EXHIBIT 10.2

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE
HAS BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED
FOR SALE, SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT,
OR APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN AVAILABLE EXEMPTION
THEREFROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS
EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE
SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.

XENONICS HOLDINGS, INC.

FORM OF CONVERTIBLE SENIOR SECURED NOTE

 

No. S2014-                                        , 2014   
U.S.$                        

1. Convertible Note.

This Convertible Senior Secured Note is one of a duly authorized series of
Convertible Senior Secured Notes (individually, the “Convertible Note” and
collectively, the “Convertible Notes”) of Xenonics Holdings, Inc., a Nevada
corporation (the “Company”). The Convertible Notes are similar in terms except
for dates, principal amounts and named payees and are being issued pursuant to a
Subscription Agreement of various dates (the “Subscription Agreement”) entered
into by and between the Company and the signatories thereto under which the
Company is offering to sell up to an aggregate principal amount of $1,000,000 of
Convertible Notes thereunder. By its acceptance of this Convertible Note, each
Holder agrees to be bound by the terms of the Subscription Agreement. The
Convertible Notes are secured obligations of the Company, to the extent provided
for in the Security Agreement dated as of the date of the Subscription
Agreements (the “Security Agreement”) entered into among the Company and the
holders of the Convertible Notes, and are pari passu in right of payment,
collection and priority of secured interest to the Prior Notes (as defined in
the Security Agreement) of the Company. This Convertible Note is a direct
obligation of the Company and ranks pari passu with all other Convertible Notes
now or hereafter issued in accordance with the Subscription Agreement under the
terms set forth herein.

Capitalized terms used and not otherwise defined herein, shall have the
respective meanings given to those terms in Section 10 hereof.

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2. Principal and Interest.

(a) The Company for value received, hereby promises to pay to
                                        , or its registered assigns (the
“Holder”) on             , 2017 (the “Maturity Date”), (i) the principal sum of
                    DOLLARS (U.S. $            .00) and (ii) all accrued and
unpaid interest thereon. Notwithstanding the foregoing, however, the Company’s
payment obligations hereunder may be accelerated in accordance with the
redemption rights, as provided in Section 6 below, or in the Event of Default
(as defined in Section 8). Interest is payable on each date specified therefor
in Section 2(c) below or on the date of redemption (if any) at the then-current
Interest Rate in cash. Payment of the principal of this Convertible Note shall
be made upon the surrender of this Convertible Note to the Company, at its chief
executive office (or such other office within the United States as shall be
designated by the Company to the Holder hereof) (the “Designated Office”), in
such coin or currency of the United States of America as at the time of payment
shall be legal tender for the payment of public and private debts. Payment of
principal (and premium, if any), interest and all other amounts payable with
respect to the Convertible Notes shall be made by U.S. dollar check mailed to
the address of the Holder entitled thereto as such address shall appear in the
Subscription Agreement. Payments of principal and interest shall be deemed made
on the date such payment is deposited or, if mailed, on the date deposited in
the mail with proper postage and addressed to the Holder and the address as
shown on the records of the Company, or such other address as provided to the
Company in writing by the Holder. In the event that the date for the payment of
any amount payable under this Convertible Note falls due on a Saturday, Sunday
or public holiday under the laws of the State of California, the time for
payment of such amount shall be extended to the next succeeding Business Day and
Interest shall continue to accrue on any principal amount so effected until the
payment thereof on such extended due date.

(b) Payment of Interest. This Convertible Note shall bear simple interest at the
rate of 13% per annum (the “Interest Rate”). Interest on the unconverted and
then outstanding principal amount of this Convertible Note shall be calculated
on the basis of a 360-day year and shall accrue daily commencing on the original
issue date of this Convertible Note until the earlier of (i) payment in full of
the principal sum hereon, together with all accrued and unpaid interest has been
made or (ii) this Convertible Note has been converted in full. Interest shall
cease to accrue with respect to any principal amount of Convertible Notes that
are converted or repaid. Interest is payable semi-annually on September 30th and
March 30th of each year during which this Convertible Note is outstanding, to
the holder of the Convertible Notes on such date and on each Conversion Date (as
defined herein) and on the Maturity Date (each such date, an “Interest Payment
Date”), in cash.

3. Conversion.

(a) General. The Holder shall have the right, in accordance with the terms
hereof, to convert the principal amount, and any accrued and unpaid interest
thereon, of this Convertible Note into shares of Common Stock (“Conversion
Shares”). Except as provided below, the Holder may exercise such conversion
rights at any time and from time to time prior to the Maturity Date and prior to
the redemption (if any) of this Convertible Note, upon no less than 15 days’
written notice by the Holder to the Company. The Holder may convert all or a
portion of the principal amount of outstanding Convertible Notes, and any
accrued and unpaid interest thereon, into Conversion Shares at a conversion rate
equal to $0.07 per share (the “Conversion Rate”). In calculating the number of
Conversion Shares to be issued to the Holder, such number shall be rounded down
to the nearest whole number. The Company shall not issue any fractional
Conversion Shares under any circumstances, but shall pay to the Holder any cash
amounts in respect of the value of any fractional Conversion Shares that may
have been issuable in the absence of the aforementioned prohibition.

 

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(b) Number of Conversion Shares. The number of Conversion Shares issuable upon
conversion of this Convertible Note shall be determined by dividing the
principal amount of this Convertible Note, or the part of the principal amount
to be converted, plus the accrued but unpaid interest, by the Conversion Rate in
effect on the Conversion Date (as defined in subparagraph (c)(2) below). To
convert this Convertible Note, at any time and from time to time prior to the
Maturity Date and prior to redemption (if any), upon no less than 15 days’
written notice by the Holder to the Company, the Holder shall send by facsimile
(or otherwise deliver) a copy of the fully executed conversion notice in the
form attached as Exhibit A hereto (the “Conversion Notice”) to the Company and
shall contain a completed schedule in the form of Schedule 1 to the Conversion
Notice (as amended on each Conversion Date, the “Conversion Schedule”)
reflecting the remaining principal amount of this Convertible Note and all
accrued and unpaid interest thereon subsequent to the conversion at issue. The
Holder shall surrender or cause to be surrendered this Convertible Note as soon
as practicable thereafter to the Company, and pay any transfer taxes or other
applicable taxes or duties, if required. The Company shall not be obligated to
issue shares of Common Stock upon a conversion unless either this Convertible
Note is delivered to the Company as provided above, or the Holder notifies the
Company that this Convertible Note has been lost, stolen or destroyed and
delivers the documentation to the Company required by Section 11(c)(3) hereof.

(c) Issuance of Conversion Shares. As promptly as practicable on or after the
Conversion Date, and in no event more than seven (7) business days after receipt
of the Conversion Notice, the Company shall cause to be issued and delivered to
the Holder or its nominee that number of shares of Common Stock issuable upon
conversion of the portion of this Convertible Note being converted. The Company
shall deliver to the Holder physical certificates representing the Common Stock
issuable upon conversion. The Holder is not entitled to any rights of a holder
of Common Stock until this Convertible Note has been converted into Common
Stock.

(1) This Convertible Note shall be deemed to have been converted immediately
prior to the close of business on the day that the Holders delivers notice to
the Company in accordance with the foregoing provisions (such day, the
“Conversion Date”), and at such time the rights of the Holder of this
Convertible Note as the Holder hereof shall cease, and the Person or Persons
entitled to receive the shares of Common Stock issuable upon conversion shall be
deemed to be a stockholder of record on the Conversion Date; provided, however,
that no surrender of this Convertible Note on any date that is not a Business
Day shall be effective to constitute the person or persons entitled to receive
the shares of Common Stock upon such conversion as the record holder or holders
of such shares of Common Stock on such date, but such surrender shall be
effective to constitute the person or persons entitled to receive such shares of
Common Stock as the record holder or holders thereof for all purposes at the
close of business on the next succeeding Business Day. If the Holder converts
more than one Convertible Note at the same time, the number of shares of Common
Stock issuable upon the conversion shall be based on the aggregate principal
amount of Convertible Notes converted.

(2) If the Holder elects to convert less than the entire aggregate principal
amount outstanding of this Convertible Note, the Company shall issue to the
Holder a new Convertible Note, duly executed by the Company, in form and
substance identical to this Convertible Note surrendered by the Holder, for the
balance of the aggregate principal amount of this Convertible Note that has not
been so converted.

 

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(d) Adjustment of Conversion Rate. The Conversion Rate will be subject to
adjustments from time to time as follows:

(1) In case the Company shall hereafter pay a dividend or make a distribution to
all holders of the outstanding Common Stock in shares of Common Stock, the
Conversion Rate in effect at the opening of business on the day following the
Conversion Record Date shall be reduced by multiplying such Conversion Rate by a
fraction: (A) the numerator of which shall be the number of shares of Common
Stock outstanding at the close of business on the Conversion Record Date fixed
for the determination of the holders entitled to such dividend or distribution;
and (B) the denominator of which shall be the sum of such number of shares
referred to in (A) above and the total number of shares constituting such
dividend or other distribution. Such reduction in the Conversion Rate shall
become effective immediately after the opening of business on the day following
the Conversion Record Date. If any dividend or distribution of the type
described in this Section 3(e)(1) is declared but not so paid or made, the
Conversion Rate shall again be adjusted to the Conversion Rate that otherwise
would then be in effect if such dividend or distribution had not been declared.

(2) In case the outstanding shares of Common Stock shall be subdivided into a
greater number of shares of Common Stock, the Conversion Rate in effect at the
opening of business on the day following the day upon which such subdivision
becomes effective shall be proportionately reduced, and conversely, in case the
outstanding shares of Common Stock shall be combined into a smaller number of
shares of Common Stock, the Conversion Rate in effect at the opening of business
on the day following the day upon which such combination becomes effective shall
be proportionately increased, such reduction or increase, as applicable, to
become effective immediately after the opening of business on the day following
the day upon which such subdivision or combination becomes effective.

(3) (A) In case the Company shall, by dividend or otherwise, distribute to all
or substantially all holders of its Common Stock shares of any class of Capital
Stock of the Company (other than any dividends or distributions to which
Section 3(e)(1) applies) or evidences of its indebtedness, cash or other assets,
including securities, but excluding dividends or distributions of stock,
securities or other property or assets (including cash) in connection with a
reclassification, change, merger, consolidation, statutory share exchange,
combination, sale or conveyance to which Section 3(f) applies (such Capital
Stock, evidences of its indebtedness, cash, other assets or securities being
distributed hereinafter in this Section 3(e)(3) called the “Distributed
Assets”), then, in each such case, the Conversion Rate shall be reduced so that
the same shall be equal to the price determined by multiplying the Conversion
Rate in effect immediately prior to the close of business on the Conversion
Record Date with respect to such distribution by a fraction: (i) the numerator
of which shall be the Fair Market Value of the Common Stock of the Company on
such date less the fair market value (as determined by the Board of Directors,
whose determination shall be conclusive and set forth in a Board resolution) on
such date of the portion of the Distributed Assets so distributed applicable to
one share of Common Stock (determined on the basis of the number of shares of
Common Stock outstanding on the Conversion Record Date); and (ii) the
denominator of which shall be such Fair Market Value of the Common Stock of the
Company on such date.

(B) Such reduction in the Conversion Rate shall become effective immediately
prior to the opening of business on the day following the Conversion Record
Date. However, in the event that the then fair market value (as so determined)
of the portion of the Distributed Assets so distributed applicable to one share
of Common Stock is equal to or greater than the Fair Market Value on the
Conversion Record Date, in lieu of the foregoing adjustment, adequate provision
shall be made so that the Holder of this Convertible Note shall have the right
to receive upon conversion hereof (or any portion hereof) the amount of
Distributed Assets the Holder would have received had the Holder converted this
Convertible Note (or portion hereof) immediately prior to such Conversion Record
Date. In the event that such dividend or distribution is not so paid or made,
the Conversion Rate shall again be adjusted to be the Conversion Rate that
otherwise would then be in effect if such dividend or distribution had not been
declared.

 

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(4) Adjustment of Conversion Rate upon Issuance of Common Stock, Options,
Convertible Securities, Etc.

(A) If prior to the Maturity Date (or any Conversion Date or Redemption Date, if
applicable), the Company (i) issues or sells any Common Stock, Convertible
Securities, warrants, or Options or (ii) directly or indirectly effectively
reduces the conversion, exercise or exchange price for any Convertible
Securities or Options which are currently outstanding, at or to an effective Per
Share Selling Price (as defined below) which is less than the then-current
Conversion Rate, then in each such case the Conversion Rate in effect
immediately prior to such issue or sale date, as applicable, shall be
automatically reduced effective concurrently with such issue or sale to an
amount determined by multiplying the Conversion Rate then in effect by a
fraction, (x) the numerator of which shall be the sum of (1) the number of
shares of Common Stock outstanding immediately prior to such issue or sale, plus
(2) the number of shares of Common Stock which the aggregate consideration
received by the Company for such additional shares would purchase at such
Conversion Rate and (y) the denominator of which shall be the number of shares
of Common Stock of the Company outstanding immediately after such issue or sale.
Notwithstanding the foregoing, however, no adjustment hereunder shall be made
with respect to an Exempt Issuance, as defined below.

(B) For the purposes of the foregoing adjustment, in the case of the issuance of
any Convertible Securities or Options, the maximum number of shares of Common
Stock issuable upon exercise, exchange or conversion of such Convertible
Securities or Options shall be deemed to be outstanding at the initial
conversion or exercise price applicable to such securities, provided that no
further adjustment shall be made upon the actual issuance of Common Stock upon
exercise, exchange or conversion of such Convertible Securities or Options, and
provided further that to the extent such Convertible Securities or Options
expire or terminate unconverted or unexercised, then at such time the Conversion
Rate shall be readjusted as if such portion of such Convertible Securities or
Options had not been issued. For purposes of this Section 3(e)(4), if an event
occurs that triggers more than one of the above adjustment provisions, then only
one adjustment shall be made and the calculation method which yields the
greatest downward adjustment in the Conversion Rate shall be used. If shares are
issued for a consideration other than cash, the Per Share Selling Price shall be
the fair value of such consideration as determined in good faith by independent
certified public accountants mutually acceptable to the Company and the Holder.
In the event the Company directly or indirectly effectively reduces the
conversion, exercise or exchange price for any Convertible Securities or Options
which are currently outstanding, then the Per Share Selling Price shall equal
such effectively reduced conversion, exercise or exchange price.

 

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(C) As used herein, “Exempt Issuance” means the issuance of (i) shares of Common
Stock or Options or Convertible Securities to employees, officers, consultants,
service providers or directors of the Company approved by a majority of the
non-employee members of the Board of Directors or a majority of the members of a
committee of non-employee directors established for such purpose an in effect as
of June 1, 2014, (ii) Common Stock, Convertible Securities, warrants, or Options
(1) upon the exercise or exchange of or conversion of any securities issued
hereunder and/or other securities exercisable or exchangeable for or convertible
into shares of Common Stock issued and outstanding as of the date of the
Subscription Agreement, or (2) pursuant to other rights or agreements binding on
the Company as of the date of the Subscription Agreement; provided that such
securities have not been amended since the date of the Subscription Agreement to
increase the number of such securities or to decrease the exercise price,
exchange price or conversion price of such securities; (iii) shares of Common
Stock issued by reason of a dividend, stock split, split-up or other
distribution on shares of Common Stock; (iv) shares of Common Stock, Convertible
Securities, warrants or Options in connection with transactions with vendors,
suppliers, lenders or other commercial partners, the terms of which are approved
by the Board of Directors, and in each case, the primary purpose of which is not
to raise equity capital; (v) shares of Common Stock, Convertible Securities,
warrants or Options in connection with transactions pursuant to which the
Company transfers or assigns liabilities, claims or contract rights; (vi) shares
of Common Stock, Convertible Securities, warrants or Options issued pursuant to
mergers, acquisitions, asset sales or strategic alliances approved by a majority
of the disinterested directors of the Company, provided that any such issuance
shall provide to the Company additional benefits in addition to the investment
of funds, but shall not include a transaction in which the Company is issuing
securities primarily for the purpose of raising equity capital; and (vii) shares
of Common Stock, issued pursuant to the Subscription Agreement.

(D) For purposes hereof: (i) “Convertible Securities” means any stock or
securities (other than Options) directly or indirectly convertible into or
exercisable or exchangeable for Common Stock; (ii) “Options” means any rights,
warrants or options to subscribe for or purchase Common Stock or Convertible
Securities; and (iii) “Per Share Selling Price” shall include the amount
actually paid by third parties for each share of Common Stock in a sale or
issuance by the Company. A sale of shares of Common Stock shall include the sale
or issuance of Convertible Securities or Options, and in such circumstances the
Per Share Selling Price of the Common Stock covered thereby shall also include
the exercise, exchange or conversion price thereof (in addition to the
consideration received by the Company upon such sale or issuance less the fee
amount as provided above).

(5) No adjustment in the Conversion Rate shall be required unless such
adjustment would require an increase or decrease of at least 1% in such price;
provided, however, that any adjustments which by reason of this Section 3(e)(5)
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations under this Section 3 shall be made
by the Company in good faith and shall be made to the nearest cent or to the
nearest one hundredth of a share, as applicable. No adjustment need be made for
a change in the par value or no par value of the Common Stock.

(6) Whenever the Conversion Rate is adjusted as provided in Section 3(e), the
Company shall compute the adjusted Conversion Rate in accordance with
Section 3(e) and shall prepare a certificate signed by an officer of the Company
setting forth the adjusted Conversion Rate and showing in reasonable detail the
facts upon which such adjustment is based, and shall promptly deliver such
certificate to the Holder of this Convertible Note. For purposes of this
Section 3(e), the number of shares of Common Stock at any time outstanding shall
not include shares held in the treasury of the Company but shall include shares
issuable in respect of scrip certificates issued in lieu of fractions of shares
of Common Stock. The Company will not pay any dividend or make any distribution
on shares of Common Stock held in the treasury of the Company.

 

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(7) For purposes hereof:

(A) “Conversion Record Date” shall mean, with respect to any dividend,
distribution or other transaction or event in which the holders of Common Stock
have the right to receive any cash, securities or other property or in which the
Common Stock (or other applicable security) is exchanged for or converted into
any combination of cash, securities or other property, the date fixed for
determination of stockholders entitled to receive such cash, securities or other
property (whether such date is fixed by the Board of Directors or by statute,
contract or otherwise).

(B) “Fair Market Value” shall mean the average of the daily Trading Prices per
share of Common Stock (or such other security as specified herein) for the 10
consecutive Trading Days immediately prior to the date in question.

Notwithstanding the foregoing, whenever successive adjustments to the Conversion
Rate are called for pursuant to this Section 3(e), such adjustments shall be
made to the Fair Market Value as may be necessary or appropriate to effectuate
the intent of this Section 3(e) and to avoid unjust or inequitable results as
determined in good faith by the Board of Directors.

(f) Adjustments for Reclassifications, Mergers, Sales of Assets and Other
Business Combinations or Transactions. If any of following events occur: (1) any
reclassification or change of the outstanding shares of Common Stock (other than
a change in par value, or from par value to no par value, or from no par value
to par value, or as a result of a subdivision or combination), as a result of
which holders of Common Stock shall be entitled to receive Capital Stock,
securities or other property or assets (including cash) with respect to or in
exchange for such Common Stock; (2) any merger, consolidation, statutory share
exchange or combination of the Company with another Person as a result of which
holders of Common Stock shall be entitled to receive stock, securities or other
property or assets (including cash) with respect to or in exchange for such
Common Stock; or (3) any sale or conveyance of the properties and assets of the
Company as, or substantially as, an entirety to any other Person as a result of
which holders of Common Stock shall be entitled to receive stock, securities or
other property or assets (including cash) with respect to or in exchange for
such Common Stock, then the Company or the successor or purchasing corporation,
as applicable, shall provide that this Convertible Note shall be convertible
into the kind and amount of shares of capital stock and other securities or
property or assets (including cash) that such Holder would have been entitled to
receive upon such reclassification, change, merger, consolidation, statutory
share exchange, combination, sale or conveyance had this Convertible Note been
converted into Common Stock immediately prior to such reclassification, change,
merger, consolidation, statutory share exchange, combination, sale or conveyance
assuming the Holder, as a holder of Common Stock, did not exercise its rights of
election, if any, as to the kind or amount of securities, cash or other property
receivable upon such reclassification, change, merger, consolidation, statutory
share exchange, combination, sale or conveyance and that the rights of the
Holder to convert this Convertible Note for adjustments thereafter shall be as
nearly equivalent as may be practicable to the adjustments provided for in this
Section 3. The above provisions of this Section shall apply to successive or
series of related reclassifications, changes, mergers, consolidations, statutory
share exchanges, combinations, sales and conveyances.

(g) Notices of Proposed Adjustments. In case at any time after the date hereof:

(1) the Company shall declare a dividend (or any other distribution) on its
Common Stock that would result in an adjustment to the Conversion Rate pursuant
to this Section 3;

(2) there shall occur any reclassification of the Common Stock of the Company
(other than a subdivision or combination of its outstanding Common Stock, a
change in par value, a change from par value to no par value or a change from no
par value to par value), or any merger, consolidation, statutory share exchange
or combination to which the Company is a party and for which approval of any
stockholders of the Company is required, or the sale, transfer or conveyance of
all or substantially all of the assets of the Company; or

 

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(3) there shall occur the voluntary or involuntary dissolution, liquidation or
winding up of the Company;

the Company shall cause to be provided to the Holder of this Convertible Note,
at least 10 days prior to the applicable record or effective date hereinafter
specified, a notice stating: (A) the date on which a record is to be taken for
the purpose of such dividend or distribution, or, if a record is not to be
taken, the date as of which the holders of shares of Common Stock of record to
be entitled to such dividend or distribution are to be determined; or (B) the
date on which such reclassification, merger, consolidation, statutory share
exchange, combination, sale, transfer, conveyance, dissolution, liquidation or
winding up is expected to become effective, and the date as of which it is
expected that holders of shares of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities, cash or other property
deliverable upon such reclassification, merger, consolidation, statutory share
exchange, sale, transfer, dissolution, liquidation or winding up. Neither the
failure to give such notice nor any defect therein shall affect the legality or
validity of the proceedings or actions described in Sections 3(g)(1) through
3(g)(3).

(h) Availability of Conversion Shares. The Company shall at all times reserve
and keep available, free from preemptive rights, out of its authorized but
unissued Common Stock, for the purpose of effecting the conversion of this
Convertible Note, the full number of shares of Common Stock then issuable upon
the conversion of this Convertible Note. The Company covenants that all shares
of Common Stock that may be issued upon conversion of this Convertible Note will
upon issue be fully paid and nonassessable.

(i) Taxes. Except as provided in the next sentence, the Company will pay any and
all taxes (other than taxes on income) and duties that may be payable in respect
of the issue or delivery of Common Stock upon conversion of this Convertible
Note. The Company shall not, however, be required to pay any tax or duty that
may be payable in respect of any transfer involved in the issue and delivery of
Common Stock in a name other than that of the Holder of this Convertible Note,
and no such issue or delivery shall be made unless and until the Person
requesting such issue has paid to the Company the amount of any such tax or
duty, or has established to the satisfaction of the Company that such tax or
duty has been paid.

(j) Registration Rights;Sales under Rule 144. The Company shall not be required
to undertake or cause the registration of the shares of Common Stock issuable
upon the conversion of this Convertible Note. For so long as principal or
interest under this Convertible Note remain due and owing, the Company shall
(i) make all periodic and other filings required to be made by it from time to
time under the Securities and Exchange Act of 1934 and the rules and regulations
promulgated thereunder in order to preserve its status as a “reporting issuer”
with the meaning of SEC Rule 144 and (ii) provide at its cost and expense, in a
timely manner, for and on behalf of holders of Conversion Shares any and all
opinions of counsel as may be required of the Company’s stock transfer agent to
allow for the resale of the Conversion Shares pursuant to SEC Rule 144.

 

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4. Prepayment/Redemption.

(a) At any time and from time to time on a date commencing on the first year
anniversary date and ending on a date prior to the Maturity Date, upon no less
than 30 days’ written notice by the Company to the Holder (the “Redemption
Notice”), the Company may elect, in its sole option, to redeem all or a portion
of the then outstanding Convertible Notes by payment of the Redemption Amount
(defined below) (the “Redemption Amount”). The last day of such notice day
period shall be the “Redemption Date” unless such date shall not be a Business
Day, in which event, the Redemption Date shall be first Business Day following
the expiration of such notice period. The Redemption Amount is due in full on
the Redemption Date. Within 15 days from the date of the Redemption Notice, the
Holder may exercise the conversion feature of the Convertible Notes that are the
subject of the Redemption Notice, by providing written notice to the Company of
such Holder’s intention to exercise such conversion feature. The Conversion
Shares underlying such Convertible Notes shall be issued by the Company on or
prior to the 10th day following the date of the Holder’s notice of intention to
exercise such conversion feature. The Company covenants and agrees that it will
honor all Notices of Conversion tendered from the time of delivery of the
Redemption Notice through the date all amounts owing thereon are due and paid in
full.

(b) As used herein, “Redemption Amount” means either (i) for any redemption for
which the Redemption Date shall be on or before the second year anniversary of
the original issue date of this Convertible Note, the Redemption Amount shall be
equal to 110% of the principal amount thereof, plus the unpaid interest which
has accrued on the principal of the outstanding Convertible Notes up to and
including the day immediately preceding the Redemption Date or (ii) for any
redemption for which the Redemption Date shall be after the second year
anniversary of the original issue date of this Convertible Note, the Redemption
Amount shall be equal to 100% of the principal amount thereof, plus the unpaid
interest which has accrued on the principal of the outstanding Convertible Notes
up to and including the day immediately preceding the Redemption Date.

5. Seniority and Security.

(a) Seniority of Note. The Convertible Notes shall rank pari passu with all
other Prior Notes and senior to all unsecured Indebtedness of the Company. This
Convertible Note is issued subject to the provisions of this Section 5 and each
person taking or holding this Convertible Note, accepts and agrees to be bound
by these provisions. Accordingly, the indebtedness evidenced by this Convertible
Note is hereby expressly in right of payment to the prior payment of all other
Indebtedness. The Holder will not demand or receive from the Company (and
Company will not pay to the Holder) all or any part of the Convertible Note, by
way of payment, prepayment, setoff, lawsuit or otherwise, nor will the Holder
exercise any remedy with respect to any of the collateral secured by the Senior
Indebtedness, nor will the Holder commence, or cause to commence, prosecute or
participate in any administrative, legal or equitable action against the
Company, except in accordance with the Security Agreement. Notwithstanding the
foregoing, the Holder shall be entitled to receive cancellation of indebtedness
hereunder in consideration of the conversion of such indebtedness into
securities of the Company pursuant to the terms of this Convertible Note.
Nothing in this section shall prohibit the Holder from converting all or any
part of the Convertible Note into equity securities of the Company. The Company
and the Holder further agree that neither the Company nor the Holder will modify
this Section 5 without the prior consent of holders of a Majority in Interest of
the Convertible Notes.

 

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(b) Security Interest. As security for the full, prompt and complete payment and
performance of the Company’s obligations hereunder, the Company hereby grants to
the Holder of this Convertible Note, equally and ratably with the security
interests granted to the other Holders of other Convertible Notes issued under
the Subscription Agreements, a security interest in and to the Collateral (as
collectively defined in that certain Security Agreement) pursuant to the
Security Agreement. Provided that proper filing is made in accordance with the
Uniform Commercial Code and as otherwise expressly set forth herein, the Company
hereby represents and warrants that Holder shall, and during such time as this
Convertible Note remains outstanding, have a valid, perfected first priority
security interest in the Collateral.

(c) Intercreditor Agreement. Each Holder of this Convertible Note and the rights
granted hereunder and under the Security Agreement, shall be subject to the
terms and conditions of the Intercreditor Agreement of even date herewith
between the Company, the holders of Prior Debt and the Holder. Pursuant to the
terms of the Intercreditor Agreement, among other things, the Holder and the
Company agree:

(i) So long as the Company remains current in its interest payments to the New
Secured Parties under the Notes, the Company may pay interest to the Existing
Secured Parties (as defined in the Intercreditor Agreement) under the Existing
Secured Notes (as defined in the Intercreditor Agreement);

(ii) So long as the Company generates (a) at least $1,000,000 of revenue during
any fiscal quarter of the Company, and (b) positive EBITDA (as defined in the
Intercreditor Agreement) during such quarter, the Company may, in its
discretion, pay down the principal balance under the Existing Secured Notes
within 45 days after the end of any such quarter in an amount not to exceed 25%
of such positive EBITDA on a cumulative basis;

(iii) provided, however, that no principal payments may be made unless the
Company has free cash of at least $200,000.

(d) Consent to Appointment of Agent. Each Holder of this Convertible Note
consents to the appointment of Sandlapper Securities LP as the agent in the
Security Agreement and Intercreditor Agreement, and any successor to the initial
agent, for the purposes of exercising the rights and remedies of the Holders as
set forth in the Security Agreement and the Intercreditor Agreement.

6. Events of Default.

(a) “Event of Default”, wherever used herein, means any one of the following
events (whatever the reason for such Event of Default and whether it shall be
voluntary or involuntary or be 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):

(1) the Company defaults in the payment of the principal or interest (a
“Defaulted Payment”) on this Convertible Note when the same becomes due and
payable, and such default continues for a period of 30 days after written notice
of such failure, requiring the Company to remedy the same, shall have been given
to the Company by the holders of at least a Majority in Interest of the
outstanding Convertible Notes;

(2) the Company fails to perform or observe any other term, covenant or
agreement contained in this Convertible Note or the Security Agreement or
Intercreditor Agreement, and the default continues for a period of 30 days after
written notice of such failure, requiring the Company to remedy the same, shall
have been given to the Company by the holders of at least a Majority in Interest
of the outstanding Convertible Notes;

 

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(3) a default by the Company in the conversion of any of the Convertible Notes,
which default continues for a period of 15 days after written notice of such
failure, requiring the Company to remedy the same, shall have been given to the
Company by the holders of at least a Majority in Interest of the outstanding
Convertible Notes;

(4) any proceeding under any applicable U.S. federal or state bankruptcy,
insolvency, reorganization or other similar law relating to the Company or to
all or any material part of its properties is instituted against the Company
without its consent and continues undischarged or unstayed for ninety
(90) calendar days, or any order for relief is entered in any such proceeding or
there is an entry by a court having competent jurisdiction of (A) a decree or
order for relief in respect of the Company in an involuntary case or proceeding
under any applicable U.S. federal or state bankruptcy, insolvency,
reorganization or other similar law or (B) a decree or order adjudging the
Company bankrupt or insolvent, or approving as properly filed a petition seeking
reorganization, arrangement, adjustment or composition of or in respect of the
Company, under any applicable U.S. federal or state law, or appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company or of any substantial part of its property, or
ordering the winding up or liquidation of its affairs;

(5) the commencement by the Company of a voluntary case or proceeding under any
applicable U.S. federal or state bankruptcy, insolvency, reorganization or other
similar law; or the Company commences any other proceeding under any adjustment
of debt, relief of debtors, dissolution, or liquidation or similar law relating
to the Company or any subsidiary thereof; or the consent by the Company to the
entry of a decree or order for relief in respect of the Company in an
involuntary case or proceeding under any applicable U.S. federal or state
bankruptcy, insolvency, reorganization or other similar law or to the
commencement of any bankruptcy or insolvency case or proceeding against the
Company, or the consent by the Company to the appointment of, or the taking
possession by, a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company, of any substantial part
of its property which continues undischarged or unstayed for a period of 60
days; or the making by the Company of an assignment for the benefit of
creditors; or

(6) A default or event of default exists under the Prior Notes or any other
obligation of the Company for the payment of borrowed money in excess of $50,000
individually or $150,000 in the aggregate for all such obligations, and is not
paid when due or within any applicable grace period, or such obligation becomes
or is declared to be due and payable before the expressed maturity of the
obligation, or there shall have occurred an event which, with the giving of
notice or lapse of time, or both, would cause any such obligation to become, or
allow any such obligation to be declared to be, due and payable;

(7) One or more final judgments, orders or decrees shall be rendered against the
Company by a court of competent jurisdiction that either: (i) exceeds by more
than $50,000 any insurance coverage applicable thereto (to the extent the
relevant insurer has been notified of such claim and has not denied coverage
therefor); or (ii) would be reasonably likely to have a Material Adverse Effect
on the Company, and either (x) enforcement proceedings shall have been commenced
upon any such judgment, order or decree or (y) such judgment, order or decree
shall not have been vacated or discharged for a period of thirty
(30) consecutive days and there shall not be in effect (by reason of a pending
appeal or otherwise) any stay of enforcement thereof;

 

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(8) The direct or indirect sale, lease, exclusive license, assignment, transfer,
conveyance or other disposition by the Company of: (i) all or substantially all
of its assets, including without limitation, a sale, transfer or assignment of
the assets of any direct or indirect subsidiary, in one or a series of related
transactions; or (ii) any capital stock or limited liability interests of any
subsidiary; or (iii) any profits, losses, dividends or distributions of any kind
of the Company or any subsidiary.

(b) Acceleration of Payment. If an Event of Default occurs and is continuing,
the holders of at least a Majority in Interest of the Convertible Notes, by
written notice to the Company, may declare due and payable the principal of this
Convertible Note and all other outstanding Convertible Notes, plus any accrued
and unpaid interest to the date of payment. Upon a declaration of acceleration,
such principal and premium, if any, and accrued and unpaid interest, to the date
of payment shall be immediately due and payable. Notwithstanding the foregoing,
if an Event of Default specified in Section 7(a)(4) or 7(a)(5) occurs with
respect to the Company, the principal and accrued and unpaid interest, on this
Convertible Note shall become and be immediately due and payable, without any
declaration or other act on the part of the Holder.

The holders of not less than a Majority in Interest of the principal of the
outstanding Convertible Notes may, on behalf of the holders of all of the
Convertible Notes, waive, rescind and annul an acceleration and its consequences
(including waiver of any defaults) if the rescission would not conflict with any
judgment or decree of a court of competent jurisdiction and is not precluded by
the restrictions set forth in Section 9(d).

(c) Collections. If an Event of Default with respect to this Convertible Note
occurs and such Event of Default has not been waived or annulled, the Holder may
pursue any available remedy by proceeding at law or in equity to collect the
Defaulted Payment or interest due and payable on this Convertible Note or to
enforce the performance of any provision of this Convertible Note.

(d) Right to Receive Payment Upon Default. Notwithstanding any other provision
in this Convertible Note, unless the Holder elects to convert this Convertible
Note following any Event of Default, the Holder of this Convertible Note shall
have the right, which is absolute and unconditional, subject to the Senior
Indebtedness and the Intercreditor Agreement, receive payment of the principal
and interest in respect of the Convertible Notes held by the Holder, on or after
the final Maturity Date, or to bring suit for the enforcement of any such
payment on or after such date or the right to convert, and such rights shall not
be impaired or affected adversely without the consent of the Holder.

(e) No Exclusive Right or Remedy. Except as otherwise provided herein, no right
or remedy conferred in this Convertible Note upon the Holder is intended to be
exclusive of any other right or remedy, and every right and remedy shall, to the
extent permitted by law, be cumulative and in addition to every other right and
remedy given hereunder or hereafter existing at law or in equity or
otherwise. The assertion or employment of any right or remedy hereunder, or
otherwise, shall not prevent the concurrent assertion or employment of any other
appropriate right or remedy.

(f) No Waiver of Right or Remedy. No delay or omission of the Holder of this
Convertible Note to exercise any right or remedy accruing upon any Event of
Default shall impair any such right or remedy or constitute a waiver of any such
Event of Default or any acquiescence therein. Every right and remedy given by
this Section 6 or by law to the Holder may be exercised from time to time, and
as often as may be deemed expedient, by the Holder.

 

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7. Covenants.

For so long as all or any portion of principal or interest on this Convertible
Note is due and payable, the Company shall not take any of the following actions
without the prior written consent of Majority in Interest, which consent may be
withheld for any reason:

(a) the acquisition of the Company by another entity by means of any transaction
or series of related transactions (including any acquisition of common stock or
common stock equivalents, limited liability membership interests, partnership
interests, reorganization, merger or consolidation), after the consummation of
which the holders of the voting securities of the Company outstanding
immediately prior to such transaction or series of related transactions own,
directly or indirectly, less than a majority of the total voting power
represented by the outstanding voting securities of the Company or such other
surviving or resulting entity (or if the Company or such other surviving or
resulting entity is a wholly-owned subsidiary immediately following such
acquisition, its parent) immediately after such transaction or series of related
transactions;

(b) the direct or indirect sale, lease, exclusive license, assignment, transfer,
conveyance or other disposition by the Company of: (i) all or substantially all
of its assets, except by the Company to a direct or indirect wholly-owned
subsidiary of the Company; or (ii) any capital stock or limited liability
interests of any direct or indirect subsidiary; or (iii) any profits, losses,
dividends or distributions of any kind of the Company or any direct or indirect
subsidiary.

(c) any acquisition or disposition (including licensing) of any business or
assets, except in the ordinary course of business or the sale of inventory on an
arms-length basis (which, for purposes of clarity, includes entering into normal
and customary agreements and licenses with manufacturers, distributors, sales
agents and the like);

(d) the liquidation, dissolution or winding-up of the business and affairs of
the Company or any direct or indirect subsidiary of the Company;

(e) any capital expenditure exceeding the sum of $50,000 individually or
$150,000 in the aggregate which is not for the benefit of the Company;

(f) enter into any agreement or arrangement to incur any indebtedness other than
the Convertible Notes or unsecured debt;

(g) enter into any agreement or arrangement that would result in the creation of
any lien or encumbrance on any of the assets of the Company or any direct or
indirect subsidiary;

(h) redeem, purchase for cancellation or otherwise retire or pay off any of its
outstanding securities other than the Convertible Notes;

(i) declare or pay any dividends or make any distribution, whether in cash, in
shares of stock, limited liability interests, or in specie, or otherwise on any
of its outstanding securities;

 

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(j) alter, modify or amend the terms of employment or compensation to the
Company’s Chairman of the Board of Directors or Chief Executive Officer, except
if such alteration, amendment or modification is to reduce or terminate the
terms of such employment;

(k) enter into any transaction, or make any amendment thereto, with any director
or officer of the Company, or any immediate family member or Affiliate of any
director or officer of the Company, including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring payments
to or from, any such officer or director (or any immediate family member or
Affiliate thereof); and

(p) use all or any portion of the proceeds of the issuance of the Convertible
Notes to pay any fees to Affiliates of the Company, except as described in the
Subscription Agreement.

8. Restrictions on Transfer.

(a) This Convertible Note and the Common Stock or other securities issuable upon
conversion of this Convertible Note have not been registered under the
Securities Act, or the securities laws of any state or other
jurisdiction. Neither this Convertible Note nor the Common Stock or other
securities issuable upon conversion of this Convertible Note nor any interest or
participation herein may be reoffered, sold, assigned, transferred, pledged,
encumbered or otherwise disposed of (a “Transfer”) in the absence of such
registration or unless (i) such transaction is exempt from, or not subject to,
registration under the Securities Act or the securities laws of any state or
other jurisdiction and (ii) is made in compliance with applicable federal and
state statutory resale restrictions, if any. The Holder by its acceptance of
this Convertible Note or the Common Stock issuable upon conversion of this
Convertible Note agrees that it shall not offer, sell, assign, transfer, pledge,
encumber or otherwise dispose of this Convertible Note or any portion thereof or
interest therein other than in a minimum denomination of $10,000 principal
amount (or any integral multiple of $1,000 in excess thereof) and then (other
than with respect to a Transfer pursuant to a registration statement that is
effective at the time of such Transfer) only (a) to the Company, (b) to an
Affiliate of the Holder, (c) to a person it reasonably believes to be an
“accredited investor” within the meaning of Rule 501(a) under the Securities
Act, or (d) pursuant to a transaction in compliance with Rule 144 or Rule 144A
under the Securities Act, and in the case of (b), (c) and (d) above in which the
transferor (y) agrees to be bound by the restrictions and limitations set forth
herein and in the Subscription Agreement and (z) furnishes the Company with such
certifications, legal opinions or other information as the Company may
reasonably request to confirm that such transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act as applicable.

(b) The Holder acknowledges that the shares of Common Stock and other securities
issuable upon conversion of this Convertible Note shall bear the following
legend:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR APPLICABLE
STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT, OR (B) AN OPINION OF
COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER
SAID ACT (II) UNLESS SOLD OR TRANSFERRED TO A “QUALIFIED INSTITUTIONAL BUYER”
WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT OR (III) UNLESS SOLD
PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.

 

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(c) The Holder represents that it is an “accredited investor” within the meaning
of Rule 501 of the Securities Act. The Holder has been advised that this
Convertible Note has not been registered under the Securities Act, or any state
securities laws and, therefore, cannot be resold unless it is registered under
the Securities Act and applicable state securities laws or unless an exemption
from such registration requirements is available. The Holder is aware that the
Company is under no obligation to effect any such registration or to file for or
comply with any exemption from registration. The Holder has not been formed
solely for the purpose of making this investment and is acquiring the
Convertible Note for its own account for investment, and not with a view to, or
for resale in connection with, the distribution thereof.

(d) The Company shall cooperate with the Holder and take all actions reasonably
necessary to effectuate any Transfer of this Convertible Note by the Holder that
is permitted under Section 8(a) above.

9. Definitions.

Unless otherwise defined in this Convertible Note, the following capitalized
terms shall have the following respective meanings when used herein. Other
capitalized terms used in this Convertible Note that are not defined herein
shall have the respective meanings ascribed to such terms as set forth in the
Subscription Agreement:

“Affiliate” of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. 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.

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

“Business Day” means each Monday, Tuesday, Wednesday, Thursday and Friday that
is not a day on which the banking institutions in the City of New York, New York
are authorized or obligated by law or executive order to close or be closed.

“Capital Stock” of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interest
in (however designated) equity of such Person, but excluding any debt securities
convertible into such equity.

 

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“Common Stock” means any stock of any class of the Company which has no
preference in respect of dividends or of amounts payable in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the Company
and which is not subject to redemption by the Company. However, subject to the
provisions of Section 3(e) hereof, shares assumable on conversion of the
Convertible Notes shall include only shares of the class designated as Common
Stock, par value $0.001 per share, of the Company at the date of execution of
this Convertible Note or shares of any class or classes resulting from any
reclassification or reclassifications thereof and which have no preference in
respect of dividends or of amounts payable in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company and which are
not subject to redemption by the Company, provided that if at any time there
shall be more than one such resulting class, the shares of each such class then
so assumable shall be substantially in the proportion which the total number of
shares of such class resulting from all such reclassifications bears to the
total number of shares of all such classes resulting from all such
reclassifications.

“Convertible Note Register” means the register or other ledger maintained by the
Company that records the record owners of the Convertible Notes.

“Defaulted Payment” has the meaning set forth in Section 8 hereof.

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

“Holder” means the person in whose name this Convertible Note is registered on
the Convertible Note Register.

“Indebtedness” means, without duplication, with respect to any Person (the
“subject Person”), all liabilities, obligations and indebtedness of the subject
Person to any other Person, of any kind or nature, now or hereafter owing,
arising, due or payable, howsoever evidenced, created, incurred, acquired or
owing, whether primary, secondary, direct, contingent, fixed or otherwise,
consisting of indebtedness for borrowed money or the deferred purchase price of
property, excluding purchases of property, product, merchandise and services in
the ordinary course of business, but including (a) all obligations and
liabilities of any Person secured by any lien on the subject Person’s property,
even though the subject Person shall not have assumed or become liable for the
payment thereof; (except unperfected liens incurred in the ordinary course of
business and not in connection with the borrowing of money); provided, however,
that all such obligations and liabilities which are limited in recourse to such
property shall be included in Indebtedness only to the extent of the book value
of such property as would be shown on a balance sheet of the subject Person
prepared in accordance with GAAP; (b) all capital lease obligations and other
obligations or liabilities created or arising under any conditional sale or
other title retention agreement with respect to property used or acquired by the
subject Person, even if the rights and remedies of the lessor, seller or lender
thereunder are limited to repossession of such property; provided, however, that
all such obligations and liabilities which are limited in recourse to such
property shall be included in Indebtedness only to the extent of the book value
of such property as would be shown on a balance sheet of the subject Person
prepared in accordance with GAAP; (c) all obligations and liabilities under
guarantees; (d) the present value of lease payments due under synthetic leases;
(e) all obligations and liabilities under any asset securitization or
sale/leaseback transaction; and (f) obligations of such Person in respect of
letters of credit or similar instruments issued or accepted by banks and other
financial institutions for the account of such Person; provided, further,
however, that in no event shall the term Indebtedness include the capital stock
surplus, retained earnings, minority interests in the common stock of
Subsidiaries, lease obligations (other than pursuant to (b) or (d) above),
reserves for deferred income taxes and investment credits, other deferred
credits or reserves.

“Majority in Interest” has the meaning set forth in Section 11(d).

“Maturity Date” has the meaning set forth in Section 2 hereof.

 

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“Person” shall mean and include an individual, a partnership, a corporation
(including a business trust), a joint stock company, a limited liability
company, an unincorporated association, a joint venture or other entity or a
governmental authority.

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

“Subscription Agreement” means the Subscription Agreement among the Company and
the initial holders of the Convertible Notes.

“Subsidiary” means, in respect of any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers, general partners or trustees
thereof is at the time owned or controlled, directly or indirectly, by (i) such
Person; (ii) such Person and one or more Subsidiaries of such Person; or
(iii) one or more Subsidiaries of such Person.

“Trading Day” means: (1) if the applicable security is quoted on the Nasdaq
Stock Market, a day on which the Nasdaq Stock Market is open for business;
(2) if that security is listed on the New York Stock Exchange, a day on which
trades may be made on the New York State Exchange; (3) if that security is not
so listed on the New York Stock Exchange and not quoted on the Nasdaq Stock
Market, a day on which the principal U.S. securities exchange on which the
securities are listed or the OTC Bulletin Board, if the Company’s securities are
quoted thereon, is open for business; or (4) if the applicable security is not
so listed, admitted for trading or quoted, any day other than a Saturday or a
Sunday or a day on which banking institutions in the State of California are
authorized or obligated by law or executive order to close.

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

“Trading Price” of a security on any date of determination means: (1) the
closing sale price as reported by the Trading Market on which the Common Stock
is listed or quoted for trading on the date in question; or (2) if such security
is not listed or quoted for trading on a Trading Market, the average of the last
bid and ask prices for such security on such date from a dealer engaged in the
trading of convertible securities selected by the Company for this purpose, or
as determined by the Board of Directors in good faith.

10. Miscellaneous.

(a) Payment; No Recourse. No provision of this Convertible Note shall alter or
impair the obligation of the Company, which is absolute and unconditional, to
pay the principal of (and premium, if any) and interest, if any, on this
Convertible Note at the times, places and rate, and in the coin or currency,
herein prescribed, and in accordance with the terms and conditions set forth
herein; or to convert this Convertible Note as herein provided. This Convertible
Note is issued upon the express condition, to which each successive holder
expressly assents and by receiving the same agrees, that no recourse under or
upon any obligation, covenant or agreement of the Convertible Note, or for the
payment of the Principal of, or premium, if any, or the interest on, the
Convertible Note, or for any claim based on the Convertible Note, or otherwise
in respect hereof, shall be had against any incorporator or any past, present or
future stockholder, officer or director, as such, of the Company or of any
successor corporation, whether by virtue of the constitution, statute or rule of
law or by any assessment or penalty or otherwise howsoever, all such individual
liability being hereby expressly waived and released as a condition of and as a
part of the consideration for the execution and issue of the Convertible Note.

 

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(b) Notice. The Company will give prompt written notice to the Holder of this
Convertible Note of any change in the location of the Designated Office. Any
notice to the Company or to the holder of this Convertible Note shall be given
in the manner set forth in the Subscription Agreement; provided that the Holder
of this Convertible Note, if not a party to such Subscription Agreement, may
specify alternative notice instructions to the Company.

(c) Transfer. (1) The transfer of this Convertible Note is registrable on the
Convertible Note Register upon surrender of this Convertible Note for
registration of transfer at the Designated Office, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company duly executed by, the Holder hereof or such Holder’s attorney duly
authorized in writing, and thereupon one or more new Convertible Notes, of
authorized denominations and for the same aggregate principal amount, will be
issued to the designated transferee or transferees. Such Convertible Notes are
issuable only in registered form without coupons in denominations of $1,000 and
any integral multiple thereof. No service charge shall be made for any such
registration of transfer, but the Company may require payment of a sum
sufficient to recover any tax or other governmental charge payable in connection
therewith. Prior to due presentation of this Convertible Note for registration
of transfer, the Company and any agent of the Company may treat the Person in
whose name this Convertible Note is registered as the owner thereof for all
purposes, whether or not this Convertible Note be overdue, and neither the
Company nor any such agent shall be affected by notice to the contrary.

(2) Upon presentation of this Convertible Note for registration of transfer at
the Designated Office accompanied by (i) certification by the transferor that
such transfer is in compliance with the terms hereof and (ii) by a written
instrument of transfer in a form approved by the Company executed by the Holder,
in person or by the Holder’s attorney thereunto duly authorized in writing, and
including the name, address and telephone and fax numbers of the transferee and
name of the contact person of the transferee, such Convertible Note shall be
transferred on the Convertible Note Register, and a new Convertible Note of like
tenor and bearing the same legends shall be issued in the name of the transferee
and sent to the transferee at the address and c/o the contact person so
indicated. Transfers and exchanges of Convertible Notes shall be subject to such
additional restrictions as are set forth in the legends on the Convertible Notes
and to such additional reasonable regulations as may be prescribed by the
Company as specified in Section 9 hereof. Successive registrations of transfers
as aforesaid may be made from time to time as desired, and each such
registration shall be Convertible Noted on the Convertible Note register.

(3) Upon receipt by the Company of evidence reasonably satisfactory to it of the
loss, theft, destruction or mutilation of this Convertible Note, and in the case
of loss, theft or destruction, receipt of indemnity reasonably satisfactory to
the Company and upon surrender and cancellation of this Convertible Note, if
mutilated, the Company will deliver a new Convertible Note of like tenor and
dated as of such cancellation, in lieu of such Convertible Note.

 

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(d) Amendments; Waivers. Neither this Convertible Note nor any term hereof may
be amended or waived orally or in writing, except that any term of this
Convertible Note and the other Convertible Notes may be amended and the
observance of any term of this Convertible Note and the other Convertible Notes
may be waived (either generally or in a particular instance and either
retroactively or prospectively), and such amendment or waiver shall be
applicable to all of the Convertible Notes, upon the approval of the Company and
the holders of fifty-one percent (51%) or more of the outstanding principal
amount of all then outstanding Convertible Notes (a “Majority in Interest”);
provided, however, that any amendment that would (i) change the maturity of the
principal of or any installment of interest on any of the Convertible Notes,
(ii) reduce the principal amount of, or any premium or interest on any
Convertible Note, (iii) reduce the percentage in aggregate principal amount of
Convertible Notes outstanding necessary to modify or amend the Convertible Notes
or to waive any past default; or (iv) modify this Section 10(d) shall, in each
case, require the approval of the holder of each Convertible Note to which such
amendment shall apply. The Company may, without the consent of any holder of the
Convertible Notes, amend the Convertible Notes for the purpose curing any
ambiguity or correcting or supplementing any defective provision contained in
the Convertible Notes; provided that such modification or amendment does not, in
the good faith opinion of the Board of Directors, adversely affect the interests
of the holders of the Convertible Notes in any material respect, or adding or
modifying any other provisions with respect to matters or questions arising
under the Convertible Notes which the Company may deem necessary or desirable
and which will not adversely affect the interests of the holders of the
Convertible Notes. The Company will not amend any provision of any other
Convertible Note in a manner favorable to any holder thereof unless a similar
amendment is made or offered with respect to all of the Convertible Notes.

(e) Governing Law. This security shall be governed by and construed in
accordance with the internal laws of the State of California, without regard to
the principles of conflicts of law thereof.

(f) Headings. Article and Section headings used herein are for convenience of
reference only, are not part of this Convertible Note and shall not affect the
construction of, or be taken into consideration in interpreting, this
Convertible Note.

(g) Severability. If any provision of this Convertible Note is invalid, illegal
or unenforceable, the balance of this Convertible Note shall remain in effect,
and if any provision is inapplicable to any Person or circumstance, it shall
nevertheless remain applicable to all other Persons and circumstances. This
Convertible Note is subject to the express condition that at no time shall the
Company be obligated or required to pay interest hereunder at a rate which could
subject the Holder or any other Person to either civil or criminal liability as
a result of being in excess of the maximum interest rate which the Company is
permitted by applicable law to contract or agree to pay. If by the terms of this
Convertible Note, the Company is at any time required or obligated to pay
interest hereunder at a rate in excess of such maximum rate, the rate of
interest under this Convertible Note shall be deemed to be immediately reduced
to such maximum rate and the interest payable shall be computed at such maximum
rate and all prior interest payments in excess of such maximum rate shall be
applied and shall be deemed to have been payments in reduction of the principal
balance of this Convertible Note.

 

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(h) Execution; Entirety. This Convertible Note may be executed in counterparts
(and by different parties hereto on different counterparts), each of which shall
constitute an original, but all of which when taken together shall constitute a
single contract. Delivery of an executed counterpart of a signature page of this
Convertible Note by telecopy shall be effective as delivery of a manually
executed counterpart of this Convertible Note. This Convertible Note constitutes
the entire contract among the parties relating to the subject matter hereof and
supersede any and all previous agreements and understandings, oral or written,
relating to the subject matter hereof.

[Remainder of page intentionally left blank.]

 

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IN WITNESS WHEREOF, the Company has caused this Convertible Note to be duly
executed on the date first written above.

 

XENONICS HOLDINGS, INC.

By:

   

Name:

 

Alan Magerman

Title:

 

Chairman and Chief Executive Officer

 

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EXHIBIT A

CONVERSION NOTICE

NOTICE OF CONVERSION

The undersigned hereby elects to convert principal and, if specified, interest
under the Convertible Note (the “Convertible Note”) of Xenonics Holdings, Inc.
(the “Company”) into shares of common stock, $0.001 par value per share (the
“Common Stock”), of the Company according to the conditions hereof, as of the
date written below. If shares are to be issued in the name of a person other
than the undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the holder for any conversion, except for such transfer taxes, if
any.

The undersigned agrees to comply with the prospectus delivery requirements under
the applicable securities laws in connection with any transfer of the aforesaid
shares of Common Stock.

Conversion calculations:

 

    Date to Effect Conversion:                                         

Principal Amount of Convertible Notes to be Converted:

   

$                     

    Number of shares of Common Stock or Conversion Securities (if applicable)
to be Issued:                         

Applicable Conversion Rate:                                     

   

Signature:

 

 

   

Name:

 

 

   

Address:

 

 

 

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Schedule 1

CONVERSION SCHEDULE

This Conversion Schedule reflects conversions made under Section 3 of the above
referenced Note.

Dated:

 

Date of

Conversion

(or for first entry,

Original Issue

Date)

   Amount of
Conversion    Aggregate
Principal Amount
Remaining
Subsequent to
Conversion
(or original
Principal
Amount)    Company Attest

 

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