purchaser will offer, sell or otherwise transfer the Securities, only (A) pursuant to a registration statement that has been declared effective under the Securities Act, (B) pursuant to offers and sales that occur outside the United States within the meaning of Regulation S in a transaction meeting the requirements of Rule 904 (or other applicable Rule) under the Securities Act, or (C) pursuant to another available exemption from the registration requirements of the Securities Act, subject to the Company’s right prior to any offer, sale or transfer pursuant to clauses (B) or (C) to require the delivery of an opinion of counsel, certificates or other information reasonably satisfactory to the Company for the purpose of determining the availability of an exemption.

4.11.6   The Purchaser will not engage in hedging transactions involving the Securities unless such transactions are in compliance with the Securities Act.

4.11.7   The Purchaser represents and warrants that the undersigned is not a citizen of the United States and is not, and has no present intention of becoming, a resident of the United States (defined as being any natural person physically present within the United States for at least 183 days in a 12-month consecutive period or any entity who maintained an office in the United States at any time during a 12-month consecutive period). The Purchaser understands that the Company may rely upon the representations and warranty of this paragraph as a basis for an exemption from registration of the Securities under the Securities Act of 1933, as amended, and the provisions of relevant state securities laws.

5.1         Release of Funds from Escrow upon Execution and Closing.  The Purchasers and the Company hereby acknowledge that all funds shall be in the non-interest bearing Escrow prior to Closing.  In connection therewith, the Company and Purchasers each authorize and instruct the Escrow Agent to disburse funds from Escrow upon receipt by Escrow Agent of a jointly executed instruction letter as provided in the Escrow Agreement and satisfaction of the closing conditions herein, substantially in accordance with the terms hereof, as more fully specified by written instruction of the Placement Agent and the Company.  No consent of or notice to Purchasers shall be necessary whatsoever in connection with such release and disbursement at Closing, and the Purchasers and Company jointly and severally indemnify the Escrow Agent and Placement Agent for any and all acts taken in good faith to implement the foregoing.

           

6.1         Use of Proceeds.  The Company intends to employ the net proceeds from the purchase and sale of the Shares for purposes of working capital, marketing acquisition and expansion and to further the operations of the Company only and not for the repayment of any existing debt in excess of $10,000.00.    Pending the Company’s use of the proceeds from the purchase and sale of the Shares, the Company intends to invest the funds in government securities and insured, short–term, interest–bearing investments of varying maturities.

6.2         Registration Rights.  For purposes of this Section 6.2, all references to the Purchaser shall be deemed to mean and include, the Purchaser, Placement Agent and their respective assigns as holders of Registrable Securities (as defined in Section 6.2.1(b) below).  The Company shall make best efforts to (i) within 20 days after the termination of the offering of Units as set forth in Recital B hereof, file a Registration Statement (as hereinafter defined) with respect to all of the Registrable Securities (as hereinafter defined) and (ii) obtain effectiveness of said Registration Statement for at least 12 months following effective date.

6.2.1      Notice of Registration.  If the Company shall determine to register any of its securities under the Securities Act in connection with the public offering of such securities, either for its own account or the account of a security holder, other than (A) a registration relating to employee benefit plans, (B) a registration relating to Rule 145 or similar transaction, or (C) a registration on any form that does not include substantially the same information as could be required to be included in a registration statement covering the sale of Registrable Securities, the Company will:

(a)         promptly give to each Purchaser written notice thereof; and

(b)        use commercially reasonable efforts to include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within twenty (20) days after receipt of such written notice from the Company, by any such Purchaser, except as set forth in Section 6.2.2 below.  In the event that the Company decides for any reason not to complete the registration of securities other than Registrable Securities as part of an underwritten public offering it shall specify that such Registrable Securities are to be included in the underwriting on the same terms and conditions as the securities otherwise being sold through underwriters under such registration.

“Registrable Securities” means (i) the Shares, the Warrant Shares and all other shares of Common Stock held by, or issuable to, the Purchasers or its assigns (including, without limitation, any Additional Shares, as hereinafter defined) and, (ii) any Placement Agent Shares and Common Stock underlying the Placement Agent Warrants issued to the Placement Agent or its assigns pursuant to the terms of this Agreement or any agreement with the Placement Agent calling for compensation relating hereto, which have not been registered under the Securities Act pursuant to an effective registration statement filed thereunder; provided, however, that the Purchasers shall not be required to exercise the Warrants in order to have the Warrant Shares included in any registration statement filed on the appropriate form with, and declared effective by, the SEC under the Securities Act and covering the resale by the Purchasers of the Registrable Securities (a “Registration Statement”).

6.2.2       Registration Process.  In connection with the registration of the Registrable Securities pursuant to Section 6.2.1, the Company shall:

(a)         Prepare and file with the SEC the Registration Statement and such amendments (including post effective amendments) to the Registration Statement and supplements to the prospectus included therein (a “Prospectus”) as the Company may deem necessary or appropriate and take all lawful action such that the Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, not misleading and that the Prospectus forming part of the Registration Statement, and any amendment or supplement thereto, does not at any time during the period commencing on the effective date of the Registration Statement and ending on the date on which all of the Registrable Securities may be sold to the public without registration under the Securities Act in reliance on Rule 144 (the “Registration Period”) include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading;

(b)         Comply with the provisions of the Securities Act with respect to the Registrable Securities covered by the Registration Statement until the earlier of (i) such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by each Purchaser as set forth in the Prospectus forming part of the Registration Statement or (ii) the date on which the Registration Statement is withdrawn;

(c)         Furnish to each Purchaser and its legal counsel identified to the Company (i) promptly after the same is prepared and publicly distributed, filed with the SEC, or received by the Company, one copy of the Registration Statement, each Prospectus, and each amendment or supplement thereto, and (ii) such number of copies of the Prospectus and all amendments and supplements thereto and such other documents, as the Purchaser may reasonably request in order to facilitate the disposition of the Registrable Securities;

(d)         Register or qualify the Registrable Securities covered by the Registration Statement under such securities or “blue sky” laws of such jurisdictions as the Purchasers reasonably request, (ii) prepare and file in such jurisdictions such amendments (including post effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof at all times during the Registration Period, (iii) take all such other lawful actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all such other lawful actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (A) qualify to do business in any jurisdiction where it would not otherwise be required to qualify, (B) subject itself to general taxation in any such jurisdiction or (C) file a general consent to service of process in any such jurisdiction;

(e)         As promptly as practicable after becoming aware of such event, notify each Purchaser of the occurrence of any event, as a result of which the Prospectus included in the 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, in light of the circumstances under which they were made, not misleading, and promptly prepare an amendment to the Registration Statement and supplement to the Prospectus to correct such untrue statement or omission, and deliver a number of copies of such supplement and amendment to each Purchaser as such Purchaser may reasonably request;

(f)          As promptly as practicable after becoming aware of such event, notify each Purchaser (or, in the event of an underwritten offering, the managing underwriters) of the issuance by the SEC of any stop order or other suspension of the effectiveness of the Registration Statement and take all lawful action to effect the withdrawal, rescission or removal of such stop order or other suspension;

(g)         Take all such other lawful actions reasonably necessary to expedite and facilitate the disposition by the Purchaser of its Registrable Securities in accordance with the intended methods therefor provided in the Prospectus which are customary under the circumstances;

(h)         In the event of an underwritten offering, promptly include or incorporate in a Prospectus supplement or post effective amendment to the Registration Statement such information as the underwriters reasonably agree should be included therein and to which the Company does not reasonably object and make all required filings of such Prospectus supplement or post effective amendment as soon as practicable after it is notified of the matters to be included or incorporated in such Prospectus supplement or post effective amendment;

(i)          In connection with any underwritten offering, deliver such documents and certificates as may be reasonably required by the underwriters; and

(j)          Cooperate with the Purchasers to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold pursuant to the Registration Statement, which certificates shall, if required under the terms of this Agreement, be free of all restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as any Purchaser may request and maintain a transfer agent for the Common Stock.

6.2.3      Obligations and Acknowledgements of the Purchasers.  In connection with the registration of the Registrable Securities, each Purchaser shall have the following obligations and hereby make the following acknowledgements:

(a)         It shall be a condition precedent to the obligations of the Company to include the Registrable Securities in the Registration Statement that each Purchaser wishing to participate in the Registration Statement (i) shall furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the registration of such Registrable Securities and (ii) shall execute such documents in connection with such registration as the Company may reasonably request.  Prior to the first anticipated filing date of a Registration Statement, the Company shall notify each Purchaser of the information the Company requires from such Purchaser (the “Requested Information”) if such Purchaser elects to have any of its Registrable Securities included in the Registration Statement.  If a Purchaser notifies the Company and provides the Company the information required hereby prior to the time the Registration Statement is declared effective, the Company will file an amendment to the Registration Statement that includes the Registrable Securities of such Purchaser provided, however, that the Company shall not be required to file such amendment to the Registration Statement at any time less than five (5) business days prior to the effective date.

(b)         Each Purchaser agrees to cooperate with the Company in connection with the preparation and filing of a Registration Statement hereunder, unless such Purchaser has notified the Company in writing of its election to exclude all of its Registrable Securities from such Registration Statement;

(c)         Each Purchaser agrees that, upon receipt of any notice from the Company of the occurrence of any event of the kind described in Section 6.2.2(e) or 6.2.2(f), such Purchaser shall immediately discontinue its disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until the Purchaser’s receipt of the copies of the supplemented or amended Prospectus contemplated by Section 6.2.2(e) and, if so directed by the Company, the Purchaser shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in the Purchaser’s possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice; and

(d)         Each Purchaser acknowledges that it may be deemed to be a statutory underwriter within the meaning of the Securities Act with respect to the Registrable Securities being registered for resale by it, and if a Purchaser includes Registrable Securities for offer and sale within a Registration Statement such Purchaser hereby consents to the inclusion in such Registration Statement of a disclosure to such effect.

6.2.5       Indemnification and Contribution.

(a)         Indemnification by the Company.  The Company shall indemnify and hold harmless each Purchaser and each underwriter, if any, which facilitates the disposition of Registrable Securities, and each of their respective officers and directors and each Person who controls such underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the 1934 Act (each such Person being sometimes hereinafter referred to as an “Indemnified Person”) from and against any losses, claims, damages or liabilities, joint or several, to which such Indemnified Person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or an 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 arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Prospectus or an omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and the Company hereby agrees to reimburse such Indemnified Person for all reasonable legal and other expenses incurred by them in connection with investigating or defending any such action or claim as and when such expenses are incurred; provided, however, that the Company shall not be liable to any such Indemnified Person in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon (i) an untrue statement or alleged untrue statement made in, or an omission or alleged omission from, such Registration Statement or Prospectus in reliance upon and in conformity with written information furnished to the Company by such Indemnified Person expressly for use therein or (ii) in the case of the occurrence of an event of the type specified in Section 6.2.2(e), the use by the Indemnified Person of an outdated or defective Prospectus after the Company has provided to such Indemnified Person an updated Prospectus correcting the untrue statement or alleged untrue statement or omission or alleged omission giving rise to such loss, claim, damage or liability.

 

(b)         Indemnification by the Purchasers and Underwriters.  Each Purchaser agrees, as a consequence of the inclusion of any of its Registrable Securities in a Registration Statement, and each underwriter, if any, which facilitates the disposition of Registrable Securities shall agree, severally and not jointly, as a consequence of facilitating such disposition of Registrable Securities to (i) indemnify and hold harmless the Company, its directors (including any person who, with his or her consent, is named in the Registration Statement as a director nominee of the Company), its officers who sign any Registration Statement and each Person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the 1934 Act, against any losses, claims, damages or liabilities to which the Company or such other persons may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in such Registration Statement or Prospectus or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in light of the circumstances under which they were made, in the case of the Prospectus), not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by the Purchaser or underwriter expressly for use therein, and (ii) reimburse the Company for any legal or other expenses incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that such Purchaser shall not be liable under this Section 6.2.5(b) for any amount in excess of the net proceeds paid to such Purchaser in respect of Registrable Securities sold by it.

(c)         Notice of Claims, etc.  Promptly after receipt by a Person seeking indemnification pursuant to this Section 6.2.5 (an “Indemnified Party”) of written notice of any investigation, claim, proceeding or other action in respect of which indemnification is being sought (each, a “Claim”), the Indemnified Party promptly shall notify the Person against whom indemnification pursuant to this Section 6.2.5 is being sought (the “Indemnifying Party”) of the commencement thereof; but the omission to so notify the Indemnifying Party shall not relieve it from any liability that it otherwise may have to the Indemnified Party, except to the extent that the Indemnifying Party is materially prejudiced and forfeits substantive rights and defenses by reason of such failure.  In connection with any Claim as to which both the Indemnifying Party and the Indemnified Party are parties, the Indemnifying Party shall be entitled to assume the defense thereof.  Notwithstanding the assumption of the defense of any Claim by the Indemnifying Party, the Indemnified Party shall have the right to employ separate legal counsel and to participate in the defense of such Claim, and the Indemnifying Party shall bear the reasonable fees, out of pocket costs and expenses of such separate legal counsel to the Indemnified Party if (and only if): (i) the Indemnifying Party shall have agreed to pay such fees, costs and expenses, (ii) the Indemnified Party shall reasonably have concluded that representation of the Indemnified Party by the Indemnifying Party by the same legal counsel would not be appropriate due to actual or, as reasonably determined by legal counsel to the Indemnified Party, potentially differing interests between such parties in the conduct of the defense of such Claim, or if there may be legal defenses available to the Indemnified Party that are in addition to or disparate from those available to the Indemnifying Party, or (iii) the Indemnifying Party shall have failed to employ legal counsel reasonably satisfactory to the Indemnified Party within a reasonable period of time after notice of the commencement of such Claim.  If the Indemnified Party employs separate legal counsel in circumstances other than as described in the preceding sentence, the fees, costs and expenses of such legal counsel shall be borne exclusively by the Indemnified Party.  Except as provided above, the Indemnifying Party shall not, in connection with any Claim in the same jurisdiction, be liable for the fees and expenses of more than one firm of counsel for the Indemnified Party (together with appropriate local counsel).  The Indemnified Party shall not, without the prior written consent of the Indemnifying Party (which consent shall not unreasonably be withheld), settle or compromise any Claim or consent to the entry of any judgment that does not include an unconditional release of the Indemnifying Party from all liabilities with respect to such Claim or judgment or contain any admission of wrongdoing.

 

(d)         Contribution.  If the indemnification provided for in this Section 6.2.5 is unavailable to or insufficient to hold harmless an Indemnified Party in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each Indemnifying Party shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and the Indemnified Party in connection with the statements or omissions or alleged statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations.  The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by such Indemnifying Party or by such Indemnified Party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.  The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 6.5(d) were determined by pro rata allocation (even if the Purchasers or any underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 6.2.5(d).  The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above shall be deemed to include any legal or other fees or 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.

(e)         Limitation on Purchasers’ and Underwriters’ Obligations.  Notwithstanding any other provision of this Section 6.2.5, in no event shall (i) any Purchaser have any liability under this Section 6.2.5 for any amounts in excess of the dollar amount of the proceeds actually received by such Purchaser from the sale of Registrable Securities (after deducting any fees, discounts and commissions applicable thereto) pursuant to any Registration Statement under which such Registrable Securities are registered under the Securities Act and (ii) any underwriter be required to undertake liability to any Person hereunder for any amounts in excess of the aggregate discount, commission or other compensation payable to such underwriter with respect to the Registrable Securities underwritten by it and distributed pursuant to the Registration Statement.

(f)          Other Liabilities.  The obligations of the Company under this Section 6.2.5 shall be in addition to any liability which the Company may otherwise have to any Indemnified Person and the obligations of any Indemnified Person under this Section 6.2.5 shall be in addition to any liability which such Indemnified Person may otherwise have to the Company.  The remedies provided in this Section 6.2.5 are not exclusive and shall not limit any rights or remedies which may otherwise be available to an indemnified party at law or in equity.

6.2.6       Rule 144.  With a view to making available to the Purchasers the benefits of Rule 144, the Company agrees to use its best efforts to:

(a)         comply with the provisions of paragraph (c)(1) of Rule 144; and

(b)         file with the SEC in a timely manner all reports and other documents required to be filed by the Company pursuant to Section 13 or 15(d) under the 1934 Act; and, if at any time it is not required to file such reports but in the past had been required to or did file such reports, it will, upon the request of any Purchasers, make available other information as required by, and so long as necessary to permit sales of, its Registrable Securities pursuant to Rule 144.

6.3         [Omitted.]

6.4         Covenants Relating to Operations.

6.4.1       Effective immediately after the first closing of this offering, the Company shall consider two (2) nominees of Sandgrain Securities, Inc. as a directors of the Company with a minimum term of one year following the final Closing of this offering (each, a “SG Director Designee”); provided, however, that either SG Director Designee from time to time, may at his or her sole discretion, hold a seat as Board observer, entitled to attend all meetings and obtain all documentation as though a full board member, but without any rights to consent or vote upon any matters brought before the Company’s Board of Directors, or any committee thereof. Either SG Director Designee shall also be entitled, at his or her discretion, to sit on the (or act as a non-voting observer to) the Company’s Audit Committee and/or Compensation Committee.  The Company shall see to it that each SG Director Designee (or his or her replacement as appointed from time to time) is appointed by the board and, nominated and named in any proxy or information statement, or any other written consent or action of shareholders taken, as may be necessary from time to time, so as to ensure each such person’s nomination to the Board for at least a minimum term of one year following the final Closing.   Effective immediately after the first closing of this offering, the maximum number of directors constituting the entire Board of Directors, including the SG Director Designees, shall be five (5).  Any and all compensation paid to the SG Director Designees shall be as approved by the Company’s Board of Directors and shall be consistent with compensation provided to other independent members of the Company’s Board of Directors and in accordance with Company policy.

 

6.5         Additional Share Issuances; Full Ratchet Share Adjustment.

 

6.5.1       Full Ratchet Adjustment.  In the event that at any time commencing the first Closing and continuing for a period of twelve (12) months following the final Closing or termination of the offering of Units as set forth in Recital B hereof, except for Excepted Issuances (as defined in Section 6.5.3), the Company shall agree to issue or actually issue or grant the right to receive any Common Stock or securities convertible, exercisable or exchangeable for shares of Common Stock (or modify any of the foregoing which may be outstanding)  (“Common Stock Equivalent”) to any person or entity at a price per share or conversion price or exercise price per share (the “Lower Per Share Price”) which shall be less than the per share purchase price of initially $0.90, as adjusted for stock splits, dividends and reclassifications, (the “Per Share Price”) then in effect (“Lower Price Issuance”), then, automatically and without any obligation of or notice to Purchaser or Placement Agent, the Per Share Price paid herein shall be amended, reduced, restated and deemed to be, the Lower Per Share Price and the number of Shares issuable under this Agreement shall be deemed increased to the Purchase Price paid (as set forth on the signature page and acceptance pages hereto) divided by the Lower Per Share Price, and, each Purchaser and Placement Agent (or his rightful assigns) shall have the absolute right to receive without giving or receiving any form of notice or making any form of demand, and the Company shall immediately and unconditionally issue without restriction (other than as provided in this Agreement), such number of additional shares of Common Stock (the “Additional Shares”) as equals the sum of the Purchase Price paid hereby as set forth on the signature page hereto, divided by the Lower Per Share Price, less the number Shares previously issued to the Purchaser; provided, however, if the Lower Price Issuance is for a per share price less than $0.35 per share, the Lower Per Share Price shall be deemed to be $0.35 per share.  Thereafter, and for purposes of calculating future adjustments or issuances of Additional Shares, the Per Share Price shall be amended and revised to be the Lower Per Share Price.   Certificates for Additional Shares shall be unconditionally delivered by Federal Express to Placement Agent on behalf of both itself and the Purchasers within 7 business days of the date of the Lower Price Issuance of Common Stock or Common Stock Equivalents (or, if earlier, date of commitment to make the Lower Price Issuance of Common Stock or Common Stock Equivalents).  The Company acknowledges and agrees that the Purchasers and Placement Agent and its assigns may be irreparably harmed and injured (including loss of profits) if certificates of Additional Shares are not issued promptly in accordance with the provisions hereof and shall compensate, in addition to enforcement costs, any lost profits or expenses of Purchaser, Placement Agent, or their rightful assigns in the event that a court finds in favor of such any of such persons in any action by such persons to enforce their rights.

 

6.5.2       Effective Price.   For purposes of Section 6.5, in connection with any issuance of any Common Stock Equivalents, (i) the maximum number of Common Stock potentially issuable at any time upon conversion, exercise or exchange of such Common Stock Equivalents (the “Deemed Number”) shall be deemed to be outstanding or subscribed for and required to be issued upon issuance of such Common Stock Equivalents, (ii) the deemed issue price (“Effective Price”) applicable to such Common Stock Equivalents shall equal the minimum dollar value of consideration payable to the Company to purchase such Common Stock Equivalents and to convert, exercise or exchange them into Common Stock, divided by the Deemed Number, and (iii) no further adjustment shall be made to the Per Share Price upon the actual issuance of Common Stock upon conversion exercise or exchange of such Common Stock Equivalents if issued at or higher than the Effective Price. Common Stock issued or issuable by the Company for no consideration will be deemed to have been issued or to be issuable for $0.0001 per share of Common Stock.

 

6.5.3       Excepted Issuances.   For purposes of Section 6.5, “Excepted Issuance” shall mean (i) as a result of the issuance of any Shares or Warrants in this offering (including in subsequent Closings of this offering at the same price) or exercise of any of the Warrants issued pursuant to the Subscription Agreement or any of securities or warrants issued to the Placement Agent acting in connection with the sale of the Units (including the exercise or conversion of any of the foregoing), (ii) the Company’s issuance of Common Stock or Common Stock Equivalents upon the exercise or conversion of options, warrants or convertible notes or other securities, outstanding on the date hereof as specifically described in SEC Reports (but not if the amounts and exercise prices of the same are not both already described in the SEC Reports) or specifically disclosed herein,  (iii) as granted to officers, directors or employees and other service providers in connection with any existing board approved stock option, incentive or similar plan or any stock option, incentive or similar plan approved by the Board of Directors of the Company and the SG Director Designees, including the exercise of the same, and (iv) the issuance of securities as full or partial consideration in connection with a merger, asset acquisition or reorganization (other than a mere reincorporation transaction) approved by the Board of Directors of the Company and the SG Director Designees; provided, however, that the aggregate issuances from time to time pursuant to subsections (ii) and (iii) shall not exceed 6,000,000 shares of Common Stock.

 

6.6         Filing of Reports.  The Company will use best efforts to file on a timely basis, any and all reports or amendments thereto, as it is required to file in order to remain fully current with all of its reporting obligations under the Exchange Act so as to enable sales without resale limitations 6 months from the date of first Closing, pursuant to Rule 144, as amended (“Rule 144 Sales”). It is expressly agreed and acknowledged that the Company’s obligation pursuant to this Section 6.6 shall extend only until the period ending 18 months from the date of final Closing, after which time such obligation shall terminate automatically. The Company acknowledges and understands that its failure to make such filings on a timely basis could cause irreparable injury to Purchasers and Placement Agent, both with respect to the Shares and Warrant Shares owned by them and that the Company may be subject to liability therefore, including, without limitation, actual lost profits as the result of any failure to file the required reports on a timely basis.  Accordingly, if during the period commencing 6 months from the date of the first Closing and ending 18 months from the date of final Closing, the Company fails to maintain a current filing status with the SEC to allow Rule 144 Sales, a holder of a Unit shall be entitled to liquidated damages of 5% per calendar month capped at the dollar amount such holder invested; provided, however, that an affiliate of the Company shall not be entitled to such liquidated damages.  For avoidance of doubt, all references herein to filings to be made on a “timely basis” shall include and mean, any extension periods permissible under Rule 12b-25 of the Exchange Act, provided that the Company has complied with such rule, but not beyond said extension date.

 

7.1           Conditions Precedent to the Obligation of the Company to Close and to Sell the Shares.  The obligation hereunder of the Company to close and issue and sell the Shares to the Purchasers at a Closing is subject to the satisfaction or waiver, at or before such Closing of the conditions set forth below.  These conditions are for the Company’s and Placement Agent’s sole benefit and may be waived by the Company and Placement Agent at any time in their sole discretion.

7.1.1       Accuracy of the Purchasers’ Representations and Warranties.  The representations and warranties of each Purchaser (including, for avoidance of doubt, those relating to the Questionnaire) shall be true and correct in all material respects as of the date when made and as of such Closing as though made at that time, except for representations and warranties that are expressly made as of a particular date, which shall be true and correct in all material respects as of such date.

7.1.2       Performance by the Purchasers.  Each Purchaser shall have performed, satisfied, and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Purchasers at or prior to such Closing.

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

7.1.4       Delivery of Purchase Price.  The Purchase Price for the Shares shall be available in cleared funds in Escrow and authorized by the Company and Placement Agent, in their sole and absolute discretion, for distribution on such Closing in accordance with the terms hereof.

7.1.5       Delivery of Transaction Documents.  The Transaction Documents shall have been duly executed and delivered by the Purchasers to the Company.

7.2           Conditions Precedent to the Obligation of the Purchasers to Close and to Purchase the Shares.  The obligation hereunder of the Purchasers to purchase the Shares and consummate the transactions contemplated by this Agreement is subject to the satisfaction or waiver, at or before such Closing, of each of the conditions set forth below.  These conditions are for the Purchasers’ sole benefit and may be waived by the Purchasers and Placement Agent at any time in their sole discretion.

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

7.2.2       Performance by the Company.  The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to such Closing.

7.2.3       No Suspension, Etc.  Trading in the Common Stock of the Company shall not have been suspended by the SEC or the OTC Bulletin Board (except for any suspension of trading of limited duration agreed to by the Company, which suspension shall be terminated prior to the Closing)..

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

7.2.5       No Proceedings or Litigation.  No action, suit or proceeding before any arbitrator or any governmental authority shall have been commenced, and no investigation by any governmental authority shall have been initiated, against the Company or any subsidiary, or any of the officers, directors or affiliates of the Company or any subsidiary seeking to restrain, prevent or change the transactions contemplated by this Agreement, or seeking damages in connection with such transactions.

7.2.6       Shares and Warrants.  At the Closing, the Company shall have delivered to the Purchasers the Warrants and the Shares and shall have delivered to the Placement Agent the Placement Agent Warrants and Placement Agent Shares along with all appropriate board resolutions or other necessary documentation in order to issue the Shares in such denominations as each Purchaser may request.   The Company shall also deliver this Agreement, duly executed by the Company.

7.2.7       Secretary’s Certificate.  The Company shall deliver to the Placement Agent a secretary’s certificate, dated as of the first Closing Date, as to (i) the resolutions adopted by the Board of Directors approving the transactions contemplated hereby, (ii) the Company’s Articles of Incorporation, (iii) the Bylaws, each as in effect at such Closing, and (iv) the authority and incumbency of the officers of the Company executing the Transaction Documents and any other documents required to be executed or delivered in connection therewith.

I,__________________________________, am the ___________________________ of __________________________________________________________________ (the “Entity”).