THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS.

 

8% FORM OF SENIOR SECURED CONVERTIBLE NOTE

 

Elephant Talk Communications, Corp.
8% Senior Secured Convertible Note

 

Issuance Date: March 29, 2012

Original Principal Amount: $8,800,000 

No.: [A-1]

 

FOR VALUE RECEIVED, Elephant Talk Communications, Corp., a Delaware corporation
(the “Company”), hereby promises to pay to the order of [HOLDER] or its
registered assigns (“Holder”) the amount set out above as the Original Principal
Amount (as reduced pursuant to the terms hereof pursuant to any Installment
Payment (as defined below), redemption, conversion or otherwise, the
“Principal”) when due, whether upon any Installment Date, the Maturity Date (as
defined below), 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 any Installment Date, the Maturity Date or
acceleration, conversion, redemption or otherwise (in each case in accordance
with the terms hereof). This Convertible Note (including all Convertible Notes
issued in exchange, transfer or replacement hereof, this “Note”) is one of an
issue of Convertible Notes issued pursuant to the Securities Purchase Agreement
(as defined below) (collectively, the “Notes” and such other Convertible Notes,
the “Other Notes”). Certain capitalized terms used herein are defined in Section
25.

 

1.          PAYMENTS OF PRINCIPAL AND INTEREST. The Company will pay the
Principal of and Interest and premium, if any, on the Notes as set forth herein.
The amounts of principal and Interest corresponding to each Installment Date are
set forth on Exhibit A attached hereto, without giving effect to any Default
Interest, Stock Replacement Payment, Late Charges or other adjustments as
provided in this Note. For the avoidance of doubt, no Installment Amount shall
be reduced as a result of the Holder’s conversion of any part of this Note
(other than a Conversion effected in accordance with Section 2(g)); provided,
however, if the entire outstanding Principal, Interest, Late Charges and other
amounts due hereunder is less than the applicable Installment Amount for any
Installment Date such lesser amount shall be due and payable on such Installment
Date. Interest on the Notes will accrue at an annual rate equal to eight percent
(8%) (the “Interest Rate”); provided, however, that upon the occurrence and
during the continuance of an Event of Default, until such Event of Default is
cured (if applicable), the Interest Rate shall be equal to the lesser of (x)
nineteen percent (19%) per annum and (y) the maximum applicable legal rate per
annum. Interest shall be paid on each Installment Date commencing on the Initial
Installment Date. If an Installment Date is not a Trading Day, payment shall
instead be made on the next succeeding Trading Day, and no additional Interest
shall accrue on the Notes for the intervening period. Interest on the Notes will
be computed on the basis of a 365-day year and the actual number of days
elapsed.

 

 

 

 

2.          INSTALLMENT PAYMENTS.

 

(a)          General. On each applicable Installment Date, the Company shall pay
to the Holder the Installment Amount due on such Installment Date, at the
Company’s option, in cash or shares of Common Stock or any combination of cash
and shares of Common Stock subject to the provisions of this Section 2;
provided, however, that no portion of the Installment Amount may be paid in
shares of Common Stock unless (A) the Equity Conditions are satisfied, or waived
by the Holder, as applicable, (B) the Holder’s Exchange Cap Allocation (as
defined below) and/or Authorized Share Allocation (as defined below) has not
been exceeded and (C) the portion of the Installment Amount to be paid in shares
of Common Stock does not, unless waived by the Holder, exceed the Dollar Volume
Limitation.

 

(b)          Installment Notice. On a date not less than twenty two (22) Trading
Days, but in no event more than twenty-five (25) Trading Days, prior to each
Installment Date (the “Installment Notice Date”), the Company shall deliver a
written notice by e-mail or facsimile (an “Installment Notice”) to the Holder,
which shall either: (i) confirm that the entire applicable Installment Amount
shall be paid in cash; or (ii) (A) state that the Company elects to pay all or a
portion of the Installment Amount in shares of Common Stock, (B) specify the
portion which the Company elects to pay in cash (such amount, the “Cash Payment
Amount”) and the portion that the Company elects to pay in shares of Common
Stock (such portion a “Stock Payment Amount”), which amounts when added together
must equal the applicable Installment Amount, (C) certify that the Equity
Conditions are then satisfied, (D) specify the applicable Dollar Volume
Limitation (expressed in U.S. Dollars) and certify that the Stock Payment Amount
does not exceed such applicable Dollar Volume Limitation and (E) certify that
the Holder’s Exchange Cap Allocation and/or Authorized Share Allocation has not
been exceeded. If (x) the Company does not timely deliver an Installment Notice
in accordance with this Section 2(b) or (y) the Equity Conditions are not
satisfied, then, unless waived by the Holder, the Company shall be deemed to
have delivered an Installment Notice electing to pay the entire Installment
Amount in cash. Any Cash Payment Amount shall be paid in accordance with Section
2(c) and any Stock Payment Amount shall be paid in accordance with Section 2(d).
Each Installment Notice, whether actually given or deemed given, shall be
irrevocable and may not be modified or amended.

 

(c)          Mechanics of Cash Payment. On each Installment Date, to the extent
that the Company elects to pay all or any portion of the Installment Amount in
cash as provided above, the Company shall pay the applicable Cash Payment Amount
for such Installment Date to the Holder by wire transfer of immediately
available funds.

 

2

 

 

(e)          Mechanics of Stock Payment. To the extent that the Company elects
to pay all or any portion of the applicable Installment Amount in shares of
Common Stock, the applicable Stock Payment Amount shall be paid as follows:

 

(i)          twenty-one (21) Trading Days prior to the applicable Installment
Date (the “Advance Date”), the Company shall deliver to the Holder a number of
shares of Common Stock determined by dividing (x) the Stock Payment Amount for
such Installment Date by (y) ninety percent (90%) of the VWAP on the Trading Day
immediately preceding such Advance Date (the “Advance Shares”), as such number
of Advance Shares may be reduced pursuant to clause (y) of Section 2(d)(ii); and

 

(ii)         not later than two (2) Trading Days after the applicable
Installment Date, the Company shall deliver an additional number of shares of
Common Stock (the “True-Up Shares”), if any, to the Holder equal to the positive
difference between (a) the Stock Payment Amount divided by the Stock Payment
Price for such Installment Date and (b) the Advance Shares (without taking into
account any reduction in the number of Advance Shares delivered to the Holder as
a result of clause (y) of this Section 2(d)(ii)); provided; however, that if
clause (b) exceeds clause (a), then, at the Company’s option, the Holder shall
(x) return such excess number of shares Common Stock to the Company within five
(5) Trading Days after the Installment Date, and such excess shares shall be
deemed cancelled for all purposes effective as of the applicable Installment
Date or (y) the Holder shall retain such excess number of shares of Common Stock
and the number of Advance Shares that Company is required to deliver on the next
Advance Date shall be reduced by the amount of such excess number of shares of
Common Stock. For the avoidance of doubt, the Holder shall not have any
liability to the Company to the extent that any Advance Shares that are returned
to the Company pursuant to the immediately preceding sentence decrease in value
following the applicable Advance Date.

 

(f)          Busted Stock Payments. Notwithstanding any other provision of this
Section 2, to the extent that the Company elects to pay all or any portion of an
Installment Amount in shares of Common Stock:

 

(i)          to the extent that the aggregate number of Advance Shares or
True-Up Shares to be delivered to the Holder pursuant to Section 2(d) in respect
of any individual Stock Payment Amount would cause such Holder to exceed the
Maximum Percentage (as defined below), then, (I) the Holder shall provide
written notice to the Company that such delivery of all or a portion of the
Advance Shares or True-Up Shares would cause such Holder to exceed the Maximum
Percentage, and (II) in addition to delivery of the number of Advance Shares or
True-Up Shares that would not cause such Holder to exceed the Maximum
Percentage, the Company shall pay to the Holder in lieu of such number of
Advance Shares or True-Up Shares that would cause such Holder to exceed the
Maximum Percentage (such excess number of shares, the “Excess Shares”), not more
than the later of (x) three (3) Trading Days after such Installment Date and (y)
three (3) Trading Days after the date of the Holder’s written notice, an amount
in cash equal to the portion of the Stock Payment Amount that would otherwise be
payable in respect of the Excess Shares;

 

 

3

 

  

(ii)         to the extent that such Stock Payment Amount, when aggregated with
any shares of Common Stock already issued to the Holder in respect of this Note,
would cause the Holder’s Exchange Cap Allocation or Authorized Share Allocation,
as the case may be, to be exceeded, then that portion of such Stock Payment
Amount that would not exceed the Holder’s Exchange Cap Allocation or Authorized
Share Allocation, as the case may be, shall be delivered to the Holder in shares
of Common Stock as provided above and the Company shall pay to the Holder, not
more than three (3) Trading Days after the Installment Date, an amount in cash
equal Stock Replacement Payment in lieu of any the portion of the Stock Payment
Amount that would cause the Holder’s Exchange Cap Allocation or Authorized Share
Allocation, as the case may be, to be exceeded;

 

(iii)        if the Equity Conditions are neither (x) satisfied nor (y) waived
in accordance with the terms hereof, as applicable, on the Trading Day
immediately preceding the Advance Date and/or on the Advance Date, or if the
VWAP cannot be determined on the Trading Day immediately preceding the Advance
Date, or if the Company fails to deliver the Advance Shares to the Holder on the
Advance Date, then the Holder may, at its option, upon written notice to the
Company, require the Company to pay to the Holder, not later than two (2)
Trading Days after the Installment Date, an amount of cash equal to the Stock
Replacement Payment in lieu of any the portion of the Stock Payment Amount; or

 

(iv)        if subsequent to the delivery of the Advance Shares, (A) the Equity
Conditions are neither satisfied nor waived in accordance with the terms hereof,
as applicable, on any day during the Stock Payment Pricing Period or (B) if the
VWAP cannot be determined on any day during the Stock Payment Pricing Period,
then the Holder may, at its option, elect in a written notice to the Company to
redeliver all or any portion of the Advance Shares to the Company and the
Company shall pay to the Holder, not later than two (2) Trading Days after such
Installment Date, an amount of cash equal to the Stock Replacement Payment in
lieu of such portion of the Stock Payment Amount for which such Holder has
elected in writing to redeliver Advance Shares to the Company. For the avoidance
of doubt, to the extent this Section 2(e)(iv) applies, then by the second (2nd)
Trading Day after such Installment Date, the Company must pay to the Holder an
amount of cash and Advance Shares equal in value to at least the applicable Cash
Payment Amount plus an amount equal to the product of (x) a fraction the
numerator of which is the average VWAP of the Common Stock for the applicable
Stock Payment Pricing Period and the denominator of which is the Stock Payment
Price for such Stock Payment Pricing Period and (y) the entire Stock Payment
Amount.

 

The “Stock Replacement Payment” shall be determined according to the following
formula:

 

SRP = (S/X) * Y

 

For the purposes of the foregoing formula:

 

SRP = Stock Replacement Payment

 

S = the Stock Payment Amount (or (A) in the case that either or both of the
Holder’s Exchange Cap Allocation and/or Authorized Share Allocation is exceeded
as provided above, only that portion of such Stock Payment Amount that would
exceed the Holder’s Exchange Cap Allocation and/or Authorized Share Allocation,
as applicable, and/or (B) in the case of Section 2(e)(iv) that portion of the
Stock Payment Amount for which the Holder has elected in its written notice to
redeliver Advance Shares to the Company).

 

4

 

 

X = the Stock Payment Price for the applicable Installment Date.

 

Y = the highest VWAP during the Stock Payment Pricing Period for the applicable
Installment Date.

 

(g)          Delivery of Shares. Any shares of Common Stock required to be
delivered by the Company to the Holder under this Section 2 shall be credited to
the Holder’s or its designee’s balance account with Depository Trust Company
(“DTC”) through its Deposit/Withdrawal at Custodian system. In addition, the
provisions of Section 3(c)(ii) shall apply to the delivery of shares Common
Stock under this Section 2 mutatis mutandis as if each date when shares of
Common Stock are required to be delivered under this Section 2 was a Share
Delivery Date (as defined below).

 

(h)          Conversion Rights Unaffected.  Notwithstanding any provision to the
contrary, the Holder may deliver a Conversion Notice (as defined below) on the
26th, 27th or 28th Trading day prior to any Installment Date with respect to all
or any portion of the specific Installment Amount to be paid on such Installment
Date.  Accordingly, the Conversion Amount for any such conversion shall reduce
the applicable Installment Amount for such Installment Date dollar for dollar.

 

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

 

(a)          Conversion Right. Subject to the provisions of Section 3(d), at any
time or times on or after the Issuance Date (including, without limitation, on
the Maturity Date), the Holder shall be entitled to convert all or 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) and Section 2(h), at the Conversion Rate. 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 that may be payable with respect to the issuance and delivery
of Common Stock upon conversion of any Conversion Amount.

 

(b)          Conversion Prices; Conversion Rates. 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 (A) the portion of the
Principal to be converted, redeemed or otherwise with respect to which this
determination is being made, (B) accrued and unpaid Interest with respect to
such Principal, and (C) accrued and unpaid Late Charges with respect to such
Principal and Interest.

 

 

5

 

  

(ii)         “Conversion Price” means, as of any Conversion Date (as defined
below) or other date of determination, $[___] [NTD: 115% OF THE TRAILING 30 DAY
CLOSING PRICE PRIOR TO CLOSING], subject to adjustment as provided herein.
Notwithstanding the foregoing, following a Launch Failure, the Conversion Price
for any Conversion Date shall be the lowest of (a) the Conversion Price in
effect on the Trading Day immediately prior to such Launch Failure, (b) the
amount equal to 90% of the average of the five lowest VWAPs for the twenty (20)
consecutive Trading Days prior to such Conversion Date, and (c) the amount equal
to 90% of the lowest reported trade price for the Common Stock as reported by
Bloomberg on such Conversion Date (the “Reset Conversion Price”). The Holder’s
determination of the Reset Conversion Price shall be final and binding on the
Company absent fraud or manifest error.

 

(c)          Mechanics of Conversion.

 

(i)          Conversion Prior to Maturity Date. To convert any Conversion Amount
into shares of Common Stock on any date (a “Conversion Date”), the Holder shall
deliver (whether via facsimile, e-mail or otherwise), for receipt on or prior to
11:59:59 p.m., New York time, on such date, a copy of an executed notice of
conversion in the form attached hereto as Exhibit B (the “Conversion Notice”) to
the Company. If and only if required by Section 3(c)(iii), within two (2)
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
15(b)). On or before the second (2nd) Trading Day following the date of receipt
of a Conversion Notice, the Company shall transmit by facsimile and e-mail an
acknowledgment of confirmation, in the form attached hereto as Exhibit C, of
receipt of such Conversion Notice to the Holder and the Company’s transfer agent
(the “Transfer Agent”). On or before the fifth (5th) Trading Day following the
date of receipt of a Conversion Notice, the Company shall credit such aggregate
number of shares of Common Stock to which the Holder shall be entitled to the
Holder’s or its designee’s balance account with DTC through its
Deposit/Withdrawal at Custodian system. 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 three (3) 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 15(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.

 

6

 

  

(ii)         Company’s Failure to Timely Convert. If the Company shall fail, for
any reason or for no reason, within five (5) Trading Days after the Company’s
receipt of a Conversion Notice (whether via facsimile, e-mail or otherwise) (the
“Share Delivery Date”), to credit the Holder’s or its designee’s balance account
with DTC for such number of shares of Common Stock to which the Holder is
entitled upon the Holder’s conversion of any Conversion Amount (a “Conversion
Failure”), then, in addition to all other remedies available to the Holder, (1)
the Company shall pay in cash to the Holder on each day that the issuance of
such shares of Common Stock is not timely effected an amount equal to 1% of the
product of (A) the sum of the number of shares of Common Stock not issued to the
Holder on a timely basis and to which the Holder is entitled multiplied by (B)
the Closing Sale Price of the Common Stock on the Trading Day immediately
preceding the last possible date which the Company could have issued such shares
of Common Stock to the Holder without violating Section 3(c)(i) and (2) the
Holder, upon written notice to the Company, may, at its sole option, 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 the Company shall fail to credit the Holder’s or
its designee’s balance account with DTC for the number of shares of Common Stock
to which the Holder is entitled upon the Holder’s conversion hereunder by the
Share Delivery Date, and if on or after such Share Delivery Date the Holder (or
any other Person in respect, or on behalf, of 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, or a sale of a number of shares of Common Stock equal to
all or any portion of the number of shares of Common Stock, issuable upon such
conversion that the Holder so anticipated receiving from the Company, then, in
addition to all other remedies available to the Holder, the Company shall,
within three (3) Business Days after 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, 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 credit the Holder’s balance account with DTC for the
number of shares of Common Stock to which the Holder is entitled upon the
Holder’s conversion hereunder shall terminate, or (ii) promptly honor its
obligation to so credit the Holder’s balance account with DTC for the number of
shares of Common Stock to which the Holder is entitled upon the Holder’s
conversion hereunder and pay cash to the Holder in an amount equal to the Buy-In
Price. Nothing herein 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.

 

(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 of the Notes and the principal amount of the Notes held by such holders
(the “Registered Notes”). 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 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 15. Notwithstanding anything to the contrary set forth in
this Section 3, upon conversion of any portion of this Note in accordance with
the terms hereof, the Holder shall not be required to physically surrender this
Note to the Company unless (A) the full Conversion Amount represented by this
Note is being converted (in which event this Note shall be delivered to the
Company 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) and the
dates of such conversions 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.

 

7

 

  

(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 18.

 

(v)         Cash Settlement. Notwithstanding anything contained herein to the
contrary, to the extent that the number of shares of Common Stock to be issued
in connection with any conversion hereunder would exceed the Holder’s Exchange
Cap Allocation and/or Authorized Share Allocation or, for purposes of a forced
conversion under Section 8(b), the Maximum Percentage, such conversion shall be
“cash settled” and the Company shall pay to such Holder an amount in cash equal
to the sum of (x) the Conversion Amount being converted and (y) the Conversion
Premium (as defined below). The “Conversion Premium” means the product of (v)
the difference between (A) the VWAP of the Common Stock on the Conversion Date
and (B) the Conversion Price in effect on such Conversion Date and (w) the
number of shares of Common Stock to which the Holder is entitled in connection
with such Conversion, no later than two (2) Trading Days after the date of the
applicable Conversion Notice. Notwithstanding the foregoing, the Company’s
aggregate liability under this Section 3(c)(v) shall not exceed $8,800,000 (to
be divided pro rata per Note) less any amortization payments. For the avoidance
of doubt, the foregoing does not limit the Holder’s other rights and remedies
hereunder at law, in equity or otherwise.

 

8

 

  

(d)          Limitations on Conversions.

 

(i)          Beneficial Ownership. Notwithstanding anything to the contrary set
forth in this Note, at no time may the Company issue to the Holder shares of
Common Stock if the number of shares of Common Stock to be issued pursuant to
such issuance would exceed, when aggregated with all other shares of Common
Stock beneficially owned by the Holder at such time (as determined in accordance
with Section 13(d) of the 1934 Act (as defined in the Securities Purchase
Agreement) and the rules thereunder, including without limitation, shares of
Common Stock that would be aggregated with the Holder’s beneficial ownership for
purpose of determining a group under Section 13(d) of the 1934 Act), the number
of shares of Common Stock that would result in the Holder beneficially owning
(as determined in accordance with Section 13(d) of the 1934 Act and the rules
thereunder, including without limitation, shares of Common Stock that would be
aggregated with the Holder’s beneficial ownership for purpose of determining a
group under Section 13(d) of the 1934 Act) more than 4.9% (the “Maximum
Percentage”) of the then issued and outstanding shares of Common Stock. By
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 9.9%
specified in such notice; provided that (i) any such increase 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 not to any other holder of the Notes. The provisions of this paragraph shall
be implemented in a manner otherwise than in strict conformity with the terms of
this paragraph to correct this paragraph (or any portion hereof) which may be
defective or inconsistent with the intended Maximum Percentage beneficial
ownership limitation herein contained or to make changes or supplements
necessary or desirable to properly give effect to such Maximum Percentage
limitation. 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 to the Holder the number of shares of Common Stock then outstanding,
including by virtue of any prior conversion or exercise of convertible or
exercisable securities into Common Stock, including, without limitation,
pursuant to this Note or other securities issued pursuant to the Securities
Purchase Agreement.

 

(ii)         Principal Market Regulation. Subject to Sections 2(e)(ii) and
3(c)(v), the Company shall not issue any shares of Common Stock 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
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, 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 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 Purchaser (as defined in the Securities Purchase Agreement) shall
be issued in the aggregate, pursuant to the terms of this Notes, shares of
Common Stock in an amount greater than the product of (i) the Exchange Cap
multiplied by (ii) the quotient of (1) the original principal amount of Notes
issued to such Purchaser pursuant to the Securities Purchase Agreement on the
Closing Date (as defined in the Securities Purchase Agreement) divided by
(2) the aggregate original principal amount of all Notes issued to all the
Purchasers pursuant to the Securities Purchase Agreement on the Closing Date
(with respect to each Purchaser, the “Exchange Cap Allocation”). In the event
that any Purchaser shall sell or otherwise transfer any of such Purchaser's
Notes, the transferee shall be allocated a pro rata portion of such Purchaser's
Exchange Cap Allocation, and the restrictions of the prior sentence shall apply
to such transferee with respect to the portion of the Exchange Cap Allocation
allocated to such transferee. Upon conversion in full of a Purchaser’s Notes,
the difference (if any) between such Purchaser’s Exchange Cap Allocation and the
number of shares of Common Stock actually issued to such Purchaser upon such
Purchaser’s conversion in full of such Notes shall be allocated to the
respective Exchange Cap Allocations of the remaining holders of Notes on a pro
rata basis in proportion to the aggregate principal amount of the Notes then
held by each such holder.

 

9

 

  

4.          RIGHTS UPON EVENT OF DEFAULT.

 

(a)          Event of Default. Each of the following events shall constitute an
“Event of Default”:

 

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

 

(ii)         the Company’s (A) failure to cure a Conversion Failure by delivery
of the required number of shares of Common Stock within three (3) Trading Days
after the applicable Conversion Date or (B) notice, written or oral, to any
holder of the Notes, including, without limitation, by way of public
announcement or through any of its agents (which the Company fails to renounce
the actions of its agent within three (3) Trading Days after becoming aware of
such action), 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);

 

(iii)        at any time following the tenth (10th) consecutive day that the
Holder’s Authorized Share Allocation is less than 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);

 

(iv)        the Company’s 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 failure to pay any redemption
payments or amounts hereunder and/or the Company’s failure to deliver Advance
Shares or True-Up Shares when and as due as provided in Section 2) 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;

 

(v)         the occurrence of any default under, redemption of or acceleration
prior to maturity of any Indebtedness (as defined in the Securities Purchase
Agreement but excluding any Indebtedness arising out of the Notes) of the
Company or any of its Subsidiaries;

 

(vi)        bankruptcy, insolvency, reorganization, receivership,
conservatorship or liquidation proceedings or other proceedings for the relief
of debtors shall be instituted by or against the Company or any Significant
Subsidiary, and, if instituted against the Company or any such Subsidiary by a
third party, shall not be dismissed within ninety (90) days of their initiation;

 

 

10

 

 

(vii)       the commencement by the Company or any Significant 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 Significant 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
Significant 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, the taking of corporate action by the Company or any
Significant Subsidiary in furtherance of any such action or the commencement by
any Person of a UCC foreclosure sale of a material portion of the Company’s or
any Significant Subsidiary’s assets or any other similar action under federal,
state or foreign law;

 

(viii)      the entry by a court of (i) 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
(ii) 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 thirty (30) consecutive days;

 

(ix)         a final judgment or judgments (excluding judgments relating to any
actions set forth on Schedule 2.1(k) of the Securities Purchase Agreement that
are not in excess of $2,000,000) 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 thirty (30) days after the entry thereof,
bonded, discharged or stayed pending appeal, or are not discharged within thirty
(30) days after the expiration of such stay;

 

(x)          (a) the Company shall default on any of its obligations under any
other debenture or any mortgage, indenture agreement, factoring agreement or
other instrument under which there may be issued, or by which there may be
secured or evidenced any indebtedness for borrowed money or money due under any
long term leasing or factoring agreement in an amount exceeding $150,000 and
such default shall result in such indebtedness becoming or being declared due
and payable prior to the date on which it would otherwise become due and
payable;

 

(xi)         any breach of the Company’s covenants set forth in Sections 3.9 (if
such breach is not cured within 2 days of the date of breach), 3.10 (if such
breach is not cured within 12 days of such breach), 3.11 (if such breach is not
cured within 12 days of such breach), 3.12 (if such breach is not cured within
12 days of such breach), 3.13 (if such breach is not cured within 12 days of
such breach), 3.15 (or if the Company fails to obtain the stockholder approval
contemplated by such Section 3.15), if either such breach is not cured within 5
days of such breach, 3.16 , 3.17 (if such breach is not cured within 12 days of
such breach) and/or 3.21 (if such breach is not cured within 12 days of such
breach) of the Securities Purchase Agreement;

 

11

 

  

(xii)        other than as specifically set forth in another clause of this
Section 4(a), the Company breaches any material representation, warranty,
covenant or other term or condition of any Transaction Document (including this
Note), except, in the case of a breach of a material covenant or other term or
condition that is curable, only if such breach remains uncured for a period of
five (5) days after notice by Holder;

 

(xiii)       any material provision of any Security Document or any other
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 Company or any Subsidiary intended to be a party thereto, only if
such breach remains uncured for a period of five (5) days after notice by
Holder, 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 such Security Document or other such
Transaction Document;

 

(xiv)      any Security Document, after delivery thereof pursuant to the
Securities Purchase Agreement, shall, other than pursuant to the express terms
thereof, for any reason fail or cease to create a valid, perfected first
priority Lien (as defined in the Security Documents) in favor of the Collateral
Agent (as defined in the Security Documents) for the benefit of the holders of
the Notes on any Collateral (as defined in the Security Documents) purported to
be covered thereby;

 

(xv)       any bank at which any deposit account, blocked account, or lockbox
account of the Company or any Subsidiary is maintained shall fail to comply with
any material term of any deposit account, blocked account, lockbox account or
similar agreement to which such bank is a party or any securities intermediary,
commodity intermediary or other financial institution at any time in custody,
control or possession of any investment property of the Company or any
Subsidiary shall fail to comply with any of the terms of any investment property
control agreement to which such Person is a party (it being understood that only
accounts pursuant to which the Collateral Agent has requested account control
agreements should be subject to this clause (xv));

 

(xvi)      until the date that any Lien therein is released in accordance with
the terms of the Security Documents, any material damage to, or loss, theft or
destruction of, any Collateral, whether or not insured;

 

(xvii)     a material false or inaccurate certification (including a false or
inaccurate deemed certification) by the Company that the Equity Conditions are
satisfied, the Dollar Volume Limitation has not been exceeded or as to whether
any Event of Default has occurred;

 

12

 

  

(xviii)    the failure of any Registration Statement required to be filed
pursuant to the Registration Rights Agreement to be declared effective by the
SEC on or prior to the date that is ninety (90) days after the applicable
Effectiveness Deadline (as defined in the Registration Rights Agreement), or,
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 is unavailable
to any holder of the Notes for sale of all of such holder's Registrable
Securities (as defined in the Registration Rights Agreement) in accordance with
the terms of the Registration Rights Agreement, and such lapse or unavailability
continues for a period of ten (10) consecutive trading days or for more than an
aggregate of thirty (30) trading days in any 365-day period (other than days
during an Allowable Grace Period (as defined in the Registration Rights
Agreement)); provided, however, that notwithstanding anything to the contrary
contained herein, the Company's failure to meet one or more of the requirements
of this Section 4(a)(xviii) shall not constitute an Event of Default if all of
the Registrable Securities then held by the holder of the Notes may be sold
without the requirement to be in compliance with Rule 144(c)(1) and otherwise
without restriction or limitation pursuant to Rule 144 (including any volume
limitations or public information requirements);

 

(xix)       any Event of Default (as defined in the Other Notes) occurs with
respect to any Other Notes; or

 

(xx)        the occurrence of a Launch Failure.

 

(b)          Remedies. If an Event of Default occurs and is continuing with
respect to any of the Notes, the Holder may declare all of the then outstanding
Principal of this Note and all other Notes held by the Holder, including any
Interest and unpaid Late Charges, to be due and payable immediately, except that
in the case of an Event of Default arising from events described in clauses
(vi), (vii) and/or (viii) of Section 4(a), this Note shall become due and
payable automatically without further action or notice. In the event of such
acceleration, the amount due and owing to the Holder shall be 110% of the
outstanding Principal of the Notes held by the Holder (plus all accrued and
unpaid Interest and Late Charges, if any). The Holder’s remedies under this Note
shall be cumulative.

 

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, having similar rights as set forth in Section 2 of the
Notes and having similar ranking to the Notes, and satisfactory to the Holder
and (ii) the Successor 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 the Company’s Common Stock (or
other securities, cash, assets or other property), 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), as adjusted in accordance with the provisions 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 or other issuances of shares of
Common Stock hereunder.

 

13

 

  

(b)          Notice of a Fundamental Transaction; Redemption Right. No sooner
than twenty (20) Trading Days nor later than ten (10) Trading Days prior to the
consummation of a Fundamental Transaction, but not prior to the public
announcement of such Fundamental Transaction, the Company shall deliver written
notice thereof via facsimile, e-mail and overnight courier to the Holder (a
“Fundamental Transaction Notice”). At any time during the period beginning after
the Holder’s receipt of a Fundamental Transaction Notice or the Holder becoming
aware of a Fundamental Transaction if a Fundamental Transaction 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 Fundamental Transaction or (B) the date of receipt of such
Fundamental Transaction Notice, the Holder may require the Company to redeem all
or any portion of this Note by delivering written notice thereof (“Fundamental
Transaction Redemption Notice”) to the Company, which Fundamental Transaction
Redemption Notice shall indicate the Principal amount of this Note that 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 115% of the Principal amount being redeemed plus all accrued and unpaid
Interests and Late Charges (the “Fundamental Transaction Redemption Price”) and
such Fundamental Transaction Redemption Price shall be due and payable in cash
not later then two (2) Trading Days after the consummation of such Fundamental
Transaction. Redemptions required by this Section 5 shall have priority to
payments to stockholders in connection with such Fundamental Transaction.
Notwithstanding anything to the contrary in this Section 5, but subject to
Section 3(d), until the Fundamental Transaction Redemption Price (together with
any Late Charges thereon) is paid in full, the Principal amount of this Note
submitted for redemption under this Section 5(b) (together with any accrued and
unpaid Interest and Late Charges thereon) may be converted, in whole or in part,
by the Holder into shares of Common Stock pursuant to Section 3.

 

14

 

  

6.          RIGHTS UPON 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 insure that the Holder will thereafter have the right
to receive upon a conversion of this Note (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. The provision made pursuant to the preceding sentence shall
be in a form and substance satisfactory to the Holder. The provisions of this
Section 6(b) 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. So
long as all or any portion of the Note remains outstanding, if and whenever on
or after the Issuance 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) for a consideration per share less than a price
equal to the Conversion Price in effect immediately prior to such issue 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 Applicable Price shall be reduced
to an amount equal to an amount obtained by dividing the Applicable Price by a
fraction, the numerator of which shall be the product of (i) the total number of
shares of Common Stock outstanding immediately after such Dilutive Issuance
multiplied by (ii) the Applicable Price, and the denominator of which shall be
an amount equal to the sum of (a) the number of shares of Common Stock
outstanding immediately prior to such Dilutive Issuance multiplied by the
Applicable Price plus (b) the aggregate consideration received by the Company
(determined as provided below) for such Dilutive Issuance. Notwithstanding the
foregoing, no adjustments shall be made under this Section 7 with respect to any
Exempt Issuance. “Exempt Issuance” shall mean the issuance of (i) shares of
Common Stock or securities convertible or exchangeable into Common Stock to
officers, directors, employees and consultants to the Company and (ii) up to
fifteen (15) million shares of Common Stock or securities convertible or
exchangeable into fifteen (15) million shares of Common Stock as all or part of
the consideration for the acquisition (whether by merger or otherwise) by the
Company for stock or assets of any other entity in a transaction approved by the
Board of Directors of the Company. For purposes of determining the adjusted
Conversion Price under this Section 7(a), the following shall be applicable:

 

15

 

  

(i)          Exercise 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 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
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 exercise of such Option. 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 Options or upon conversion, exercise or exchange of any
Convertible Securities issuable upon exercise of any such Option” 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 exercise of such Option and upon conversion, exercise or exchange of
any Convertible Security issuable upon exercise of such Option 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 minus (2) the sum of all amounts paid or payable to the holder of
such Option (or any other Person) upon the exercise of such Option and upon
conversion, exercise or exchange of any Convertible Security issuable upon
exercise of such Option plus the value of any other consideration received or
receivable by, or benefit conferred on, the holder of such Option (or any other
Person).

 

(ii)         Exercise 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 issuable upon the conversion, exercise or
exchange 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 conversion, exercise or exchange 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” 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
conversion, exercise or exchange of such Convertible Security 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 minus
(2) the sum of all amounts paid or payable to the holder of such Convertible
Security (or any other Person) upon the exercise 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).

 

(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, 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 Issuance 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.

 

16

 

  

(iv)        Calculation of Consideration Received. If any Option or Convertible
Security is issued or deemed issued in connection with the issuance or sale or
deemed issuance or sale of any other securities of the Company, together
comprising one integrated transaction, (x) such Option or Convertible Security
(as applicable) will be deemed to have been issued for consideration equal to
the Black Scholes Consideration Value thereof and (y) the other securities
issued or sold or deemed to have been issued or sold in such integrated
transaction shall be deemed to have been issued for consideration equal to the
difference of (I) the aggregate consideration received by the Company minus
(II) the Black Scholes Consideration Value of each such Option or Convertible
Security (as applicable). 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 will be deemed to be the net amount 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 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 average VWAP of such security for the five
(5) Trading Day period 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 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 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 issue 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).

 

(b)          Adjustment of Conversion Price upon Subdivision or Combination of
Common Stock. Without limiting any provision of Section 5 or Section 7(a), and
so long as all or any portion of the Note remains outstanding, if the Company at
any time on or after the Issuance Date subdivides (by any stock split, stock
dividend, recapitalization or otherwise) 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, 6 or Section 7(a), if the Company
at any time on or after the Issuance Date combines (by combination, reverse
stock split or otherwise) 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.

 

17

 

  

(c)          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(c) 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 and whose fees and expenses shall be
borne by the Company.

 

(d)          No Modification of Company’s Covenants. For the avoidance of doubt,
nothing contained in this Section 7 shall be deemed to modify or limit the
Company’s covenants contained in the Securities Purchase Agreement.

 

8.          COMPANY’S RIGHT OF OPTIONAL REDEMPTION AND FORCED CONVERSION.

 

(a)          Company’s Right of Optional Redemption.

 

(i)          At any time after the one (1) year anniversary of the Issuance
Date, the Company shall have the right to redeem a portion or the entire
outstanding amount of this Note (including all Principal, Interest, Late Charges
and any other amounts payable hereunder) (a “Company Optional Redemption”) at a
redemption price equal to 115% thereof (together, the “Company Redemption
Price”) subject to the provisions of this Section 8(a). The Company shall
deliver written notice of a Company Optional Redemption (a “Company Optional
Redemption Notice”) to the Holder thirty (30) Trading Days prior to the date set
by the Company for such Company Optional Redemption (the “Company Redemption
Date”). Once delivered, a Company Optional Redemption Notice shall be
irrevocable. The Company Redemption Price shall be due and payable by the
Company in cash. If the Company elects to cause a Company Optional Redemption
pursuant to this Section 8(a), then it must simultaneously take the same action
with respect to the Other Notes and if such redemption is for a portion of this
Note such redemption shall be pro rata among the Holders.

 

18

 

  

(ii)         At any time after a Launch Failure, the Company shall have the
right to redeem a portion or the entire outstanding amount of this Note
(including all Principal, Interest, Late Charges and any other amounts payable
hereunder) (a “LF Company Optional Redemption”) at a redemption price equal to
100% thereof (together, the “LF Company Redemption Price”) subject to the
provisions of this Section 8(a). The Company shall deliver written notice of an
LF Company Optional Redemption (a “LF Company Optional Redemption Notice”) to
the Holder one (1) Trading Day prior to the date set by the Company for such LF
Company Optional Redemption (the “LF Company Redemption Date”). Once delivered,
an LF Company Optional Redemption Notice shall be irrevocable. The LF Company
Redemption Price shall be due and payable by the Company in cash. If the Company
elects to cause an LF Company Optional Redemption pursuant to this Section 8(b),
then it must simultaneously take the same action with respect to the Other Notes
and if such redemption is for a portion of this Note such redemption shall be
pro rata among the Holders.

 

(iii)        For the avoidance of doubt, the Holder may convert all or any
portion this Note at any time prior to the Company Redemption Date or LF Company
Redemption Date, as applicable, notwithstanding the Company’s delivery of a
Company Optional Redemption Notice or LF Company Optional Redemption Notice, as
applicable. To the extent, that the Holder converts all or any portion of the
Note prior to the Company Redemption Date or LF Company Redemption Date, as
applicable, the Holder shall not be entitled to receive the Company Redemption
Price or the LF Company Redemption Price, as applicable, for the Conversion
Amount so converted.

 

(b)          Forced Conversion.

 

(i)          If the VWAP of the Common Stock equals or exceeds 150% of the
Conversion Price then in effect on each of thirty (30) consecutive Trading Days
(the “Conversion Occurrence”), then the Company may state its intention to cause
the conversion of one hundred (100) percent of this Note at the Conversion Price
in effect as of the Forced Conversion Date (as defined below) by providing an
irrevocable written notice (the “Conversion Occurrence Notice”) to the Holder;
provided that such Conversion Occurrence Notice shall be sent within one (1)
Trading Day after a Conversion Occurrence and must be sent concurrently to the
holders of all Notes. The Conversion Occurrence Notice shall indicate that the
Company seeks to cause conversion of one hundred (100) percent of this Note and
shall set forth the date for such conversion of the Note (the “Forced Conversion
Date”), which date shall be thirty (30) Trading Days after the date the
Conversion Occurrence Notice is delivered (the “Conversion Notice Period”). The
Company’s right to force conversion of this Note pursuant to this Section
8(b)(i) is a one-time right to force conversion.

 

(ii)         Notwithstanding the foregoing, the Company may not effect a forced
conversion of this Note pursuant to this Section 8(b) unless:

 

a.           the Equity Conditions are satisfied, or waived by the Holder,
during each day of the Conversion Notice Period;

 

b.           the number of shares of Common Stock to be issued in connection
with any such forced conversion would not cause the Holder to exceed the Maximum
Percentage, the Holder’s Exchange Cap Allocation and/or Authorized Share
Allocation. However, at the option of the Holder, conversion of the portion of
this Note that may not be converted because such conversion would cause the
Holder to exceed the Maximum Percentage, the Holder’s Exchange Cap Allocation
and/or Authorized Share Allocation shall be deferred until such time as the
conversion hereof shall not exceed such limits.

 

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c.           The conversion shall occur on the Forced Conversion Date, and the
Company shall deliver the required number of shares to the Holder in accordance
with Section 3(c)(i) mutatis mutandis. For the avoidance of doubt, if the
Company fails to deliver the required number of shares of Common Stock on the
Forced Conversion Date in accordance with Section 3(c)(i) mutatis mutandis the
Holder shall have the remedies set forth in Section 3(c)(ii).

 

d.           Nothing in this Note shall limit the Holder’s right to convert
after the Conversion Occurrence Notice has been received but before actual
forced conversion. Without limiting the foregoing, the Holder may submit a
Conversion Notice for the specific portion of the Note subject to a forced
conversion at any time prior to the Forced Conversion Date notwithstanding the
delivery of a Conversion Occurrence Notice.

 

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, the Company (i) 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, (ii) shall take all such actions as may be
necessary or appropriate in order that the Company may validly and legally issue
fully paid and non-assessable shares of Common Stock upon the conversion of this
Note, and (iii) shall, so long as any of the Notes are outstanding, take all
action necessary to reserve and keep available out of its authorized and
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the Notes, the maximum number of shares of Common Stock as shall
from time to time be necessary to effect the conversion of the Notes then
outstanding (without regard to any limitations on conversion).

 

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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 225% 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 and other
issuances hereunder, including Section 2, 225% 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 issuance hereunder 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
Issuance Date or the date of the 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. Following a Launch Failure, the Company may not issue any shares of
Common Stock except pursuant to this Note and the Other Notes.

 

(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 or other issuances of shares of Common
Stock hereunder, including Section 2, 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 sixty (60) 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.

 

11.         VOTING RIGHTS. The Holder shall have no voting rights as the holder
of this Note, except as required by law and as expressly provided in this Note.

 

12.         PARTICIPATION. In addition to any adjustments pursuant to Section 7,
the Holder, as the holder of this Note, shall be entitled to receive such
dividends paid and distributions made to the holders of Common Stock to the same
extent as if the Holder had converted this Note into Common Stock (without
regard to any limitations on conversion herein or elsewhere) and had held such
shares of Common Stock on the record date for such dividends and distributions.
Payments under the preceding sentence shall be made concurrently with the
dividend or distribution to the holders of Common Stock (provided, however, to
the extent that the Holder’s right to participate in any such dividend or
distribution would result in the Holder exceeding the Maximum Percentage, then
the Holder shall not be entitled to participate in such dividend or distribution
to such extent (or the beneficial ownership of any such shares of Common Stock
as a result of such dividend or distribution to such extent) and such dividend
or distribution to such extent shall be held in abeyance for the benefit of the
Holder until such time, if ever, as its right thereto would not result in the
Holder exceeding the Maximum Percentage).

 

21

 

  

13.         AMENDING THE TERMS OF THIS NOTE. The prior written consent of the
Holder shall be required for any change or amendment to this Note. No
consideration shall be offered or paid to the Holder to amend or consent to a
waiver or modification of any provision of this Note unless the same
consideration is also offered to all of the holders of the Other Notes. The
Holder shall be entitled, at its option, to the benefit of any amendment to any
of the Other Notes.

 

14.         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.

 

15.         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 15(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 15(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 15(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 15(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.

 

22

 

  

(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 15(a) or Section 15(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.

 

16.         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 Sections 2, 3 and 7).

 

17.         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, 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 (as defined in the Securities
Purchase Agreement) paid for this Note may have been less than the original
Principal amount hereof.

 

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

 

23

 

  

19.         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.

 

20.         DISPUTE RESOLUTION. In the case of a dispute as to the determination
of the Conversion Price, the Closing Bid Price, the Closing Sale Price, the
VWAP, the Stock Replacement Payment, the Dollar Volume Limitation, the Exchange
Cap Allocation, the Authorized Share Allocation, or fair market value (as the
case may be) or the arithmetic calculation of the Conversion Rate (as the case
may be), the Company or the Holder (as the case may be) shall submit the
disputed determinations or arithmetic calculations (as the case may be) via
facsimile (i) within two (2) Business Days after receipt of the applicable
notice giving rise to such dispute to the Company or the Holder (as the case may
be) or (ii) if no notice gave rise to such dispute, at any time after the Holder
learned of the circumstances giving rise to such dispute. If the Holder and the
Company are unable to agree upon such determination or calculation within two
(2) Business Days of such disputed determination or arithmetic calculation (as
the case may be) being submitted to the Company or the Holder (as the case may
be), then the Company shall, within two (2) Business Days, submit via facsimile
(a) the disputed determination of the Conversion Price, the Closing Bid Price,
the Closing Sale Price, the VWAP, the Stock Replacement Payment, the Dollar
Volume Limitation, the Exchange Cap Allocation, the Authorized Share Allocation,
or fair market value (as the case may be) to an independent, reputable U.S.
investment bank selected by the Holder or (b) the disputed arithmetic
calculation of the Conversion Rate (as the case may be) to the Company’s
independent, outside accountant. The Company shall cause at its expense the
investment bank or the accountant (as the case may be) to perform the
determinations or calculations (as the case may be) and notify the Company and
the Holder of the results no later than ten (10) Business Days from the time it
receives such disputed determinations or calculations (as the case may be). Such
investment bank’s or accountant’s determination or calculation (as the case may
be) shall be binding upon all parties absent demonstrable error or fraud.

 

21.         NOTICES; PAYMENTS.

 

(a)          Notices. Whenever notice is required to be given under this Note,
unless otherwise provided herein, such notice shall be given in accordance with
Section 7.4 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 all 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.

 

24

 

  

(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 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 nineteen (19%) per
annum from the date such amount was due until the same is paid in full (“Late
Charge”).

 

22.         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.

 

23.         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.

 

25

 

  

24.         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. 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. In the event that any provision
of this Note is invalid or unenforceable under any applicable statute or rule of
law, then such provision shall be deemed inoperative to the extent that it may
conflict therewith and shall be deemed modified to conform with such statute or
rule of law. Any such provision which may prove invalid or unenforceable under
any law shall not affect the validity or enforceability of any other provision
of this Note. Nothing contained herein 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. 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.

 

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

 

(a)          “Black Scholes Consideration Value” means the value of the
applicable Option or Convertible Security (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 or Convertible Security
(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 or
Convertible Security (as the case may be) as of the date of issuance of such
Option or Convertible Security (as the case may be) and (iii) 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 or Convertible Security (as the case may be).

 

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

 

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

 

26

 

  

(d)          “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 Pink OTC
Markets Inc.(formerly Pinks 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 20. All
such determinations shall be appropriately adjusted for any stock dividend,
stock split, stock combination or other similar transaction during such period.

 

(e)          “Closing Date” has the meaning given in the Securities Purchase
Agreement.

 

(f)          “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.

 

(g)          “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.

 

(h)          “Current Subsidiary” means any Person in which the Company on the
Issuance Date, directly or indirectly, (i) owns any of the outstanding capital
stock or holds any equity or similar interest of such Person or (ii) controls or
operates all or any part of the business, operations or administration of such
Person.

 

(i)          “Dollar Volume Limitation” means fifteen percent (15%) of the
aggregate dollar trading volume of the Common Stock on the Principal Market (or
other applicable Eligible Market) over the thirty (30) consecutive Trading Day
period ending on the Trading Day immediately preceding the date of any
Installment Notice. For the purposes of this definition the term “dollar trading
volume” for any Trading Day shall be determined by multiplying the VWAP by the
volume as reported on Bloomberg for such Trading Day.

 

(j)          “Eligible Market” means the Principal Market, The New York Stock
Exchange, the Nasdaq Capital Market, the Nasdaq Global Select Market or the
Nasdaq Global Market.

 

27

 

  

(k)          “Equity Conditions” means each of the following: (i) on each day
during the Equity Conditions Measuring Period, each Registration Statement
required to be filed under the Registration Rights Agreement shall be effective
and all shares of Common Stock to be issued on the applicable Installment Date
shall be eligible for resale by the Holder without restriction and without need
for additional registration under any applicable federal or state securities
laws, and the Company shall have no knowledge of any fact that would cause any
shares of Common Stock not to be so eligible for resale by the Holder without
restriction and without need for additional registration under any applicable
federal or state securities laws; (ii) on each day during the Equity Conditions
Measuring Period, the shares of Common Stock are designated for listing on an
Eligible Market and shall not have been suspended from trading on such Eligible
Market nor shall delisting or suspension by such Eligible Market have been
threatened or pending in writing by such exchange nor shall there be any SEC or
judicial stop trade order or trading suspension stop order; (iii) any shares of
Common Stock to be issued in connection with the applicable Installment Date may
be issued in full without violating the rules or regulations of the Principal
Market or any applicable laws; (v) on each day during the Equity Conditions
Measuring Period, the Company has not provided any Holder with any material,
non-public information; (vi) on each day during the Equity Conditions Measuring
Period, neither the Registration Statement nor any prospectus included therein
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading and such Registration
Statement and any prospectus included therein shall comply with all applicable
securities laws as to form and substance; (vii) the Transfer Agent is
participating in DTC’s Fast Automated Securities Transfer Program; (ix) all
shares of Common Stock to be issued in connection with the applicable
Installment Date are duly authorized and will be validly issued, fully paid and
non-assessable upon issuance, free and clear of all liens, claims or
encumbrances, and the issuance thereof will not require any further approvals of
the Company’s Board of Directors or stockholders; (x) on each day during the
Equity Conditions Measuring Period, there shall not have occurred or be
continuing, unless waiver by the Holder, either (A) an Event of Default or (B)
an event that with the passage of time or giving of notice would constitute an
Event of Default; and (xi) on each day during the Equity Conditions Measuring
Period, unless waived by the Holder, the Closing Price of the Common Stock is at
least $1.00 per share (appropriately adjusted for any stock split, stock
dividend, stock combination, stock buy-back or other similar transaction). All
references to “Registration Statement” shall include any prospectus included
therein and any amendments or supplements to such Registration Statement or any
such prospectus, as filed from time to time, including without limitation, any
1934 Act filings incorporated by reference therein.

 

(l)          “Equity Conditions Measuring Period” means the period beginning
twenty-one (21) Trading Days prior to the applicable Installment Date (or such
other date of determination) and ending on and including such Installment Date
(or such other date of determination). For the avoidance of doubt, the Equity
Conditions Measuring Period for each Installment Date shall include the Advance
Date, the Stock Payment Pricing Period and such Installment Date.

 

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(m)          “Fundamental Transaction” means that (i) (1) the Company or any of
its Subsidiaries shall, directly or indirectly, in one or more related
transactions, consolidate or merge with or into (whether or not the Company or
any of its Subsidiaries is the surviving corporation) any other Person, or
(2) the Company or any of its Subsidiaries shall, directly or indirectly, in one
or more related transactions, sell, lease, license, assign, transfer, convey or
otherwise dispose of all or substantially all of its respective properties or
assets to any other Person, or (3) the Company or any of its Subsidiaries shall,
directly or indirectly, in one or more related transactions, allow any other
Person to make a purchase, tender or exchange offer that is accepted by the
holders of more than 50% of the outstanding shares of Voting Stock of the
Company (not including any shares of Voting Stock of the Company held by the
Person or Persons making or party to, or associated or affiliated with the
Persons making or party to, such purchase, tender or exchange offer), or (4) the
Company or any of its Subsidiaries shall, directly or indirectly, in one or more
related transactions, consummate a stock or share purchase agreement or other
business combination (including, without limitation, a reorganization,
recapitalization, spin-off or scheme of arrangement) with any other Person
whereby such other Person acquires more than 50% of the outstanding shares of
Voting Stock of the Company, or (5) the Company or any of its Subsidiaries
shall, directly or indirectly, in one or more related transactions, reorganize,
recapitalize or reclassify the Common Stock, or (ii) any Person or Persons
acting jointly or in concert is or shall become the beneficial owner, directly
or indirectly, of 50% of the aggregate ordinary voting power represented by
issued and outstanding Voting Stock of the Company.

 

(n)          “Initial Installment Date” means May 1, 2012.

 

(o)          “Installment Amount” means (a) with respect to each Installment
Date other than the Maturity Date, the amount set forth on Exhibit A as the
Installment Amount for such Installment date and (b) with respect to the
Maturity Date, the amount set forth on Exhibit A as the Installment Amount for
the Maturity Date plus all other outstanding Principal, Interest, Late Charges
and other amounts due and payable under this Note.

 

(p)          “Installment Date” means the Initial Installment Date and each date
listed on Exhibit A as an Installment Date.

 

(q)          “Launch Failure” shall mean the failure of the Company and/or one
of its Subsidiaries (in partnership with Adeptra), within sixty (60) days from
the Closing Date, to enter into a contract with one of the ten largest
international financial institutions to provide SIM swapping fraud detection and
prevention services to such financial institution in which the Company and/or
one of its Subsidiaries receives net compensation of at least $1,000,000.

 

(r)          “Maturity Date” shall mean May 1, 2014.

 

(s)          “New Subsidiary” means, as of any date of determination, any Person
in which the Company after the Issuance Date, directly or indirectly, (i) owns
or acquires any of the outstanding capital stock or holds any equity or similar
interest of such Person or (ii) controls or operates all or any part of the
business, operations or administration of such Person.

 

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

 

(u)          “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.

 

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(v)         “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.

 

(w)          “Principal Market” means the NYSE Amex or such other Eligible
Market where the Common Stock is then listed.

 

(x)          “Registration Rights Agreement” means that certain registration
rights agreement, dated as of the Issuance Date, by and among the Company and
the initial holders of Notes, as may be amended from time to time

 

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

 

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

 

(aa)         “Significant Subsidiaries” means, as of any date of determination,
collectively, all Subsidiaries that would constitute a “significant subsidiary”
under Rule 1-02 of Regulation S-X promulgated by the SEC, and each of the
foregoing, individually, a “Significant Subsidiary.”

 

(bb)         “Stock Payment Price” means, with respect to any Installment Date,
ninety (90%) of the average of the five (5) lowest VWAPs of the Common Stock
during the Stock Payment Pricing Period.

 

(cc)         “Stock Payment Pricing Period” means, with respect to any
Installment Date, the twenty (20) Trading Days immediately prior to such
Installment Date. For the avoidance of doubt, the Stock Payment Pricing Period
does not include the Installment Date.

 

(dd)         “Subsidiaries” means, as of any date of determination,
collectively, all Current Subsidiaries and all New Subsidiaries, and each of the
foregoing, individually, a “Subsidiary.”

 

(ee)         “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.

 

(ff)         “Trading Day” means 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.

 

30

 

 

 

(gg)         “Voting Stock” of a Person means capital stock of such Person of
the class or classes pursuant to which the holders thereof have the general
voting power to elect, or the general power to appoint, at least a majority of
the board of directors, managers, trustees or other similar governing body of
such Person (irrespective of whether or not at the time capital stock of any
other class or classes shall have or might have voting power by reason of the
happening of any contingency).

 

(hh)         “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
“Volume at Price” function 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 Pink OTC Markets
Inc.(formerly Pinks 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 20. All such determinations shall be
appropriately adjusted for any stock dividend, stock split, stock combination or
other similar transaction during such period.

 

26.         MAXIMUM PAYMENTS. Nothing contained in this Note shall, or 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 under this Note
exceeds 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.

 

[signature page follows]

 

31

 

 

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

 

Elephant Talk Communications, Corp.

 

By:     Name:   Title:

 

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EXHIBIT A

 

Installment Dates

 

Installment  Installment Date  Amount 5/1/12    6/1/12    7/1/12    8/1/12   
9/1/12    10/1/12    11/1/12    12/1/12    1/1/13    2/1/13    3/1/13    4/1/13 
  5/1/13    6/1/13    7/1/13    8/1/13    9/1/13    10/1/13    11/1/13   
12/1/13    1/1/14    2/1/14    3/1/14    4/1/14    5/1/14   

 

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EXHIBIT B

 

ELEPHANT TALK COMMUNICATIONS, CORP.

CONVERSION NOTICE

 

Reference is made to the Convertible Note (the “Note”) issued to the undersigned
by Elephant Talk Communications, Corp. (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.

 

Date of Conversion:

 

Aggregate Conversion Amount to be converted:

 

Conversion Price:

 

Number of shares of Common Stock to be issued:

 

Facsimile Number:

 

Dated:

 

DWAC Instructions:

 

Name of Holder:

  

By:     Print Name:   Print Title:

 

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EXHIBIT C

ACKNOWLEDGMENT

 

The Company hereby acknowledges this Conversion Notice and hereby directs
[TRANSFER AGENT] to issue the above indicated number of shares of Common Stock.

 

Elephant Talk Communications, Corp.

 

By: /s/ Steven van der Velden   Name: Steven van der Velden   Title: President
and CEO

 

35