Exhibit 10.2

 

[FORM OF SENIOR SECURED CONVERTIBLE NOTE]

 

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL TO THE HOLDER (IF REQUESTED BY THE COMPANY), IN A FORM REASONABLY
ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
(II) UNLESS SOLD OR ELIGIBLE TO BE SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER
SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD
CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 18(a)
HEREOF. THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE
SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET
FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.

 

Axion Power International, Inc.

 

Senior Secured Convertible Note

 

Issuance Date:  [●] 2015 Original Principal Amount: U.S. $[●]

 

FOR VALUE RECEIVED, Axion Power International, Inc., a Delaware corporation (the
“Company”), hereby promises to pay to the order of [BUYER] or its registered
assigns (“Holder”) the amount set out above as the Original Principal Amount (as
reduced pursuant to the terms hereof pursuant to redemption, conversion or
otherwise, the “Principal”) when due, whether upon the Maturity Date, on any
Installment Date with respect to the Installment Amount due on such Installment
Date (each as defined below), or upon acceleration, redemption or otherwise (in
each case in accordance with the terms hereof) and to pay interest (“Interest”)
on any outstanding Principal at the applicable Interest Rate (as defined below)
from the date set out above as the Issuance Date (the “Issuance Date”) until the
same becomes due and payable, whether upon the Maturity Date, on any Installment
Date with respect to the Installment Amount due on such Installment Date, or
upon acceleration, conversion, redemption or otherwise (in each case in
accordance with the terms hereof). This Senior Secured Convertible Note
(including all Senior Secured Convertible Notes issued in exchange, transfer or
replacement hereof, this “Note”) is one of an issue of Senior Secured
Convertible Notes issued pursuant to the Securities Purchase Agreement, dated as
of November 4, 2015 (the “Subscription Date”), by and among the Company and the
investors (the “Buyers”) referred to therein, as amended from time to time,
and/or pursuant to a Permitted Exchange (as defined in the Securities Purchase
Agreement) (if any) (collectively, the “Notes”, and such other Senior Secured
Convertible Notes, the “Other Notes”). Certain capitalized terms used herein are
defined in Section 31.

 

 

 

 

1.          PAYMENTS OF PRINCIPAL. On each Installment Date, the Company shall
pay to the Holder an amount equal to the Installment Amount due on such
Installment Date in accordance with Section 8. On the Maturity Date, the Company
shall pay to the Holder an amount in cash (excluding any amounts paid in shares
of Common Stock on the Maturity Date in accordance with Section 8) representing
all outstanding Principal, accrued and unpaid Interest and accrued and unpaid
Late Charges (as defined in Section 24(c)) on such Principal and Interest. Other
than as specifically permitted by this Note, the Company may not prepay any
portion of the outstanding Principal, accrued and unpaid Interest or accrued and
unpaid Late Charges on Principal and Interest, if any.

 

2.          INTEREST; INTEREST RATE.

 

(a)          Interest on this Note shall commence accruing on the Issuance Date
and shall be computed on the basis of a 360-day year and twelve 30-day months
and shall be payable in arrears on each Interest Date and shall compound each
calendar month and shall be payable in accordance with the terms of this Note.
Interest shall be paid (i) on each Interest Date occurring on an Installment
Date in accordance with Section 8 as part of the applicable Installment Amount
due on the applicable Installment Date and (ii) with respect to each other
Interest Date, on such Interest Date in cash.

 

(b)          Prior to the payment of Interest on an Interest Date, Interest on
this Note shall accrue at the Interest Rate and be payable by way of inclusion
of the Interest in the Conversion Amount on each Conversion Date in accordance
with Section 3(b)(i) or upon any redemption in accordance with Section 11 or any
required payment upon any Bankruptcy Event of Default. From and after the
occurrence and during the continuance of any Event of Default, the Interest Rate
shall automatically be increased to eighteen percent (18.0%) per annum. In the
event that such Event of Default is subsequently cured, the adjustment referred
to in the preceding sentence shall cease to be effective as of the calendar day
immediately following the date of such cure; provided that the Interest as
calculated and unpaid at such increased rate during the continuance of such
Event of Default shall continue to apply to the extent relating to the days
after the occurrence of such Event of Default through and including the date of
such cure of such Event of Default.

 

3.          CONVERSION OF NOTES. This Note shall be convertible into validly
issued, fully paid and non-assessable shares of Common Stock (as defined below),
on the terms and conditions set forth in this Section 3.

 

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(a)          Conversion Right. Subject to the provisions of Section 3(d), at any
time or times on or after the Issuance Date, the Holder shall be entitled to
convert any portion of the outstanding and unpaid Conversion Amount (as defined
below) into validly issued, fully paid and non-assessable shares of Common Stock
in accordance with Section 3(c), at the Conversion Rate (as defined below). The
Company shall not issue any fraction of a share of Common Stock upon any
conversion. If the issuance would result in the issuance of a fraction of a
share of Common Stock, the Company shall round such fraction of a share of
Common Stock up to the nearest whole share. The Company shall pay any and all
transfer, stamp, issuance and similar taxes, costs and expenses (including,
without limitation, fees and expenses of the Transfer Agent (as defined below))
that may be payable with respect to the issuance and delivery of Common Stock
upon conversion of any Conversion Amount.

 

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

 

(i)          “Conversion Amount” means the sum of (x) portion of the Principal
to be converted, redeemed or otherwise with respect to which this determination
is being made (y) all accrued and unpaid Interest with respect to such portion
of the Principal amount and accrued and unpaid Late Charges with respect to such
portion of such Principal and such Interest and (z) the applicable Make-Whole
Amount, if any.

 

(ii)         “Conversion Price” means, as of any Conversion Date or other date
of determination, $1.23, subject to adjustment as provided herein.

 

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(c)          Mechanics of Conversion.

 

(i)          Optional Conversion. To convert any Conversion Amount into shares
of Common Stock on any date (a “Conversion Date”), the Holder shall deliver
(whether via facsimile, electronic mail or otherwise), for receipt on or prior
to 11:59 p.m., New York time, on such date, a copy of an executed notice of
conversion in the form attached hereto as Exhibit I (the “Conversion Notice”) to
the Company. If required by Section 3(c)(iii), within three (3) Trading Days
following a conversion of this Note as aforesaid, the Holder shall surrender
this Note to a nationally recognized overnight delivery service for delivery to
the Company (or an indemnification undertaking with respect to this Note in the
case of its loss, theft or destruction as contemplated by Section 18(b)). On or
before the first (1st) Trading Day following the date of receipt of a Conversion
Notice, the Company shall transmit by facsimile or electronic mail an
acknowledgment of confirmation, in the form attached hereto as Exhibit II, of
receipt of such Conversion Notice to the Holder and the Company’s transfer agent
(the “Transfer Agent”) which confirmation shall constitute an instruction to the
Transfer Agent to process such Conversion Notice in accordance with the terms
herein. On or before the third (3rd) Trading Day following the date on which the
Company has received a Conversion Notice (or such earlier date as required
pursuant to the 1934 Act or other applicable law, rule or regulation for the
settlement of a trade initiated on the applicable Conversion Date of such shares
of Common Stock issuable pursuant to such Conversion Notice) (the “Share
Delivery Deadline”), the Company shall (1) provided that the Transfer Agent is
participating in The Depository Trust Company’s (“DTC”) Fast Automated
Securities Transfer Program, credit such aggregate number of shares of Common
Stock to which the Holder shall be entitled pursuant to such conversion to the
Holder’s or its designee’s balance account with DTC through its
Deposit/Withdrawal at Custodian system or (2) if the Transfer Agent is not
participating in the DTC Fast Automated Securities Transfer Program, upon the
request of the Holder, issue and deliver (via reputable overnight courier) to
the address as specified in the Conversion Notice, a certificate, registered in
the name of the Holder or its designee, for the number of shares of Common Stock
to which the Holder shall be entitled pursuant to such conversion. If this Note
is physically surrendered for conversion pursuant to Section 3(c)(iii) and the
outstanding Principal of this Note is greater than the Principal portion of the
Conversion Amount being converted, then the Company shall as soon as practicable
and in no event later than five (5) Business Days after receipt of this Note and
at its own expense, issue and deliver to the Holder (or its designee) a new Note
(in accordance with Section 18(d)) representing the outstanding Principal not
converted. The Person or Persons entitled to receive the shares of Common Stock
issuable upon a conversion of this Note shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on the Conversion Date.
In the event of a partial conversion of this Note pursuant hereto, (x) the
Principal amount converted shall be deducted from the Installment Amount(s)
relating to the Installment Date(s) as set forth in the applicable Conversion
Notice and (y) the amount of Restricted Principal converted, if any, shall be
set forth in the applicable Conversion Notice. Notwithstanding anything to the
contrary contained in this Note or the Registration Rights Agreement, after the
effective date of the Registration Statement (as defined in the Registration
Rights Agreement) and prior to the Holder’s receipt of the notice of a Grace
Period (as defined in the Registration Rights Agreement) (and thereafter, so
long as no Grace Period is continuing), the Company shall cause the Transfer
Agent to deliver unlegended shares of Common Stock to the Holder (or its
designee) in connection with any sale of Registrable Securities (as defined in
the Registration Rights Agreement) with respect to which the Holder has entered
into a contract for sale, and delivered a copy of the prospectus included as
part of the particular Registration Statement to the extent applicable, and for
which the Holder has not yet settled.

 

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(ii)         Company’s Failure to Timely Convert. If the Company shall fail, for
any reason or for no reason, on or prior to the applicable Share Delivery
Deadline, either (I) if the Transfer Agent is not participating in the DTC Fast
Automated Securities Transfer Program, to issue and deliver to the Holder (or
its designee) a certificate for the number of shares of Common Stock to which
the Holder is entitled and register such shares of Common Stock on the Company’s
share register or, if the Transfer Agent is participating in the DTC Fast
Automated Securities Transfer Program, to credit the balance account of the
Holder or the Holder’s designee with DTC for such number of shares of Common
Stock to which the Holder is entitled upon the Holder’s conversion of this Note
(as the case may be) or (II) if the Registration Statement covering the resale
of the shares of Common Stock that are the subject of the Conversion Notice (the
“Unavailable Conversion Shares”) is not available for the resale of such
Unavailable Conversion Shares and the Company fails to promptly, but in no event
later than as required pursuant to the Registration Rights Agreement (x) so
notify the Holder and (y) deliver the shares of Common Stock electronically
without any restrictive legend by crediting such aggregate number of shares of
Common Stock to which the Holder is entitled pursuant to such exercise to the
Holder’s or its designee’s balance account with DTC through its
Deposit/Withdrawal At Custodian system (the event described in the immediately
foregoing clause (II) is hereinafter referred as a “Notice Failure” and together
with the event described in clause (I) above, a “Conversion Failure”) and, if
such Notice Failure or Conversion Failure, as applicable, continues for five (5)
consecutive Trading Days, then, in addition to all other remedies available to
the Holder, (1) the Company shall pay in cash to the Holder on each day after
such Share Delivery Deadline that the issuance of such shares of Common Stock is
not timely effected an amount equal to 2% per month, pro rated, of the product
of (A) the sum of the number of shares of Common Stock not issued to the Holder
on or prior to the Share Delivery Deadline and to which the Holder is entitled,
multiplied by (B) any trading price of the Common Stock selected by the Holder
in writing as in effect at any time during the period beginning on the
applicable Conversion Date and ending on the applicable Share Delivery Deadline
and (2) the Holder, upon written notice to the Company, may void its Conversion
Notice with respect to, and retain or have returned (as the case may be) any
portion of this Note that has not been converted pursuant to such Conversion
Notice, provided that the voiding of a Conversion Notice shall not affect the
Company’s obligations to make any payments which have accrued prior to the date
of such notice pursuant to this Section 3(c)(ii) or otherwise. In addition to
the foregoing, if on or prior to the Share Delivery Deadline either (A) if the
Transfer Agent is not participating in the DTC Fast Automated Securities
Transfer Program, the Company shall fail to issue and deliver to the Holder (or
its designee) a certificate and register such shares of Common Stock on the
Company’s share register or, if the Transfer Agent is participating in the DTC
Fast Automated Securities Transfer Program, the Transfer Agent shall fail to
credit the balance account of the Holder or the Holder’s designee with DTC for
the number of shares of Common Stock to which the Holder is entitled upon the
Holder’s conversion hereunder or pursuant to the Company’s obligation pursuant
to clause (II) below or (B) a Notice Failure occurs, and if on or after such
Share Delivery Deadline the Holder purchases (in an open market transaction or
otherwise) shares of Common Stock to deliver in satisfaction of a sale by the
Holder of all or any portion of the number of shares of Common Stock issuable
upon such conversion that the Holder anticipated receiving from the Company (a
“Buy-In”), then, in addition to all other remedies available to the Holder, the
Company shall, within three (3) Business Days after receipt of the Holder’s
request and in the Holder’s discretion, either: (I) pay cash to the Holder in an
amount equal to the Holder’s total purchase price (including brokerage
commissions and other out-of-pocket expenses, if any) for the shares of Common
Stock so purchased (including, without limitation, by any other Person in
respect, or on behalf, of the Holder) (the “Buy-In Price”), at which point the
Company’s obligation to so issue and deliver such certificate (and to issue such
shares of Common Stock) or credit the balance account of such Holder or such
Holder’s designee, as applicable, with DTC for the number of shares of Common
Stock to which the Holder is entitled upon the Holder’s conversion hereunder (as
the case may be) (and to issue such shares of Common Stock) shall terminate, or
(II) promptly honor its obligation to so issue and deliver to the Holder a
certificate or certificates representing such shares of Common Stock or credit
the balance account of such Holder or such Holder’s designee, as applicable,
with DTC for the number of shares of Common Stock to which the Holder is
entitled upon the Holder’s conversion hereunder (as the case may be) and pay
cash to the Holder in an amount equal to the excess (if any) of the Buy-In Price
over the product of (x) such number of shares of Common Stock multiplied by (y)
the lowest Closing Sale Price of the Common Stock on any Trading Day during the
period commencing on the date of the applicable Conversion Notice and ending on
the date of such issuance and payment under this clause (II) (the “Buy-In
Payment Amount”). Nothing shall limit the Holder’s right to pursue any other
remedies available to it hereunder, at law or in equity, including, without
limitation, a decree of specific performance and/or injunctive relief with
respect to the Company’s failure to timely deliver certificates representing
shares of Common Stock (or to electronically deliver such shares of Common
Stock) upon the conversion of this Note as required pursuant to the terms
hereof.

 

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(iii)        Registration; Book-Entry. The Company shall maintain a register
(the “Register”) for the recordation of the names and addresses of the holders
of each Note and the principal amount of the Notes and Restricted Principal held
by such holders held by such holders (the “Registered Notes”). The entries in
the Register shall be conclusive and binding for all purposes absent manifest
error. The Company and the holders of the Notes shall treat each Person whose
name is recorded in the Register as the owner of a Note for all purposes
(including, without limitation, the right to receive payments of Principal and
Interest hereunder) notwithstanding notice to the contrary. A Registered Note
may be assigned, transferred or sold in whole or in part only by registration of
such assignment or sale on the Register. Upon its receipt of a written request
to assign, transfer or sell all or part of any Registered Note by the holder
thereof, the Company shall record the information contained therein in the
Register and issue one or more new Registered Notes in the same aggregate
principal amount as the principal amount of the surrendered Registered Note to
the designated assignee or transferee pursuant to Section 18, provided that if
the Company does not so record an assignment, transfer or sale (as the case may
be) of all or part of any Registered Note within two (2) Business Days of its
receipt of such a request, then the Register shall be automatically deemed
updated to reflect such assignment, transfer or sale (as the case may be).
Notwithstanding anything to the contrary set forth in this Section 3, following
conversion of any portion of this Note in accordance with the terms hereof, the
Holder shall not be required to physically surrender this Note to the Company
unless (A) the full Conversion Amount represented by this Note is being
converted (in which event this Note shall be delivered to the Company following
conversion thereof as contemplated by Section 3(c)(i)) or (B) the Holder has
provided the Company with prior written notice (which notice may be included in
a Conversion Notice) requesting reissuance of this Note upon physical surrender
of this Note. The Holder and the Company shall maintain records showing the
Principal, Interest and Late Charges converted and/or paid (as the case may be)
or Restricted Principal becoming unrestricted and the dates of such conversions,
Controlled Account Release (as defined below) and/or payments (as the case may
be) or shall use such other method, reasonably satisfactory to the Holder and
the Company, so as not to require physical surrender of this Note upon
conversion. If the Company does not update the Register to record such
Principal, Interest and Late Charges converted and/or paid (as the case may be)
or Restricted Principal becoming unrestricted and the dates of such conversions,
Controlled Account Release and/or payments (as the case may be) within two (2)
Business Days of such occurrence, then the Register shall be automatically
deemed updated to reflect such occurrence.

 

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(iv)        Pro Rata Conversion; Disputes. In the event that the Company
receives a Conversion Notice from more than one holder of Notes for the same
Conversion Date and the Company can convert some, but not all, of such portions
of the Notes submitted for conversion, the Company, subject to Section 3(d),
shall convert from each holder of Notes electing to have Notes converted on such
date a pro rata amount of such holder’s portion of its Notes submitted for
conversion based on the principal amount of Notes submitted for conversion on
such date by such holder relative to the aggregate principal amount of all Notes
submitted for conversion on such date. In the event of a dispute as to the
number of shares of Common Stock issuable to the Holder in connection with a
conversion of this Note, the Company shall issue to the Holder the number of
shares of Common Stock not in dispute and resolve such dispute in accordance
with Section 23.

 

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(d)          Limitations on Conversions.

 

(i)          Beneficial Ownership Limitation. The Company shall not affect the
conversion of any portion of this Note, and the Holder shall not have the right
to convert any portion of this Note pursuant to the terms and conditions of this
Note and any such conversion shall be null and void and treated as if never
made, to the extent that after giving effect to such conversion, the Holder
together with the other Attribution Parties collectively would beneficially own
in excess of 4.99% (the “Maximum Percentage”) of the shares of Common Stock
outstanding immediately after giving effect to such conversion. For purposes of
the foregoing sentence, the aggregate number of shares of Common Stock
beneficially owned by the Holder and the other Attribution Parties shall include
the number of shares of Common Stock held by the Holder and all other
Attribution Parties plus the number of shares of Common Stock issuable upon
conversion of this Note with respect to which the determination of such sentence
is being made, but shall exclude shares of Common Stock which would be issuable
upon (A) conversion of the remaining, nonconverted portion of this Note
beneficially owned by the Holder or any of the other Attribution Parties and (B)
exercise or conversion of the unexercised or nonconverted portion of any other
securities of the Company (including, without limitation, any convertible notes
or convertible preferred stock or warrants, including, without limitation, the
Warrants) beneficially owned by the Holder or any other Attribution Party
subject to a limitation on conversion or exercise analogous to the limitation
contained in this Section 3(d)(i). For purposes of this Section 3(d)(i),
beneficial ownership shall be calculated in accordance with Section 13(d) of the
1934 Act. For purposes of determining the number of outstanding shares of Common
Stock the Holder may acquire upon the conversion of this Note without exceeding
the Maximum Percentage, the Holder may rely on the number of outstanding shares
of Common Stock as reflected in (x) the Company’s most recent Annual Report on
Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other
public filing with the SEC, as the case may be, (y) a more recent public
announcement by the Company or (z) any other written notice by the Company or
the Transfer Agent, if any, setting forth the number of shares of Common Stock
outstanding (the “Reported Outstanding Share Number”). If the Company receives a
Conversion Notice from the Holder at a time when the actual number of
outstanding shares of Common Stock is less than the Reported Outstanding Share
Number, the Company shall notify the Holder in writing of the number of shares
of Common Stock then outstanding and, to the extent that such Conversion Notice
would otherwise cause the Holder’s beneficial ownership, as determined pursuant
to this Section 3(d)(i), to exceed the Maximum Percentage, the Holder must
notify the Company of a reduced number of shares of Common Stock to be purchased
pursuant to such Conversion Notice. For any reason at any time, upon the written
or oral request of the Holder, the Company shall within one (1) Business Day
confirm orally and in writing or by electronic mail to the Holder the number of
shares of Common Stock then outstanding. In any case, the number of outstanding
shares of Common Stock shall be determined after giving effect to the conversion
or exercise of securities of the Company, including this Note, by the Holder and
any other Attribution Party since the date as of which the Reported Outstanding
Share Number was reported. In the event that the issuance of shares of Common
Stock to the Holder upon conversion of this Note results in the Holder and the
other Attribution Parties being deemed to beneficially own, in the aggregate,
more than the Maximum Percentage of the number of outstanding shares of Common
Stock (as determined under Section 13(d) of the 1934 Act), the number of shares
so issued by which the Holder’s and the other Attribution Parties’ aggregate
beneficial ownership exceeds the Maximum Percentage (the “Excess Shares”) shall
be deemed null and void and shall be cancelled ab initio, and the Holder shall
not have the power to vote or to transfer the Excess Shares. Upon delivery of a
written notice to the Company, the Holder may from time to time increase or
decrease the Maximum Percentage to any other percentage not in excess of 9.99%
as specified in such notice; provided that (i) any such increase in the Maximum
Percentage will not be effective until the sixty-first (61st) day after such
notice is delivered to the Company and (ii) any such increase or decrease will
apply only to the Holder and the other Attribution Parties and not to any other
holder of Notes that is not an Attribution Party of the Holder. For purposes of
clarity, the shares of Common Stock issuable pursuant to the terms of this Note
in excess of the Maximum Percentage shall not be deemed to be beneficially owned
by the Holder for any purpose including for purposes of Section 13(d) or Rule
16a-1(a)(1) of the 1934 Act. No prior inability to convert this Note pursuant to
this paragraph shall have any effect on the applicability of the provisions of
this paragraph with respect to any subsequent determination of convertibility.
The provisions of this paragraph shall be construed and implemented in a manner
otherwise than in strict conformity with the terms of this Section 3(d)(i) to
the extent necessary to correct this paragraph (or any portion of this
paragraph) which may be defective or inconsistent with the intended beneficial
ownership limitation contained in this Section 3(d)(i) or to make changes or
supplements necessary or desirable to properly give effect to such limitation.
The limitation contained in this paragraph may not be waived and shall apply to
a successor holder of this Note.

 

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(ii)         Principal Market Regulation. The Company shall not issue any shares
of Common Stock upon conversion of this Note or otherwise pursuant to the terms
of this Note if the issuance of such shares of Common Stock would exceed the
aggregate number of shares of Common Stock which the Company may issue upon
conversion or exercise (as the case may be) of the Notes and the Warrants or
otherwise pursuant to the terms of this Note without breaching the Company’s
obligations under the rules or regulations of the Principal Market (the number
of shares which may be issued without violating such rules and regulations,
including rules related to the aggregate of offerings under NASDAQ Listing Rule
5635(d), the “Exchange Cap”), except that such limitation shall not apply in the
event that the Company (A) obtains the approval of its stockholders as required
by the applicable rules of the Principal Market for issuances of shares of
Common Stock upon conversion or exercise (as the case may be) of the Notes and
the Warrants or otherwise pursuant to the terms of this Note in excess of such
amount or (B) obtains a written opinion from outside counsel to the Company that
such approval is not required, which opinion shall be reasonably satisfactory to
the Holder. Until such approval or such written opinion is obtained, no Buyer
shall be issued in the aggregate, upon conversion or exercise (as the case may
be) of any Notes or any of the Warrants or otherwise pursuant to the terms of
this Note, shares of Common Stock in an amount greater than the product of (i)
the Exchange Cap multiplied by (ii) the quotient of (A) the aggregate original
principal amount of Notes issued to such Buyer pursuant to the Securities
Purchase Agreement on the Closing Date (as defined in the Securities Purchase
Agreement) (and pursuant to any Permitted Exchange to such Buyer, if any)
divided by (B) the aggregate original principal amount of all Notes issued to
the Buyers pursuant to the Securities Purchase Agreement on the Closing Date
(and pursuant to any Permitted Exchange to any Buyer, if any) (with respect to
each Buyer, the “Exchange Cap Allocation”). In the event that any Buyer shall
sell or otherwise transfer any of such Buyer’s Notes, the transferee shall be
allocated a pro rata portion of such Buyer’s Exchange Cap Allocation with
respect to such portion of such Notes so transferred, and the restrictions of
the prior sentence shall apply to such transferee with respect to the portion of
the Exchange Cap Allocation so allocated to such transferee. Upon conversion and
exercise in full of a holder’s Notes and Warrants, the difference (if any)
between such holder’s Exchange Cap Allocation and the number of shares of Common
Stock actually issued to such holder upon such holder’s conversion in full of
such holder’s Notes and exercise in full of such Warrants shall be allocated to
the respective Exchange Cap Allocations of the remaining holders of Notes and
Warrants on a pro rata basis in proportion to the shares of Common Stock
underlying the Notes and Warrants then held by each such holder. At any time
after the earlier to occur of (x) the Stockholder Approval Date (as defined in
the Securities Purchase Agreement) and (y) the Stockholder Meeting Deadline (as
defined in the Securities Purchase Agreement, in the event that the Company is
prohibited from issuing shares of Common Stock pursuant to this Section 3(d)(ii)
(the “Exchange Cap Shares”), the Company shall pay cash in exchange for the
cancellation of such shares of Common Stock at a price equal to the sum of (i)
the product of (x) such number of Exchange Cap Shares and (y) the greatest
Closing Sale Price of the Common Stock on any Trading Day during the period
commencing on the date the Holder delivers the applicable Conversion Notice with
respect to such Exchange Cap Shares to the Company and ending on the date of
such issuance and payment under this Section 3(d)(ii) and (ii) to the extent the
Holder purchases (in an open market transaction or otherwise) shares of Common
Stock to deliver in satisfaction of a sale by the Holder of Exchange Cap Shares,
any Buy-In Payment Amount, any brokerage commissions and other out-of-pocket
expenses, if any, of the Holder incurred in connection therewith (collectively,
the “Exchange Cap Share Cancellation Amount”); provided, that no Exchange Cap
Share Cancellation Amount shall be due and payable to the Holder to the extent
that (x) on or prior to the applicable Share Delivery Deadline, the Exchange Cap
Allocation of a Holder is increased (whether by assignment by a holder of Notes
and/or Warrants or all, or any portion, of such holder's Exchange Cap Allocation
or otherwise) (an “Exchange Cap Allocation Increase”) and (y) after giving
effect to such Exchange Cap Allocation Increase, the Company delivers the
applicable Exchange Cap Shares to the Holder (or its designee) on or prior to
the applicable Share Delivery Deadline.

 

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4.          RIGHTS UPON EVENT OF DEFAULT.

 

(a)          Event of Default. Each of the following events shall constitute an
“Event of Default” and each of the events in clauses (ix), (x) and (xi) shall
constitute a “Bankruptcy Event of Default”:

 

(i)          the failure of the applicable Registration Statement (as defined in
the Registration Rights Agreement) to be filed with the SEC on or prior to the
date that is ten (10) days after the applicable Filing Deadline (as defined in
the Registration Rights Agreement) or the failure of the applicable Registration
Statement to be declared effective by the SEC on or prior to the date that is
ten (10) days after the applicable Effectiveness Deadline (as defined in the
Registration Rights Agreement);

 

(ii)         while the applicable Registration Statement is required to be
maintained effective pursuant to the terms of the Registration Rights Agreement,
the effectiveness of the applicable Registration Statement lapses for any reason
(including, without limitation, the issuance of a stop order) or such
Registration Statement (or the prospectus contained therein) is unavailable to
any holder of Registrable Securities (as defined in the Registration Rights
Agreement) for sale of all of such holder’s Registrable Securities in accordance
with the terms of the Registration Rights Agreement, and such lapse or
unavailability continues for a period of ten (10) consecutive days or for more
than an aggregate of twenty (20) days in any 365-day period (excluding days
during an Allowable Grace Period (as defined in the Registration Rights
Agreement));

 

10 

 

 

(iii)        the suspension (or threatened suspension) from trading or the
failure (or threatened failure) of the Common Stock to be trading or listed (as
applicable) on an Eligible Market for a period of five (5) consecutive Business
Days or for more than an aggregate of ten (10) Business Days in any 365-day
period;

 

(iv)        the Company’s (A) failure to cure a Conversion Failure or a Delivery
Failure (as defined in the Warrants) by delivery of the required number of
shares of Common Stock within eight (8) Trading Days after the applicable
Conversion Date or exercise date (as the case may be) or (B) notice, written or
oral, to any holder of the Notes or Warrants, including, without limitation, by
way of public announcement or through any of its agents, at any time, of its
intention not to comply, as required, with a request for conversion of any Notes
into shares of Common Stock that is requested in accordance with the provisions
of the Notes, other than pursuant to Section 3(d), or a request for exercise of
any Warrants for shares of Common Stock in accordance with the provisions of the
Warrants;

 

(v)         except to the extent the Company is in compliance with Section 10(b)
below, at any time following the tenth (10th) consecutive day that the Holder’s
Authorized Share Allocation (as defined in Section 10(a) below) is less than (A)
the number of shares of Common Stock that the Holder would be entitled to
receive upon a conversion of the full Conversion Amount of this Note (without
regard to any limitations on conversion set forth in Section 3(d) or otherwise),
and (B) the number of shares of Common Stock that the Holder would be entitled
to receive upon exercise in full of the Holder’s Warrants (without regard to any
limitations on exercise set forth in the Warrants);

 

(vi)        the Company’s or any Subsidiary’s (as defined in the Securities
Purchase Agreement) failure to pay to the Holder any amount of Principal,
Interest, Late Charges or other amounts when and as due under this Note
(including, without limitation, the Company’s or any Subsidiary’s failure to pay
any redemption payments or amounts hereunder) or any other Transaction Document
(as defined in the Securities Purchase Agreement) or any other agreement,
document, certificate or other instrument delivered in connection with the
transactions contemplated hereby and thereby, except, in the case of a failure
to pay Interest and Late Charges when and as due, in which case only if such
failure remains uncured for a period of at least five (5) days;

 

(vii)       the Company fails to remove any restrictive legend on any
certificate or any shares of Common Stock issued to the Holder upon conversion
or exercise (as the case may be) of any Securities (as defined in the Securities
Purchase Agreement) acquired by the Holder under the Securities Purchase
Agreement (including this Note) as and when required by such Securities or the
Securities Purchase Agreement, unless otherwise then prohibited by applicable
federal securities laws, and any such failure remains uncured for at least five
(5) Trading Days;

 

(viii)      the occurrence of any default under, redemption of or acceleration
prior to maturity of an aggregate of at least $500,000 of Indebtedness (as
defined in the Securities Purchase Agreement) of the Company or any of its
Subsidiaries, other than with respect to any Other Notes;

 

11 

 

 

(ix)         bankruptcy, insolvency, reorganization or liquidation proceedings
or other proceedings for the relief of debtors shall be instituted by or against
the Company or any Subsidiary and, if instituted against the Company or any
Subsidiary by a third party, shall not be dismissed within forty-five (45) days
of their initiation;

 

(x)          the commencement by the Company or any Subsidiary of a voluntary
case or proceeding under any applicable federal, state or foreign bankruptcy,
insolvency, reorganization or other similar law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to
the entry of a decree, order, judgment or other similar document in respect of
the Company or any Subsidiary in an involuntary case or proceeding under any
applicable federal, state or foreign bankruptcy, insolvency, reorganization or
other similar law or to the commencement of any bankruptcy or insolvency case or
proceeding against it, or the filing by it of a petition or answer or consent
seeking reorganization or relief under any applicable federal, state or foreign
law, or the consent by it to the filing of such petition or to the appointment
of or taking possession by a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Subsidiary or of
any substantial part of its property, or the making by it of an assignment for
the benefit of creditors, or the execution of a composition of debts, or the
occurrence of any other similar federal, state or foreign proceeding, or the
admission by it in writing of its inability to pay its debts generally as they
become due, the taking of corporate action by the Company or any Subsidiary in
furtherance of any such action or the taking of any action by any Person to
commence a Uniform Commercial Code foreclosure sale or any other similar action
under federal, state or foreign law;

 

(xi)         the entry by a court of (i) a decree, order, judgment or other
similar document in respect of the Company or any Subsidiary of a voluntary or
involuntary case or proceeding under any applicable federal, state or foreign
bankruptcy, insolvency, reorganization or other similar law or (ii) a decree,
order, judgment or other similar document adjudging the Company or any
Subsidiary as bankrupt or insolvent, or approving as properly filed a petition
seeking liquidation, reorganization, arrangement, adjustment or composition of
or in respect of the Company or any Subsidiary under any applicable federal,
state or foreign law or (iii) a decree, order, judgment or other similar
document appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Subsidiary or of
any substantial part of its property, or ordering the winding up or liquidation
of its affairs, and the continuance of any such decree, order, judgment or other
similar document or any such other decree, order, judgment or other similar
document unstayed and in effect for a period of forty-five (45) consecutive
days;

 

12 

 

 

(xii)        a final judgment or judgments for the payment of money aggregating
in excess of $500,000 are rendered against the Company and/or any of its
Subsidiaries and which judgments are not, within forty-five (45) days after the
entry thereof, bonded, discharged, settled or stayed pending appeal, or are not
discharged within thirty (30) days after the expiration of such stay; provided,
however, any judgment which is covered by insurance or an indemnity from a
credit worthy party shall not be included in calculating the $500,000 amount set
forth above so long as the Company provides the Holder a written statement from
such insurer or indemnity provider (which written statement shall be reasonably
satisfactory to the Holder) to the effect that such judgment is covered by
insurance or an indemnity and the Company or such Subsidiary (as the case may
be) will receive the proceeds of such insurance or indemnity within forty-five
(45) days of the issuance of such judgment;

 

(xiii)       the Company and/or any Subsidiary, individually or in the
aggregate, either (i) fails to pay, when due, or within any applicable grace
period, any payment with respect to any Indebtedness in excess of $500,000 due
to any third party (other than, with respect to unsecured Indebtedness only,
payments contested by the Company and/or such Subsidiary (as the case may be) in
good faith by proper proceedings and with respect to which adequate reserves
have been set aside for the payment thereof in accordance with GAAP) or is
otherwise in breach or violation of any agreement for monies owed or owing in an
amount in excess of $500,000, which breach or violation permits the other party
thereto to declare a default or otherwise accelerate amounts due thereunder, or
(ii) suffer to exist any other circumstance or event that would, with or without
the passage of time or the giving of notice, result in a default or event of
default under any agreement binding the Company or any Subsidiary, which default
or event of default would or is likely to have a material adverse effect on the
business, assets, operations (including results thereof), liabilities,
properties, condition (including financial condition) or prospects of the
Company or any of its Subsidiaries, individually or in the aggregate;

 

(xiv)      other than as specifically set forth in another clause of this
Section 4(a), the Company or any Subsidiary breaches any representation,
warranty, covenant or other term or condition of any Transaction Document,
except, in the case of a breach of a covenant or other term or condition that is
curable, only if such breach remains uncured for a period of five (5)
consecutive Trading Days;

 

(xv)       a false or inaccurate certification (including a false or inaccurate
deemed certification) by the Company that either (A) the Equity Conditions are
satisfied, (B) there has been no Equity Conditions Failure, or (C) as to whether
any Event of Default has occurred;

 

(xvi)      any breach or failure in any respect by the Company or any Subsidiary
to comply with any provision of Section 13 of this Note;

 

(xvii)     any provision of any Transaction Document shall at any time for any
reason (other than pursuant to the express terms thereof) cease to be valid and
binding on or enforceable against the parties thereto, or the validity or
enforceability thereof shall be contested by any party thereto, or a proceeding
shall be commenced by the Company or any Subsidiary or any governmental
authority having jurisdiction over any of them, seeking to establish the
invalidity or unenforceability thereof, or the Company or any Subsidiary shall
deny in writing that it has any liability or obligation purported to be created
under any Transaction Document;

 

13 

 

 

(xviii)    each Controlled Account Agreement shall for any reason fail or cease
to create a separate valid and perfected and, except to the extent permitted by
the terms hereof or thereof, first priority Lien on the Collateral (as defined
below) in favor of the Holder or any material provision of any Controlled
Account Agreement shall at any time for any reason cease to be valid and binding
on or enforceable against the Company or the validity or enforceability thereof
shall be contested by any party thereto, or a proceeding shall be commenced by
the Company or any governmental authority having jurisdiction over the Company,
seeking to establish the invalidity or unenforceability thereof;

 

(xix)       any Material Adverse Effect (as defined in the Securities Purchase
Agreement) occurs; or

 

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

 

(b)          Notice of an Event of Default; Redemption Right. Upon the
occurrence of an Event of Default with respect to this Note or any Other Note,
the Company shall within one (1) Business Day deliver written notice thereof via
facsimile or electronic mail and overnight courier (with next day delivery
specified) (an “Event of Default Notice”) to the Holder. At any time after the
earlier of the Holder’s receipt of an Event of Default Notice and the Holder
becoming aware of an Event of Default, the Holder may require the Company to
redeem (regardless of whether such Event of Default has been cured) all or any
portion of this Note by delivering written notice thereof (the “Event of Default
Redemption Notice”) to the Company, which Event of Default Redemption Notice
shall indicate the portion of this Note the Holder is electing to redeem. Each
portion of this Note subject to redemption by the Company pursuant to this
Section 4(b) shall be redeemed by the Company at a price equal to the greater of
(i) the product of (A) the Conversion Amount to be redeemed multiplied by (B)
the Redemption Premium and (ii) the product of (X) the Conversion Rate with
respect to the Conversion Amount in effect at such time as the Holder delivers
an Event of Default Redemption Notice multiplied by (Y) the greatest Closing
Sale Price of the Common Stock on any Trading Day during the period commencing
on the date immediately preceding such Event of Default and ending on the date
the Company makes the entire payment required to be made under this Section 4(b)
(the “Event of Default Redemption Price”). Redemptions required by this Section
4(b) shall be made in accordance with the provisions of Section 11. To the
extent redemptions required by this Section 4(b) are deemed or determined by a
court of competent jurisdiction to be prepayments of this Note by the Company,
such redemptions shall be deemed to be voluntary prepayments. Notwithstanding
anything to the contrary in this Section 4, but subject to Section 3(d), until
the Event of Default Redemption Price (together with any Late Charges thereon)
is paid in full, the Conversion Amount submitted for redemption under this
Section 4(b) (together with any Late Charges thereon) may be converted, in whole
or in part, by the Holder into Common Stock pursuant to the terms of this Note.
In the event of a partial redemption of this Note pursuant hereto, (x) the
Principal amount redeemed shall be deducted from the Installment Amount(s)
relating to the applicable Installment Date(s) as set forth in the Event of
Default Redemption Notice and (y) the amount of Restricted Principal redeemed,
if any, shall be set forth in the applicable Event of Default Redemption Notice.
In the event of the Company’s redemption of any portion of this Note under this
Section 4(b), the Holder’s damages would be uncertain and difficult to estimate
because of the parties’ inability to predict future interest rates and the
uncertainty of the availability of a suitable substitute investment opportunity
for the Holder. Accordingly, any redemption premium due under this Section 4(b)
is intended by the parties to be, and shall be deemed, a reasonable estimate of
the Holder’s actual loss of its investment opportunity and not as a penalty. Any
redemption upon an Event of Default shall not constitute an election of remedies
by the Holder, and all other rights and remedies of the Holder shall be
preserved.

 

14 

 

 

(c)          Mandatory Redemption upon Bankruptcy Event of Default.
Notwithstanding anything to the contrary herein, and notwithstanding any
conversion that is then required or in process, upon any Bankruptcy Event of
Default, whether occurring prior to or following the Maturity Date, the Company
shall immediately pay to the Holder an amount in cash representing (i) all
outstanding Principal, accrued and unpaid Interest and accrued and unpaid Late
Charges on such Principal and Interest, multiplied by (ii) the Redemption
Premium, in addition to any and all other amounts due hereunder, without the
requirement for any notice or demand or other action by the Holder or any other
person or entity, provided that the Holder may, in its sole discretion, waive
such right to receive payment upon a Bankruptcy Event of Default, in whole or in
part, and any such waiver shall not affect any other rights of the Holder
hereunder, including any other rights in respect of such Bankruptcy Event of
Default, any right to conversion, and any right to payment of the Event of
Default Redemption Price or any other Redemption Price, as applicable.

 

5.            RIGHTS UPON FUNDAMENTAL TRANSACTION.

 

(a)          Assumption. The Company shall not enter into or be party to a
Fundamental Transaction unless (i) the Successor Entity assumes in writing all
of the obligations of the Company under this Note and the other Transaction
Documents in accordance with the provisions of this Section 5(a) pursuant to
written agreements in form and substance satisfactory to the Holder and approved
by the Holder prior to such Fundamental Transaction, including agreements to
deliver to each holder of Notes in exchange for such Notes a security of the
Successor Entity evidenced by a written instrument substantially similar in form
and substance to the Notes, including, without limitation, having a principal
amount and interest rate equal to the principal amounts then outstanding and the
interest rates of the Notes held by such holder, having similar conversion
rights as the Notes and having similar ranking and security to the Notes, and
satisfactory to the Holder and (ii) the Successor Entity (including its Parent
Entity) is a publicly traded corporation whose common stock is quoted on or
listed for trading on an Eligible Market. Upon the occurrence of any Fundamental
Transaction, the Successor Entity shall succeed to, and be substituted for (so
that from and after the date of such Fundamental Transaction, the provisions of
this Note and the other Transaction Documents referring to the “Company” shall
refer instead to the Successor Entity), and may exercise every right and power
of the Company and shall assume all of the obligations of the Company under this
Note and the other Transaction Documents with the same effect as if such
Successor Entity had been named as the Company herein. Upon consummation of a
Fundamental Transaction, the Successor Entity shall deliver to the Holder
confirmation that there shall be issued upon conversion or redemption of this
Note at any time after the consummation of such Fundamental Transaction, in lieu
of the shares of Common Stock (or other securities, cash, assets or other
property (except such items still issuable under Sections 6 and 15, which shall
continue to be receivable thereafter) issuable upon the conversion or redemption
of the Notes prior to such Fundamental Transaction, such shares of the publicly
traded common stock (or their equivalent) of the Successor Entity (including its
Parent Entity) which the Holder would have been entitled to receive upon the
happening of such Fundamental Transaction had this Note been converted
immediately prior to such Fundamental Transaction (without regard to any
limitations on the conversion of this Note), as adjusted in accordance with the
provisions of this Note. Notwithstanding the foregoing, the Holder may elect, at
its sole option, by delivery of written notice to the Company to waive this
Section 5(a) to permit the Fundamental Transaction without the assumption of
this Note. The provisions of this Section 5 shall apply similarly and equally to
successive Fundamental Transactions and shall be applied without regard to any
limitations on the conversion of this Note.

 

15 

 

  

(b)          Notice of a Change of Control; Redemption Right. No sooner than
twenty (20) Trading Days nor later than ten (10) Trading Days prior to the
consummation of a Change of Control (the “Change of Control Date”), but not
prior to the public announcement of such Change of Control, the Company shall
deliver written notice thereof via facsimile or electronic mail and overnight
courier to the Holder (a “Change of Control Notice”). At any time during the
period beginning after the Holder’s receipt of a Change of Control Notice or the
Holder becoming aware of a Change of Control if a Change of Control Notice is
not delivered to the Holder in accordance with the immediately preceding
sentence (as applicable) and ending on the later of twenty (20) Trading Days
after (A) consummation of such Change of Control or (B) the date of receipt of
such Change of Control Notice, the Holder may require the Company to redeem all
or any portion of this Note by delivering written notice thereof (“Change of
Control Redemption Notice”) to the Company, which Change of Control Redemption
Notice shall indicate the Conversion Amount the Holder is electing to redeem.
The portion of this Note subject to redemption pursuant to this Section 5 shall
be redeemed by the Company in cash at a price equal to the greatest of (i) the
product of (w) the Change of Control Redemption Premium multiplied by (y) the
Conversion Amount being redeemed, (ii) the product of (x) the Change of Control
Redemption Premium multiplied by (y) the product of (A) the Conversion Amount
being redeemed multiplied by (B) the quotient determined by dividing (I) the
greatest Closing Sale Price of the shares of Common Stock during the period
beginning on the date immediately preceding the earlier to occur of (1) the
consummation of the applicable Change of Control and (2) the public announcement
of such Change of Control and ending on the date the Holder delivers the Change
of Control Redemption Notice by (II) the Conversion Price then in effect and
(iii) the product of (y) the Change of Control Redemption Premium multiplied by
(z) the product of (A) the Conversion Amount being redeemed multiplied by (B)
the quotient of (I) the aggregate cash consideration and the aggregate cash
value of any non-cash consideration per share of Common Stock to be paid to the
holders of the shares of Common Stock upon consummation of such Change of
Control (any such non-cash consideration constituting publicly-traded securities
shall be valued at the highest of the Closing Sale Price of such securities as
of the Trading Day immediately prior to the consummation of such Change of
Control, the Closing Sale Price of such securities on the Trading Day
immediately following the public announcement of such proposed Change of Control
and the Closing Sale Price of such securities on the Trading Day immediately
prior to the public announcement of such proposed Change of Control) divided by
(II) the Conversion Price then in effect (the “Change of Control Redemption
Price”). Redemptions required by this Section 5 shall be made in accordance with
the provisions of Section 11 and shall have priority to payments to stockholders
in connection with such Change of Control. To the extent redemptions required by
this Section 5(b) are deemed or determined by a court of competent jurisdiction
to be prepayments of this Note by the Company, such redemptions shall be deemed
to be voluntary prepayments. Notwithstanding anything to the contrary in this
Section 5, but subject to Section 3(d), until the Change of Control Redemption
Price (together with any Late Charges thereon) is paid in full, the Conversion
Amount submitted for redemption under this Section 5(b) (together with any Late
Charges thereon) may be converted, in whole or in part, by the Holder into
Common Stock pursuant to Section 3. In the event of a partial redemption of this
Note pursuant hereto, (x) the Principal amount redeemed shall be deducted from
the Installment Amount(s) relating to the applicable Installment Date(s) as set
forth in the Change of Control Redemption Notice and (y) the amount of
Restricted Principal redeemed, if any, shall be set forth in the applicable
Change of Control Redemption Notice. In the event of the Company’s redemption of
any portion of this Note under this Section 5(b), the Holder’s damages would be
uncertain and difficult to estimate because of the parties’ inability to predict
future interest rates and the uncertainty of the availability of a suitable
substitute investment opportunity for the Holder. Accordingly, any redemption
premium due under this Section 5(b) is intended by the parties to be, and shall
be deemed, a reasonable estimate of the Holder’s actual loss of its investment
opportunity and not as a penalty.

 

6.          RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.

 

(a)          Purchase Rights. In addition to any adjustments pursuant to Section
7 below, if at any time the Company grants, issues or sells any Options,
Convertible Securities or rights to purchase stock, warrants, securities or
other property pro rata to all or substantially all of the record holders of any
class of Common Stock (the “Purchase Rights”), then the Holder will be entitled
to acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which the Holder could have acquired if the Holder had held the
number of shares of Common Stock acquirable upon complete conversion of this
Note (without taking into account any limitations or restrictions on the
convertibility of this Note) immediately prior to the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of shares of Common
Stock are to be determined for the grant, issue or sale of such Purchase Rights
(provided, however, that to the extent that the Holder’s right to participate in
any such Purchase Right would result in the Holder and the other Attribution
Parties exceeding the Maximum Percentage, then the Holder shall not be entitled
to participate in such Purchase Right to the extent of the Maximum Percentage
(and shall not be entitled to beneficial ownership of such shares of Common
Stock as a result of such Purchase Right (and beneficial ownership) to the
extent of any such excess) and such Purchase Right to such extent shall be held
in abeyance for the benefit of the Holder until such time or times, if ever, as
its right thereto would not result in the Holder and the other Attribution
Parties exceeding the Maximum Percentage, at which time or times the Holder
shall be granted such right (and any Purchase Right granted, issued or sold on
such initial Purchase Right or on any subsequent Purchase Right held similarly
in abeyance) to the same extent as if there had been no such limitation).

 

16 

 

 

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

 

7.           RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

 

(a)          Adjustment of Conversion Price upon Issuance of Common Stock. If
and whenever on or after the Subscription Date the Company issues or sells, or
in accordance with this Section 7(a) is deemed to have issued or sold, any
shares of Common Stock (including the issuance or sale of shares of Common Stock
owned or held by or for the account of the Company, but excluding any Excluded
Securities issued or sold or deemed to have been issued or sold) for a
consideration per share (the “New Issuance Price”) less than a price equal to
the Conversion Price in effect immediately prior to such issuance or sale or
deemed issuance or sale (such Conversion Price then in effect is referred to
herein as the “Applicable Price”) (the foregoing a “Dilutive Issuance”), then,
immediately after such Dilutive Issuance, the Conversion Price then in effect
shall be reduced to an amount equal to the New Issuance Price. For all purposes
of the foregoing (including, without limitation, determining the adjusted
Conversion Price and the New Issuance Price under this Section 7(a)), the
following shall be applicable:

 

17 

 

 

(i)          Issuance of Options. If the Company in any manner grants or sells
any Options and the lowest price per share for which one share of Common Stock
is at any time issuable upon the exercise of any such Option or upon conversion,
exercise or exchange of any Convertible Securities issuable upon exercise of any
such Option or otherwise pursuant to the terms thereof is less than the
Applicable Price, then such share of Common Stock shall be deemed to be
outstanding and to have been issued and sold by the Company at the time of the
granting or sale of such Option for such price per share. For purposes of this
Section 7(a)(i), the “lowest price per share for which one share of Common Stock
is issuable upon the exercise of any such Option or upon conversion, exercise or
exchange of any Convertible Securities issuable upon exercise of any such Option
or otherwise pursuant to the terms thereof” shall be equal to (1) the lower of
(x) the sum of the lowest amounts of consideration (if any) received or
receivable by the Company with respect to any one share of Common Stock upon the
granting or sale of such Option, upon exercise of such Option and upon
conversion, exercise or exchange of any Convertible Security issuable upon
exercise of such Option or otherwise pursuant to the terms thereof and (y) the
lowest exercise price set forth in such Option for which one share of Common
Stock is issuable upon the exercise of any such Options or upon conversion,
exercise or exchange of any Convertible Securities issuable upon exercise of any
such Option or otherwise pursuant to the terms thereof, minus (2) the sum of all
amounts paid or payable to the holder of such Option (or any other Person) upon
the granting or sale of such Option, upon exercise of such Option and upon
conversion, exercise or exchange of any Convertible Security issuable upon
exercise of such Option or otherwise pursuant to the terms thereof plus the
value of any other consideration received or receivable by, or benefit conferred
on, the holder of such Option (or any other Person). Except as contemplated
below, no further adjustment of the Conversion Price shall be made upon the
actual issuance of such share of Common Stock or of such Convertible Securities
upon the exercise of such Options or otherwise pursuant to the terms thereof or
upon the actual issuance of such shares of Common Stock upon conversion,
exercise or exchange of such Convertible Securities.

 

(ii)         Issuance of Convertible Securities. If the Company in any manner
issues or sells any Convertible Securities and the lowest price per share for
which one share of Common Stock is at any time issuable upon the conversion,
exercise or exchange thereof or otherwise pursuant to the terms thereof is less
than the Applicable Price, then such share of Common Stock shall be deemed to be
outstanding and to have been issued and sold by the Company at the time of the
issuance or sale of such Convertible Securities for such price per share. For
the purposes of this Section 7(a)(ii), the “lowest price per share for which one
share of Common Stock is issuable upon the conversion, exercise or exchange
thereof or otherwise pursuant to the terms thereof” shall be equal to (1) the
lower of (x) the sum of the lowest amounts of consideration (if any) received or
receivable by the Company with respect to one share of Common Stock upon the
issuance or sale of the Convertible Security and upon conversion, exercise or
exchange of such Convertible Security or otherwise pursuant to the terms thereof
and (y) the lowest conversion price set forth in such Convertible Security for
which one share of Common Stock is issuable upon conversion, exercise or
exchange thereof or otherwise pursuant to the terms thereof minus (2) the sum of
all amounts paid or payable to the holder of such Convertible Security (or any
other Person) upon the issuance or sale of such Convertible Security plus the
value of any other consideration received or receivable by, or benefit conferred
on, the holder of such Convertible Security (or any other Person). Except as
contemplated below, no further adjustment of the Conversion Price shall be made
upon the actual issuance of such shares of Common Stock upon conversion,
exercise or exchange of such Convertible Securities or otherwise pursuant to the
terms thereof, and if any such issuance or sale of such Convertible Securities
is made upon exercise of any Options for which adjustment of the Conversion
Price has been or is to be made pursuant to other provisions of this Section
7(a), except as contemplated below, no further adjustment of the Conversion
Price shall be made by reason of such issuance or sale.

 

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(iii)        Change in Option Price or Rate of Conversion. If the purchase or
exercise price provided for in any Options, the additional consideration, if
any, payable upon the issue, conversion, exercise or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible into
or exercisable or exchangeable for shares of Common Stock increases or decreases
at any time (other than proportional changes in conversion or exercise prices,
as applicable, in connection with an event referred to in Section 7(b) below),
the Conversion Price in effect at the time of such increase or decrease shall be
adjusted to the Conversion Price which would have been in effect at such time
had such Options or Convertible Securities provided for such increased or
decreased purchase price, additional consideration or increased or decreased
conversion rate (as the case may be) at the time initially granted, issued or
sold. For purposes of this Section 7(a)(iii), if the terms of any Option or
Convertible Security that was outstanding as of the Subscription Date are
increased or decreased in the manner described in the immediately preceding
sentence, then such Option or Convertible Security and the shares of Common
Stock deemed issuable upon exercise, conversion or exchange thereof shall be
deemed to have been issued as of the date of such increase or decrease. No
adjustment pursuant to this Section 7(a) shall be made if such adjustment would
result in an increase of the Conversion Price then in effect.

 

19 

 

 

(iv)        Calculation of Consideration Received. If any Option and/or
Convertible Security and/or Adjustment Right is issued in connection with the
issuance or sale or deemed issuance or sale of any other securities of the
Company (as determined by the Holder, the “Primary Security”, and such Option
and/or Convertible Security and/or Adjustment Right, the “Secondary
Securities”), together comprising one integrated transaction (or one or more
transactions if such issuances or sales or deemed issuances or sales of
securities of the Company either (A) have at least one investor or purchaser in
common, (B) are consummated in reasonable proximity to each other and/or (C) are
consummated under the same plan of financing), the aggregate consideration per
share of Common Stock with respect to such Primary Security shall be deemed to
be equal to the difference of (x) the lowest price per share for which one share
of Common Stock was issued (or was deemed to be issued pursuant to Section
7(a)(i) or 7(a)(ii) above, as applicable) in such integrated transaction solely
with respect to such Primary Security, minus (y) with respect to such Secondary
Securities, the sum of (I) the Black Scholes Consideration Value of each such
Option, if any, (II) the fair market value (as determined by the Holder in good
faith) or the Black Scholes Consideration Value, as applicable, of such
Adjustment Right, if any, and (III) the fair market value (as determined by the
Holder) of such Convertible Security, if any, in each case, as determined on a
per share basis in accordance with this Section 7(a)(iv). If any shares of
Common Stock, Options or Convertible Securities are issued or sold or deemed to
have been issued or sold for cash, the consideration received therefor (for the
purpose of determining the consideration paid for such Common Stock, Option or
Convertible Security, but not for the purpose of the calculation of the Black
Scholes Consideration Value) will be deemed to be the net amount of
consideration received by the Company therefor. If any shares of Common Stock,
Options or Convertible Securities are issued or sold for a consideration other
than cash, the amount of such consideration received by the Company (for the
purpose of determining the consideration paid for such Common Stock, Option or
Convertible Security, but not for the purpose of the calculation of the Black
Scholes Consideration Value) will be the fair value of such consideration,
except where such consideration consists of publicly traded securities, in which
case the amount of consideration received by the Company for such securities
will be the arithmetic average of the VWAPs of such security for each of the
five (5) Trading Days immediately preceding the date of receipt. If any shares
of Common Stock, Options or Convertible Securities are issued to the owners of
the non-surviving entity in connection with any merger in which the Company is
the surviving entity, the amount of consideration therefor (for the purpose of
determining the consideration paid for such Common Stock, Option or Convertible
Security, but not for the purpose of the calculation of the Black Scholes
Consideration Value) will be deemed to be the fair value of such portion of the
net assets and business of the non-surviving entity as is attributable to such
shares of Common Stock, Options or Convertible Securities (as the case may be).
The fair value of any consideration other than cash or publicly traded
securities will be determined jointly by the Company and the Holder. If such
parties are unable to reach agreement within ten (10) days after the occurrence
of an event requiring valuation (the “Valuation Event”), the fair value of such
consideration will be determined within five (5) Trading Days after the tenth
(10th) day following such Valuation Event by an independent, reputable appraiser
jointly selected by the Company and the Holder. The determination of such
appraiser shall be final and binding upon all parties absent manifest error and
the fees and expenses of such appraiser shall be borne by the Company.

 

(v)         Record Date. If the Company takes a record of the holders of shares
of Common Stock for the purpose of entitling them (A) to receive a dividend or
other distribution payable in shares of Common Stock, Options or in Convertible
Securities or (B) to subscribe for or purchase shares of Common Stock, Options
or Convertible Securities, then such record date will be deemed to be the date
of the issuance or sale of the shares of Common Stock deemed to have been issued
or sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase (as the case may be).

 

20 

 

 

(b)          Adjustment of Conversion Price upon Subdivision or Combination of
Common Stock. Without limiting any provision of Section 5 or Section 7(a), if
the Company at any time on or after the Subscription Date subdivides (by any
stock split, stock dividend, stock combination, recapitalization or other
similar transaction) one or more classes of its outstanding shares of Common
Stock into a greater number of shares, the Conversion Price in effect
immediately prior to such subdivision will be proportionately reduced. Without
limiting any provision of Section 5 or Section 7(a), if the Company at any time
on or after the Subscription Date combines (by any stock split, stock dividend,
stock combination, recapitalization or other similar transaction) one or more
classes of its outstanding shares of Common Stock into a smaller number of
shares, the Conversion Price in effect immediately prior to such combination
will be proportionately increased. Any adjustment pursuant to this Section 7(b)
shall become effective immediately after the effective date of such subdivision
or combination. If any event requiring an adjustment under this Section 7(b)
occurs during the period that a Conversion Price is calculated hereunder, then
the calculation of such Conversion Price shall be adjusted appropriately to
reflect such event.

 

(c)          Holder’s Right of Adjusted Conversion Price. In addition to and not
in limitation of the other provisions of this Section 7, if the Company in any
manner issues or sells or enters into any agreement to issue or sell, any Common
Stock, Options or Convertible Securities (any such securities, “Variable Price
Securities”), after the Subscription Date that are issuable pursuant to such
agreement or convertible into or exchangeable or exercisable for shares of
Common Stock at a price which varies or may vary with the market price of the
shares of Common Stock, including by way of one or more reset(s) to a fixed
price, but exclusive of such formulations reflecting customary anti-dilution
provisions (such as share splits, share combinations, share dividends and
similar transactions) (each of the formulations for such variable price being
herein referred to as, the “Variable Price”), the Company shall provide written
notice thereof via facsimile and overnight courier to the Holder on the date of
such agreement and the issuance of such Convertible Securities or Options. From
and after the date the Company enters into such agreement or issues any such
Variable Price Securities, the Holder shall have the right, but not the
obligation, in its sole discretion to substitute the Variable Price for the
Conversion Price upon conversion of this Note by designating in the Conversion
Notice delivered upon any conversion of this Note that solely for purposes of
such conversion the Holder is relying on the Variable Price rather than the
Conversion Price then in effect. The Holder’s election to rely on a Variable
Price for a particular conversion of this Note shall not obligate the Holder to
rely on a Variable Price for any future conversion of this Note. In addition,
from and after the date the Company enters into such agreement or issues any
such Variable Price Securities, for purposes of calculating the Pre-Installment
Conversion Price and Installment Conversion Price as of any time of
determination, the “Conversion Price” as used therein shall mean the lower of
(x) the Conversion Price as of such time of determination and (y) the Variable
Price as of such time of determination.

 

21 

 

 

(d)          Stock Combination Event Adjustments. If at any time and from time
to time on or after the Subscription Date there occurs any stock split, stock
dividend, stock combination recapitalization or other similar transaction
involving the Common Stock (each, a “Stock Combination Event”, and such date
thereof, the “Stock Combination Event Date”) and the Event Market Price is less
than the Conversion Price then in effect (after giving effect to the adjustment
in Section 7(b) above), then on the sixteenth (16th) Trading Day immediately
following such Stock Combination Event Date, the Conversion Price then in effect
on such sixteenth (16th) Trading Day (after giving effect to the adjustment in
Section 7(b) above) shall be reduced (but in no event increased) to the Event
Market Price. For the avoidance of doubt, if the adjustment in the immediately
preceding sentence would otherwise result in an increase in the Conversion Price
hereunder, no adjustment shall be made.

 

(e)          Other Events. In the event that the Company (or any Subsidiary)
shall take any action to which the provisions hereof are not strictly
applicable, or, if applicable, would not operate to protect the Holder from
dilution or if any event occurs of the type contemplated by the provisions of
this Section 7 but not expressly provided for by such provisions (including,
without limitation, the granting of stock appreciation rights, phantom stock
rights or other rights with equity features), then the Company’s board of
directors shall in good faith determine and implement an appropriate adjustment
in the Conversion Price so as to protect the rights of the Holder, provided that
no such adjustment pursuant to this Section 7(e) will increase the Conversion
Price as otherwise determined pursuant to this Section 7, provided further that
if the Holder does not accept such adjustments as appropriately protecting its
interests hereunder against such dilution, then the Company’s board of directors
and the Holder shall agree, in good faith, upon an independent investment bank
of nationally recognized standing to make such appropriate adjustments, whose
determination shall be final and binding absent manifest error and whose fees
and expenses shall be borne by the Company.

 

(f)          Calculations. All calculations under this Section 7 shall be made
by rounding to the nearest cent or the nearest 1/100th of a share, as
applicable. The number of shares of Common Stock outstanding at any given time
shall not include shares owned or held by or for the account of the Company, and
the disposition of any such shares shall be considered an issue or sale of
Common Stock.

 

(g)          Voluntary Adjustment by Company. The Company may at any time during
the term of this Note, with the prior written consent of the Required Holders,
reduce the then current Conversion Price to any amount and for any period of
time deemed appropriate by the board of directors of the Company.

  

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8.            INSTALLMENT CONVERSION OR REDEMPTION.

  

(a)          General. On each applicable Installment Date the Company shall pay
to the Holder of this Note the applicable Installment Amount due on such date by
converting such Installment Amount in accordance with this Section 8 (an
“Installment Conversion”); provided further that the Company shall not be
entitled to effect an Installment Conversion with respect to any portion of such
Installment Amount and shall be required to pay the entire amount of such
Installment Amount in cash (an “Installment Redemption”) if on the applicable
Installment Notice Due Date or on the applicable Installment Date (as the case
may be) there is an Equity Conditions Failure, except that an Installment
Conversion may still occur on the applicable Installment Date in accordance with
Section 8(b) with the written consent of the Holder. On the date which is the
twenty-first (21st) Trading Day prior to each Installment Date (or, with respect
to the initial Installment Date, the Initial Installment Notice Due Date) (each,
an “Installment Notice Due Date”), the Company shall deliver written notice
(each, an “Installment Notice” and the date all of the holders receive such
notice is referred to as to the “Installment Notice Date”), to each holder of
Notes and such Installment Notice shall (i) either (A) confirm that the
applicable Installment Amount of such holder’s Note shall be converted in whole
pursuant to an Installment Conversion or (B) (1) state that the Company is
required to redeem, in accordance with the provisions of the Notes, in whole or
in part, the applicable Installment Amount pursuant to an Installment Redemption
and (2) specify the portion of the applicable Installment Amount which the
Company is required to redeem, pursuant to an Installment Redemption (such
amount to be redeemed in cash, the “Installment Redemption Amount”) and the
portion of the applicable Installment Amount, if any, with respect to which the
Company will, and is permitted to, effect an Installment Conversion (such amount
of the applicable Installment Amount so specified to be so converted pursuant to
this Section 8 is referred to herein as the “Installment Conversion Amount”),
which amounts when added together, must equal the entire applicable Installment
Amount and (ii) if the applicable Installment Amount is to be paid, in whole or
in part, pursuant to an Installment Conversion, certify that there is not then
an Equity Conditions Failure as of the date of the Installment Notice. Each
Installment Notice shall be irrevocable and may not be revoked by the Company.
If the Company does not timely deliver an Installment Notice in accordance with
this Section 8 with respect to a particular Installment Date, then the Company
shall be deemed to have delivered an irrevocable Installment Notice confirming
an Installment Conversion of the entire Installment Amount payable on such
Installment Date and shall be deemed to have certified that there is not then an
Equity Conditions Failure in connection with such Installment Conversion. No
later than two (2) Trading Days after delivery or deemed delivery (as
applicable) of the applicable Installment Notice setting forth an Installment
Conversion Amount, the Company shall deliver to the Holder’s account with DTC
such number of shares of Common Stock (the “Pre-Installment Conversion Shares”)
equal to the quotient of (x) such Installment Conversion Amount divided by (y)
the Pre-Installment Conversion Price, and as to which the Holder shall be the
owner thereof as of such time of delivery or deemed delivery (as the case may
be) of such Installment Notice. Except as expressly provided in this Section
8(a), the Company shall convert and/or redeem the applicable Installment Amount
of this Note pursuant to this Section 8 and the corresponding Installment
Amounts of the Other Notes pursuant to the corresponding provisions of the Other
Notes in the same ratio of the applicable Installment Amount being converted
and/or redeemed hereunder. The applicable Installment Conversion Amount (whether
set forth in the applicable Installment Notice or by operation of this Section
8) shall be converted in accordance with Section 8(b) and the applicable
Installment Redemption Amount shall be redeemed in accordance with Section 8(c).

 

23 

 

 

(b)         Mechanics of Installment Conversion. Subject to Section 3(d), if the
Company delivers an Installment Notice or is deemed to have delivered an
Installment Notice certifying that such Installment Amount is being paid, in
whole or in part, in an Installment Conversion in accordance with Section 8(a),
then the remainder of this Section 8(b) shall apply. The applicable Installment
Conversion Amount, if any, shall be converted on the applicable Installment Date
at the applicable Installment Conversion Price and the Company shall, on such
Installment Date, deliver to the Holder’s account with DTC such shares of Common
Stock issued upon such conversion (subject to the reduction contemplated by the
immediately following sentence and, if applicable, the penultimate sentence of
this Section 8(b)), provided that the Equity Conditions are then satisfied (or
waived in writing by the Holder) on such Installment Date and an Installment
Conversion is not otherwise prohibited under any other provision of this Note.
The number of shares of Common Stock to be delivered upon such Installment
Conversion shall be reduced by the number of any Pre-Installment Conversion
Shares delivered in connection with such Installment Date. If an Event of
Default occurs during any applicable Equity Conditions Measuring Period, then,
at the option of the Holder designated in writing to the Company, either (i) the
Holder shall return to the Company all, or any part, of such Pre-Installment
Conversion Shares delivered in connection with the applicable Installment Date
or (ii) the Conversion Amount used to calculate the Event of Default Redemption
Price shall be reduced by the product of (x) the Installment Conversion Amount
applicable to such Installment Date (as adjusted downward proportionally with
respect to any Pre-Installment Conversion Shares returned to the Company
pursuant to clause (i) above) multiplied by (y) the Conversion Share Ratio (as
defined below). If any of the Equity Conditions are not satisfied (or waived in
writing by the Holder) on such Installment Date or an Installment Conversion is
not otherwise permitted under any other provision of this Note, then, at the
option of the Holder designated in writing to the Company, the Holder may
require the Company to do any one or more of the following: (i) the Company
shall redeem all or any part designated by the Holder of the unconverted
Installment Conversion Amount (such designated amount is referred to as the
“Designated Redemption Amount”) and the Company shall pay to the Holder within
three (3) days of such Installment Date, by wire transfer of immediately
available funds, an amount in cash equal to 125% of such Designated Redemption
Amount, and/or (ii) the Installment Conversion shall be null and void with
respect to all or any part designated by the Holder of the unconverted
Installment Conversion Amount and the Holder shall be entitled to all the rights
of a holder of this Note with respect to such designated part of the Installment
Conversion Amount; provided, however, the Conversion Price for such designated
part of such unconverted Installment Conversion Amount shall thereafter be
adjusted to equal the lesser of (A) the Installment Conversion Price as in
effect on the date on which the Holder voided the Installment Conversion and (B)
the Installment Conversion Price that would be in effect on the date on which
the Holder delivers a Conversion Notice relating thereto as if such date was an
Installment Date. In addition, if any of the Equity Conditions are not satisfied
(or waived in writing by the Holder) on such Installment Date or an Installment
Conversion is not otherwise permitted under any other provision of this Note,
then, at the Holder’s option, either (I) the Holder shall return any
Pre-Installment Conversion Shares delivered in connection with the applicable
Installment Date or (II) the applicable Designated Redemption Amount shall be
reduced by the product of (X) the Installment Conversion Amount applicable to
such Installment Date multiplied by (Y) the Conversion Share Ratio. If the
Company fails to redeem any Designated Redemption Amount by the third (3rd) day
following the applicable Installment Date by payment of such amount by such
date, then the Holder shall have the rights set forth in Section 11(a) as if the
Company failed to pay the applicable Installment Redemption Price (as defined
below) and all other rights under this Note (including, without limitation, such
failure constituting an Event of Default described in Section 4(a)(vi)).
Notwithstanding anything to the contrary in this Section 8(b), but subject to
3(d), until the Company delivers Common Stock representing the Installment
Conversion Amount to the Holder, the Installment Conversion Amount may be
converted by the Holder into Common Stock pursuant to Section 3. In the event
that the Holder elects to convert the Installment Conversion Amount prior to the
applicable Installment Date as set forth in the immediately preceding sentence,
the Installment Conversion Amount so converted shall be deducted from the
Installment Amount(s) relating to the applicable Installment Date(s) as set
forth in the applicable Conversion Notice. If, with respect to an Installment
Date, the number of Pre-Installment Conversion Shares delivered to the Holder
exceeds the number of Post-Installment Conversion Shares with respect to such
Installment Date, then the number of shares of Common Stock equal to such excess
shall constitute a credit against the number of shares of Common Stock to be
issued to such Holder pursuant to Section 8(a) hereof, at the option of the
Holder, either (x) against any conversion of this Note pursuant to Section
3(c)(i) as selected by the Holder or (y) on the Maturity Date, or, if earlier,
the last Installment Date, reducing the number of shares of Common Stock
required to be actually issued by the Company to the Holder on such date by the
amount of such excess on a share-for-share basis. The Company shall pay any and
all taxes that may be payable with respect to the issuance and delivery of any
shares of Common Stock in any Installment Conversion hereunder.

 

24 

 

 

(c)         Mechanics of Installment Redemption. If the Company is required to
effect an Installment Redemption, in whole or in part, in accordance with
Section 8(a), then the Installment Redemption Amount, if any, shall be redeemed
by the Company in cash on the applicable Installment Date by wire transfer to
the Holder of immediately available funds in an amount equal to 105% of the
applicable Installment Redemption Amount (the “Installment Redemption Price”).
If the Company fails to redeem such Installment Redemption Amount on such
Installment Date by payment of the Installment Redemption Price, then, at the
option of the Holder designated in writing to the Company (any such designation
shall be a “Conversion Notice” for purposes of this Note), the Holder may
require the Company to convert all or any part of the Installment Redemption
Amount at the Installment Conversion Price (determined as of the date of such
designation as if such date were an Installment Date). Conversions required by
this Section 8(c) shall be made in accordance with the provisions of Section
3(c). Notwithstanding anything to the contrary in this Section 8(c), but subject
to Section 3(d), until the Installment Redemption Price (together with any Late
Charges thereon) is paid in full, the Installment Redemption Amount (together
with any Late Charges thereon) may be converted, in whole or in part, by the
Holder into Common Stock pursuant to Section 3. In the event the Holder elects
to convert all or any portion of the Installment Redemption Amount prior to the
applicable Installment Date as set forth in the immediately preceding sentence,
the Installment Redemption Amount so converted shall be deducted from the
Installment Amounts relating to the applicable Installment Date(s) as set forth
in the applicable Conversion Notice. Redemptions required by this Section 8(c)
shall be made in accordance with the provisions of Section 11.

 

25 

 

 

(d)         Deferred Installment Amount. Notwithstanding any provision of this
Section 8(d) to the contrary, the Holder may, at its option and in its sole
discretion, deliver a written notice to the Company no later than the Trading
Day immediately prior to an Installment Date electing to have the payment of all
or any portion of an Installment Amount payable on such Installment Date
deferred (such amount deferred, the “Deferral Amount”) until any subsequent
Installment Date selected by the Holder, in its sole discretion, in which case,
the Deferral Amount shall be added to, and become part of, such subsequent
Installment Amount and such Deferral Amount shall continue to accrue Interest
hereunder. Any notice delivered by the Holder pursuant to this Section 8(d)
shall set forth (i) the Deferral Amount and (ii) the date that such Deferral
Amount shall now be payable.

 

(e)         Accelerations. Notwithstanding anything herein to the contrary,
during the period commencing on an Installment Date (a “Current Installment
Date”) and ending on the Trading Day immediately prior to the next Installment
Date (each, an “Installment Period”), at the option of the Holder, at one or
more times, the Holder may convert other Installment Amounts of this Note (each,
an “Acceleration”), in whole or in part, at the Installment Conversion Price of
such Current Installment Date in accordance with the conversion procedures set
forth in Section 3 hereunder, mutatis mutandis. Notwithstanding the foregoing,
with respect to any given Installment Period, the Holder may not elect to effect
any Acceleration during such Installment Period if either (x) in the aggregate,
all the Accelerations in such Installment Period exceeds the sum of two (2)
other Installment Amounts, or (y) Accelerations have been consummated in four
(4) prior Installment Periods. For the avoidance of doubt, this Section 8(e)
shall apply independently to each Note held by a Holder.

 

9.          NONCIRCUMVENTION. The Company hereby covenants and agrees that the
Company will not, by amendment of its Certificate of Incorporation (as defined
in the Securities Purchase Agreement), Bylaws (as defined in the Securities
Purchase Agreement) or through any reorganization, transfer of assets,
consolidation, merger, scheme of arrangement, dissolution, issue or sale of
securities, or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Note, and will at all times in good
faith carry out all of the provisions of this Note and take all action as may be
required to protect the rights of the Holder of this Note. Without limiting the
generality of the foregoing or any other provision of this Note or the other
Transaction Documents, the Company (a) shall not increase the par value of any
shares of Common Stock receivable upon conversion of this Note above the
Conversion Price then in effect, and (b) shall take all such actions as may be
necessary or appropriate in order that the Company may validly and legally issue
fully paid and nonassessable shares of Common Stock upon the conversion of this
Note. Notwithstanding anything herein to the contrary, if after the sixty (60)
calendar day anniversary of the Issuance Date, the Holder is not permitted to
convert this Note in full for any reason (other than pursuant to restrictions
set forth in Section 3(d)(i) hereof), the Company shall use its best efforts to
promptly remedy such failure, including, without limitation, obtaining such
consents or approvals as necessary to permit such conversion into shares of
Common Stock.

 

26 

 

 

10.         RESERVATION OF AUTHORIZED SHARES.

 

(a)          Reservation. The Company shall initially reserve out of its
authorized and unissued Common Stock a number of shares of Common Stock for each
of the Notes equal to 200% of the entire Conversion Rate with respect to the
entire Conversion Amount of each such Note as of the Issuance Date. So long as
any of the Notes are outstanding, the Company shall take all action necessary to
reserve and keep available out of its authorized and unissued Common Stock,
solely for the purpose of effecting the conversion of the Notes, 200% of the
number of shares of Common Stock as shall from time to time be necessary to
effect the conversion of all of the Notes then outstanding, provided that at no
time shall the number of shares of Common Stock so reserved be less than the
number of shares required to be reserved by the previous sentence (without
regard to any limitations on conversions) (the “Required Reserve Amount”). The
initial number of shares of Common Stock reserved for conversions of the Notes
and each increase in the number of shares so reserved shall be allocated pro
rata among the holders of the Notes based on the original principal amount of
the Notes held by each holder on the Closing Date (and pursuant to any Permitted
Exchange to any Buyer, if any) or increase in the number of reserved shares, as
the case may be (the “Authorized Share Allocation”). In the event that a holder
shall sell or otherwise transfer any of such holder’s Notes, each transferee
shall be allocated a pro rata portion of such holder’s Authorized Share
Allocation. Any shares of Common Stock reserved and allocated to any Person
which ceases to hold any Notes shall be allocated to the remaining holders of
Notes, pro rata based on the principal amount of the Notes then held by such
holders.

 

(b)          Insufficient Authorized Shares. If, notwithstanding Section 10(a),
and not in limitation thereof, at any time while any of the Notes remain
outstanding the Company does not have a sufficient number of authorized and
unreserved shares of Common Stock to satisfy its obligation to reserve for
issuance upon conversion of the Notes at least a number of shares of Common
Stock equal to the Required Reserve Amount (an “Authorized Share Failure”), then
the Company shall immediately take all action necessary to increase the
Company’s authorized shares of Common Stock to an amount sufficient to allow the
Company to reserve the Required Reserve Amount for the Notes then outstanding.
Without limiting the generality of the foregoing sentence, as soon as
practicable after the date of the occurrence of an Authorized Share Failure, but
in no event later than ninety (90) days after the occurrence of such Authorized
Share Failure, the Company shall hold a meeting of its stockholders for the
approval of an increase in the number of authorized shares of Common Stock. In
connection with such meeting, the Company shall provide each stockholder with a
proxy statement and shall use its best efforts to solicit its stockholders’
approval of such increase in authorized shares of Common Stock and to cause its
board of directors to recommend to the stockholders that they approve such
proposal. In the event that the Company is prohibited from issuing shares of
Common Stock pursuant to the terms of this Note due to the failure by the
Company to have sufficient shares of Common Stock available out of the
authorized but unissued shares of Common Stock (such unavailable number of
shares of Common Stock, the “Authorized Failure Shares”), in lieu of delivering
such Authorized Failure Shares to the Holder, the Company shall pay cash in
exchange for the redemption of such portion of the Conversion Amount convertible
into such Authorized Failure Shares at a price equal to the sum of (i) the
product of (x) such number of Authorized Failure Shares and (y) the greatest
Closing Sale Price of the Common Stock on any Trading Day during the period
commencing on the date the Holder delivers the applicable Conversion Notice with
respect to such Authorized Failure Shares to the Company and ending on the date
of such issuance and payment under this Section 10(a); and (ii) to the extent
the Holder purchases (in an open market transaction or otherwise) shares of
Common Stock to deliver in satisfaction of a sale by the Holder of Authorized
Failure Shares, any brokerage commissions and other out-of-pocket expenses, if
any, of the Holder incurred in connection therewith. Nothing contained in
Section 10(a) or this Section 10(b) shall limit any obligations of the Company
under any provision of the Securities Purchase Agreement.

 

27 

 

 

11.         REDEMPTIONS.

 

(a)          Mechanics. The Company shall deliver the applicable Event of
Default Redemption Price to the Holder in cash within five (5) Business Days
after the Company’s receipt of the Holder’s Event of Default Redemption Notice.
If the Holder has submitted a Change of Control Redemption Notice in accordance
with Section 5(b), the Company shall deliver the applicable Change of Control
Redemption Price to the Holder in cash concurrently with the consummation of
such Change of Control if such notice is received prior to the consummation of
such Change of Control and within five (5) Business Days after the Company’s
receipt of such notice otherwise. The Company shall deliver the applicable
Installment Redemption Price to the Holder in cash on the applicable Installment
Date. Notwithstanding anything herein to the contrary, in connection with any
redemption hereunder at a time the Holder is entitled to receive a cash payment
under any of the other Transaction Documents, at the option of the Holder
delivered in writing to the Company, the applicable Redemption Price hereunder
shall be increased by the amount of such cash payment owed to the Holder under
such other Transaction Document and, upon payment in full or conversion in
accordance herewith, shall satisfy the Company’s payment obligation under such
other Transaction Document. In the event of a redemption of less than all of the
Conversion Amount of this Note, the Company shall promptly cause to be issued
and delivered to the Holder a new Note (in accordance with Section 18(d))
representing the outstanding Principal which has not been redeemed. In the event
that the Company does not pay the applicable Redemption Price to the Holder
within the time period required, at any time thereafter and until the Company
pays such unpaid Redemption Price in full, the Holder shall have the option, in
lieu of redemption, to require the Company to promptly return to the Holder all
or any portion of this Note representing the Conversion Amount that was
submitted for redemption and for which the applicable Redemption Price (together
with any Late Charges thereon) has not been paid. Upon the Company’s receipt of
such notice, (x) the applicable Redemption Notice shall be null and void with
respect to such Conversion Amount, (y) the Company shall immediately return this
Note, or issue a new Note (in accordance with Section 18(d)), to the Holder, and
in each case the principal amount of this Note or such new Note (as the case may
be) shall be increased by an amount equal to the difference between (1) the
applicable Redemption Price (as the case may be, and as adjusted pursuant to
this Section 11, if applicable) minus (2) the Principal portion of the
Conversion Amount submitted for redemption and (z) the Conversion Price of this
Note or such new Notes (as the case may be) shall be automatically adjusted with
respect to each conversion effected thereafter by the Holder to the lowest of
(A) the Conversion Price as in effect on the date on which the applicable
Redemption Notice is voided, (B) 85% of the lowest Closing Bid Price of the
Common Stock during the period beginning on and including the date on which the
applicable Redemption Notice is delivered to the Company and ending on and
including the date on which the applicable Redemption Notice is voided and (C)
85% of the VWAP of the Common Stock for the five (5) Trading Day period
immediately preceding the Conversion Date of the applicable conversion. The
Holder’s delivery of a notice voiding a Redemption Notice and exercise of its
rights following such notice shall not affect the Company’s obligations to make
any payments of Late Charges which have accrued prior to the date of such notice
with respect to the Conversion Amount subject to such notice.

 

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(b)          Redemption by Other Holders. Upon the Company’s receipt of notice
from any of the holders of the Other Notes for redemption or repayment as a
result of an event or occurrence substantially similar to the events or
occurrences described in Section 4(b) or Section 5(b) (each, an “Other
Redemption Notice”), the Company shall immediately, but no later than one (1)
Business Day of its receipt thereof, forward to the Holder by facsimile or
electronic mail a copy of such notice. If the Company receives a Redemption
Notice and one or more Other Redemption Notices, during the seven (7) Business
Day period beginning on and including the date which is three (3) Business Days
prior to the Company’s receipt of the Holder’s applicable Redemption Notice and
ending on and including the date which is three (3) Business Days after the
Company’s receipt of the Holder’s applicable Redemption Notice and the Company
is unable to redeem all principal, interest and other amounts designated in such
Redemption Notice and such Other Redemption Notices received during such seven
(7) Business Day period, then the Company shall redeem a pro rata amount from
each holder of the Notes (including the Holder) based on the principal amount of
the Notes submitted for redemption pursuant to such Redemption Notice and such
Other Redemption Notices received by the Company during such seven (7) Business
Day period.

 

12.         VOTING RIGHTS. The Holder shall have no voting rights as the holder
of this Note, except as required by law (including, without limitation, the
Delaware Business Corporation Act) and as expressly provided in this Note.

 

13.         COVENANTS. Until all of the Notes have been converted, redeemed or
otherwise satisfied in accordance with their terms:

 

(a)          Rank. All payments due under this Note (a) shall rank pari passu
with all Other Notes and (b) shall be senior to all other Indebtedness of the
Company and its Subsidiaries.

 

(b)          Incurrence of Indebtedness. The Company shall not, and the Company
shall cause each of its Subsidiaries to not, directly or indirectly, incur or
guarantee, assume or suffer to exist any Indebtedness (other than (i) the
Indebtedness evidenced by this Note and the Other Notes and (ii) other Permitted
Indebtedness).

 

29 

 

 

(c)          Existence of Liens. The Company shall not, and the Company shall
cause each of its Subsidiaries to not, directly or indirectly, allow or suffer
to exist any mortgage, lien, pledge, charge, security interest or other
encumbrance upon or in any property or assets (including accounts and contract
rights) owned by the Company or any of its Subsidiaries (collectively, “Liens”)
other than Permitted Liens.

 

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

 

(e)          Restriction on Redemption and Cash Dividends. The Company shall
not, and the Company shall cause each of its Subsidiaries to not, directly or
indirectly, redeem, repurchase or declare or pay any cash dividend or
distribution on any of its capital stock.

 

(f)          Restriction on Transfer of Assets. The Company shall not, and the
Company shall cause each of its Subsidiaries to not, directly or indirectly,
sell, lease, license, assign, transfer, spin-off, split-off, close, convey or
otherwise dispose of any assets or rights of the Company or any Subsidiary owned
or hereafter acquired whether in a single transaction or a series of related
transactions, other than (i) sales, leases, licenses, assignments, transfers,
conveyances and other dispositions of such assets or rights by the Company and
its Subsidiaries in the ordinary course of business consistent with its past
practice and (ii) sales of inventory and product in the ordinary course of
business.

 

(g)          Maturity of Indebtedness. The Company shall not, and the Company
shall cause each of its Subsidiaries to not, directly or indirectly, permit any
Indebtedness of the Company or any of its Subsidiaries to mature or accelerate
prior to the Maturity Date.

 

(h)          Change in Nature of Business. The Company shall not, and the
Company shall cause each of its Subsidiaries to not, directly or indirectly,
engage in any material line of business substantially different from those lines
of business conducted by or publicly contemplated to be conducted by the Company
and each of its Subsidiaries on the Subscription Date or any business
substantially related or incidental thereto. The Company shall not, and the
Company shall cause each of its Subsidiaries to not, directly or indirectly,
modify its or their corporate structure or purpose.

 

(i)           Preservation of Existence, Etc. The Company shall maintain and
preserve, and cause each of its Subsidiaries to maintain and preserve, its
existence, rights and privileges, and become or remain, and cause each of its
Subsidiaries to become or remain, duly qualified and in good standing in each
jurisdiction in which the character of the properties owned or leased by it or
in which the transaction of its business makes such qualification necessary.

 

30 

 

 

(j)           Maintenance of Properties, Etc. The Company shall maintain and
preserve, and cause each of its Subsidiaries to maintain and preserve, all of
its properties which are necessary or useful in the proper conduct of its
business in good working order and condition, ordinary wear and tear excepted,
and comply, and cause each of its Subsidiaries to comply, at all times with the
provisions of all leases to which it is a party as lessee or under which it
occupies property, so as to prevent any loss or forfeiture thereof or
thereunder.

 

(k)          Maintenance of Intellectual Property. The Company will, and will
cause each of its Subsidiaries to, take all action necessary or advisable to
maintain all of the Intellectual Property Rights (as defined in the Securities
Purchase Agreement) of the Company and/or any of its Subsidiaries that are
necessary or material to the conduct of its business in full force and effect.

 

(l)           Maintenance of Insurance. The Company shall maintain, and cause
each of its Subsidiaries to maintain, insurance with responsible and reputable
insurance companies or associations (including, without limitation,
comprehensive general liability, hazard, rent and business interruption
insurance) with respect to its properties (including all real properties leased
or owned by it) and business, in such amounts and covering such risks as is
required by any governmental authority having jurisdiction with respect thereto
or as is carried generally in accordance with sound business practice by
companies in similar businesses similarly situated.

 

(m)         Transactions with Affiliates. The Company shall not, nor shall it
permit any of its Subsidiaries to, enter into, renew, extend or be a party to,
any transaction or series of related transactions (including, without
limitation, the purchase, sale, lease, transfer or exchange of property or
assets of any kind or the rendering of services of any kind) with any affiliate,
except in the ordinary course of business in a manner and to an extent
consistent with past practice and necessary or desirable for the prudent
operation of its business, for fair consideration and on terms no less favorable
to it or its Subsidiaries than would be obtainable in a comparable arm’s length
transaction with a Person that is not an affiliate thereof.

 

(n)          Restricted Issuances. The Company shall not, directly or
indirectly, without the prior written consent of the holders of a majority in
aggregate principal amount of the Notes then outstanding, (i) issue any Notes
(other than as contemplated by the Securities Purchase Agreement and the Notes)
or (ii) issue any other securities that would cause a breach or default under
the Notes or the Warrants.

 

31 

 

  

(o)          Controlled Accounts; Controlled Account Release; Collateral.

 

(i)        General. The Company shall establish and maintain a bank account for
each holder of Notes (collectively, including the Holder Master Restricted
Account, the “Master Restricted Accounts”) at a Controlled Account Bank, which
Master Restricted Account applicable to a holder of Notes shall be subject to a
deposit account control agreement in form and substance reasonably acceptable to
such holder of Notes (each, a “Controlled Account Agreement”). On the Issuance
Date, the Company shall have directed the initial Buyers to deposit an aggregate
of $7,150,000 of the Purchase Price (as defined in the Securities Purchase
Agreement) into Master Restricted Accounts.

 

(ii)       Controlled Account Release. Upon the occurrence of any Controlled
Account Release Event, the Holder shall, as soon as commercially practicable,
but in no event later than two (2) Trading Days thereafter, cause the applicable
Controlled Account Release Amount to be released from the Holder Master
Restricted Account and deposited into an bank account specified in writing by
the Company on or prior to such date (each a “Controlled Account Release”);
provided, that if the Company fails to select a bank account in a writing
delivered to the Holder on or prior to such second Trading Day, the Holder shall
effect such Controlled Account Release as soon as commercially practicable after
receipt of such bank account election from the Company.

 

(iii)      Grant of Security Interest. The Company hereby grants and pledges to
the Holder a continuing security interest in any cash or other assets, from time
to time, in that certain deposit account called the Holder Master Restricted
Account, including any and all cash, proceeds, funds, credits, rights and other
assets therein or arising therefrom, from time to time, and any additions,
dividends, profits and interest in the foregoing and any replacements or
substitutions therefore (collectively, the “Collateral”) to secure prompt
repayment of any and all amounts outstanding hereunder from time to time and to
secure prompt performance by the Company of each of its covenants and duties
under the Transaction Documents (as defined in the Securities Purchase
Agreement). Such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a valid,
first priority security interest in later-acquired Collateral. Notwithstanding
any filings undertaken related to Holder’s rights under the New York Uniform
Commercial Code, the Holder’s Lien (as defined in the Notes) on the Collateral
shall remain in effect for so long as any Restricted Principal remains
outstanding. Notwithstanding the foregoing, upon any Controlled Account Release,
but solely with respect to such portion of the Restricted Principal hereunder
subject to such Controlled Account Release (each, a “Controlled Account Release
Amount”), the Holder hereby automatically releases any lien hereunder on such
Controlled Account Release Amount.

 

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(iv)      Cash Payment Obligations. Notwithstanding anything herein to the
contrary, at the option of the Holder, the Holder may satisfy all, or any part,
of any redemption or other cash payment obligation of the Company hereunder
and/or pursuant to any other Transaction Document (as defined in the Securities
Purchase Agreement) (each, a “Cash Payment Obligation”) from the Collateral in
the Holder Master Restricted Account, including, without limitation, in
connection with any Event of Default, Change of Control, Installment Redemption
or payment due at the Maturity Date.  In connection with any Cash Payment
Obligation hereunder, the Company hereby irrevocably consents to the Holder’s
delivery of an instruction letter to the Controlled Account Bank to release
Collateral from the Holder Master Restricted Account, in each case, in an amount
not to exceed any Cash Payment Obligation to the Holder.  Notwithstanding the
foregoing, in the absence of any such election by the Holder, the Company shall
remain obligated to pay such Cash Payment Obligation to the Holder without
regard to any Collateral in the Holder Master Restricted Account. Upon the
occurrence of any event which could reasonably be expected to result in a Cash
Payment Obligation (including, without limitation, any breach of an Equity
Condition (other than clauses (i) and (vii) of the definition of Equity
Condition prior to the six month anniversary of the initial Issuance Date)), the
Holder may, at the Holder’s option, withdraw all, or any part, of the Collateral
in the Holder Master Restricted Account; provided that such withdrawal shall not
constitute the delivery of a Redemption Notice hereunder or payment hereunder
unless the Holder specifies in writing to the Company that the Holder has
applied such Collateral in satisfaction of such Cash Payment Obligation.

 

(v)       Breach of Controlled Account Agreement. If the Controlled Account Bank
breaches any covenant or other term or condition of any Controlled Account
Agreement or otherwise fails to promptly comply with the instructions of the
Holder in connection with the Collateral, the Holder may, at its option,
withdraw the Collateral from the Controlled Account Bank and hold such
Collateral until such time as (x) the Company and the Holder have agreed upon a
replacement Controlled Account Bank and (y) a Controlled Account Agreement with
respect to such Collateral and a new account shall have been duly executed by
the Company, the Holder and the replacement Controlled Account Bank.
Notwithstanding anything herein to the contrary, if the Company or any of its
Subsidiaries receives any of the Collateral in breach of any Controlled Account
Agreement (or receives notice from any holder of Notes that an amount was wired
to the Company from a Master Restricted Account attributable to such holder of
Notes without the proper authorization of such holder of Notes), the Company
shall promptly cause such amounts to be returned to such applicable Master
Restricted Account.

 

33 

 

 

(p)          Independent Investigation. At the request of the Holder either (x)
at any time when an Event of Default has occurred and is continuing, (y) upon
the occurrence of an event that with the passage of time or giving of notice
would constitute an Event of Default or (z) at any time the Holder reasonably
believes an Event of Default may have occurred or be continuing, the Company
shall hire an independent, reputable investment bank selected by the Company and
approved by the Holder to investigate as to whether any breach of this Note has
occurred (the “Independent Investigator”). If the Independent Investigator
determines that such breach of this Note has occurred, the Independent
Investigator shall notify the Company of such breach and the Company shall
deliver written notice to each holder of a Note of such breach. In connection
with such investigation, the Independent Investigator may, during normal
business hours, inspect all contracts, books, records, personnel, offices and
other facilities and properties of the Company and its Subsidiaries and, to the
extent available to the Company after the Company uses reasonable efforts to
obtain them, the records of its legal advisors and accountants (including the
accountants’ work papers) and any books of account, records, reports and other
papers not contractually required of the Company to be confidential or secret,
or subject to attorney-client or other evidentiary privilege, and the
Independent Investigator may make such copies and inspections thereof as the
Independent Investigator may reasonably request. The Company shall furnish the
Independent Investigator with such financial and operating data and other
information with respect to the business and properties of the Company as the
Independent Investigator may reasonably request. The Company shall permit the
Independent Investigator to discuss the affairs, finances and accounts of the
Company with, and to make proposals and furnish advice with respect thereto to,
the Company’s officers, directors, key employees and independent public
accountants or any of them (and by this provision the Company authorizes said
accountants to discuss with such Independent Investigator the finances and
affairs of the Company and any Subsidiaries), all at such reasonable times, upon
reasonable notice, and as often as may be reasonably requested.

 

14.        SECURITY. This Note is secured to the extent and in the manner set
forth in this Note.

 

15.        DISTRIBUTION OF ASSETS. In addition to any adjustments pursuant to
Section 7, if the Company shall declare or make any dividend or other
distributions of its assets (or rights to acquire its assets) to any or all
holders of shares of Common Stock, by way of return of capital or otherwise
(including without limitation, any distribution of cash, stock or other
securities, property or options by way of a dividend, spin off,
reclassification, corporate rearrangement, scheme of arrangement or other
similar transaction) (the “Distributions”), then the Holder will be entitled to
such Distributions as if the Holder had held the number of shares of Common
Stock acquirable upon complete conversion of this Note (without taking into
account any limitations or restrictions on the convertibility of this Note)
immediately prior to the date on which a record is taken for such Distribution
or, if no such record is taken, the date as of which the record holders of
Common Stock are to be determined for such Distributions (provided, however,
that to the extent that the Holder’s right to participate in any such
Distribution would result in the Holder and the other Attribution Parties
exceeding the Maximum Percentage, then the Holder shall not be entitled to
participate in such Distribution to the extent of the Maximum Percentage (and
shall not be entitled to beneficial ownership of such shares of Common Stock as
a result of such Distribution (and beneficial ownership) to the extent of any
such excess) and the portion of such Distribution shall be held in abeyance for
the benefit of the Holder until such time or times, if ever, as its right
thereto would not result in the Holder and the other Attribution Parties
exceeding the Maximum Percentage, at which time or times the Holder shall be
granted such Distribution (and any Distributions declared or made on such
initial Distribution or on any subsequent Distribution held similarly in
abeyance) to the same extent as if there had been no such limitation).

 

34 

 

 

16.         AMENDING THE TERMS OF THIS NOTE. The prior written consent of the
Holder shall be required for any change, waiver or amendment to this Note.

 

17.         TRANSFER. This Note and any shares of Common Stock issued upon
conversion of this Note may be offered, sold, assigned or transferred by the
Holder without the consent of the Company, subject only to the provisions of
Section 2(g) of the Securities Purchase Agreement.

 

18.         REISSUANCE OF THIS NOTE.

 

(a)          Transfer. If this Note is to be transferred, the Holder shall
surrender this Note to the Company, whereupon the Company will forthwith issue
and deliver upon the order of the Holder a new Note (in accordance with Section
18(d)), registered as the Holder may request, representing the outstanding
Principal being transferred by the Holder and, if less than the entire
outstanding Principal is being transferred, a new Note (in accordance with
Section 18(d)) to the Holder representing the outstanding Principal not being
transferred. The Holder and any assignee, by acceptance of this Note,
acknowledge and agree that, by reason of the provisions of Section 3(c)(iii)
following conversion or redemption of any portion of this Note, the outstanding
Principal represented by this Note may be less than the Principal stated on the
face of this Note.

 

(b)          Lost, Stolen or Mutilated Note. Upon receipt by the Company of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of this Note (as to which a written certification and the
indemnification contemplated below shall suffice as such evidence), and, in the
case of loss, theft or destruction, of any indemnification undertaking by the
Holder to the Company in customary and reasonable form and, in the case of
mutilation, upon surrender and cancellation of this Note, the Company shall
execute and deliver to the Holder a new Note (in accordance with Section 18(d))
representing the outstanding Principal.

 

(c)          Note Exchangeable for Different Denominations. This Note is
exchangeable, upon the surrender hereof by the Holder at the principal office of
the Company, for a new Note or Notes (in accordance with Section 18(d) and in
principal amounts of at least $1,000) representing in the aggregate the
outstanding Principal of this Note, and each such new Note will represent such
portion of such outstanding Principal as is designated by the Holder at the time
of such surrender.

 

(d)          Issuance of New Notes. Whenever the Company is required to issue a
new Note pursuant to the terms of this Note, such new Note (i) shall be of like
tenor with this Note, (ii) shall represent, as indicated on the face of such new
Note, the Principal remaining outstanding (or in the case of a new Note being
issued pursuant to Section 18(a) or Section 18(c), the Principal designated by
the Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining
outstanding under this Note immediately prior to such issuance of new Notes),
(iii) shall have an issuance date, as indicated on the face of such new Note,
which is the same as the Issuance Date of this Note, (iv) shall have the same
rights and conditions as this Note, and (v) shall represent accrued and unpaid
Interest and Late Charges on the Principal and Interest of this Note, from the
Issuance Date.

 

35 

 

 

19.         REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND
INJUNCTIVE RELIEF. The remedies provided in this Note shall be cumulative and in
addition to all other remedies available under this Note and any of the other
Transaction Documents at law or in equity (including a decree of specific
performance and/or other injunctive relief), and nothing herein shall limit the
Holder’s right to pursue actual and consequential damages for any failure by the
Company to comply with the terms of this Note. The Company covenants to the
Holder that there shall be no characterization concerning this instrument other
than as expressly provided herein. Amounts set forth or provided for herein with
respect to payments, conversion and the like (and the computation thereof) shall
be the amounts to be received by the Holder and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holder and that the
remedy at law for any such breach may be inadequate. The Company therefore
agrees that, in the event of any such breach or threatened breach, the Holder
shall be entitled, in addition to all other available remedies, to an injunction
restraining any such breach or any such threatened breach, without the necessity
of showing economic loss and without any bond or other security being required.
The Company shall provide all information and documentation to the Holder that
is requested by the Holder to enable the Holder to confirm the Company’s
compliance with the terms and conditions of this Note (including, without
limitation, compliance with Section 7).

 

20.         PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this Note
is placed in the hands of an attorney for collection or enforcement or is
collected or enforced through any legal proceeding or the Holder otherwise takes
action to collect amounts due under this Note or to enforce the provisions of
this Note or (b) there occurs any bankruptcy, reorganization, receivership of
the Company or other proceedings affecting Company creditors’ rights and
involving a claim under this Note, then the Company shall pay the costs incurred
by the Holder for such collection, enforcement or action or in connection with
such bankruptcy, reorganization, receivership or other proceeding, including,
without limitation, reasonable attorneys’ fees and disbursements. The Company
expressly acknowledges and agrees that no amounts due under this Note shall be
affected, or limited, by the fact that the purchase price paid for this Note was
less than the original Principal amount hereof.

 

21.         CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly
drafted by the Company and the initial Holder and shall not be construed against
any such Person as the drafter hereof. The headings of this Note are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Note. Unless the context clearly indicates otherwise,
each pronoun herein shall be deemed to include the masculine, feminine, neuter,
singular and plural forms thereof. The terms “including,” “includes,” “include”
and words of like import shall be construed broadly as if followed by the words
“without limitation.” The terms “herein,” “hereunder,” “hereof” and words of
like import refer to this entire Note instead of just the provision in which
they are found. Unless expressly indicated otherwise, all section references are
to sections of this Note. Terms used in this Note and not otherwise defined
herein, but defined in the other Transaction Documents, shall have the meanings
ascribed to such terms on the Closing Date in such other Transaction Documents
unless otherwise consented to in writing by the Holder.

 

36 

 

 

22.         FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of
the Holder in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privilege. No waiver shall be effective unless it is
in writing and signed by an authorized representative of the waiving party.
Notwithstanding the foregoing, nothing contained in this Section 22 shall permit
any waiver of any provision of Section 3(d).

 

23.         DISPUTE RESOLUTION.

 

(a)          Submission to Dispute Resolution.

 

(i)          In the case of a dispute relating to a Closing Bid Price, a Closing
Sale Price, a Conversion Price, an Installment Conversion Price, a
Pre-Installment Conversion Price, a VWAP or a fair market value or the
arithmetic calculation of a Conversion Rate, the Restricted Principal, or the
applicable Redemption Price (as the case may be) (including, without limitation,
a dispute relating to the determination of any of the foregoing), the Company or
the Holder (as the case may be) shall submit the dispute to the other party via
facsimile or electronic mail (A) if by the Company, within two (2) Business Days
after the occurrence of the circumstances giving rise to such dispute or (B) if
by the Holder at any time after the Holder learned of the circumstances giving
rise to such dispute. If the Holder and the Company are unable to promptly
resolve such dispute relating to such Closing Bid Price, such Closing Sale
Price, such Conversion Price, such Installment Conversion Price, such
Pre-Installment Conversion Price, such VWAP or such fair market value, or the
arithmetic calculation of such Conversion Rate, the Restricted Principal or such
applicable Redemption Price (as the case may be), at any time after the second
(2nd) Business Day following such initial notice by the Company or the Holder
(as the case may be) of such dispute to the Company or the Holder (as the case
may be), then the Holder may, at its sole option, select an independent,
reputable investment bank to resolve such dispute.

 

(ii)         The Holder and the Company shall each deliver to such investment
bank (A) a copy of the initial dispute submission so delivered in accordance
with the first sentence of this Section 23 and (B) written documentation
supporting its position with respect to such dispute, in each case, no later
than 5:00 p.m. (New York time) by the fifth (5th) Business Day immediately
following the date on which the Holder selected such investment bank (the
“Dispute Submission Deadline”) (the documents referred to in the immediately
preceding clauses (A) and (B) are collectively referred to herein as the
“Required Dispute Documentation”) (it being understood and agreed that if either
the Holder or the Company fails to so deliver all of the Required Dispute
Documentation by the Dispute Submission Deadline, then the party who fails to so
submit all of the Required Dispute Documentation shall no longer be entitled to
(and hereby waives its right to) deliver or submit any written documentation or
other support to such investment bank with respect to such dispute and such
investment bank shall resolve such dispute based solely on the Required Dispute
Documentation that was delivered to such investment bank prior to the Dispute
Submission Deadline). Unless otherwise agreed to in writing by both the Company
and the Holder or otherwise requested by such investment bank, neither the
Company nor the Holder shall be entitled to deliver or submit any written
documentation or other support to such investment bank in connection with such
dispute (other than the Required Dispute Documentation).

 

37 

 

 

(iii)        The Company and the Holder shall cause such investment bank to
determine the resolution of such dispute and notify the Company and the Holder
of such resolution no later than ten (10) Business Days immediately following
the Dispute Submission Deadline. The fees and expenses of such investment bank
shall be borne solely by the Company, and such investment bank’s resolution of
such dispute shall be final and binding upon all parties absent manifest error.

 

(b)          Miscellaneous. The Company expressly acknowledges and agrees that
(i) this Section 23 constitutes an agreement to arbitrate between the Company
and the Holder (and constitutes an arbitration agreement) under § 7501, et seq.
of the New York Civil Practice Law and Rules (“CPLR”) and that the Holder is
authorized to apply for an order to compel arbitration pursuant to CPLR §
7503(a) in order to compel compliance with this Section 23, (ii) a dispute
relating to a Conversion Price includes, without limitation, disputes as to (A)
whether an issuance or sale or deemed issuance or sale of Common Stock occurred
under Section 7(a), (B) the consideration per share at which an issuance or
deemed issuance of Common Stock occurred, (C) whether any issuance or sale or
deemed issuance or sale of Common Stock was an issuance or sale or deemed
issuance or sale of Excluded Securities, (D) whether an agreement, instrument,
security or the like constitutes and Option or Convertible Security and (E)
whether a Dilutive Issuance occurred, (iii) the terms of this Note and each
other applicable Transaction Document shall serve as the basis for the selected
investment bank’s resolution of the applicable dispute, such investment bank
shall be entitled (and is hereby expressly authorized) to make all findings,
determinations and the like that such investment bank determines are required to
be made by such investment bank in connection with its resolution of such
dispute and in resolving such dispute such investment bank shall apply such
findings, determinations and the like to the terms of this Note and any other
applicable Transaction Documents, (iv) the Holder (and only the Holder), in its
sole discretion, shall have the right to submit any dispute described in this
Section 23 to any state or federal court sitting in The City of New York,
Borough of Manhattan in lieu of utilizing the procedures set forth in this
Section 23 and (v) nothing in this Section 23 shall limit the Holder from
obtaining any injunctive relief or other equitable remedies (including, without
limitation, with respect to any matters described in this Section 23).

 

38 

 

 

24.         NOTICES; CURRENCY; PAYMENTS.

 

(a)          Notices. Whenever notice is required to be given under this Note,
unless otherwise provided herein, such notice shall be given in accordance with
Section 9(f) of the Securities Purchase Agreement. The Company shall provide the
Holder with prompt written notice of all actions taken pursuant to this Note,
including in reasonable detail a description of such action and the reason
therefore. Without limiting the generality of the foregoing, the Company will
give written notice to the Holder (i) immediately upon any adjustment of the
Conversion Price, setting forth in reasonable detail, and certifying, the
calculation of such adjustment and (ii) at least fifteen (15) days prior to the
date on which the Company closes its books or takes a record (A) with respect to
any dividend or distribution upon the Common Stock, (B) with respect to any
grant, issuances, or sales of any Options, Convertible Securities or rights to
purchase stock, warrants, securities or other property to holders of shares of
Common Stock or (C) for determining rights to vote with respect to any
Fundamental Transaction, dissolution or liquidation, provided in each case that
such information shall be made known to the public prior to or in conjunction
with such notice being provided to the Holder.

 

(b)          Currency. All dollar amounts referred to in this Note are in United
States Dollars (“U.S. Dollars”), and all amounts owing under this Note shall be
paid in U.S. Dollars. All amounts denominated in other currencies (if any) shall
be converted into the U.S. Dollar equivalent amount in accordance with the
Exchange Rate on the date of calculation. “Exchange Rate” means, in relation to
any amount of currency to be converted into U.S. Dollars pursuant to this Note,
the U.S. Dollar exchange rate as published in the Wall Street Journal on the
relevant date of calculation (it being understood and agreed that where an
amount is calculated with reference to, or over, a period of time, the date of
calculation shall be the final date of such period of time).

 

(c)          Payments. Whenever any payment of cash is to be made by the Company
to any Person pursuant to this Note, unless otherwise expressly set forth
herein, such payment shall be made in lawful money of the United States of
America by a certified check drawn on the account of the Company and sent via
overnight courier service to such Person at such address as previously provided
to the Company in writing (which address, in the case of each of the Buyers,
shall initially be as set forth on the Schedule of Buyers attached to the
Securities Purchase Agreement), provided that the Holder may elect to receive a
payment of cash via wire transfer of immediately available funds by providing
the Company with prior written notice setting out such request and the Holder’s
wire transfer instructions. Whenever any amount expressed to be due by the terms
of this Note is due on any day which is not a Business Day, the same shall
instead be due on the next succeeding day which is a Business Day. Any amount of
Principal or other amounts due under the Transaction Documents which is not paid
when due shall result in a late charge being incurred and payable by the Company
in an amount equal to interest on such amount at the rate of eighteen percent
(18%) per annum from the date such amount was due until the same is paid in full
(“Late Charge”).

 

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

 

39 

 

 

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

 

27.         GOVERNING LAW. This Note shall be construed and enforced in
accordance with, and all questions concerning the construction, validity,
interpretation and performance of this Note shall be governed by, the internal
laws of the State of New York, without giving effect to any choice of law or
conflict of law provision or rule (whether of the State of New York or any other
jurisdictions) that would cause the application of the laws of any jurisdictions
other than the State of New York. Except as otherwise required by Section 23
above, the Company hereby irrevocably submits to the exclusive jurisdiction of
the state and federal courts sitting in The City of New York, Borough of
Manhattan, for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein, and
hereby irrevocably waives, and agrees not to assert in any suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction of
any such court, that such suit, action or proceeding is brought in an
inconvenient forum or that the venue of such suit, action or proceeding is
improper. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. Nothing contained herein shall
be deemed to limit in any way any right to serve process in any manner permitted
by law. Nothing contained herein (i) shall be deemed or operate to preclude the
Holder from bringing suit or taking other legal action against the Company in
any other jurisdiction to collect on the Company’s obligations to the Holder, to
realize on any collateral or any other security for such obligations, or to
enforce a judgment or other court ruling in favor of the Holder or (ii) shall
limit, or shall be deemed or construed to limit, any provision of Section 23.
THE COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO, AND AGREES NOT
TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED
HEREBY.

 

28.         JUDGMENT CURRENCY.

 

(a)          If for the purpose of obtaining or enforcing judgment against the
Company in any court in any jurisdiction it becomes necessary to convert into
any other currency (such other currency being hereinafter in this Section 28
referred to as the “Judgment Currency”) an amount due in U.S. dollars under this
Note, the conversion shall be made at the Exchange Rate prevailing on the
Trading Day immediately preceding:

 

(i)          the date actual payment of the amount due, in the case of any
proceeding in the courts of New York or in the courts of any other jurisdiction
that will give effect to such conversion being made on such date: or

 

(ii)         the date on which the foreign court determines, in the case of any
proceeding in the courts of any other jurisdiction (the date as of which such
conversion is made pursuant to this Section 28(a)(ii) being hereinafter referred
to as the “Judgment Conversion Date”).

 

40 

 

 

(b)          If in the case of any proceeding in the court of any jurisdiction
referred to in Section 28(a)(ii) above, there is a change in the Exchange Rate
prevailing between the Judgment Conversion Date and the date of actual payment
of the amount due, the applicable party shall pay such adjusted amount as may be
necessary to ensure that the amount paid in the Judgment Currency, when
converted at the Exchange Rate prevailing on the date of payment, will produce
the amount of US dollars which could have been purchased with the amount of
Judgment Currency stipulated in the judgment or judicial order at the Exchange
Rate prevailing on the Judgment Conversion Date.

 

(c)          Any amount due from the Company under this provision shall be due
as a separate debt and shall not be affected by judgment being obtained for any
other amounts due under or in respect of this Note.

 

29.         SEVERABILITY. If any provision of this Note is prohibited by law or
otherwise determined to be invalid or unenforceable by a court of competent
jurisdiction, the provision that would otherwise be prohibited, invalid or
unenforceable shall be deemed amended to apply to the broadest extent that it
would be valid and enforceable, and the invalidity or unenforceability of such
provision shall not affect the validity of the remaining provisions of this Note
so long as this Note as so modified continues to express, without material
change, the original intentions of the parties as to the subject matter hereof
and the prohibited nature, invalidity or unenforceability of the provision(s) in
question does not substantially impair the respective expectations or reciprocal
obligations of the parties or the practical realization of the benefits that
would otherwise be conferred upon the parties. The parties will endeavor in good
faith negotiations to replace the prohibited, invalid or unenforceable
provision(s) with a valid provision(s), the effect of which comes as close as
possible to that of the prohibited, invalid or unenforceable provision(s).

 

30.         MAXIMUM PAYMENTS. Without limiting Section 9(d) of the Securities
Purchase Agreement, nothing contained herein shall be deemed to establish or
require the payment of a rate of interest or other charges in excess of the
maximum permitted by applicable law. In the event that the rate of interest
required to be paid or other charges hereunder exceed the maximum permitted by
such law, any payments in excess of such maximum shall be credited against
amounts owed by the Company to the Holder and thus refunded to the Company.

 

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

 

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

 

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

 

(c)          “Adjustment Right” means any right granted with respect to any
securities issued in connection with, or with respect to, any issuance or sale
(or deemed issuance or sale in accordance with Section 7) of shares of Common
Stock (other than rights of the type described in Section 6(a) hereof) that
could result in a decrease in the net consideration received by the Company in
connection with, or with respect to, such securities (including, without
limitation, any cash settlement rights, cash adjustment or other similar
rights).

 

41 

 

 

(d)          “Affiliate” means, with respect to any Person, any other Person
that directly or indirectly controls, is controlled by, or is under common
control with, such Person, it being understood for purposes of this definition
that “control” of a Person means the power directly or indirectly either to vote
10% or more of the stock having ordinary voting power for the election of
directors of such Person or direct or cause the direction of the management and
policies of such Person whether by contract or otherwise.

 

(e)          “Approved Stock Plan” means any employee benefit plan which has
been approved by the board of directors of the Company prior to or subsequent to
the Subscription Date pursuant to which shares of Common Stock and standard
options to purchase Common Stock may be issued to any employee, officer or
director for services provided to the Company in their capacity as such.

 

(f)          “Attribution Parties” means, collectively, the following Persons
and entities: (i) any investment vehicle, including, any funds, feeder funds or
managed accounts, currently, or from time to time after the Issuance Date,
directly or indirectly managed or advised by the Holder’s investment manager or
any of its Affiliates or principals, (ii) any direct or indirect Affiliates of
the Holder or any of the foregoing, (iii) any Person acting or who could be
deemed to be acting as a Group together with the Holder or any of the foregoing
and (iv) any other Persons whose beneficial ownership of the Company’s Common
Stock would or could be aggregated with the Holder’s and the other Attribution
Parties for purposes of Section 13(d) of the 1934 Act. For clarity, the purpose
of the foregoing is to subject collectively the Holder and all other Attribution
Parties to the Maximum Percentage.

 

(g)          “Black Scholes Consideration Value” means the value of the
applicable Option, Convertible Security or Adjustment Right (as the case may be)
as of the date of issuance thereof calculated using the Black Scholes Option
Pricing Model obtained from the “OV” function on Bloomberg utilizing (i) an
underlying price per share equal to the Closing Sale Price of the Common Stock
on the Trading Day immediately preceding the public announcement of the
execution of definitive documents with respect to the issuance of such Option,
Convertible Security or Adjustment Right (as the case may be), (ii) a risk-free
interest rate corresponding to the U.S. Treasury rate for a period equal to the
remaining term of such Option, Convertible Security or Adjustment Right (as the
case may be) as of the date of issuance of such Option, Convertible Security or
Adjustment Right (as the case may be), (iii) a zero cost of borrow and (iv) an
expected volatility equal to the greater of 100% and the 100 day volatility
obtained from the “HVT” function on Bloomberg (determined utilizing a 365 day
annualization factor) as of the Trading Day immediately following the date of
issuance of such Option, Convertible Security or Adjustment Right (as the case
may be).

 

(h)          “Bloomberg” means Bloomberg, L.P.

 

42 

 

 

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

 

(j)           “Change of Control” means any Fundamental Transaction other than
(i) any merger of the Company or any of its, direct or indirect, wholly-owned
Subsidiaries with or into any of the foregoing Persons, (ii) any reorganization,
recapitalization or reclassification of the shares of Common Stock in which
holders of the Company’s voting power immediately prior to such reorganization,
recapitalization or reclassification continue after such reorganization,
recapitalization or reclassification to hold publicly traded securities and,
directly or indirectly, are, in all material respects, the holders of the voting
power of the surviving entity (or entities with the authority or voting power to
elect the members of the board of directors (or their equivalent if other than a
corporation) of such entity or entities) after such reorganization,
recapitalization or reclassification, or (iii) pursuant to a migratory merger
effected solely for the purpose of changing the jurisdiction of incorporation of
the Company or any of its Subsidiaries.

 

(k)          “Change of Control Redemption Premium” means 125%.

 

(l)           “Closing Bid Price” and “Closing Sale Price” means, for any
security as of any date, the last closing bid price and last closing trade
price, respectively, for such security on the Principal Market, as reported by
Bloomberg, or, if the Principal Market begins to operate on an extended hours
basis and does not designate the closing bid price or the closing trade price
(as the case may be) then the last bid price or last trade price, respectively,
of such security prior to 4:00:00 p.m., New York time, as reported by Bloomberg,
or, if the Principal Market is not the principal securities exchange or trading
market for such security, the last closing bid price or last trade price,
respectively, of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg, or if
the foregoing do not apply, the last closing bid price or last trade price,
respectively, of such security in the over-the-counter market on the electronic
bulletin board for such security as reported by Bloomberg, or, if no closing bid
price or last trade price, respectively, is reported for such security by
Bloomberg, the average of the bid prices, or the ask prices, respectively, of
any market makers for such security as reported in the “pink sheets” by OTC
Markets Group Inc. (formerly Pink Sheets LLC). If the Closing Bid Price or the
Closing Sale Price cannot be calculated for a security on a particular date on
any of the foregoing bases, the Closing Bid Price or the Closing Sale Price (as
the case may be) of such security on such date shall be the fair market value as
mutually determined by the Company and the Holder. If the Company and the Holder
are unable to agree upon the fair market value of such security, then such
dispute shall be resolved in accordance with the procedures in Section 23. All
such determinations shall be appropriately adjusted for any stock splits, stock
dividends, stock combinations, recapitalizations or other similar transactions
during such period.

 

(m)         “Common Stock” means (i) the Company’s shares of common stock,
$0.001 par value per share, and (ii) any capital stock into which such common
stock shall have been changed or any share capital resulting from a
reclassification of such common stock.

 

43 

 

 

(n)          “Controlled Account Release Event” means, as applicable, (i) with
respect to any Restricted Principal designated to be converted in a Conversion
Notice, the Company’s receipt of both (A) such Conversion Notice hereunder
executed by the Holder in which all, or any part, of the Principal to be
converted includes any Restricted Principal and (B) written confirmation by the
Holder that the shares of Common Stock issued pursuant to such Conversion Notice
have been properly delivered in accordance with Section 3(c) (in each case, as
adjusted, if applicable, to reflect the withdrawal of any Conversion Notice, in
whole or in part, by the Holder, whether pursuant to Section 3(c)(ii) or
otherwise), (ii) the Company’s receipt of a notice by the Holder electing to
effect a release of any Restricted Principal to the Company, and (iii) on the
first Trading Day of each calendar month commencing on the thirtieth (30th)
Trading Day after the Registration Release Date, the lesser of (x) the amount of
Restricted Principal then outstanding hereunder and (y) the Holder Pro Rata
Amount of $1,000,000; provided, in the case of clauses (iii) above, as of such
date of determination, no Equity Conditions Failure then exists.

 

(o)          “Conversion Share Ratio” means as to any applicable Installment
Date, the quotient of (i) the number of Pre-Installment Conversion Shares
delivered in connection with such Installment Date divided by (ii) the number of
Post-Installment Conversion Shares applicable to such Installment Date.

 

(p)          “Convertible Securities” means any stock or other security (other
than Options) that is at any time and under any circumstances, directly or
indirectly, convertible into, exercisable or exchangeable for, or which
otherwise entitles the holder thereof to acquire, any shares of Common Stock.

 

(q)          “Eligible Market” means The New York Stock Exchange, the NYSE MKT,
the Nasdaq Global Select Market, the Nasdaq Global Market, the OTCQX, the OTCQB
or the Principal Market.

 

44 

 

 

(r)           “Equity Conditions” means, with respect to any given date of
determination: (i) on each day during the period beginning thirty calendar days
prior to such applicable date of determination and ending on and including such
applicable date of determination (or, with respect to the initial Installment
Date, during the period beginning on the Initial Installment Notice Due Date and
ending on and including the initial Installment Date) either (x) one or more
Registration Statements filed pursuant to the Registration Rights Agreement
shall be effective and the prospectus contained therein shall be available on
such applicable date of determination (with, for the avoidance of doubt, any
shares of Common Stock previously sold pursuant to such prospectus deemed
unavailable) for the resale of all shares of Common Stock to be issued in
connection with the event requiring this determination (or issuable upon
conversion of the Conversion Amount being redeemed or amount of Restricted
Principal being released, as applicable, in the event requiring this
determination at the Conversion Price then in effect (without regard to any
limitations on conversion set forth herein)) (each, a “Required Minimum
Securities Amount”), in each case, in accordance with the terms of the
Registration Rights Agreement and there shall not have been during such period
any Grace Periods (as defined in the Registration Rights Agreement) or (y) all
Registrable Securities shall be eligible for sale pursuant to Rule 144 (as
defined in the Securities Purchase Agreement) without the need for registration
under any applicable federal or state securities laws (in each case,
disregarding any limitation on conversion of the Notes, other issuance of
securities with respect to the Notes and exercise of the Warrants) and no
Current Information Failure (as defined in the Registration Rights Agreement)
exists or is continuing; (ii) on each day during the period beginning thirty
calendar days prior to the applicable date of determination and ending on and
including the applicable date of determination (the “Equity Conditions Measuring
Period”), the Common Stock (including all Registrable Securities) is listed or
designated for quotation (as applicable) on an Eligible Market; (iii) during the
Equity Conditions Measuring Period, the Company shall have delivered all shares
of Common Stock issuable upon conversion of this Note on a timely basis as set
forth in Section 3 hereof and all other shares of capital stock required to be
delivered by the Company on a timely basis as set forth in the other Transaction
Documents; (iv) any shares of Common Stock to be issued in connection with the
event requiring determination (or issuable upon conversion of the Conversion
Amount being redeemed in the event requiring this determination) may be issued
in full without violating Section 3(d) hereof; (v) any shares of Common Stock to
be issued in connection with the event requiring determination (or issuable upon
conversion of the Conversion Amount being redeemed in the event requiring this
determination (without regards to any limitations on conversion set forth
herein)) may be issued in full without violating the rules or regulations of the
Eligible Market on which the Common Stock is then listed or designated for
quotation (as applicable); (vi) on each day during the Equity Conditions
Measuring Period, no public announcement of a pending, proposed or intended
Fundamental Transaction shall have occurred which has not been abandoned,
terminated or consummated; (vii) the Company shall have no knowledge of any fact
that would reasonably be expected to cause (1) any Registration Statement
required to be filed pursuant to the Registration Rights Agreement to not be
effective or the prospectus contained therein to not be available for the resale
of the applicable Required Minimum Securities Amount of Registrable Securities
in accordance with the terms of the Registration Rights Agreement or (2) any
Registrable Securities to not be eligible for sale pursuant to Rule 144 without
the need for registration under any applicable federal or state securities laws
(in each case, disregarding any limitation on conversion of the Notes, other
issuance of securities with respect to the Notes and exercise of the Warrants)
and no Current Information Failure exists or is continuing; (viii) the Holder
shall not be in (and no other holder of Notes shall be in) possession of any
material, non-public information provided to any of them by the Company, any of
its Subsidiaries or any of their respective affiliates, employees, officers,
representatives, agents or the like; (ix) on each day during the Equity
Conditions Measuring Period, the Company otherwise shall have been in compliance
with each, and shall not have breached any representation or warranty in any
material respect (other than representations or warranties subject to material
adverse effect or materiality, which may not be breached in any respect) or any
covenant or other term or condition of any Transaction Document, including,
without limitation, the Company shall not have failed to timely make any payment
pursuant to any Transaction Document; (x) on each Trading Day during the Equity
Conditions Measuring Period, there shall not have occurred any Volume Failure or
Price Failure as of such applicable date of determination; (xi) on the
applicable date of determination (A) no Authorized Share Failure shall exist or
be continuing and the applicable Required Minimum Securities Amount of shares of
Common Stock are available under the certificate of incorporation of the Company
and reserved by the Company to be issued pursuant to the Notes and (B) all
shares of Common Stock to be issued in connection with the event requiring this
determination (or issuable upon conversion of the Conversion Amount being
redeemed in the event requiring this determination (without regards to any
limitations on conversion set forth herein)) may be issued in full without
resulting in an Authorized Share Failure; (xii) on each day during the Equity
Conditions Measuring Period, there shall not have occurred and there shall not
exist an Event of Default or an event that with the passage of time or giving of
notice would constitute an Event of Default; and (xiii) the shares of Common
Stock issuable pursuant the event requiring the satisfaction of the Equity
Conditions are duly authorized and listed and eligible for trading without
restriction on an Eligible Market.

 

45 

 

 

(s)          “Equity Conditions Failure” means that on any day during the period
commencing (x) twenty (20) Trading Days prior to the applicable Installment
Notice Date through the later of the applicable Installment Date and the date on
which the applicable shares of Common Stock are actually delivered to the Holder
or (y) twenty (20) Trading Days prior to the date of the applicable Controlled
Account Release Event through the date of the applicable Controlled Account
Release Event, the Equity Conditions have not been satisfied (or waived in
writing by the Holder).

 

(t)          “Event Market Price” means, with respect to any Stock Combination
Event Date, the quotient determined by dividing (x) the sum of the VWAP of the
Common Stock for each of the five (5) lowest Trading Days during the fifteen
(15) consecutive Trading Day period ending and including the Trading Day
immediately preceding the sixteenth (16th) Trading Day after such Stock
Combination Event Date, divided by (y) five (5).

 

46 

 

 

(u)          “Excluded Securities” means (i) shares of Common Stock or standard
options to purchase Common Stock issued to directors, officers or employees of
the Company for services rendered to the Company in their capacity as such
pursuant to an Approved Stock Plan (as defined above), provided that (A) all
such issuances (taking into account the shares of Common Stock issuable upon
exercise of such options) after the Subscription Date pursuant to this clause
(i) do not, in the aggregate, exceed more than 5% of the Common Stock issued and
outstanding immediately prior to the Subscription Date and (B) the exercise
price of any such options is not lowered, none of such options are amended to
increase the number of shares issuable thereunder and none of the terms or
conditions of any such options are otherwise materially changed in any manner
that adversely affects any of the Buyers; (ii) shares of Common Stock issued
upon the conversion or exercise of Convertible Securities (other than standard
options to purchase Common Stock issued pursuant to an Approved Stock Plan that
are covered by clause (i) above) issued prior to the Subscription Date, provided
that the conversion price of any such Convertible Securities (other than
standard options to purchase Common Stock issued pursuant to an Approved Stock
Plan that are covered by clause (i) above) is not lowered, none of such
Convertible Securities (other than standard options to purchase Common Stock
issued pursuant to an Approved Stock Plan that are covered by clause (i) above)
are amended to increase the number of shares issuable thereunder and none of the
terms or conditions of any such Convertible Securities (other than standard
options to purchase Common Stock issued pursuant to an Approved Stock Plan that
are covered by clause (i) above) are otherwise materially changed in any manner
that adversely affects any of the Buyers; (iii) the shares of Common Stock
issuable upon conversion of the Notes or otherwise pursuant to the terms of the
Notes; provided, that the terms of the Notes are not amended, modified or
changed on or after the Subscription Date (other than antidilution adjustments
pursuant to the terms thereof in effect as of the Subscription Date), (iv) the
shares of Common Stock issuable upon exercise of the Warrants; provided, that
the terms of the Warrants are not amended, modified or changed on or after the
Subscription Date (other than antidilution adjustments pursuant to the terms
thereof in effect as of the Subscription Date); and (v) shares of Common Stock,
Options and Convertible Securities issued pursuant to equipment strategic
mergers or acquisitions of other assets or businesses, or strategic licensing or
development transactions; provided that (x) the primary purpose of such issuance
is not to raise capital as determined in good faith by the Buyers, (y) the
purchaser or acquirer of such shares of Common Stock in such issuance solely
consists of either (1) the actual participants in such strategic licensing or
development transactions, (2) the actual owners of such assets or securities
acquired in such merger or acquisition or (3) the shareholders, partners or
members of the foregoing Persons, and (z) the number or amount (as the case may
be) of such shares of Common Stock issued to such Person by the Company shall
not be disproportionate to such Person’s actual participation in such strategic
licensing or development transactions or ownership of such assets or securities
to be acquired by the Company (as applicable).

 

47 

 

 

(v)         “Fundamental Transaction” means (A) that the Company shall, directly
or indirectly, including through subsidiaries, Affiliates or otherwise, in one
or more related transactions, (i) consolidate or merge with or into (whether or
not the Company is the surviving corporation) another Subject Entity, or (ii)
sell, assign, transfer, convey or otherwise dispose of all or substantially all
of the properties or assets of the Company or any of its “significant
subsidiaries” (as defined in Rule 1-02 of Regulation S-X) to one or more Subject
Entities, or (iii) make, or allow one or more Subject Entities to make, or allow
the Company to be subject to or have its Common Stock be subject to or party to
one or more Subject Entities making, a purchase, tender or exchange offer that
is accepted by the holders of at least either (x) 50% of the outstanding shares
of Common Stock, (y) 50% of the outstanding shares of Common Stock calculated as
if any shares of Common Stock held by all Subject Entities making or party to,
or Affiliated with any Subject Entities making or party to, such purchase,
tender or exchange offer were not outstanding; or (z) such number of shares of
Common Stock such that all Subject Entities making or party to, or Affiliated
with any Subject Entity making or party to, such purchase, tender or exchange
offer, become collectively the beneficial owners (as defined in Rule 13d-3 under
the 1934 Act) of at least 50% of the outstanding shares of Common Stock, or (iv)
consummate a stock or share purchase agreement or other business combination
(including, without limitation, a reorganization, recapitalization, spin-off or
scheme of arrangement) with one or more Subject Entities whereby all such
Subject Entities, individually or in the aggregate, acquire, either (x) at least
50% of the outstanding shares of Common Stock, (y) at least 50% of the
outstanding shares of Common Stock calculated as if any shares of Common Stock
held by all the Subject Entities making or party to, or Affiliated with any
Subject Entity making or party to, such stock purchase agreement or other
business combination were not outstanding; or (z) such number of shares of
Common Stock such that the Subject Entities become collectively the beneficial
owners (as defined in Rule 13d-3 under the 1934 Act) of at least 50% of the
outstanding shares of Common Stock, or (v) reorganize, recapitalize or
reclassify its Common Stock, (B) that the Company shall, directly or indirectly,
including through subsidiaries, Affiliates or otherwise, in one or more related
transactions, allow any Subject Entity individually or the Subject Entities in
the aggregate to be or become the “beneficial owner” (as defined in Rule 13d-3
under the 1934 Act), directly or indirectly, whether through acquisition,
purchase, assignment, conveyance, tender, tender offer, exchange, reduction in
outstanding shares of Common Stock, merger, consolidation, business combination,
reorganization, recapitalization, spin-off, scheme of arrangement,
reorganization, recapitalization or reclassification or otherwise in any manner
whatsoever, of either (x) at least 50% of the aggregate ordinary voting power
represented by issued and outstanding Common Stock, (y) at least 50% of the
aggregate ordinary voting power represented by issued and outstanding Common
Stock not held by all such Subject Entities as of the date of this Note
calculated as if any shares of Common Stock held by all such Subject Entities
were not outstanding, or (z) a percentage of the aggregate ordinary voting power
represented by issued and outstanding shares of Common Stock or other equity
securities of the Company sufficient to allow such Subject Entities to effect a
statutory short form merger or other transaction requiring other shareholders of
the Company to surrender their shares of Common Stock without approval of the
shareholders of the Company or (C) directly or indirectly, including through
subsidiaries, Affiliates or otherwise, in one or more related transactions, the
issuance of or the entering into any other instrument or transaction structured
in a manner to circumvent, or that circumvents, the intent of this definition in
which case this definition shall be construed and implemented in a manner
otherwise than in strict conformity with the terms of this definition to the
extent necessary to correct this definition or any portion of this definition
which may be defective or inconsistent with the intended treatment of such
instrument or transaction.

 

(w)         “GAAP” means United States generally accepted accounting principles,
consistently applied.

 

(x)          “Governmental Indebtedness” means the principal of (and premium, if
any), interest on, and all fees and other amounts (including, without
limitation, any reasonable out-of-pocket costs, enforcement expenses (including
reasonable out-of-pocket legal fees and disbursements), collateral protection
expenses and other reimbursement or indemnity obligations relating thereto)
payable by Company and/or its Subsidiaries, from time to time, under or in
connection with any financing facility by any governmental or quasi-governmental
agency the purpose of which is to fund plant, property and equipment
acquisitions by the Company or any of its Subsidiaries and which will be secured
solely by a first lien on the plant, property and equipment so acquired (each, a
“Governmental Indebtedness Lien”); provided, however, that the aggregate
outstanding amount of the Governmental Indebtedness does not at any time exceed
$1,000,000.

 

48 

 

 

(y)          “Group” means a “group” as that term is used in Section 13(d) of
the 1934 Act and as defined in Rule 13d-5 thereunder.

 

(z)          “Holder Master Restricted Account” means, solely with respect to
the Holder, account number [ ] at [ ], or such other account as may be directed
by the Holder, from time to time, subject to a Controlled Account Agreement in
favor of the Holder in a form reasonably acceptable to the Holder.

 

(aa)        “Holder Pro Rata Amount” means, as of any date of determination, a
fraction (i) the numerator of which is the original Principal amount of this
Note on the Closing Date and (ii) the denominator of which is the aggregate
original principal amount of all Notes issued (other than pursuant to the
Permitted Exchange, if any) pursuant to the Securities Purchase Agreement on the
Closing Date.

 

(bb)       “Indebtedness” shall have the meaning ascribed to such term in the
Securities Purchase Agreement.

 

(cc)        “Initial Installment Notice Due Date” means the earlier of (x) the
later of (A) the Issuance Date and (B) the Effective Date (as defined in the
Registration Rights Agreement) of the initial Registration Statement, and (y)
January __, 2016.

 

(dd)       “Installment Amount” means the sum of (A) (i) with respect to any
Installment Date other than the Maturity Date, the lesser of (x) the quotient of
(I) the Principal amount outstanding under this Note as of the initial
Installment Date, divided by (II) the number of Installment Dates occurring
hereunder (as determined as of the initial Installment Date assuming no
Deferrals, Accelerations, redemptions or conversions hereunder prior to the
Maturity Date) and (y) the Principal amount then outstanding under this Note as
of such Installment Date, and (ii) with respect to the Installment Date that is
the Maturity Date, the Principal amount then outstanding under this Note as of
such Installment Date (in each case, as any such Installment Amount may be
reduced pursuant to the terms of this Note, whether upon conversion, redemption
or otherwise), (B) any Deferral Amount deferred pursuant to Section 8(d) and
included in such Installment Amount in accordance therewith, (C) any
Acceleration Amount accelerated pursuant to Section 8(e) and included in such
Installment Amount in accordance therewith and (D) in each case of clauses (A)
through (C) above, the sum of any accrued and unpaid Interest as of such
Installment Date under this Note, if any, the applicable Make-Whole Amount with
respect to such Installment Amount, if any, and accrued and unpaid Late Charges,
if any, under this Note as of such Installment Date. In the event the Holder
shall sell or otherwise transfer any portion of this Note, the transferee shall
be allocated a pro rata portion of the each unpaid Installment Amount hereunder.

 

(ee)        “Installment Conversion Price” means, with respect to a particular
date of determination, the lowest of (i) the Conversion Price then in effect,
(ii) 85% of the VWAP of the Common Stock on the Trading Day immediately prior to
the applicable Installment Date and (iii) the price which shall be computed as
85% of the quotient of (I) the sum of the three (3) lowest VWAPs of the Common
Stock of each Trading Day during the ten (10) consecutive Trading Day period
ending and including the Trading Day immediately prior to the applicable
Installment Date, divided by (II) three (3). All such determinations to be
appropriately adjusted for any stock split, stock dividend, stock combination or
other similar transaction during any such measuring period.

 

49 

 

 

(ff)         “Installment Date” means (i) the twenty-first (21st) Trading Day
after the Initial Installment Notice Due Date, (ii) then, (x) if the first
Trading Day of the calendar month immediately following the initial Installment
Date occurs less than twenty (20) Trading Days after the initial Installment
Date, the first Trading Day of the second calendar month immediately following
the initial Installment Date or (y) otherwise, the first Trading Day of the
calendar month immediately following the initial Installment Date, (iii)
thereafter, the first Trading Day of the calendar month immediately following
the previous Installment Date until the Maturity Date, and (iv) the Maturity
Date.

 

(gg)       “Interest Date” means, with respect to any given calendar month, (x)
if prior to the initial Installment Date or after the Maturity Date, the first
Trading Day of such calendar month or (y) if on or after the initial Installment
Date, but on or prior to the Maturity Date, such Installment Date, if any, in
such calendar month.

 

(hh)       “Interest Rate” means nine percent (9%) per annum, as may be adjusted
from time to time in accordance with Section 2.

 

(ii)          “Make-Whole Amount” means, as of any given date, the amount of any
Interest that, but for any conversion, Installment Conversion, Acceleration or
redemption hereunder on such given date, would have accrued with respect to the
Conversion Amount or Installment Amount being converted or redeemed under this
Note at the Interest Rate for the period from such given date through the
Maturity Date.

 

(jj)          “Maturity Date” shall mean [ ]1; provided, however, the Maturity
Date may be extended at the option of the Holder (i) in the event that, and for
so long as, an Event of Default shall have occurred and be continuing or any
event shall have occurred and be continuing that with the passage of time and
the failure to cure would result in an Event of Default or (ii) through the date
that is twenty (20) Business Days after the consummation of a Fundamental
Transaction in the event that a Fundamental Transaction is publicly announced or
a Change of Control Notice is delivered prior to the Maturity Date, provided
further that if a Holder elects to convert some or all of this Note pursuant to
Section 3 hereof, and the Conversion Amount would be limited pursuant to Section
3(d) hereunder, the Maturity Date shall automatically be extended until such
time as such provision shall not limit the conversion of this Note.

 

(kk)        “Options” means any rights, warrants or options to subscribe for or
purchase shares of Common Stock or Convertible Securities.

 

 

1 Insert the fourteen month anniversary of the Closing Date (as defined the
Securities Purchase Agreement).

 

50 

 

 

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

 

(mm)      “Permitted Indebtedness” means (i) Indebtedness evidenced by this Note
and the Other Notes, (ii) Indebtedness set forth on Schedule 3(s) to the
Securities Purchase Agreement, as in effect as of the Subscription Date, (iii)
Governmental Indebtedness, (iv) Indebtedness secured by Permitted Liens or
unsecured but as described in clauses (iv) and (v) of the definition of
Permitted Liens and (v) up to $1 million of aggregate principal amount of
Indebtedness incurred by the Company that is made expressly subordinate in right
of payment to the Indebtedness evidenced by this Note, as reflected in a written
agreement acceptable to the Holder, and which Indebtedness does not provide at
any time for (1) the payment, prepayment, repayment, repurchase or defeasance,
directly or indirectly, of any principal or premium, if any, thereon until at
least ninety-one (91) days after the Maturity Date and (2) total interest and
fees at a rate in excess of eight percent (8%) per annum.

 

(nn)       “Permitted Liens” means (i) any Lien for taxes not yet due or
delinquent or being contested in good faith by appropriate proceedings for which
adequate reserves have been established in accordance with GAAP, (ii) any
statutory Lien arising in the ordinary course of business by operation of law
with respect to a liability that is not yet due or delinquent, (iii) any Lien
created by operation of law, such as materialmen’s liens, mechanics’ liens and
other similar liens, arising in the ordinary course of business with respect to
a liability that is not yet due or delinquent or that are being contested in
good faith by appropriate proceedings, (iv) Liens (A) upon or in any equipment
or inventory acquired or held by the Company or any of its Subsidiaries to
secure the purchase price of such equipment or inventory or indebtedness
incurred solely for the purpose of financing the acquisition or lease of such
equipment or inventory, or (B) existing on such equipment or inventory at the
time of its acquisition, provided that the Lien is confined solely to the
property so acquired and improvements thereon, and the proceeds of such
equipment or inventory, in either case, with respect to indebtedness, (v) Liens
incurred in connection with the extension, renewal or refinancing of the
indebtedness secured by Liens of the type described in clause (iv) above,
provided that any extension, renewal or replacement Lien shall be limited to the
property encumbered by the existing Lien and the principal amount of the
Indebtedness being extended, renewed or refinanced does not increase, (vi) Liens
in favor of customs and revenue authorities arising as a matter of law to secure
payments of custom duties in connection with the importation of goods, (vii)
Governmental Indebtedness Liens and (viii) Liens arising from judgments, decrees
or attachments in circumstances not constituting an Event of Default under
Section 4(a)(xii).

 

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

 

51 

 

 

(pp)        “Post-Installment Conversion Shares” means that number of shares of
Common Stock that would be required to be delivered pursuant to Section 8 on an
applicable Installment Date without taking into account the delivery of any
Pre-Installment Conversion Shares.

 

(qq)        “Pre-Installment Conversion Price” means, with respect to a
particular date of determination, the lowest of (i) the Conversion Price then in
effect, (ii) 85% of the VWAP of the Common Stock on the Trading Day immediately
preceding the delivery or deemed delivery of the applicable Installment Notice
and (iii) the price which shall be computed as 85% of the quotient of (I) the
sum of the three (3) lowest VWAPs of the Common Stock of each Trading Day during
the ten (10) consecutive Trading Day period ending and including the Trading Day
immediately preceding the delivery or deemed delivery of the applicable
Installment Notice, divided by (II) three (3). All such determinations to be
appropriately adjusted for any stock split, stock dividend, stock combination or
other similar transaction during any such measuring period.

 

(rr)         “Price Failure” means, with respect to a particular date of
determination, the VWAP of the Common Stock on any Trading Day during the
fifteen (15) consecutive Trading Day period ending on the Trading Day
immediately preceding such date of determination (such period, the “Price
Failure Measuring Period”) fails to exceed $0.25 (as adjusted for stock splits,
stock dividends, stock combinations, recapitalizations or other similar
transactions). All such determinations to be appropriately adjusted for any
stock splits, stock dividends, stock combinations, recapitalizations or other
similar transactions during such Price Failure Measuring Period.

 

(ss)        “Principal Market” means the Nasdaq Capital Market (or, if the
shares of Common Stock are not listed on the Nasdaq Capital Market and are
listed on one or more Eligible Markets, the primary Eligible Market in which the
shares of Common Stock are then listed).

 

(tt)          “Redemption Notices” means, collectively, the Event of Default
Redemption Notices, the Installment Notices with respect to any Installment
Redemption and the Change of Control Redemption Notices, and each of the
foregoing, individually, a “Redemption Notice.”

 

(uu)       “Redemption Premium” means 125%.

 

(vv)       “Redemption Prices” means, collectively, Event of Default Redemption
Prices, the Change of Control Redemption Prices and the Installment Redemption
Prices, and each of the foregoing, individually, a “Redemption Price.”

 

(ww)      “Registration Release Date” means the earlier to occur of (i) the
Effective Date (as defined in the Registration Rights Agreement) of a
Registration Statement registering any of the Registrable Securities (as defined
in the Registration Rights Agreement) and (ii) the later of (x) the initial date
all of the Registrable Securities are eligible to be sold pursuant to Rule 144
and (y) the date no Current Information Failure (as defined in the Registration
Rights Agreement) exists or is continuing.

 

52 

 

 

(xx)         “Registration Rights Agreement” means that certain registration
rights agreement, dated as of the Closing Date, by and among the Company and the
initial holders of the Notes relating to, among other things, the registration
of the resale of the Common Stock issuable upon conversion of the Notes or
otherwise pursuant to the terms of the Notes and exercise of the Warrants, as
may be amended from time to time.

 

(yy)        “Restricted Principal” means, as of any given date, the difference
of (i) all cash amounts held in the Master Restricted Account of the Holder as
of the Closing Date and (ii) all cash amounts released from the Master
Restricted Account of the Holder to the Company (or at the Company’s direction)
on or prior to such given date.

 

(zz)         “SEC” means the United States Securities and Exchange Commission or
the successor thereto.

 

(aaa)      “Securities Purchase Agreement” means that certain securities
purchase agreement, dated as of the Subscription Date, by and among the Company
and the initial holders of the Notes pursuant to which the Company issued the
Notes, as may be amended from time to time.

 

(bbb)     “Subscription Date” means November 4, 2015.

 

(ccc)      “Subject Entity” means any Person, Persons or Group or any Affiliate
or associate of any such Person, Persons or Group.

 

(ddd)     “Successor Entity” means the Person (or, if so elected by the Holder,
the Parent Entity) formed by, resulting from or surviving any Fundamental
Transaction or the Person (or, if so elected by the Holder, the Parent Entity)
with which such Fundamental Transaction shall have been entered into.

 

(eee)      “Trading Day” means, as applicable, (x) with respect to all price or
trading volume determinations relating to the Common Stock, any day on which the
Common Stock is traded on the Principal Market, or, if the Principal Market is
not the principal trading market for the Common Stock, then on the principal
securities exchange or securities market on which the Common Stock is then
traded, provided that “Trading Day” shall not include any day on which the
Common Stock is scheduled to trade on such exchange or market for less than 4.5
hours or any day that the Common Stock is suspended from trading during the
final hour of trading on such exchange or market (or if such exchange or market
does not designate in advance the closing time of trading on such exchange or
market, then during the hour ending at 4:00:00 p.m., New York time) unless such
day is otherwise designated as a Trading Day in writing by the Holder or (y)
with respect to all determinations other than price determinations relating to
the Common Stock, any day on which The New York Stock Exchange (or any successor
thereto) is open for trading of securities.

 

53 

 

 

(fff)        “Volume Failure” means, with respect to a particular date of
determination, either (x) the quotient of (A) the sum of the aggregate daily
dollar trading volume (as reported on Bloomberg) of the Common Stock on each
Trading Day over the fifteen (15) consecutive Trading Day period ending on the
Trading Day immediately preceding such date of determination (such period, the
“Volume Failure Measuring Period”), divided by (B) fifteen (15) is less than
$70,000 (as adjusted for any stock splits, stock dividends, stock combinations,
recapitalizations or other similar transactions) or (y) the aggregate daily
dollar trading volume (as reported on Bloomberg) of the Common Stock on the
Principal Market on more than three (3) Trading Days during the Volume Failure
Measuring Period is less than $60,000 (as adjusted for any stock splits, stock
dividends, stock combinations, recapitalizations or other similar transactions).
All such determinations to be appropriately adjusted for any stock splits, stock
dividends, stock combinations, recapitalizations or other similar transactions
during such Volume Failure Measuring Period.

 

(ggg)     “VWAP” means, for any security as of any date, the dollar
volume-weighted average price for such security on the Principal Market (or, if
the Principal Market is not the principal trading market for such security, then
on the principal securities exchange or securities market on which such security
is then traded) during the period beginning at 9:30:01 a.m., New York time, and
ending at 4:00:00 p.m., New York time, as reported by Bloomberg through its “HP”
function (set to weighted average) or, if the foregoing does not apply, the
dollar volume-weighted average price of such security in the over-the-counter
market on the electronic bulletin board for such security during the period
beginning at 9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York
time, as reported by Bloomberg, or, if no dollar volume-weighted average price
is reported for such security by Bloomberg for such hours, the average of the
highest closing bid price and the lowest closing ask price of any of the market
makers for such security as reported in the “pink sheets” by OTC Markets Group
Inc. (formerly Pink Sheets LLC). If the VWAP cannot be calculated for such
security on such date on any of the foregoing bases, the VWAP of such security
on such date shall be the fair market value as mutually determined by the
Company and the Holder. If the Company and the Holder are unable to agree upon
the fair market value of such security, then such dispute shall be resolved in
accordance with the procedures in Section 23. All such determinations shall be
appropriately adjusted for any stock dividend, stock split, stock combination,
recapitalization or other similar transaction during such period.

 

(hhh)     “Warrants” has the meaning ascribed to such term in the Securities
Purchase Agreement, and shall include all warrants issued in exchange therefor
or replacement thereof.

 

32.        DISCLOSURE. Upon receipt or delivery by the Company of any notice in
accordance with the terms of this Note, unless the Company has in good faith
determined that the matters relating to such notice do not constitute material,
non-public information relating to the Company or any of its Subsidiaries, the
Company shall within one (1) Business Day after any such receipt or delivery
publicly disclose such material, non-public information on a Current Report on
Form 8-K or otherwise. In the event that the Company believes that a notice
contains material, non-public information relating to the Company or any of its
Subsidiaries, the Company so shall indicate to the Holder contemporaneously with
delivery of such notice, and in the absence of any such indication, the Holder
shall be allowed to presume that all matters relating to such notice do not
constitute material, non-public information relating to the Company or any of
its Subsidiaries. If the Company or any of its Subsidiaries provides material
non-public information to the Holder that is not simultaneously filed in a
Current Report on Form 8-K and the Holder has not agreed to receive such
material non-public information, the Company hereby covenants and agrees that
the Holder shall not have any duty of confidentiality to the Company, any of its
Subsidiaries or any of their respective officers, directors, employees,
affiliates or agents with respect to, or a duty to any of the foregoing not to
trade on the basis of, such material non-public information. Nothing contained
in this Section 32 shall limit any obligations of the Company, or any rights of
the Holder, under Section 4(i) of the Securities Purchase Agreement.

 

54 

 

 

[signature page follows]

 

55 

 

 

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

  

  Axion Power International, Inc.       By:        Name:      Title:

 

Senior Convertible Note - Signature Page

  

 

 

 

EXHIBIT I

 
Axion Power International, Inc.

CONVERSION NOTICE

 

Reference is made to the Senior Secured Convertible Note (the “Note”) issued to
the undersigned by Axion Power International, Inc., a Delaware corporation (the
“Company”). In accordance with and pursuant to the Note, the undersigned hereby
elects to convert the Conversion Amount (as defined in the Note) of the Note
indicated below into shares of Common Stock, $0.0001 par value per share (the
“Common Stock”), of the Company, as of the date specified below. Capitalized
terms not defined herein shall have the meaning as set forth in the Note.

 

Date of Conversion:       Aggregate Principal to be converted:       Aggregate
accrued and unpaid Interest and accrued and unpaid Late Charges with respect to
such portion of the Aggregate Principal and such Aggregate Interest to be
converted:       Aggregate Make-Whole Amount (if any)       AGGREGATE CONVERSION
AMOUNT
TO BE CONVERTED:     Please confirm the following information:     Conversion
Price:       Number of shares of Common Stock to be issued:       Installment
Amount(s) to be reduced (and corresponding Installment Date(s)) and amount of
reduction:          

 

 

 

  

¨     Check here if all or any portion of the aggregate Principal being
converted includes any Restricted Principal.  Please specify the amount
Restricted Principal being converted :__________________   ¨     Check here if
electing a Variable Price in lieu of the Conversion Price.  Please specify the
applicable Variable Price:__________________   Notwithstanding anything to the
contrary contained herein, this Conversion Notice shall constitute a
representation by the Holder of the Note submitting this Conversion Notice that
(i) after giving effect to the conversion provided for in this Conversion
Notice, such Holder (together with its affiliates) will not have beneficial
ownership (together with the beneficial ownership of such Person’s affiliates)
of a number of shares of Common Stock which exceeds the Maximum Percentage (as
defined in the Note) of the total outstanding shares of Common Stock of the
Company as determined pursuant to the provisions of Section 3(d) of the Note and
(ii) the representations set forth in Section 4(d) of the Registration Rights
Agreement with respect to the shares of Common Stock issuable in connection
herewith are true and correct in all respects.   ¨     If this Conversion Notice
is being delivered with respect to an Acceleration, check here if Holder is
electing to use _________ as the Installment Conversion Price or Installment
Conversion Price (as applicable) related to the following Installment
Date:____________   Please issue the Common Stock into which the Note is being
converted to Holder, or for its benefit, as follows:   ¨     Check here if
requesting delivery as a certificate to the following name and to the following
address:   Issue to:               ¨     Check here if requesting delivery by
Deposit/Withdrawal at Custodian as follows:     DTC Participant:       DTC
Number:       Account Number:          

 

Date: _____________ __, ___       Name of Registered Holder

 

 

 

  

By:       Name:     Title:           Tax ID:               Facsimile:          
E-mail Address:  

 

 

 

  

ACKNOWLEDGMENT

 

The Company hereby acknowledges this Conversion Notice and hereby directs
_________________ to issue the above indicated number of shares of Common Stock
in accordance with the Transfer Agent Instructions dated _____________, 20__
from the Company and acknowledged and agreed to by ________________________.

 

  Axion Power International, Inc.       By:        Name:      Title: