[FORM OF SENIOR SECURED CONVERTIBLE NOTE]

 

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID
ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED
BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS
OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 17(a) HEREOF. THE PRINCIPAL
AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON
CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF
PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.

 

MGT Capital Investments, Inc.

 

SENIOR SECURED CONVERTIBLE NOTE

 

Issuance Date:  May [     ], 2012 Original Principal Amount: U.S. $3,500,000

 

FOR VALUE RECEIVED, MGT Capital Investments, Inc., a Delaware corporation (the
"Company"), hereby promises to pay to HUDSON BAY MASTER FUND LTD. or registered
assigns (the "Holder") the amount set out above as the Original Principal Amount
(as reduced pursuant to the terms hereof pursuant to redemption, conversion or
otherwise, the "Principal") when due, whether upon the Maturity Date (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 from the date set out above as the Issuance Date
(the "Issuance Date") until the same becomes due and payable, whether upon an
Interest Date (as defined below), the Maturity Date, acceleration, conversion,
redemption or otherwise (in each case in accordance with the terms hereof). This
Senior Secured Convertible Note (including all Senior Secured Convertible Notes
issued in exchange, transfer or replacement hereof, this "Note") is one of an
issue of Senior Secured Convertible Notes issued pursuant to the Securities
Purchase Agreement on the Closing Date (collectively, the "Notes" and such other
Senior Secured Convertible Notes, the "Other Notes"). Certain capitalized terms
used herein are defined in Section 28.

 

 

 

 

(1)         PAYMENTS OF PRINCIPAL; PREPAYMENT. On the Maturity Date, the Company
shall pay to the Holder an amount in cash representing all outstanding
Principal, accrued and unpaid Interest and accrued and unpaid Late Charges on
such Principal and Interest. The "Maturity Date" shall be [______], 20131, as
may be extended at the option of the Holder (i) in the event that, and for so
long as, an Event of Default (as defined in Section 4(a)) shall have occurred
and be continuing on the Maturity Date (as may be extended pursuant to this
Section 1) or any event shall have occurred and be continuing on the Maturity
Date (as may be extended pursuant to this Section 1) that with the passage of
time and the failure to cure would result in an Event of Default and (ii)
through the date that is ten (10) Business Days after the consummation of a
Change of Control in the event that a Change of Control is publicly announced or
a Change of Control Notice (as defined in Section 5(b)) is delivered prior to
the Maturity Date. Other than as specifically permitted by this Note, the
Company may not prepay any portion of the outstanding Principal, accrued and
unpaid Interest or accrued and unpaid Late Charges on Principal and Interest, if
any.

 

(2)         INTEREST; INTEREST RATE. (a) Interest on this Note shall commence
accruing on the Issuance Date and shall be computed on the basis of a 360-day
year and twelve 30-day months and shall be payable in arrears on the first
Business Day of each Calendar Quarter after the Issuance Date (each, an
"Interest Date") with the first Interest Date being July 2, 2012. Interest shall
be payable on each Interest Date, to the record holder of this Note on the
applicable Interest Date, in shares of Common Stock ("Interest Shares") so long
as there has been no Equity Conditions Failure; provided however, that the
Company may, at its option following notice to the Holder, pay Interest on any
Interest Date in cash ("Cash Interest") or in a combination of Cash Interest and
Interest Shares. The Company shall deliver a written notice (each, an "Interest
Election Notice") to each holder of the Notes on or prior to the applicable
Interest Notice Due Date (the date such notice is delivered to all of the
holders of Notes, the "Interest Notice Date") which notice (i) either (A)
confirms that Interest to be paid on such Interest Date shall be paid entirely
in Interest Shares or (B) elects to pay Interest as Cash Interest or a
combination of Cash Interest and Interest Shares and specifies the amount of
Interest that shall be paid as Cash Interest and the amount of Interest, if any,
that shall be paid in Interest Shares and (ii) certifies that the Equity
Conditions are satisfied as of such Interest Notice Date. If there is an Equity
Conditions Failure as of the Interest Notice Date, then unless the Company has
elected to pay such Interest as Cash Interest, the Interest Notice shall
indicate that unless the Holder waives the Equity Conditions, the Interest shall
be paid as Cash Interest. If any portion of Interest for a particular Interest
Date shall be paid in Interest Shares, then (1) contemporaneously with the
delivery of the Interest Election Notice on the applicable Interest Notice Date,
the Company shall issue to the Holder, in accordance with Section 2(b), such
number of shares of Common Stock equal to (x) the amount of Interest payable on
the applicable Interest Date in Interest Shares divided by (y) the applicable
Initial Interest Conversion Price (the "Pre-Interest Shares") and (2) on the
applicable Interest Date, the Company shall issue to the Holder, in accordance
with Section 2(b), any Interest Balance Shares. All Pre-Interest Shares and
Interest Balance Shares shall be fully paid and nonassessable shares of Common
Stock (rounded to the nearest whole share in accordance with Section 3(a)). If
the Company confirmed the payment of the applicable Interest in Interest Shares,
in whole or in part, and the Equity Conditions were satisfied as of the
applicable Interest Notice Date but an Equity Conditions Failure occurred
between the applicable Interest Notice Date and any time prior to the applicable
Interest Date, the Company shall provide the Holder a subsequent notice to that
effect indicating that unless the Holder waives the Equity Conditions, the
Interest shall be paid in cash. If the Equity Conditions are not satisfied (or
waived in writing by the Holder) during such period, then at the option of the
Holder, the Holder may require the Company to pay the amount of Interest
(including any portion of the Pre-Interest Shares in which case the Holder shall
return such Pre-Interest Shares to the Company) payable on the applicable
Interest Date as Cash Interest.

 

 

 1 Insert eighteen month anniversary of the Issuance Date.

 

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(b)          When any Interest Shares are to be paid on an Interest Date, the
Company shall (i) (A) provided that the Company's transfer agent (the "Transfer
Agent") is participating in the Depository Trust Company ("DTC") Fast Automated
Securities Transfer Program, credit such aggregate number of Interest Shares 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, or (B) if
the Transfer Agent is not participating in the DTC Fast Automated Securities
Transfer Program, issue and deliver on the applicable Interest Date, to the
address set forth in the register maintained by the Company for such purpose
pursuant to the Securities Purchase Agreement or to such address as specified by
the Holder in writing to the Company at least two (2) Business Days prior to the
applicable Interest Date, a certificate, registered in the name of the Holder or
its designee, for the number of Interest Shares to which the Holder shall be
entitled and (ii) with respect to each Interest Date, pay to the Holder, in cash
by wire transfer of immediately available funds, the amount of any Cash
Interest.

 

(c)          Prior to the payment of Interest on an Interest Date, Interest on
this Note shall accrue at the Interest Rate and be payable by way of inclusion
of the Interest in the Conversion Amount on each Conversion Date in accordance
with Section 3(b)(i). From and after the occurrence and during the continuance
of an Event of Default, the Interest Rate shall be increased to eighteen percent
(18%). In the event that such Event of Default is subsequently cured, the
adjustment referred to in the preceding sentence shall cease to be effective as
of the date of such cure; provided that the Interest as calculated and unpaid at
such increased rate during the continuance of such Event of Default shall
continue to apply to the extent relating to the days after the occurrence of
such Event of Default through and including the date of cure of such Event of
Default. The Company shall pay any and all taxes that may be payable with
respect to the issuance and delivery of Interest Shares.

 

(3)         CONVERSION OF NOTES. At any time after the Issuance Date, this Note
shall be convertible into shares of the Company's common stock, par value $0.001
per share (the "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 date hereof, the Holder shall be entitled to
convert any portion of the outstanding and unpaid Conversion Amount (as defined
below) into fully paid and nonassessable shares of Common Stock in accordance
with Section 3(c), at the Conversion Rate (as defined below). The Company shall
not issue any fraction of a share of Common Stock upon any conversion. If the
issuance would result in the issuance of a fraction of a share of Common Stock,
the Company shall round such fraction of a share of Common Stock up to the
nearest whole share. The Company shall pay any and all transfer, stamp and
similar taxes that may be payable with respect to the issuance and delivery of
Common Stock upon conversion of any Conversion Amount.

 

- 3 -

 

 

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

 

(i)          "Conversion Amount" means the sum of (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.

 

(ii)         "Conversion Price" means, as of any Conversion Date (as defined
below) or other date of determination, $3.00, subject to adjustment as provided
herein.

 

(c)          Mechanics of Conversion.

 

(i)          Optional Conversion. To convert any Conversion Amount into shares
of Common Stock on any date (a "Conversion Date"), the Holder shall (A) transmit
by facsimile (or otherwise deliver), for receipt on or prior to 11:59 p.m., New
York time, on such date, a copy of an executed notice of conversion in the form
attached hereto as Exhibit I (the "Conversion Notice") to the Company and the
Transfer Agent and (B) if required by Section 3(c)(iii), surrender this Note to
a common carrier for delivery to the Company as soon as practicable on or
following such date (or an indemnification undertaking with respect to this Note
in the case of its loss, theft or destruction). On or before the first (1st)
Business Day following the date of receipt of a Conversion Notice, the Company
shall transmit by facsimile a confirmation of receipt of such Conversion Notice
to the Holder and the Transfer Agent. On or before the third (3rd) Trading Day
following the date of receipt of a Conversion Notice (the "Share Delivery
Date"), the Company shall (x) provided that the Transfer Agent is participating
in the DTC Fast Automated Securities Transfer Program, 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 or (y) if the Transfer Agent is not participating
in the DTC Fast Automated Securities Transfer Program, issue and deliver to the
address as specified in the Conversion Notice, a certificate, registered in the
name of the Holder or its designee, for the number of shares of Common Stock to
which the Holder shall be entitled. If this Note is physically surrendered for
conversion as required by 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 a new Note (in accordance with Section 17(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, irrespective of the date
such Conversion Shares are credited to the Holder's account with the Depository
or the date of delivery of the certificates evidencing such Conversion Shares,
as the case may be.

 

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(ii)         Company's Failure to Timely Convert. If the Company shall fail to
issue a certificate to the Holder or credit the Holder's balance account with
DTC, as applicable, for the number of shares of Common Stock to which the Holder
is entitled upon conversion of any Conversion Amount on or prior to the date
which is three (3) Trading Days after a Conversion Date (a "Conversion
Failure"), then (A) the Company shall pay damages to the Holder for each Trading
Day of such Conversion Failure in an amount equal to 1.5% of the product of (1)
the sum of the number of shares of Common Stock not issued to the Holder on or
prior to the Share Delivery Date and to which the Holder is entitled, and (2)
the Closing Sale Price of the Common Stock on the Share Delivery Date and (B)
the Holder, upon written notice to the Company, may void its Conversion Notice
with respect to, and retain or have returned, as the case may be, any portion of
this Note that has not been converted pursuant to such Conversion Notice;
provided that the voiding of a Conversion Notice shall not affect the Company's
obligations to make any payments which have accrued prior to the date of such
notice pursuant to this Section 3(c)(ii) or otherwise. In addition to the
foregoing, if within three (3) Trading Days after the Company's receipt of the
facsimile copy of a Conversion Notice, the Company shall fail to issue and
deliver a certificate to the Holder or credit the Holder's balance account with
DTC for the number of shares of Common Stock to which the Holder is entitled
upon such holder's conversion of any Conversion Amount or on any date of the
Company's obligation to deliver shares of Common Stock as contemplated pursuant
to clause (ii) below, and if on or after such Trading Day the Holder purchases
(in an open market transaction or otherwise) Common Stock to deliver in
satisfaction of a sale by the Holder of Common Stock issuable upon such
conversion that the Holder anticipated receiving from the Company (a "Buy-In"),
then the Company shall, within three (3) Trading 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 and
other out-of-pocket expenses, if any) for the shares of Common Stock so
purchased (the "Buy-In Price"), at which point the Company's obligation to issue
and deliver such certificate or credit the Holder's balance account with DTC for
the shares of Common Stock to which the Holder is entitled upon the Holder's
conversion of the applicable Conversion Amount shall terminate, or (ii) promptly
honor its obligation to deliver to the Holder a certificate or certificates
representing such Common Stock and pay cash to the Holder in an amount equal to
the excess (if any) of the Buy-In Price over the product of (A) such number of
shares of Common Stock, times (B) the Closing Bid Price on the Conversion Date.

 

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(iii)        Registration; Book-Entry. The Company shall maintain a register
(the "Register") for the recordation of the names and addresses of the holders
of each Note and the principal amount of the Notes held by such holders (the
"Registered Notes"). The entries in the Register shall be conclusive and binding
for all purposes absent manifest error. The Company and the holders of the Notes
shall treat each Person whose name is recorded in the Register as the owner of a
Note for all purposes, including, without limitation, the right to receive
payments of Principal and Interest, if any, hereunder, notwithstanding notice to
the contrary. A Registered Note may be assigned 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 or sell all or part of any Registered Note by a Holder, 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 17. Notwithstanding anything to the contrary
in this Section 3(c)(iii), a Holder may assign any Note or any portion thereof
to an Affiliate of such Holder or a Related Fund of such Holder without
delivering a request to assign or sell such Note to the Company and the
recordation of such assignment or sale in the Register (a "Related Party
Assignment"); provided, that (x) the Company may continue to deal solely with
such assigning or selling Holder unless and until such Holder has delivered a
request to assign or sell such Note or portion thereof to the Company for
recordation in the Register; (y) the failure of such assigning or selling Holder
to deliver a request to assign or sell such Note or portion thereof to the
Company shall not affect the legality, validity, or binding effect of such
assignment or sale and (z) such assigning or selling Holder shall, acting solely
for this purpose as a non-fiduciary agent of the Company, maintain a register
(the "Related Party Register") comparable to the Register on behalf of the
Company, and any such assignment or sale shall be effective upon recordation of
such assignment or sale in the Related Party Register. Notwithstanding anything
to the contrary set forth herein, 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 or (B) the Holder has provided the
Company with prior written notice (which notice may be included in a Conversion
Notice) requesting physical surrender and reissue of this Note. The Holder and
the Company shall maintain records showing the Principal, Interest and Late
Charges, if any, converted and the dates of such conversions 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.

 

(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 22.

 

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(v)         Mandatory Conversion.

 

(A)         If at any time from and after the Issuance Date (i) the Weighted
Average Price of the Common Stock listed on the Principal Market equals or
exceeds 200% of the Conversion Price as of the Issuance Date (subject to
appropriate adjustments for stock splits, stock dividends, stock combinations
and other similar transactions after the Issuance Date) for no less than twenty
(20) Trading Days during any thirty (30) consecutive Trading Day period
occurring following the Issuance Date (the "Mandatory Conversion Measuring
Period") and (ii) no Equity Conditions Failure has occurred, the Company shall
have the right to require the Holder to convert all or any portion of the
Conversion Amount then remaining under this Note, as designated in the Mandatory
Conversion Notice on the Mandatory Conversion Date (each as defined below) into
fully paid, validly issued and nonassessable shares of Common Stock in
accordance with Section 3(c) hereof at the Conversion Rate as of the Mandatory
Conversion Date (as defined below) (a "Mandatory Conversion"). The Company may
exercise its right to require conversion under this Section 3(c)(v)(A) by
delivering within not more than two (2) Trading Days following the end of such
Mandatory Conversion Measuring Period a written notice thereof by facsimile and
overnight courier to all, but not less than all, of the holders of Notes and the
Transfer Agent (the "Mandatory Conversion Notice" and the date all of the
holders of the Notes received such notice is referred to as the "Mandatory
Conversion Notice Date"). The Mandatory Conversion Notice shall be irrevocable.
The Mandatory Conversion Notice shall (x) state (I) the Trading Day on which the
Mandatory Conversion shall occur, which Trading Day shall not be less than
twenty (20) Trading Days nor more than sixty (60) Trading Days following the
Mandatory Conversion Notice Date (the "Mandatory Conversion Date"), (II) the
aggregate Conversion Amount of the Notes which the Company has elected to be
subject to Mandatory Conversion from the Holder (the "Mandatory Conversion
Amount") and all of the other holders of the Notes pursuant to this Section
3(c)(v)(A) (and analogous provisions under the Other Notes), (III) the number of
shares of Common Stock to be issued to the Holder on the Mandatory Conversion
Date and (y) certify that there has been no Equity Conditions Failure. The
Company may not effect more than one (1) Mandatory Conversion during any sixty
(60) consecutive Trading Day period. Notwithstanding anything to the contrary in
this Section 3(c)(v)(A), until the Mandatory Conversion has occurred, the
Mandatory Conversion Amount may be converted, in whole or in part, by the Holder
into shares of Common Stock pursuant to Section 3(c)(i). All Conversion Amounts
converted by the Holder after the Mandatory Conversion Notice Date shall reduce
the Mandatory Conversion Amount of this Note required to be converted on the
Mandatory Conversion Date, unless the Holder otherwise indicates in the
applicable Conversion Notice.

 

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(B)         Pro Rata Conversion Requirement. If the Company elects to cause a
Mandatory Conversion pursuant to Section 3(c)(v)(A), then it must simultaneously
take the same action in the same proportion with respect to the Other Notes. If
the Company elects a Mandatory Conversion of this Note pursuant to Section
3(c)(v)(A) (or similar provisions under the Other Notes) with respect to less
than all of the Conversion Amounts of the Notes then outstanding, then the
Company shall require conversion of a Conversion Amount from each of the holders
of the Notes equal to the product of (i) the aggregate Conversion Amount of
Notes which the Company has elected to cause to be converted pursuant to Section
3(c)(v)(A), multiplied by (ii) the fraction, the numerator of which is the sum
of the aggregate Original Principal Amount of the Notes purchased by such holder
of outstanding Notes and the denominator of which is the sum of the aggregate
Original Principal Amount of the Notes purchased by all holders holding
outstanding Notes (such fraction with respect to each holder is referred to as
its "Conversion Allocation Percentage," and such amount with respect to each
holder is referred to as its "Pro Rata Conversion Amount"); provided, however,
that in the event that any holder's Pro Rata Conversion Amount exceeds the
outstanding Principal amount of such holder's Note, then such excess Pro Rata
Conversion Amount shall be allocated amongst the remaining holders of Notes in
accordance with the foregoing formula. In the event that the initial holder of
any Notes shall sell or otherwise transfer any of such holder's Notes, the
transferee shall be allocated a pro rata portion of such holder's Conversion
Allocation Percentage and Pro Rata Conversion Amount.

 

(d)          Limitations on Conversions.

 

(i)          Beneficial Ownership. The Company shall not effect any conversion
of this Note, and the Holder of this Note shall not have the right to convert
any portion of this Note pursuant to the terms and conditions of this Note, to
the extent that after giving effect to such conversion, the Holder (together
with the Holder's Affiliates) would beneficially own in excess of 9.99% (the
"Maximum Percentage") of the number of shares of Common Stock outstanding
immediately after giving effect to such conversion. For purposes of the
foregoing sentence, the number of shares of Common Stock beneficially owned by
the Holder and its Affiliates shall include the number of shares of Common Stock
issuable upon conversion of this Note with respect to which the determination of
such sentence is being made, but shall exclude the number of shares of Common
Stock which would be issuable upon (A) conversion of the remaining, nonconverted
portion of this Note beneficially owned by the Holder or any of its Affiliates
and (B) exercise or conversion of the unexercised or nonconverted portion of any
other securities of the Company (including, without limitation, any Other Notes
or warrants) subject to a limitation on conversion or exercise analogous to the
limitation contained herein beneficially owned by the Holder or any of its
Affiliates. Except as set forth in the preceding sentence, for purposes of this
Section 3(d)(i), beneficial ownership shall be calculated in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). For purposes of this Section 3(d)(i), in determining the number of
outstanding shares of Common Stock, the Holder may rely on the number of
outstanding shares of Common Stock as reflected in (x) the Company's most recent
Form 10-K, Form 10-Q or Form 8-K, as the case may be, (y) a more recent public
announcement by the Company or (z) any other notice by the Company or the
Transfer Agent setting forth the number of shares of Common Stock outstanding.
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. In any case, the
number of outstanding shares of Common Stock shall be determined after giving
effect to the conversion or exercise of securities of the Company, including
this Note, by the Holder or its Affiliates since the date as of which such
number of outstanding shares of Common Stock was reported. By written notice to
the Company, the Holder may increase or decrease the Maximum Percentage to any
other percentage not in excess of 9.99% 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 Notes. The
provisions of this paragraph shall be construed and implemented in a manner
otherwise than in strict conformity with the terms of this Section 3(d)(i) to
correct this paragraph (or any portion hereof) which may be defective or
inconsistent with the intended beneficial ownership limitation herein contained
or to make changes or supplements necessary or desirable to properly give effect
to such limitation.

 

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(ii)         Principal Market Regulation. The Company shall not be obligated to
issue any shares of Common Stock upon conversion of this Note, and the Holder of
this Note shall not have the right to receive upon conversion of this Note any
shares of Common Stock, if the issuance of such shares of Common Stock would
exceed the aggregate number of shares of Common Stock which the Company may
issue upon conversion or exercise, as applicable, of the Notes and Warrants or
as Interest Shares without breaching the Company's obligations under the rules
or regulations of the Principal Market (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 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 Required
Holders. Until such approval or written opinion is obtained, no purchaser of the
Notes pursuant to the Securities Purchase Agreement (the "Purchasers") shall be
issued in the aggregate, upon conversion or exercise, as applicable, of Notes or
Warrants, or as Interest Shares, shares of Common Stock in an amount greater
than the product of the Exchange Cap multiplied by a fraction, the numerator of
which is the principal amount of Notes issued to such Purchaser pursuant to the
Securities Purchase Agreement on the Closing Date and the denominator of which
is the aggregate principal amount of all Notes issued to 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. In the event that any holder of Notes shall convert all of such
holder's Notes into a number of shares of Common Stock which, in the aggregate,
is less than such holder's Exchange Cap Allocation, then the difference between
such holder's Exchange Cap Allocation and the number of shares of Common Stock
actually issued to such holder 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.
For the avoidance of doubt, the number of shares of Common Stock outstanding as
of May 24, 2012 was 2,105,187, and as such, the Company shall be required to
obtain stockholder approval prior to the Purchasers acquiring more than an
aggregate of 421,016 shares of Common Stock as a result of the issuance of
shares of Common Stock upon exercise of the Warrants, Interest Shares and/or
Conversion Shares. Additionally, pursuant to the Principal Market rules, the
Purchasers acknowledge that the shares of Common Stock issuable upon exercise of
the Warrants, the Interest Shares and/or the Conversion Shares acquired prior to
Stockholder Approval may not be voted for the Resolutions at the Stockholder
Meeting (each as defined in the Securities Purchase Agreement).

 

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(4)         RIGHTS UPON EVENT OF DEFAULT.

 

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

 

(i)          the suspension from trading or failure of the Common Stock to be
listed on an Eligible Market for a period of ten (10) consecutive Trading Days
or for more than an aggregate of twenty (20) Trading 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 ten (10) Business Days
after the applicable Conversion Date or (B) notice, written or oral, to any
holder of the Notes, including by way of public announcement or through any of
its agents, at any time, of its intention not to comply with a request for
conversion of any Notes into shares of Common Stock that is tendered in
accordance with the provisions of the Notes, other than pursuant to Section
3(d);

 

(iii)        at any time following the tenth (10th) consecutive Business 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
amounts hereunder) or any other Transaction Document (as defined in the
Securities Purchase Agreement) or any other agreement, document, certificate or
other instrument delivered in connection with the transactions contemplated
hereby and thereby to which the Holder is a party, except, in the case of a
failure to pay Interest and/or Late Charges when and as due, in which case only
if such failure continues for a period of at least five (5) Business Days;

 

(v)         any default under, redemption of or acceleration prior to maturity
of any Indebtedness of the Company or any of its Subsidiaries (as defined in
Section 3(a) of the Securities Purchase Agreement) other than with respect to
any Other Notes;

 

(vi)        the Company or any of its Subsidiaries, pursuant to or within the
meaning of Title 11, U.S. Code, or any similar Federal, foreign or state law for
the relief of debtors (collectively, "Bankruptcy Law"), (A) commences a
voluntary case, (B) consents to the entry of an order for relief against it in
an involuntary case, (C) consents to the appointment of a receiver, trustee,
assignee, liquidator or similar official (a "Custodian"), (D) makes a general
assignment for the benefit of its creditors or (E) admits in writing that it is
generally unable to pay its debts as they become due;

 

- 10 -

 

 

(vii)       a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that (A) is for relief against the Company or any of its
Subsidiaries in an involuntary case, (B) appoints a Custodian of the Company or
any of its Subsidiaries or (C) orders the liquidation of the Company or any of
its Subsidiaries;

 

(viii)      a final judgment or judgments for the payment of money aggregating
in excess of $100,000 are rendered against the Company or any of its
Subsidiaries and which judgments are not, within sixty (60) days after the entry
thereof, bonded, discharged or stayed pending appeal, or are not discharged
within sixty (60) days after the expiration of such stay; provided, however,
that any judgment which is covered by insurance or an indemnity from a credit
worthy party shall not be included in calculating the $100,000 amount set forth
above so long as the Company provides the Holder a written statement from such
insurer or indemnity provider (which written statement shall be reasonably
satisfactory to the Holder) to the effect that such judgment is covered by
insurance or an indemnity and the Company will receive the proceeds of such
insurance or indemnity within thirty (30) days of the issuance of such judgment;

 

(ix)         the Company breaches any representation, warranty, covenant or
other term or condition of any Transaction Document, except, in the case of a
breach of a covenant or other term or condition of any Transaction Document
which is curable, only if such breach continues for a period of at least ten
(10) consecutive Business Days;

 

(x)          any breach or failure in any respect to comply with Section 14 of
this Note;

 

(xi)         the Company or any Subsidiary shall fail to perform or comply with
any covenant or agreement contained in any Security Documents (as defined in the
Securities Purchase Agreement) to which it is a party;

 

(xii)        any material provision of any Security Document (as determined by
the Collateral Agent (as defined in the Securities Purchase Agreement)) 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, or the validity or enforceability thereof shall
be contested by any party thereto, or a proceeding shall be commenced by the
Company, 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 Security Document;

 

(xiii)       any Security Document, after delivery thereof pursuant hereto,
shall for any reason fail or cease to create a valid and perfected and, except
to the extent permitted by the terms hereof or thereof, first priority Lien in
favor of the Collateral Agent for the benefit of the holders of the Notes on any
Collateral (as defined in the Security Documents) purported to be covered
thereby;

 

- 11 -

 

 

(xiv)      any material damage to, or loss, theft or destruction of, a material
amount of Collateral, whether or not insured, or any strike, lockout, labor
dispute, embargo, condemnation, act of God or public enemy, or other casualty
which causes, for more than fifteen (15) consecutive days, the cessation or
substantial curtailment of revenue producing activities at any facility of the
Company or any Subsidiary, if any such event or circumstance could reasonably be
expected to have a Material Adverse Effect (as defined in the Securities
Purchase Agreement);

 

(xv)       the Stockholder Approval has not been obtained on or prior to the
Stockholder Meeting Deadline (as defined in the Securities Purchase Agreement);

 

(xvi)      the Company's failure for any reason after the six (6) month
anniversary of the Issuance Date to satisfy the current public information
requirement under Rule 144(c); or

 

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

 

(b)          Redemption Right. Upon the occurrence of an Event of Default with
respect to this Note or any Other Note, the Company shall within one (1)
Business Day deliver written notice thereof via facsimile and overnight courier
(an "Event of Default Notice") to the Holder. At any time after the earlier of
the Holder's receipt of an Event of Default Notice and the Holder becoming aware
of an Event of Default, the Holder may require the Company to redeem (an "Event
of Default Redemption") all or any portion of this Note by delivering written
notice thereof (the "Event of Default Redemption Notice") to the Company, which
Event of Default Redemption Notice shall indicate the portion of this Note the
Holder is electing to require the Company to redeem. Each portion of this Note
subject to redemption by the Company pursuant to this Section 4(b) shall be
redeemed by the Company in cash at a price equal to 125% of the greater of (i)
the Conversion Amount to be redeemed and (ii) the product of (A) the Conversion
Amount being redeemed multiplied by (B) the quotient determined by dividing (x)
the greatest Closing Sale Price of the shares of Common Stock during the period
beginning on the date immediately preceding such Event of Default and ending on
the date the Holder delivers the Event of Default Redemption Notice, by (y) the
lowest Conversion Price in effect during such period (the "Event of Default
Redemption Price"). Redemptions required by this Section 4(b) shall be made in
accordance with the provisions of Section 11. To the extent redemptions required
by this Section 4(b) are deemed or determined by a court of competent
jurisdiction to be prepayments of the Note by the Company, such redemptions
shall be deemed to be voluntary prepayments. The parties hereto agree that in
the event of the Company's redemption of any portion of the Note under this
Section 4(b), the Holder's damages would be uncertain and difficult to estimate
because of the parties' inability to predict future interest rates and the
uncertainty of the availability of a suitable substitute investment opportunity
for the Holder. Accordingly, any Event of Default redemption premium due under
this Section 4(b) is intended by the parties to be, and shall be deemed, a
reasonable estimate of the Holder's actual loss of its investment opportunity
and not as a penalty.

 

- 12 -

 

 

(5)         RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.

 

(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 reasonably satisfactory to the Required
Holders and approved by the Required Holders 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 and the interest rates of the Notes then outstanding held by
such holder, having similar conversion rights and having similar ranking and
security to the Notes, and satisfactory to the Required Holders and (ii) the
Successor Entity (including its Parent Entity) is a publicly traded corporation
whose common stock is quoted on or listed for trading on an Eligible Market.
Upon the occurrence of any Fundamental Transaction, the Successor Entity shall
succeed to, and be substituted for (so that from and after the date of such
Fundamental Transaction, the provisions of this Note 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 with the same effect as if such Successor Entity had been named
as the Company herein. Upon consummation of the 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 the 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) (but
taking into account the relative value of the shares of Common Stock pursuant to
such Fundamental Transaction and the value of such shares of capital stock, such
adjustments to the number of shares of capital stock and such conversion price
for the purpose of protecting the economic value of this Note immediately prior
to the consummation of such Fundamental Transaction), as adjusted in accordance
with the provisions of this Note. The provisions of this Section shall apply
similarly and equally to successive Fundamental Transactions and shall be
applied without regard to any limitations on the conversion or redemption of
this Note.

 

- 13 -

 

 

(b)          Redemption Right. No sooner than fifteen (15) days nor later than
ten (10) days prior to the consummation of a Change of Control, but not prior to
the public announcement of such Change of Control, the Company shall deliver
written notice thereof via facsimile and overnight courier to the Holder (a
"Change of Control Notice"). At any time during the period beginning on the
earlier to occur of (x) any oral or written agreement by the Company or any of
its Subsidiaries, which upon consummation of the transaction contemplated
thereby would reasonably be expected to result in a Change of Control and (y)
the Holder's receipt of a Change of Control Notice and ending twenty (20)
Trading Days after the date of the consummation of such Change of Control, the
Holder may require the Company to redeem all or any portion of this Note by
delivering written notice thereof ("Change of Control Redemption Notice") to the
Company, which Change of Control Redemption Notice shall indicate the Conversion
Amount the Holder is electing to require the Company to redeem. The portion of
this Note subject to redemption pursuant to this Section 5(b) shall be redeemed
by the Company in cash at a price equal to 125% of the greater of (i) the
Conversion Amount to be redeemed and (ii) the product of (A) the Conversion
Amount being redeemed multiplied by (B) the quotient determined by dividing (x)
the greatest Closing Sale Price of the shares of Common Stock during the period
beginning on the date immediately preceding the earlier to occur of (1) the
consummation of the Change of Control and (2) the public announcement of such
Change of Control and ending on the date the Holder delivers the Change of
Control Redemption Notice, by (y) the lowest Conversion Price in effect during
such period (the "Change of Control Redemption Price"). Redemptions required by
this Section 5 shall be made in accordance with the provisions of Section 11 and
shall have priority to payments to stockholders in connection with a Change of
Control. To the extent redemptions required by this Section 5(b) are deemed or
determined by a court of competent jurisdiction to be prepayments of the Note by
the Company, such redemptions shall be deemed to be voluntary prepayments.
Notwithstanding anything to the contrary in this Section 5, but subject to
Section 3(d), until the Change of Control Redemption Price (together with any
interest thereon) is paid in full, the Conversion Amount submitted for
redemption under this Section 5(b) (together with any interest thereon) may be
converted, in whole or in part, by the Holder into Common Stock pursuant to
Section 3. The parties hereto agree that in the event of the Company's
redemption of any portion of the Note under this Section 5(b), the Holder's
damages would be uncertain and difficult to estimate because of the parties'
inability to predict future interest rates and the uncertainty of the
availability of a suitable substitute investment opportunity for the Holder.
Accordingly, any Change of Control redemption premium due under this Section
5(b) is intended by the parties to be, and shall be deemed, a reasonable
estimate of the Holder's actual loss of its investment opportunity and not as a
penalty.

 

(6)         DISTRIBUTION OF ASSETS; RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND
OTHER CORPORATE EVENTS.

 

(a)          Distribution of Assets. If the Company shall declare or make any
dividend or other distributions of its assets (or rights to acquire its assets)
to any or all holders of shares of Common Stock, by way of return of capital or
otherwise (including without limitation, any distribution of cash, stock or
other securities, property or options by way of a dividend, spin off,
reclassification, corporate rearrangement, scheme of arrangement or other
similar transaction) (the "Distributions"), then the Holder will be entitled to
such Distributions as if the Holder had held the number of shares of Common
Stock acquirable upon complete conversion of this Note (without taking into
account any limitations or restrictions on the convertibility of this Note)
immediately prior to the date on which a record is taken for such Distribution
or, if no such record is taken, the date as of which the record holders of
Common Stock are to be determined for such Distributions (provided, however,
that to the extent that the Holder's right to participate in any such
Distribution would result in the Holder exceeding the Maximum Percentage, then
the Holder shall not be entitled to participate in such Distribution to such
extent (or beneficial ownership of such shares of Common Stock as a result of
such Distribution to such extent) and the portion of such Distribution shall be
held in abeyance for the Holder until such time, if ever, as its right thereto
would not result in the Holder exceeding the Maximum Percentage).

 

- 14 -

 

 

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

 

(c)          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, at the Holder's option, (i) in addition to the shares
of Common Stock receivable upon such conversion, such securities or other assets
to which the Holder would have been entitled with respect to such shares of
Common Stock had such shares of Common Stock been held by the Holder upon the
consummation of such Corporate Event (without taking into account any
limitations or restrictions on the convertibility of this Note) or (ii) in lieu
of the shares of Common Stock otherwise receivable upon such conversion, such
securities or other assets received by the holders of shares of Common Stock in
connection with the consummation of such Corporate Event in such amounts as the
Holder would have been entitled to receive had this Note initially been issued
with conversion rights for the form of such consideration (as opposed to shares
of Common Stock) at a conversion rate for such consideration commensurate with
the Conversion Rate. Provision made pursuant to the preceding sentence shall be
in a form and substance satisfactory to the Required Holders. The provisions of
this Section 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 Subdivision or Combination of
Common Stock. If the Company at any time on or after the Subscription 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. If the Company at any time on or
after the Subscription 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.

 

- 15 -

 

 

(b)          Other Events. 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 will make an appropriate adjustment in the Conversion Price
so as to protect the rights of the Holder under this Note; provided that no such
adjustment will increase the Conversion Price as otherwise determined pursuant
to this Section 7.

 

(c)          Voluntary Adjustment By Company. The Company may at any time during
the term of this Note reduce the then current Conversion Price to any amount and
for any period of time deemed appropriate by the Board of Directors of the
Company.

 

(8)         NONCIRCUMVENTION. The Company hereby covenants and agrees that the
Company will not, by amendment of its Certificate of Incorporation, Bylaws 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.

 

(9)         RESERVATION OF AUTHORIZED SHARES.

 

(a)          Reservation. 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, 130% 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 and to issue Interest Shares pursuant to the terms of the Notes;
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 this sentence
(without regard to any limitations on conversions) (the "Required Reserve
Amount"). The initial number of shares of Common Stock reserved for conversions
of the Notes and each increase in the number of shares so reserved shall be
allocated pro rata among the holders of the Notes based on the principal amount
of the Notes held by each holder at the Closing (as defined in the Securities
Purchase Agreement) or increase in the number of reserved shares, as the case
may be (the "Authorized Share Allocation"). In the event that a holder shall
sell or otherwise transfer any of such holder's Notes, each transferee shall be
allocated a pro rata portion of such holder's Authorized Share Allocation. Any
shares of Common Stock reserved and allocated to any Person which ceases to hold
any Notes shall be allocated to the remaining holders of Notes, pro rata based
on the principal amount of the Notes then held by such holders.

 

- 16 -

 

 

(b)          Insufficient Authorized Shares. If at any time while any of the
Notes remain outstanding the Company does not have a sufficient number of
authorized and unreserved shares of Common Stock to satisfy its obligation to
reserve for issuance upon conversion of the Notes at least a number of shares of
Common Stock equal to the Required Reserve Amount (an "Authorized Share
Failure"), then the Company shall immediately take all action necessary to
increase the Company's authorized shares of Common Stock to an amount sufficient
to allow the Company to reserve the Required Reserve Amount for the Notes then
outstanding. Without limiting the generality of the foregoing sentence, as soon
as practicable after the date of the occurrence of an Authorized Share Failure,
but in no event later than sixty (60) days after the occurrence of such
Authorized Share Failure, the Company shall either (x) obtain the written
consent of its stockholders for the approval of an increase in the number of
authorized shares of Common Stock and provide each stockholder with an
information statement with respect thereto or (y) 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.

 

(10)        OPTIONAL REDEMPTION AT THE COMPANY'S ELECTION.

 

(a)          General. At any time from and after the seven (7) month anniversary
of the Issuance Date, so long as no Equity Conditions Failure has occurred, the
Company shall have the right to redeem all or any portion of the Conversion
Amount then remaining under this Note (the "Company Optional Redemption Amount")
as designated in the Company Optional Redemption Notice on the Company Optional
Redemption Date (each as defined below) (a "Company Optional Redemption"). The
portion of this Note subject to redemption pursuant to this Section 10(a) shall
be redeemed by the Company in cash at a price equal to the greater of (i) 125%
of the Conversion Amount to be redeemed and (ii) the product of (A) the
Conversion Amount being redeemed multiplied by (B) the quotient determined by
dividing (x) the greatest Closing Sale Price of the shares of Common Stock
during the period beginning on the date immediately preceding the Company
Optional Redemption Notice Date (as defined below) and ending on the date the
Company Optional Redemption Date, by (y) the lowest Conversion Price in effect
during such period (the "Company Optional Redemption Price"). The Company may
exercise its right to require redemption under this Section 10 by delivering a
written notice thereof by facsimile and overnight courier to all, but not less
than all, of the holders of Notes (the "Company Optional Redemption Notice" and
the date all of the holders of the Notes received such notice is referred to as
the "Company Optional Redemption Notice Date"). The Company Optional Redemption
Notice shall be irrevocable. The Company Optional Redemption Notice shall (x)
state the date on which the Company Optional Redemption shall occur (the
"Company Optional Redemption Date"), which date shall not be less than twenty
(20) Business Days nor more than sixty (60) Business Days following the Company
Optional Redemption Notice Date, (y) state the aggregate Conversion Amount of
the Notes which the Company has elected to be subject to Company Optional
Redemption from the Holder and all of the other holders of the Notes pursuant to
this Section 10(a) (and analogous provisions under the Other Notes) and (z)
certify that there has been no Equity Conditions Failure as of the Company
Optional Redemption Notice Date. If the Company confirmed that there was no
Equity Conditions Failure as of the applicable Company Optional Redemption
Notice Date but an Equity Conditions Failure occurred between the applicable
Company Optional Redemption Notice Date and any time through the applicable
Company Optional Redemption Date, the Company shall provide the Holder a
subsequent notice to that effect. If the Equity Conditions are not satisfied (or
waived in writing by the Holder) during such period, then the Company Conversion
shall be null and void with respect to all or any part designated by the Holder
of the unconverted Company Optional Redemption Amount and the Holder shall be
entitled to all the rights of a holder of this Note with respect to such amount
of the Company Optional Redemption Amount. The Company may not effect more than
one (1) Company Optional Redemption during any sixty (60) consecutive Trading
Day period. Notwithstanding anything to the contrary in this Section 10, until
the Company Optional Redemption Price is paid, in full, the Company Optional
Redemption Amount may be converted, in whole or in part, by the Holder into
shares of Common Stock pursuant to Section 3. All Conversion Amounts converted
by the Holder after the Company Optional Redemption Notice Date shall reduce the
Company Optional Redemption Amount of this Note required to be redeemed on the
Company Optional Redemption Date, unless the Holder otherwise indicates in the
applicable Conversion Notice. Redemptions made pursuant to this Section 10 shall
be made in accordance with Section 11.

 

- 17 -

 

 

(b)          Pro Rata Redemption Requirement. If the Company elects to cause a
Company Optional Redemption pursuant to Section 10(a), then it must
simultaneously take the same action in the same proportion with respect to the
Other Notes. If the Company elects a Company Optional Redemption pursuant to
Section 10(a) (or similar provisions under the Other Notes) with respect to less
than all of the Conversion Amounts of the Notes then outstanding, then the
Company shall require redemption of a Conversion Amount from each of the holders
of the Notes equal to the product of (i) the aggregate Conversion Amount of
Notes which the Company has elected to cause to be redeemed pursuant to Section
10(a), multiplied by (ii) the fraction, the numerator of which is the sum of the
aggregate Original Principal Amount of the Notes purchased by such holder of
outstanding Notes and the denominator of which is the sum of the aggregate
Original Principal Amount of the Notes purchased by all holders holding
outstanding Notes (such fraction with respect to each holder is referred to as
its "Company Redemption Allocation Percentage," and such amount with respect to
each holder is referred to as its "Pro Rata Company Redemption Amount");
provided, however that in the event that any holder's Pro Rata Company
Redemption Amount exceeds the outstanding Principal amount of such holder's
Note, then such excess Pro Rata Company Redemption Amount shall be allocated
amongst the remaining holders of Notes in accordance with the foregoing formula.
In the event that the initial holder of any Notes shall sell or otherwise
transfer any of such holder's Notes, the transferee shall be allocated a pro
rata portion of such holder's Company Redemption Allocation Percentage and Pro
Rata Company Redemption Amount.

 

- 18 -

 

 

(11)        REDEMPTIONS.

 

(a)          Mechanics. The Company shall deliver the applicable Event of
Default Redemption Price to the Holder within five (5) Business Days after the
Company's receipt of the Holder's Event of Default Redemption Notice (the "Event
of Default Redemption Date"). If the Holder has submitted a Change of Control
Redemption Notice in accordance with Section 5(b), the Company shall deliver the
applicable Change of Control Redemption Price to the Holder (i) concurrently
with the consummation of such Change of Control if such notice is received prior
to the consummation of such Change of Control and (ii) within five (5) Business
Days after the Company's receipt of such notice otherwise (such date, the
"Change of Control Redemption Date"). The Company shall deliver the applicable
Company Optional Redemption Price to the Holder on the applicable Company
Optional Redemption Date. The Company shall pay the applicable Redemption Price
to the Holder in cash by wire transfer of immediately available funds on the
applicable due date. In the event of a redemption of less than all of the
Conversion Amount of this Note, the Company shall promptly cause to be issued
and delivered to the Holder a new Note (in accordance with Section 17(d))
representing the outstanding Principal which has not been redeemed and any
accrued Interest on such Principal which shall be calculated as if no Redemption
Notice has been delivered. In the event that the Company does not pay the
applicable Redemption Price to the Holder within the time period required, at
any time thereafter and until the Company pays such unpaid Redemption Price in
full, the Holder shall have the option, in lieu of redemption, to require the
Company to promptly return to the Holder all or any portion of this Note
representing the Conversion Amount that was submitted for redemption and for
which the applicable Redemption Price (together with any Late Charges thereon)
has not been paid. Upon the Company's receipt of such notice, (x) the applicable
Redemption Notice shall be null and void with respect to such Conversion Amount,
(y) the Company shall immediately return this Note, or issue a new Note (in
accordance with Section 17(d)) to the Holder representing such Conversion Amount
to be redeemed and (z) the Conversion Price of this Note or such new Notes shall
be adjusted to the lesser of (A) the Conversion Price as in effect on the date
on which the applicable Redemption Notice is voided and (B) the lowest Closing
Bid Price of the shares of Common Stock during the period beginning on and
including the date on which the applicable Redemption Notice is delivered to the
Company and ending on and including the date on which the applicable Redemption
Notice is voided. The Holder's delivery of a notice voiding a Redemption Notice
and exercise of its rights following such notice shall not affect the Company's
obligations to make any payments of Late Charges which have accrued prior to the
date of such notice with respect to the Conversion Amount subject to such
notice.

 

(b)          Redemption by Other Holders. Upon the Company's receipt of notice
from any of the holders of the Other Notes for redemption or repayment as a
result of an event or occurrence substantially similar to the events or
occurrences described in Section 4(b), Section 5(b) or Section 10 (each, an
"Other Redemption Notice"), the Company shall immediately, but no later than one
(1) Business Day of its receipt thereof, forward to the Holder by facsimile a
copy of such notice. If the Company receives a Redemption Notice and one or more
Other Redemption Notices, during the seven (7) Business Day period beginning on
and including the date which is three (3) Business Days prior to the Company's
receipt of the Holder's Redemption Notice and ending on and including the date
which is three (3) Business Days after the Company's receipt of the Holder's
Redemption Notice and the Company is unable to redeem all principal, interest
and other amounts designated in such Redemption Notice and such Other Redemption
Notices received during such seven (7) Business Day period, then the Company
shall redeem a pro rata amount from each holder of the Notes (including the
Holder) based on the principal amount of the Notes submitted for redemption
pursuant to such Redemption Notice and such Other Redemption Notices received by
the Company during such seven Business Day period.

 

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(12)        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.

 

(13)        SECURITY. This Note and the Other Notes are secured to the extent
and in the manner set forth in the Security Documents.

 

(14)        COVENANTS.

 

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

 

(b)          Incurrence of Indebtedness. So long as this Note is outstanding,
the Company shall not, and the Company shall not permit any of its Subsidiaries
to, directly or indirectly, incur or guarantee, assume or suffer to exist any
Indebtedness, other than Permitted Indebtedness.

 

(c)          Existence of Liens. So long as this Note is outstanding, the
Company shall not, and the Company shall not permit any of its Subsidiaries to,
directly or indirectly, allow or suffer to exist any mortgage, lien, pledge,
charge, security interest or other encumbrance upon or in any property or assets
(including accounts and contract rights) owned by the Company or any of its
Subsidiaries (collectively, "Liens") other than Permitted Liens.

 

(d)          Cash Dividend. So long as this Note is outstanding, the Company
shall not, and the Company shall not permit any of its Subsidiaries to, directly
or indirectly, declare or pay any cash dividends or distributions on any equity
securities of the Company or of its Subsidiaries.

 

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

 

(f)          Restriction on Redemption. Until all of the Notes have been
converted, redeemed or otherwise satisfied in accordance with their terms, the
Company shall not, directly or indirectly, redeem or repurchase its capital
stock without the prior express written consent of the Required Holders.

 

(g)          Change in Nature of Business. The Company shall not make, or permit
any of its Subsidiaries to make, any change in the nature of its business as
described in the Company's most recent annual report filed on Form 10-K with the
SEC. The Company shall not modify its corporate structure or purpose.

 

- 20 -

 

 

(h)          Intellectual Property. The Company shall not, and the Company shall
not permit any of its Subsidiaries, directly or indirectly, to encumber or allow
any Liens on, any of its copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and derivative
work, whether published or unpublished, any patents, patent applications and
like protections, including improvements, divisions, continuations, renewals,
reissues, extensions, and continuations-in-part of the same, trademarks, service
marks and, to the extent permitted under applicable law, any applications
therefor, whether registered or not, and the goodwill of the business of the
Company and its Subsidiaries connected with and symbolized thereby, know-how,
operating manuals, trade secret rights, rights to unpatented inventions, and any
claims for damage by way of any past, present, or future infringement of any of
the foregoing, other than Permitted Liens.

 

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

 

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

 

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

 

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

 

- 21 -

 

 

(15)        VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The written consent of
the Required Holders shall be required for any change or amendment to the Notes;
provided that any such amendment or waiver that complies with the foregoing but
that disproportionately, materially and adversely affects the rights and
obligations of any Holder relative to the comparable rights and obligations of
the other Holders shall require the prior written consent of such adversely
affected Holder.

 

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

 

(17)        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
17(d)), registered as the Holder may request, representing the outstanding
Principal being transferred by the Holder and, if less then the entire
outstanding Principal is being transferred, a new Note (in accordance with
Section 17(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, and, in the case of loss, theft or destruction, of
any indemnification undertaking by the Holder to the Company in customary 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 17(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 17(d) and in
principal amounts of at least $100,000) representing in the aggregate the
outstanding Principal of this Note, and each such new Note will represent such
portion of such outstanding Principal as is designated by the Holder at the time
of such surrender.

 

(d)          Issuance of New Notes. Whenever the Company is required to issue a
new Note pursuant to the terms of this Note, such new Note (i) shall be of like
tenor with this Note, (ii) shall represent, as indicated on the face of such new
Note, the Principal remaining outstanding (or in the case of a new Note being
issued pursuant to Section 17(a) or Section 17(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, if any, on the Principal and Interest of this Note,
from the Issuance Date.

 

- 22 -

 

 

(18)        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. 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 breach, without the necessity of showing economic loss and
without any bond or other security being required.

 

(19)        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,
but not limited to, attorneys' fees and disbursements.

 

(20)        CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly
drafted by the Company and all the Purchasers 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.

 

(21)        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.

 

- 23 -

 

 

(22)        DISPUTE RESOLUTION. In the case of a dispute as to the determination
of the Closing Bid Price, the Closing Sale Price or the Weighted Average Price
or the arithmetic calculation of the Conversion Rate, the Conversion Price or
any Redemption Price, the Company shall submit the disputed determinations or
arithmetic calculations via facsimile within one (1) Business Day of receipt, or
deemed receipt, of the Conversion Notice or Redemption Notice or other event
giving rise to such dispute, as the case may be, to the Holder. If the Holder
and the Company are unable to agree upon such determination or calculation
within one (1) Business Day of such disputed determination or arithmetic
calculation being submitted to the Holder, then the Company shall, within one
Business Day submit via facsimile (a) the disputed determination of the Closing
Bid Price, the Closing Sale Price or the Weighted Average Price to an
independent, reputable investment bank selected by the Holder and approved by
the Company, such approval not to be unreasonably withheld or delayed, or (b)
the disputed arithmetic calculation of the Conversion Rate, Conversion Price or
any Redemption Price to an independent, outside accountant, selected by the
Holder and approved by the Company, such approval not to be unreasonably
withheld or delayed. The Company, at the Company's expense, shall cause the
investment bank or the accountant, as the case may be, to perform the
determinations or calculations and notify the Company and the Holder of the
results no later than five (5) Business Days from the time it receives the
disputed determinations or calculations. Such investment bank's or accountant's
determination or calculation, as the case may be, shall be binding upon all
parties absent demonstrable error.

 

(23)        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 9(f) of the Securities Purchase Agreement. The Company shall provide the
Holder with prompt written notice of all actions taken pursuant to this Note,
including in reasonable detail a description of such action and the reason
therefore. Without limiting the generality of the foregoing, the Company will
give written notice to the Holder (i) immediately upon any adjustment of the
Conversion Price, setting forth in reasonable detail, and certifying, the
calculation of such adjustment and (ii) at least twenty (20) 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 pro
rata subscription offer to holders of Common Stock or (C) for determining rights
to vote with respect to any Fundamental Transaction, dissolution or liquidation,
provided in each case that such information shall be made known to the public
prior to or in conjunction with such notice being provided to the Holder.

 

(b)          Payments. Whenever any payment of cash is to be made by the Company
to any Person pursuant to this Note, such payment shall be made in lawful money
of the United States of America by a 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 Purchasers, 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 and, in the case of any Interest Date which is not the date on
which this Note is paid in full, the extension of the due date thereof shall not
be taken into account for purposes of determining the amount of Interest due on
such date. 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 twenty four percent (24%) per annum from the date such
amount was due until the same is paid in full ("Late Charge").

 

- 24 -

 

 

(24)        CANCELLATION. After all Principal, accrued Interest 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.

 

(25)        WAIVER OF NOTICE. To the extent permitted by law, the Company hereby
waives demand, notice, 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.

 

(26)        GOVERNING LAW; JURISDICTION; JURY TRIAL. 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. The Company hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address it set forth on the signature page hereto and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. Nothing contained herein shall
be deemed 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, 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.

 

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

 

- 25 -

 

 

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

 

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

 

(b)           "Bloomberg" means Bloomberg Financial Markets.

 

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

 

(d)          "Change of Control" means any Fundamental Transaction other than
(i) any reorganization, recapitalization or reclassification of the Common Stock
in which holders of the Company's voting power immediately prior to such
reorganization, recapitalization or reclassification continue after such
reorganization, recapitalization or reclassification to hold publicly traded
securities and, directly or indirectly, are, in all material respect, the
holders of the voting power of the surviving entity (or entities with the
authority or voting power to elect the members of the board of directors (or
their equivalent if other than a corporation) of such entity or entities) after
such reorganization, recapitalization or reclassification or (ii) pursuant to a
migratory merger effected solely for the purpose of changing the jurisdiction of
incorporation of the Company.

 

(e)          "Calendar Quarter" means each of: the period beginning on and
including January 1 and ending on and including March 31; the period beginning
on and including April 1 and ending on and including June 30; the period
beginning on and including July 1 and ending on and including September 30; and
the period beginning on and including October 1 and ending on and including
December 31.

 

- 26 -

 

 

(f)          "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 OTC Link or "pink sheets"
by OTC Markets Group Inc. (formerly Pink OTC Markets Inc.). 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 pursuant to Section 22. All
such determinations to be appropriately adjusted for any stock dividend, stock
split, stock combination, reclassification or similar transaction during the
applicable calculation period.

 

(g)          "Closing Date" shall have the meaning set forth in the Securities
Purchase Agreement, which date is the date the Company initially issued Notes
pursuant to the terms of the Securities Purchase Agreement.

 

(h)          "Contingent Obligation" means, as to any Person, any direct or
indirect liability, contingent or otherwise, of that Person with respect to any
Indebtedness, lease, dividend or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the primary
effect thereof, is to provide assurance to the obligee of such liability that
such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be
protected (in whole or in part) against loss with respect thereto.

 

(i)          "Convertible Securities" means any stock or securities (other than
Options) directly or indirectly convertible into or exercisable or exchangeable
for shares of Common Stock.

 

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

 

- 27 -

 

 

(k)          "Equity Conditions" means each of the following conditions: (i) on
each day during the period beginning thirty (30) Trading Days prior to the
applicable date of determination and ending on and including the applicable date
of determination (the "Equity Conditions Measuring Period"), either (x) all
shares of Common Stock issuable upon conversion of the Notes, exercise of the
Warrants and as Interest Shares shall be eligible for sale without restriction
pursuant to Rule 144 and without the need for registration under any applicable
federal or state securities laws or (y) a registration statement shall be, and
on each day during the Equity Conditions Measuring Period such registration
statement shall have been, effective and available for the resale of all shares
of Common Stock issuable upon conversion of the Notes, exercise of the Warrants
and as Interest Shares; (ii) on each day during the Equity Conditions Measuring
Period the Common Stock is designated for quotation on the Principal Market or
any other Eligible Market and shall not have been suspended from trading on such
exchange or market (other than suspensions of not more than two (2) days and
occurring prior to the applicable date of determination due to business
announcements by the Company); (iii) during the one (1) year period ending on
and including the date immediately preceding the applicable date of
determination, the Company shall have delivered Conversion Shares upon
conversion of the Notes and Warrant Shares upon exercise of the Warrants to the
holders on a timely basis as set forth in Section 3(c) hereof (and analogous
provisions under the Other Notes) and Sections 2(a) of the Warrants; (iv) any
applicable shares of Common Stock to be issued in connection with the event
requiring determination may be issued in full without violating Section 3(d)(i)
and (ii) hereof and the rules or regulations of the Principal Market or any
other applicable Eligible Market; (v) during the Equity Conditions Measuring
Period, the Company shall not have failed to timely make any payments within
five (5) Business Days of when such payment is due pursuant to any Transaction
Document; (vi) during the Equity Conditions Measuring Period, there shall not
have occurred either (A) the public announcement of a pending, proposed or
intended Fundamental Transaction which has not been abandoned, terminated or
consummated, (B) an Event of Default or (C) an event that with the passage of
time or giving of notice would constitute an Event of Default (vii) the Company
shall have no knowledge of any fact that would cause any shares of Common Stock
issuable upon conversion of the Notes, shares of Common Stock issuable upon
exercise of the Warrants and issuable as Interest Shares not to be eligible for
sale without restriction pursuant to Rule 144 and without the requirement to be
in compliance with Rule 144(c)(1) (or any successor thereto) promulgated under
the 1933 Act and any applicable state securities laws; (viii) the Company
otherwise shall have been in compliance with and shall not have breached any
provision, covenant, representation or warranty of any Transaction Document;
(ix) the Stockholder Approval shall have occurred on or prior to the Stockholder
Approval Deadline; (x) no Holder shall be in possession of any material
non-public information received from the Company, any Subsidiary or its
respective agents or affiliates; and (xi) solely with respect to the delivery of
Pre-Interest Shares and Post-Interest Shares, in no event shall the Company be
permitted to pay Interest by delivering Pre-Interest Shares or Post-Interest
Shares in an amount that exceeds the product obtained by (i) multiplying the
arithmetic average of the daily dollar trading volume of the Common Stock as
reported by Bloomberg L.P. for the twenty (20) consecutive Trading Days
immediately preceding such Interest Notice Date or Interest Date, as applicable,
by (ii) two (2).

 

(l)          "Equity Conditions Failure" means that on any day during the period
commencing ten (10) Trading Days prior to the applicable date of determination
through the applicable date of determination, the Equity Conditions have not
been satisfied (or waived in writing by the Holder).

 

(m)          "Fundamental Transaction" means that (A) the Company or any of its
Subsidiaries shall, directly or indirectly, in one or more related transactions,
(i) consolidate or merge with or into (whether or not the Company or any of its
Subsidiaries is the surviving corporation) another Person or Persons, or (ii)
sell, assign, transfer, convey or otherwise dispose of all or substantially all
of the properties or assets of the Company or any of its Subsidiaries to another
Person, or (iii) allow another 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 (iv) consummate a stock purchase agreement or other business
combination (including, without limitation, a reorganization, recapitalization,
spin-off or scheme of arrangement) with another Person whereby such other Person
acquires more than the 50% of the outstanding shares of Voting Stock of the
Company (not including any shares of Voting Stock of the Company held by the
other Person or other Persons making or party to, or associated or affiliated
with the other Persons making or party to, such stock purchase agreement or
other business combination), (v) reorganize, recapitalize or reclassify its
Common Stock of the Company or (B) any "person" or "group" (as these terms are
used for purposes of Sections 13(d) and 14(d) of the Exchange Act) is or shall
become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of either (x) 50% of the aggregate ordinary voting power
represented by issued and outstanding Common Stock or (y) 50% or more of the
shares of Voting Stock of the Company not held by such Person or Persons as of
the date hereof.

 

- 28 -

 

 

(n)          "GAAP" means United States generally accepted accounting
principles, consistently applied.

 

(o)          "Holder Pro Rata Amount" means a fraction (i) the numerator of
which is the Principal amount of this Note on the Closing Date and (ii) the
denominator of which is the aggregate principal amount of all Notes issued to
the initial purchasers pursuant to the Securities Purchase Agreement on the
Closing Date.

 

(p)          "Indebtedness" of any Person means, without duplication (i) all
indebtedness for borrowed money, (ii) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services, including
(without limitation) "capital leases" in accordance with GAAP (other than trade
payables entered into in the ordinary course of business), (iii) all
reimbursement or payment obligations with respect to letters of credit, surety
bonds and other similar instruments, (iv) all obligations evidenced by notes,
bonds, debentures or similar instruments, including obligations so evidenced
incurred in connection with the acquisition of property, assets or businesses,
(v) all indebtedness created or arising under any conditional sale or other
title retention agreement, or incurred as financing, in either case with respect
to any property or assets acquired with the proceeds of such indebtedness (even
though the rights and remedies of the seller or bank under such agreement in the
event of default are limited to repossession or sale of such property), (vi) all
monetary obligations under any leasing or similar arrangement which, in
connection with GAAP, consistently applied for the periods covered thereby, is
classified as a capital lease, (vii) all indebtedness referred to in clauses (i)
through (vi) above secured by (or for which the holder of such Indebtedness has
an existing right, contingent or otherwise, to be secured by) any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by any Person,
even though the Person which owns such assets or property has not assumed or
become liable for the payment of such indebtedness, and (viii) all Contingent
Obligations in respect of indebtedness or obligations of others of the kinds
referred to in clauses (i) through (vii) above.

 

(q)          "Initial Interest Conversion Price" means, with respect to any
Interest Notice Date, the lower of (i) the applicable Conversion Price and (ii)
the price computed as 75% of the arithmetic average of the Weighted Average
Price of the Common Stock during the ten (10) consecutive Trading Day period
immediately preceding the Interest Notice Date. All such determinations to be
appropriately adjusted for any stock split, stock dividend, stock combination or
other similar transaction during such period.

 

- 29 -

 

 

(r)          "Interest Balance Shares" means, for any Interest Date, a number of
shares of Common Stock equal to (i) the Post-Interest Shares for such date minus
(ii) the amount of any Pre-Interest Shares delivered in respect of the Interest
Date; provided that in the event that the amount of Pre-Interest Shares exceeds
the Post-Interest Shares for such date (such excess, the "Interest Shares
Excess"), the Interest Balance Shares shall equal zero (0) for such date and in
no event shall the Interest Shares Excess reduce the number of Pre-Interest
Shares payable on the next Interest Notice Date, if any.

 

(s)          "Interest Conversion Price" means, with respect to any Interest
Date, the lower of (i) the applicable Conversion Price and (ii) that price which
shall be computed as arithmetic average of the 75% of the Weighted Average Price
of the Common Stock during the ten (10) consecutive Trading Day period
immediately preceding the applicable Interest Date. All such determinations to
be appropriately adjusted for any stock split, stock dividend, stock combination
or other similar transaction during such period.

 

(t)          "Interest Notice Due Date" means the thirtieth (30th) Trading Day
prior to the applicable Interest Date.

 

(u)          "Interest Rate" means 8.00% per annum, subject to adjustment as set
forth in Section 2.

 

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

 

(w)          "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.

 

(x)          "Permitted Indebtedness" means (i) Indebtedness evidenced by this
Note and the Other Notes, (ii) unsecured Indebtedness incurred by the Company
that is made expressly subordinate in right of payment to the Indebtedness
evidenced by this Note, as reflected in a written agreement acceptable to the
Required Holders and approved by the Required Holders in writing, and which
Indebtedness does not provide at any time for (A) the payment, prepayment,
repayment, repurchase or defeasance, directly or indirectly, of any principal or
premium, if any, thereon until ninety-one (91) days after the Maturity Date or
later and (B) total interest and fees at a rate in excess of 8.00% per annum,
(iii) the Acquisition Indebtedness (as defined in the Securities Purchase
Agreement) and (iv) Indebtedness secured by Permitted Liens described in clauses
(iv) and (v) of the definition of Permitted Liens.

 

- 30 -

 

 

(y)          "Permitted Liens" means (i) any Lien for taxes not yet due or
delinquent or being contested in good faith by appropriate proceedings for which
adequate reserves have been established in accordance with GAAP, (ii) any
statutory Lien arising in the ordinary course of business by operation of law
with respect to a liability that is not yet due or delinquent, (iii) any Lien
created by operation of law, such as materialmen's liens, mechanics' liens and
other similar liens, arising in the ordinary course of business with respect to
a liability that is not yet due or delinquent or that are being contested in
good faith by appropriate proceedings, (iv) Liens (A) upon or in any equipment
acquired or held by the Company or any of its Subsidiaries to secure the
purchase price of such equipment or indebtedness incurred solely for the purpose
of financing the acquisition or lease of such equipment, or (B) existing on such
equipment at the time of its acquisition, provided that the Lien is confined
solely to the property so acquired and improvements thereon, and the proceeds of
such equipment, (v) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in clause
(iv) above, provided that any extension, renewal or replacement Lien shall be
limited to the property encumbered by the existing Lien and the principal amount
of the Indebtedness being extended, renewed or refinanced does not increase,
(vi) leases or subleases and licenses and sublicenses granted to others in the
ordinary course of the Company's business, not interfering in any material
respect with the business of the Company and its Subsidiaries taken as a whole,
(vii) Liens in favor of customs and revenue authorities arising as a matter of
law to secure payments of custom duties in connection with the importation of
goods, (viii) Liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default under Section 4(a)(viii) and
(ix) Liens on the patents set forth on Schedule 28(y)(ix) attached hereto.

 

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

 

(aa)         "Post-Interest Shares" means, for any Interest Date, that number of
shares of Common Stock equal to the applicable amount of Interest to be paid in
Interest Shares on such Interest Date divided by the Interest Conversion Price
(without taking into account the delivery of any Pre-Interest Shares), rounded
up to the nearest whole share of Common Stock.

 

(bb)         "Principal Market" means NYSE MKT LLC.

 

(cc)         "Redemption Notices" means, collectively, the Event of Default
Redemption Notices, the Change of Control Redemption Notices and the Company
Optional Redemption Notices, each of the foregoing, individually, a Redemption
Notice.

 

(dd)         "Redemption Prices" means, collectively, the Event of Default
Redemption Price, the Change of Control Redemption Price and the Company
Optional Redemption Price, each of the foregoing, individually, a Redemption
Price.

 

(ee)         "Related Fund" means, with respect to any Person, a fund or account
managed by such Person or an Affiliate of such Person.

 

(ff)         "Required Holders" means the holders of Notes representing at least
a majority of the aggregate principal amount of the Notes then outstanding.

 

(gg)         "SEC" means the United States Securities and Exchange Commission.

 

- 31 -

 

 

(hh)         "Securities Purchase Agreement" means that certain securities
purchase agreement dated as of the Subscription Date by and among the Company
and the initial holders of the Notes pursuant to which the Company issued the
Notes and Warrants.

 

(ii)         "Subscription Date" means May 24, 2012.

 

(jj)         "Successor Entity" means the Person, which may be the Company,
formed by, resulting from or surviving any Fundamental Transaction or the Person
with which such Fundamental Transaction shall have been made, provided that if
such Person is not a publicly traded entity whose common stock or equivalent
equity security is quoted or listed for trading on an Eligible Market, Successor
Entity shall mean such Person's Parent Entity.

 

(kk)         "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).

 

(ll)         "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 or trustees 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).

 

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

 

(nn)         "Weighted Average Price" means, for any security as of any date,
the dollar volume-weighted average price for such security on the Principal
Market during the period beginning at 9:30:01 a.m., New York Time (or such other
time as the Principal Market publicly announces is the official open of
trading), and ending at 4:00:00 p.m., New York Time (or such other time as the
Principal Market publicly announces is the official close of trading) as
reported by Bloomberg through its "Volume at Price" functions, 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 (or
such other time as such market publicly announces is the official open of
trading), and ending at 4:00:00 p.m., New York Time (or such other time as such
market publicly announces is the official close of trading) 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 OTC Link or "pink sheets" by OTC Markets Group Inc.
(formerly Pink OTC Markets Inc.). If the Weighted Average Price cannot be
calculated for a security on a particular date on any of the foregoing bases,
the Weighted Average Price 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 pursuant to Section 22. All such
determinations to be appropriately adjusted for any stock dividend, stock split,
stock combination, reclassification or similar transaction during the applicable
calculation period.

 

- 32 -

 

 

(29)        DISCLOSURE. Upon receipt or delivery by the Company of any notice in
accordance with the terms of this Note, unless the Company has in good faith
determined that the matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries, the Company
shall within one (1) Business Day after any such receipt or delivery publicly
disclose such material, nonpublic information on a Current Report on Form 8-K or
otherwise. In the event that the Company believes that a notice contains
material, nonpublic information relating to the Company or its Subsidiaries, the
Company so shall indicate to such Holder contemporaneously with delivery of such
notice, and in the absence of any such indication, the Holder shall be allowed
to presume that all matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries.

 

[Signature Page Follows]

 

- 33 -

 

 

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

 

  MGT CAPITAL INVESTMENTS, INC.         By:       Name:     Title:

 

 

 

 

EXHIBIT I

 

MGT CAPITAL INVESTMENTS, INC.

CONVERSION NOTICE

 

Reference is made to the Senior Secured Convertible Note (the "Note") issued to
the undersigned by MGT Capital Investments, Inc., a Delaware corporation (the
"Company"). In accordance with and pursuant to the Note, the undersigned hereby
elects to convert the Conversion Amount (as defined in the Note) of the Note
indicated below into shares of Common Stock par value $0.001 per share (the
"Common Stock") of the Company, as of the date specified below.

 

Date of Conversion:  

 

Aggregate Conversion Amount to be converted:  

 

Please confirm the following information:

 

Conversion Price:  

 

Number of shares of Common Stock to be issued:  

 

Please issue the Common Stock into which the Note is being converted in the
following name and to the following address:

 

Issue to:                  

 

Facsimile Number:  

 

Authorization:  

 

By:  

 

Title:  

 

Dated:  

 

Account Number:  

  (if electronic book entry transfer)  

 

Transaction Code Number:  

  (if electronic book entry transfer)  

 

 

 

 

ACKNOWLEDGMENT

 

The Company hereby acknowledges this Conversion Notice and hereby directs VStock
Transfer, LLC to issue the above indicated number of shares of Common Stock in
accordance with the Transfer Agent Instructions dated May __, 2012 from the
Company and acknowledged and agreed to by VStock Transfer, LLC.

 

  MGT CAPITAL INVESTMENTS, INC.         By:       Name:     Title: