Exhibit 10.52

 

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 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.  ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS
NOTE, INCLUDING SECTIONS 3(c)(iii) AND 19(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.

 

8% SENIOR SECURED CONVERTIBLE NOTE

 

Issuance Date: November 1, 2009

 

Principal: U.S. $XXXX

 

FOR VALUE RECEIVED, LIQUIDMETAL TECHNOLOGIES, INC., a Delaware corporation (the
“Company”), hereby promises to pay to the order of
                                 or registered assigns (“Holder”) the amount set
out above as the Principal (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 rate of interest as determined pursuant to
Section 2, 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 8% Senior
Secured Convertible Note (including all 8% Senior Secured Convertible Notes
issued in exchange, transfer or replacement hereof, this “Note”) is one of an
issue of 8% Senior Secured Convertible Notes issued on May 1, 2009 (the
“Original Issuance Date”) pursuant to the Securities Purchase and Exchange
Agreement (the “Original Notes”) or issued after May 1, 2009 in satisfaction of
interest and/or other amounts owing by the Company to the holders of the
Original Notes (the “Interest Notes”) (the Original Notes and Interest Notes are
collectively referred to as the “Notes” herein, and any Notes other than this
Note are collectively referred to as the “Other Notes”).  This Note is deemed to
be issued pursuant to Section 2 of the Holder’s Original Note and is subject to
the terms and provisions of the Securities Purchase Agreement.  Certain
capitalized terms are defined in Section 29.

 

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(1)                                  MATURITY.  On January 3, 2011 (the
“Maturity Date”), the Company shall pay to the Holder an amount in cash
representing all outstanding Principal and accrued and unpaid Interest, and
following receipt of such payment, the Holder shall mark this Note as
“Cancelled” and shall surrender such cancelled Note to the Company by courier,
registered mail, or other traceable means.  The Company may, upon thirty (30)
calendar days prior written notice to Holder and at the sole election of the
Company, prepay this Note in whole or in part for a cash redemption price equal
to: (i) if the cash redemption price is being paid, in whole or in part, from
the proceeds of sales of the Company’s assets, which shall include fees received
from licensing the Company’s intellectual property assets, One Hundred Percent
(100%) of the portion of the principal amount being redeemed plus all accrued
and unpaid interest on the portion of the principal amount being redeemed or
(ii) if the cash redemption price is being paid solely from the Company’s income
from continuing operations, One Hundred Three Percent (103%) of the portion of
the principal amount being redeemed plus all accrued and unpaid interest on the
portion of the principal amount being redeemed; provided that (as to both
clauses (i) and (ii) above) following such notice the Holder may convert all or
any part of the portion of the Note to be redeemed so long as the Company
receives a duly executed Conversion Notice pursuant to Section 3 of this Note
prior to the date on which prepayment is actually made.

 

(2)                                  INTEREST; INTEREST RATE.  Interest on this
Note shall commence accruing on the Issuance Date and shall be computed on the
basis of a 365-day year and actual days elapsed and shall be payable in arrears
on the first Business Day of November and May during the period beginning on the
Issuance Date and ending on, and including, the Maturity Date (each, an
“Interest Date”).  Interest shall be payable on each Interest Date at the option
of the Company (i) in cash at the rate of 8.00% per annum (the “Cash Interest
Rate”) or (ii) at the rate of 10.00% per annum (the “Note Interest Rate”, and
together with the Cash Interest Rate, referred to sometimes herein as the
“Interest Rate”) in the form of one or more additional 8% Senior Secured
Convertible Notes, upon the same terms and conditions of the form of this Note,
in the principal amount of such Interest.  Prior to the payment of Interest on
an Interest Date, Interest on this Note shall accrue at the Cash Interest Rate
and be payable by way of inclusion of the Interest in the Conversion Amount in
accordance with Section 3(b)(i).  From and after the occurrence of an Event of
Default, the Interest Rate shall be increased so that the Cash Interest Rate
shall be twelve percent (12.00%) per annum and the Note Interest Rate per annum
shall be fifteen percent (15%) per annum.  In the event that such Event of
Default is subsequently cured, the adjustment referred to in the preceding
sentence shall cease to be effective as of the date of such cure; provided that
the Interest as calculated 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.

 

(3)                                  CONVERSION OF NOTES.  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.

 

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(a)                                  Conversion Right.  Subject to the
provisions of Section 3(d), at any time or times on or after the Issuance Date,
the Holder shall be entitled to convert any portion of the outstanding and
unpaid Conversion Amount (as defined below) into 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 taxes that may be payable with respect to the issuance and delivery
of Common Stock upon conversion of any Conversion Amount.

 

(b)                                 Conversion Rate.  The number of shares of
Common Stock issuable upon conversion of any Conversion Amount (as defined
below) pursuant to Section 3(a) shall be determined by dividing (x) such
Conversion Amount by (y) the Conversion Price (as defined below) (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, plus (B) accrued and unpaid
Interest with respect to such Principal, plus (C) any fees and penalties (if
any) that become due under this Note and that are not paid by the Company within
three (3) days of written demand therefor.

 

(ii)                                  “Conversion Price” means, as of any
Conversion Date (as defined below) or other date of determination, and subject
to adjustment as provided herein, $0.60.

 

(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 5:00 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 (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
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 Company’s transfer agent (the “Transfer Agent”).  On or
before the second Business Day following the date of receipt of a Conversion
Notice (the “Share Delivery Date”), the Company shall (X) 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 Depository Trust Company (“DTC”)
through its Deposit/Withdrawal At Custodian system or (Y) if the Transfer Agent
is not participating in DTC Fast Automated Securities Transfer Program, issue
and deliver to the address as specified in the Conversion Notice,

 

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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 five 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 19(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.

 

(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 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 five Business Days after the Conversion Date (a
“Conversion Failure”), then (A) the Company shall pay liquidated damages to the
Holder for each day of such Conversion Failure in an amount equal to 1.0% of the
product of (I) 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 (II) 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, 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 five (5) Business
Days after the Holder’s request and in the Holder’s discretion, either (i) pay
cash to the Holder in an amount equal to the Holder’s total purchase price
(including brokerage commissions 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 deliver such certificate (and to issue such Common
Stock) 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)                               Book-Entry. 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 and Interest 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 24.

 

(d)                                 Limitations on Conversions.

 

(i)                                     Beneficial Ownership.  Unless waived by
the Holder upon no less than sixty one (61) days prior written notice to the
Company, the Company shall not effect any conversion of this Note pursuant to
Section 3(a) to the extent that after giving effect to such conversion the
Holder (together with the Holder’s affiliates) would beneficially own in excess
of 4.99% of the number of shares of Common Stock outstanding immediately after
giving effect to such conversion.  Even if the Holder waives the limitation set
forth in the preceding sentence, the Company shall in no event 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 Section 3(a), 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% of the number of shares of
Common Stock outstanding immediately after giving effect to such conversion. 
For purposes of the foregoing sentences, 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)

 

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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.  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-Q or Form 10-K,
(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 two Business Days 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.  Notwithstanding
the foregoing, the limitations of this paragraph shall not apply to any Holder
who is an Affiliated Investor (as that term is defined in the Securities
Purchase and Exchange Agreement).

 

(ii)                                  INTENTIONALLY OMITTED.

 

(4)                                  RIGHTS UPON EVENT OF DEFAULT.

 

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

 

(i)                                     the Company’s failure to pay to the
Holder any amount of Principal or Interest when and as due under this Note if
such failure continues for a period of at least five Business Days;

 

(ii)                                  the Company’s failure to pay to the Holder
any amounts other than Principal or Interest when and as due under this Note,
the Securities Purchase and Exchange Agreement, or the Registration Rights
Agreement, which failure is not cured within five Business Days after notice of
such default sent by the Holder to the Company;

 

(iii)                               any default under, redemption prior to
maturity of, or acceleration prior to maturity of any Indebtedness (as defined
below) of the Company or any of its Subsidiaries (as defined in the Securities
Purchase and Exchange Agreement) other than with respect to (A) the Other Notes
and (B) the default by Liquidmetal Korea Co. Ltd., the Company’s subsidiary
organized under the laws of the Republic of Korea, in existence as of the
Original Issuance Date under its loan from Kookmin Bank; provided that in the
case of a payment default of such Indebtedness, such default is not cured within
applicable cure periods; further provided that in the case of a non-payment
default of such Indebtedness that has not resulted in an acceleration or
redemption of such Indebtedness prior to its maturity, only upon acceleration or
redemption of such Indebtedness;

 

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(iv)                              the Company shall fail to observe or perform
any other material covenant or agreement contained in the Securities Purchase
and Exchange Agreement or the other Transaction Documents (as defined in the
Securities Purchase and Exchange Agreement), which failure is not cured within
ten Business Days after notice of such default sent by the Holder to the
Company;

 

(v)                                 the Company or any of its Subsidiaries,
pursuant to or within the meaning of Title 11, U.S. Code, or any similar Federal
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”), or
(D) makes a general assignment for the benefit of its creditors;

 

(vi)                              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 that remains
undismissed for a period of 90 days, (B) appoints a Custodian of the Company or
any of its Subsidiaries that remains undischarged or unstayed for a period of 90
days, or (C) orders the liquidation of the Company or any of its Subsidiaries;

 

(vii)                           a final judgment or judgments for the payment of
money aggregating in excess of $250,000 are rendered against the Company or any
of its Subsidiaries and which judgments are not, within 60 days after the entry
thereof, bonded, discharged or stayed pending appeal, or are not discharged
within 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 $250,000 amount set forth above;

 

(viii)                        any breach or failure to comply with Section 15 of
this Note;

 

(ix)                              INTENTIONALLY OMITTED;

 

(x)                                   any security interest created by the
Security Agreement shall at any time not constitute a valid and perfected first
priority security interest on the collateral intended to be covered thereby (to
the extent perfection by filing, registration, recordation or possession is
required herein or therein) in favor of the Holder, or any of the security
interests granted pursuant to the Security Agreement shall be determined to be
void, voidable, invalid or unperfected, are subordinated or are ineffective to
provide the Holder with a perfected, first priority security interest in the
collateral covered by the Security Agreement (except to the extent expressly
subordinated under the terms of the Security Agreement), or, except for
expiration or termination in accordance with its terms, the Security Agreement
shall for whatever reason be terminated or cease to be in full force and effect,
or the enforceability thereof shall be contested by the Company;

 

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(xi)                                the Company or any Subsidiary commits a
default under any material contract to which it is a party and as a result of
which default the Company or its Subsidiaries will be legally obligated to pay
damages in an aggregate amount in excess of $250,000 for such default; or

 

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

 

(b)                                 Redemption Right.  Promptly after the
occurrence of an Event of Default with respect to this Note or any Other Note,
the Company shall 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 all or any portion of this Note by delivering written notice thereof (the
“Event of Default Redemption Notice”) to the Company, which Event of Default
Redemption Notice shall indicate the portion of this Note the Holder is electing
to redeem.  Each portion of this Note subject to redemption by the Company
pursuant to this Section 4(b) shall be redeemed by the Company at a price equal
to the greater of (i) the Conversion Amount to be redeemed and (ii) the product
of (A) the Conversion Rate with respect to such Conversion Amount in effect at
such time as the Holder delivers an Event of Default Redemption Notice and
(B) the Closing Sale Price of the Common Stock on the date immediately preceding
such Event of Default (the “Event of Default Redemption Price”).  Redemptions
required by this Section 4(b) shall be made in accordance with the provisions of
Section 12.

 

(5)                                  RIGHTS UPON CHANGE OF CONTROL.

 

(a)                                  Change of Control.  Each of the following
events shall constitute a “Change of Control”:

 

(i)                                     the consolidation, merger or other
business combination (including, without limitation, a reorganization or
recapitalization) of the Company with or into another Person (other than (A) a
consolidation, merger or other business combination (including, without
limitation, reorganization or recapitalization) in which Holders of the
Company’s voting power immediately prior to the transaction continue after the
transaction to hold, directly or indirectly, the voting power of the surviving
entity or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities, or (B) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company);

 

(ii)                                  the sale or transfer of all or
substantially all of the Company’s assets; or

 

(iii)                               a purchase, tender or exchange offer made to
and accepted by the Holders of more than the 50% of the outstanding shares of
Common Stock.

 

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No sooner than 15 days nor later than 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”).  The
transactions contemplated by the Securities Purchase and Exchange Agreement
shall not be deemed to constitute a Change of Control for purposes of this
Agreement.

 

(b)                                 Assumption.  Prior to the consummation of
any Change of Control, the Company will secure from any Person purchasing the
Company’s assets or Common Stock or any successor resulting from such Change of
Control (in each case, an “Acquiring Entity”) a written agreement (in form and
substance satisfactory to the Holders of Notes representing at least a majority
of the aggregate principal amount of the Notes then outstanding) to deliver to
each Holder of Notes in exchange for such Notes, a security of the Acquiring
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 held by such Holder, and satisfactory to the Holders of Notes representing
at least a majority of the principal amount of the Notes then outstanding.  In
the event that an Acquiring Entity is directly or indirectly controlled by a
company or entity whose common stock or similar equity interest is listed,
designated or quoted on a securities exchange or trading market, the Holders of
Notes representing at least a majority of the aggregate principal amount of the
Notes then outstanding may elect to treat such Person as the Acquiring Entity
for purposes of this Section 5(b).

 

(c)                                  Redemption Right.  At any time during the
period beginning after the Holder’s receipt of a Change of Control Notice and
ending on the date of the consummation of such Change of Control (or, in the
event a Change of Control Notice is not delivered at least 10 days prior to a
Change of Control, at any time on or after the date which is 10 days prior to a
Change of Control and ending ten days after 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 redeem; provided,
however, that the Company shall not be under any obligation to redeem all or any
portion of this Note or to deliver the applicable Change of Control Redemption
Price unless and until the applicable Change of Control is consummated.  The
portion of this Note subject to redemption pursuant to this Section 5 shall be
redeemed by the Company in cash at a price equal to the sum of (i) the
Conversion Amount of the portion to be redeemed, plus (ii) the Black Scholes
Value, as of the date immediately preceding the date the Change of Control is
consummated, of the Holder’s right to convert the Conversion Amount hereunder
upon the terms set forth herein (the “Change of Control Redemption Price”).  For
the purpose of this Note, “Black Scholes Value” means the value, as reasonably
calculated by the Company, of this Note, which shall be determined by use of the
Black Scholes Option Pricing Model reflecting (i) a risk-free interest rate
corresponding to the U.S. Treasury rate for a period equal to the remaining term
of this Note as of such date of request and (ii) an expected volatility equal to
the greater of 60%

 

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and the 100 day volatility obtained from the HVT function on Bloomberg; provided
that the Black Scholes Value of this Note shall not for this purpose exceed an
amount equal to $2.50 multiplied by the number of shares of Common Stock for
which this Note may be converted at the time the Change of Control is
consummated (with such $2.50 cap being subject to adjustment for stock
dividends, stock splits, reverse stock splits, and the like).

 

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

 

(a)                                  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 before 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
Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights.

 

(b)                                 Other Corporate Events. Prior to the
consummation of any recapitalization, reorganization, consolidation, merger,
spin-off or other business combination (other than a Change of Control) pursuant
to which holders of Common Stock are entitled to receive securities or other
assets with respect to or in exchange for Common Stock (a “Corporate Event”),
the Company shall make appropriate provision to insure that the Holder will
thereafter have the right to receive upon a conversion of this Note, (i) in
addition to the shares of Common Stock receivable upon such conversion, such
securities or other assets to which the Holder would have been entitled with
respect to such shares of Common Stock had such shares of Common Stock been held
by the Holder upon the consummation of such Corporate Event 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 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 Holders of Notes representing at least
a majority of the aggregate principal amount of the Notes then outstanding.

 

(7)                                  RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

 

(a)                                  Adjustment of Conversion Price upon
Issuance of Common Stock.  If and whenever on or after the Issuance Date, the
Company issues or sells, or in accordance with this Section 7(a) is deemed to
have issued or sold, any shares of Common Stock (including the issuance or sale
of shares of Common Stock owned or held by or for the account of the

 

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Company, but excluding shares of Common Stock deemed to have been issued or sold
by the Company in connection with any Excluded Security) for a consideration per
share (the “New Securities Issuance Price”) less than the Conversion Price in
effect immediately prior to such issue or sale (the foregoing a “Dilutive
Issuance”), then immediately after such Dilutive Issuance, the Conversion Price
then in effect shall be reduced effective concurrently with such Dilutive
Issuance to an amount equal to the New Securities Issuance Price.  For purposes
of determining the adjusted Conversion Price under this Section 7(a), the
following shall be applicable:

 

(i)                                     Change in Option Price or Rate of
Conversion.  If the purchase price provided for in any Options, the additional
consideration, if any, payable upon the issue, conversion, exchange or exercise
of any Convertible Securities, or the rate at which any Convertible Securities
are convertible into or exchangeable or exercisable for Common Stock changes at
any time, the Conversion Price in effect at the time of such change shall be
adjusted to the Conversion Price which would have been in effect at such time
had such Options or Convertible Securities provided for such changed purchase
price, additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold in the Dilutive Issuance.

 

(ii)                                  Calculation of Consideration Received.  In
case any Option is issued in connection with the issue or sale of other
securities of the Company, together comprising one integrated transaction in
which no specific consideration is allocated to such Options by the parties
thereto, the Options will be deemed to have been issued for a consideration of
$.01.  If any Common Stock, Options or Convertible Securities are issued or sold
or deemed to have been issued or sold for cash, the consideration received
therefor will be deemed to be the net amount received by the Company therefor. 
If any Common Stock, Options or Convertible Securities are issued or sold for a
consideration other than cash, the amount of the consideration other than cash
received by the Company will be the fair value of such consideration, except
where such consideration consists of securities, in which case the amount of
consideration received by the Company will be the Closing Sale Price of such
securities on the date of receipt.  If any Common Stock, Options or Convertible
Securities are issued to the owners of the non-surviving entity in connection
with any merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion of
the net assets and business of the non-surviving entity as is attributable to
such Common Stock, Options or Convertible Securities, as the case may be.  The
fair value of any consideration other than cash or securities will be determined
jointly by the Company and the Holders of Notes representing at least a majority
of the principal amounts of the Notes then outstanding.  If such parties are
unable to reach agreement within ten days after the occurrence of an event
requiring valuation (the “Valuation Event”), the fair value of such
consideration will be determined within five Business Days after the tenth day
following the Valuation Event by an independent, reputable appraiser jointly
selected by the Company and the Holders of Notes representing at least a
majority of the principal amounts of the Notes then outstanding.  The
determination of such appraiser shall be

 

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deemed binding upon all parties absent manifest error and the fees and expenses
of such appraiser shall be borne equally by the Company, on the hand, and the
Holders of the Notes, on the other hand.

 

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

 

(b)                                 Adjustment of Conversion Price upon
Subdivision or Combination of Common Stock.  If the Company at any time
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
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.

 

(c)                                  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.

 

(8)                                 INTENTIONALLY OMITTED.

 

(9)                                 COMPANY’S RIGHT OF MANDATORY CONVERSION. 
(a) Mandatory Conversion.  If at any time from and after the Issuance Date, the
Weighted Average Price of the Common Stock exceeds 250% of the conversion price
of the Original Notes as of the Original Issuance Date (subject to appropriate
adjustments for stock splits, stock dividends, stock combinations and other
similar transactions after the Original Issuance Date) for each of any 20
consecutive Trading Days (the “Mandatory Conversion Measuring Period”) and the
Conditions to Mandatory Conversion (as set forth in Section 9(c)) are satisfied
or waived in writing by the Holder, the Company shall have the right to require
the Holder to convert all or any such portion of the Conversion Amount of this
Note designated in the Mandatory Conversion Notice 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

 

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require conversion under this Section 9(a) by delivering within not more than
five 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 received such
notice is referred to as the “Mandatory Conversion Notice Date”).  The Mandatory
Conversion Notice shall be irrevocable.

 

(b)                                 Pro Rata Conversion Requirement.  If the
Company elects to cause a conversion of all or any portion of the Conversion
Amount of this Note pursuant to Section 9(a), then it must simultaneously take
the same action with respect to the Other Notes (except that the Company is not
required to take the same action with respect to the Other Notes to the extent
limited by Section 3(d) in this Note or similar provisions under the Other
Notes).  If the Company elects to cause the conversion of this Note pursuant to
Section 9(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 9(a), multiplied by (II) the fraction, the numerator of which is the sum
of the aggregate principal amount of the Original Notes purchased by such Holder
pursuant to the Securities Purchase and Exchange Agreement and the denominator
of which is the sum of the aggregate principal amount of the Original Notes
purchased by all Holders pursuant to the Securities Purchase and Exchange
Agreement (except to the extent limited by Section 3(d) in this Note or similar
provisions under the Other Notes) (such fraction with respect to each Holder is
referred to as its “Allocation Percentage,” and such amount with respect to each
Holder is referred to as its “Pro Rata Conversion Amount”).  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 Allocation Percentage.  The Mandatory Conversion Notice shall state
(i) the Trading Day selected for the Mandatory Conversion in accordance with
Section 9(a), which Trading Day shall be at least 10 Business Days but not more
than 60 Business 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 all of
the Holders of the Notes pursuant to this Section 9 (and analogous provisions
under the Other Notes), (iii) each Holder’s Pro Rata Conversion Amount of the
Conversion Amount of the Notes the Company has elected to cause to be converted
pursuant to this Section 9 (and analogous provisions under the Other Notes) and
(iv) the number of shares of Common Stock to be issued to such Holder as of the
Mandatory Conversion Date.  All Conversion Amounts converted by the Holder after
the Mandatory Conversion Notice Date shall reduce the Conversion Amount of this
Note required to be converted on the Mandatory Conversion Date.  If the Company
has elected a Mandatory Conversion, the mechanics of conversion set forth in
Section 3(c) shall apply, to the extent applicable, as if the Company and the
Transfer Agent had received from the Holder on the Mandatory Conversion Date a
Conversion Notice with respect to the Conversion Amount being converted pursuant
to the Mandatory Conversion.

 

(c)                                  Conditions to Mandatory Conversion.  For
purposes of this Section 

 

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9, “Conditions to Mandatory Conversion” means the following conditions:
(i) during the period beginning on the date that is six months prior to the
Mandatory Conversion Date and ending on and including the Mandatory Conversion
Date, the Company shall have delivered shares of Common Stock upon any
conversion of Conversion Amounts as set forth in Section 3(c)(i); (ii) on each
day during the period beginning on the first Trading Day of the Mandatory
Conversion Measuring Period and ending on and including the Mandatory Conversion
Date, the Common Stock shall be traded, listed, or quoted (as applicable) on the
Principal Market, the NASDAQ Global Market or Global Select Market, the NASDAQ
Capital Market, the New York Stock Exchange, or the American Stock Exchange;
(iii) on the Mandatory Conversion Date either (x) the Registration Statement or
Registration Statements required pursuant to the Registration Rights Agreement
shall be effective and available for the sale for all of the Registrable
Securities in accordance with the terms of the Registration Rights Agreement or
(y) all shares of Common Stock issuable upon conversion of the Notes shall be
eligible for sale without restriction and without the need for registration
under any applicable federal or state securities laws; (iv) on the Mandatory
Conversion Date, an Authorized Share Failure shall not be in effect; and (v) the
average number of shares of Common Stock traded on the Principal Market for the
20 Trading Days prior to the Mandatory Conversion Date shall equal or exceed
200,000 shares per day.

 

(10)                          NONCIRCUMVENTION.  The Company hereby covenants
and agrees that the Company will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, 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.

 

(11)                          RESERVATION OF AUTHORIZED SHARES.

 

(a)                                 Reservation.  Upon the filing of the Charter
Amendment (as defined in the Securities Purchase and Exchange Agreement) with
the Delaware Secretary of State, the Company shall initially reserve out of its
authorized and unissued Common Stock a number of shares of Common Stock for each
of the Notes equal to 125% of the Conversion Rate with respect to the Conversion
Amount of each such Note as of the Issuance Date.  Thereafter, the Company, so
long as any of the Notes are outstanding, shall use commercially reasonable
efforts to reserve and keep available out of its authorized and unissued Common
Stock, solely for the purpose of effecting the conversion of the Notes, 125% 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 (without regard to
any limitations on conversions) (the “Required Reserve Amount”).  The number of
shares of Common Stock reserved for conversions of the Notes 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 time of Issuance Date 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.

 

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(b)                                 Insufficient Authorized Shares.  If at any
time after the filing of the Charter Amendment with the Delaware Secretary of
State and 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 as soon as practicable use
commercially reasonable efforts 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.

 

(12)                          HOLDER’S REDEMPTIONS.

 

(a)                                 Mechanics.  In the event that the Holder has
sent an Event of Default Redemption Notice or a Change of Control Redemption
Notice to the Company pursuant to Section 4(b) or Section 5(c), respectively
(each, a “Redemption Notice”), the Holder shall promptly submit this Note to the
Company.  If the Holder has submitted an Event of Default Redemption Notice in
accordance with Section 4(b), the Company shall deliver the applicable Event of
Default Redemption Price to the Holder within five Business Days after the
Company’s receipt of the Holder’s Event of Default Redemption Notice.  If the
Holder has submitted a Change of Control Redemption Notice in accordance with
Section 5(c), the Company shall deliver the applicable Change of Control
Redemption Price to the Holder concurrently with the consummation of such Change
of Control if such notice is received prior to the consummation of such Change
of Control and within five Business Days after the Company’s receipt of such
notice if such notice is received after the consummation of such Change of
Control.  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, at the Holder’s request, a new Note (in accordance with Section 19(d))
representing the outstanding Principal which has not been redeemed.  In the
event that the Company does not pay the Event of Default Redemption Price or the
Change of Control Redemption Price (each, the “Redemption Price”), as
applicable, to the Holder (or deliver any Common Stock to be issued pursuant to
a Redemption Notice) within the time period required, at any time thereafter and
until the Company pays such unpaid Redemption Price (and issues any Common Stock
required pursuant to a Redemption Notice) 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 (or
any Common Stock required to be issued pursuant to a Redemption Notice) has not
been paid.  Upon the Company’s receipt of such notice, (x) the 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 19(d)) to the Holder representing such Conversion Amount 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 Redemption
Notice is voided and (B) the Closing Bid Price on the date on which the
Redemption Notice is voided.

 

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(b)                                 Redemption by Other Holders.  Upon the
Company’s receipt of notice from any of the Holders of the Other Notes for
redemption or repayment as a result of an event or occurrence substantially
similar to the events or occurrences described in Section 4(b) or
Section 5(c) (each, an “Other Redemption Notice”), the Company shall immediately
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 Business Day period beginning on and including the date which is three
Business Days prior to the Company’s receipt of the Holder’s Redemption Notice
and ending on and including the date which is three 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 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.

 

(13)                          SUBORDINATION TO SENIOR INDEBTEDNESS.

 

(a)                                 General.  The Company and the Holder
covenant and agree that this Note shall be subject to the provisions of this
Section 13 and to the extent and in the manner set forth in this Section 13, the
indebtedness represented by this Note and the payment of Principal, Interest,
the Redemption Price, and any redemption amount, liquidated damages, fees,
expenses, or any other amounts in respect of this Note are hereby expressly made
subordinate and junior and subject in right of payment to the prior payment in
full in cash of all Senior Indebtedness of the Company now outstanding or
hereinafter incurred.  However, notwithstanding anything to the contrary set
forth in this Note, the provisions of this Section 13 shall apply only to Senior
Indebedness described in clause (ii) of Section 29(q) of this Note.

 

(b)                                 No Payment if Default in Senior
Indebtedness.

 

(i)                                     no cash payment on account of Principal
or Redemption Price of, or Interest on, this Note or any other payment payable
with respect to this Note shall be made, and no portion of this Note shall be
redeemed or purchased directly or indirectly by the Company, if at the time of
such payment or purchase or immediately after giving effect thereto, (A) a
default in the payment of principal, premium, if any, interest or other
obligations in respect of any Senior Indebtedness occurs and is continuing (or,
in the case of Senior Indebtedness for which there is a period of grace, in the
event of such a default that continues beyond the period of grace, if any,
specified in the instrument evidencing such Senior Indebtedness) (a “Payment
Default”), unless and until such Payment Default shall have been cured or waived
or shall have ceased to exist or (B) the Company shall have received notice (a
“Payment Blockage Notice”) from the holder or holders of Senior Indebtedness
that there exists under such Senior Indebtedness a default, which

 

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shall not have been cured or waived, permitting the holder or holders thereof to
declare such Senior Indebtedness due and payable, but in the case of this clause
(B), only for the period (the “Payment Blockage Period”) commencing on the date
of receipt of the Payment Blockage Notice and ending on the date such default
shall have been cured or waived.  The Company shall resume payments on and
distributions in respect of this Note, including any past scheduled payments of
the principal of (and premium, if any) and interest on this Note to which the
Holder would have been entitled but for the provisions of this
Section 13(b)(ii), within five (5) Business Days of the date upon which such
Payment Default is cured or waived or ceases to exist or the date on which the
Payment Blockage Period ends (and if payment is made within such time period,
any Event of Default with respect to such nonpayment shall be cured).

 

(c)                                  Payment upon Dissolution, Etc.  In the
event of any bankruptcy, insolvency, reorganization, receivership, composition,
assignment for benefit of creditors or other similar proceeding initiated by or
against the Company or any dissolution or winding up or total or partial
liquidation or reorganization of the Company (being hereinafter referred to as a
“Proceeding”), the Holder agrees that such Holder shall, upon request of a
holder of Senior Indebtedness, and at such holder of Senior Indebtedness’ own
expense, take all reasonable actions (including but not limited to the execution
and filing of documents and the giving of testimony in any Proceeding, whether
or not such testimony could have been compelled by process) necessary to prove
the full amount of all its claims in any Proceeding, and the Holder shall not
waive any claim in any Proceeding without the written consent of such holder. 
If the Holder does not file a proper proof of claim or proof of debt in the form
required in any Proceeding at least thirty (30) days before the expiration of
the time to file such claim, the holders of any Senior Indebtedness are hereby
authorized to file an appropriate claim for and on behalf of the Holder.

 

The Holder shall retain the right to vote and otherwise act with respect to the
claims under this Note (including, without limitation, the right to vote to
accept or reject any plan of partial or complete liquidation, reorganization,
arrangement, composition or extension); provided that the Holder shall not vote
with respect to any such plan or take any other action in any way so as to
(i) contest the validity of any Senior Indebtedness or any collateral therefor
or guaranties thereof, (ii) contest the relative rights and duties of any of the
lenders under the Senior Indebtedness established in any instruments or
agreement creating or evidencing the Senior Indebtedness with respect to any of
such collateral or guaranties, or (iii) contest the Holders’ obligations and
agreements set forth in this Section 13.

 

Upon payment or distribution to creditors in a Proceeding of assets of the
Company of any kind or character, whether in cash, property or securities, all
principal and interest due upon any Senior Indebtedness shall first be paid in
full before the Holder shall be entitled to receive or, if received, to retain
any payment or distribution on account of this Note, and upon any such
Proceeding, any payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities, to which the Holder would be
entitled except for the provisions of this Section 13, shall be paid by the
Company or by any receiver, trustee in

 

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bankruptcy, liquidating trustee, agent or other Person making such payment or
distribution, or by the Holder who shall have received such payment or
distribution, directly to the holders of the Senior Indebtedness (pro rata to
each such holder on the basis of the respective amounts of such Senior
Indebtedness held by such holder) or their representatives to the extent
necessary to pay all such Senior Indebtedness in full after giving effect to any
concurrent payment or distribution to or for the holders of such Senior
Indebtedness, before any payment or distribution is made to the Holder or any
Holders of the Notes.

 

(d)                                 Payments on Notes.  Subject to Sections
13(b) and 13(c), the Company may make regularly scheduled payments of the
Principal of, or Interest on, this Note or any other payment payable with
respect to this Note, if at the time of payment, and immediately after giving
effect thereto, there exists no Payment Default or a Payment Blockage Period.

 

(e)                                  Certain Rights.  Nothing contained in this
Section 13 or elsewhere in this Note is intended to or shall impair, as among
the Company, its creditors including the holders of Senior Indebtedness and the
Holder, the right, which is absolute and unconditional, of the Holder to convert
this Note in accordance herewith.

 

(f)                                   Subrogation.  Subject to payment in full
in cash of all Senior Indebtedness, the rights of the Holder shall be subrogated
to the rights of the holders of Senior Indebtedness to receive payments or
distributions of the assets of the Company made on such Senior Indebtedness
until all principal and interest on this Note shall be paid in full in cash; and
for purposes of such subrogation, no payments or distributions to the holders of
Senior Indebtedness of any cash, property or securities to which the Holder
would be entitled except for the subordination provisions of this Section 13
shall, as between the Holder and the Company and/or its creditors other than the
holders of the Senior Indebtedness, be deemed to be a payment on account of the
Senior Indebtedness.

 

(g)                                  Rights of Holders Unimpaired.  The
provisions of this Section 13 are and are intended solely for the purposes of
defining the relative rights of the Holder and the holders of Senior
Indebtedness and nothing in this Section 13 shall impair, as between the Company
and the Holder, the obligation of the Company, which is unconditional and
absolute, to pay to the Holder the principal thereof (and premium, if any) and
interest thereon, in accordance with the terms of this Note.

 

(h)                                 Holders of Senior Indebtedness.  These
provisions regarding subordination will constitute a continuing offer to all
Persons who, in reliance upon such provisions, become holders of, or continue to
hold, Senior Indebtedness; such provisions are made for the benefit of the
holders of Senior Indebtedness, and such holders are hereby made obligees under
such provisions to the same extent as if they were named therein, and they or
any of them may proceed to enforce such subordination and no amendment or
modification of the provisions contained herein shall diminish the rights of
such holders unless such holders have agreed in writing thereto.  The holders of
Senior Indebtedness may, at any time and from time to

 

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time, without the consent of or notice to the Holder, without incurring
responsibility to the Holder and without impairing or releasing the
subordination provisions of this Section 13, (i) subject to the limitations set
forth herein, increase the amount of, change the manner, terms or place of
payment of, or renew or alter, any Senior Indebtedness, or otherwise amend,
modify, restate or supplement the same (provided that any such modified
indebtedness continues to be constitute Senior Indebedness within the meaning of
this Agreement), (ii) sell, exchange or release any collateral mortgaged,
pledged or otherwise securing the Senior Indebtedness, (iii) release any Person
liable in any manner for the Senior Indebtedness and (iv) exercise or refrain
from exercising any rights against the Company or any other Person.

 

(i)                                     Proceeds Held in Trust.  In the event
that notwithstanding the foregoing, any payment or distribution of assets of the
Company of any kind or character, whether in cash, property or securities
(including, without limitation, by way of setoff or otherwise) prohibited by the
provisions hereof shall be received by the Holder before all Senior Indebtedness
if paid in full in cash, such payment or distribution shall be held in trust for
the benefit of and shall be paid over or delivered to the holders of Senior
Indebtedness, as their respective interests may appear, as calculated by the
Company, for application to, or to be held as collateral for, the payment of any
Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior
Indebtedness in full in cash after giving effect to any concurrent payment or
distribution to or for the holders of such Senior Indebtedness.

 

(j)                                    Blockage of Remedies.  In addition to any
restrictions included in the Security Agreement, during any Payment Default or
any Payment Blockage Period, if an Event of Default has occurred and is
continuing under this Note, the Holder will not commence or join with any
creditor of the Company in asserting or commencing any proceedings to collect or
enforce its rights hereunder or take any action to foreclose or realize upon the
indebtedness hereunder for a period beginning on the date of such Event of
Default and ending on the date such Payment Default is cured, waived or ceases
to exist or the date such Payment Blockage Period ends, as the case may be.

 

(k)                                 Subsequent Senior Indebtedness Requested
Modifications.  In connection with the incurrence of any future Senior
Indebtedness, the Holder agrees that it shall act reasonably and negotiate in
good faith any modifications to the provisions of this Section 13 reasonably
requested by the holder of such Senior Indebtedness; provided that nothing in
this section shall restrict the holders of Notes representing at least a
majority of the aggregate principal amount of the Notes then outstanding from
changing or amending this Section 13 pursuant to Section 17 hereof upon the
request of the Company.

 

(l)                                     Failure to Make Payment.  In the event
that the Company is prohibited or restricted from making any payment required
under this Note by reason of the provisions of this Section 13, such prohibition
or restriction shall not preclude the failure to make such payment from being an
Event of Default under Section 4(a) of this Note.

 

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(14)                          VOTING RIGHTS.  The Holder shall have no voting
rights as the holder of this Note, except as required by law, including but not
limited to the Delaware General Corporation Law, and as expressly provided in
this Note.

 

(15)                          RANK; SECURITY; ADDITIONAL INDEBTEDNESS; LIENS.

 

(a)                                 Rank.               All payments due under
this Note (a) shall rank pari passu in right of payment with all Other Notes
(“Pari Passu Indebtedness”), (b) shall be subordinate in right of payment to the
prior payment of all existing and future Senior Indebtedness upon the terms set
forth in Section 13 above, and (c) shall be senior in right of payment to all
other Indebtedness of the Company, other than Senior Indebtedness and Pari Passu
Indebtedness.

 

(b)                                 Security.  This Note is secured by assets of
the Company under that certain Security Agreement, dated May 1, 2009, among the
Company and the purchasers of the Original Notes (the “Security Agreement”).

 

(c)                                  Incurrence of Certain 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 which shall rank senior to
the Notes, other than Senior Indebtedness and Qualified Subsidiary
Indebtedness.  “Qualified Subsidiary Indebtedness” means: (i) Indebtedness
incurred by Liquidmetal Coatings, LLC or its Subsidiaries, but only to the
extent not guaranteed by, or secured by the assets of, the Company or any other
Company Subsidiary, and (ii) Indebtedness incurred by the Company’s foreign
subsidiaries, but only to the extent not guaranteed by, or secured by the assets
of, the Company or any Company Subsidiary incorporated in the United States. 
“Qualified Subsidiary Indebtedness” shall not include any Indebtedness incurred
by Liquidmetal Korea Co. Ltd., a subsidiary of the Company organized under the
laws of the Republic of Korea (“LMK”), after the date of the Securities Purchase
and Exchange Agreement except to the extent that such Indebtedness is incurred
to refinance Indebtedness existing prior to the date of the Securities Purchase
and Exchange Agreement on terms than are more favorable or the same to LMK as
the terms of such existing Indebtedness.

 

(d)                                 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 Senior Indebtedness, Pari
Passu Indebtedness, or Qualified Subsidiary Indebtedness, 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 an Event of Default has
occurred and is continuing.

 

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(16)                          PARTICIPATION.  The Holder, as the holder of this
Note, shall be entitled to such dividends paid and distributions made to the
holders of Common Stock (each, a “Distribution”), in each such case to the
extent of the Distribution as if the Holder had converted this Note into Common
Stock (without regard to any limitations on conversion herein or elsewhere) and
had held such shares of Common Stock on the record date for such dividends and
distributions.  Payments (if any) under the preceding sentence shall be made
concurrently with the dividend or distribution to the holders of Common Stock.

 

(17)                          AMENDMENT TO THE TERMS OF NOTES; LIKE TREATMENT OF
NOTES.  This Note shall not be modified, amended, changed, terminated,
supplemented, or any term or condition hereof waived except in writing signed by
the Company and Holder.  In addition, neither the Company nor any of its
affiliates shall, directly or indirectly, pay or cause to be paid any
consideration (immediate or contingent), whether by way of interest, fee,
payment for the redemption or conversion of the Notes, or otherwise, to any
Holder of Notes, for or as an inducement to, or in connection with the
solicitation of, any consent, waiver or amendment of any terms or provisions of
the Notes, unless such consideration is required to be paid to all Holders of
Notes.  The Company shall not, directly or indirectly, redeem any Notes unless
such offer of redemption is made pro rata to all Holders of Notes on identical
terms.  For clarification purposes, this provision constitutes a separate right
granted by the Company to each Holder of Notes and negotiated separately by each
Holder of Notes, is intended for the Company to treat the Holders of Notes as a
class, and shall not in any way be construed as the Holders of Notes acting in
concert or as a group with respect to the purchase, disposition or voting of
Notes or otherwise.

 

(18)                          TRANSFER.  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 and
Exchange Agreement.

 

(19)                          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 19(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 19(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) and this Section 19(a), 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 19(d)) representing the outstanding
Principal.

 

21

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(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 19(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 19(a) or
Section 19(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 Interest on the Principal and
Interest of this Note, from the Issuance Date.

 

(20)                            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, the
Securities Purchase and Exchange Agreement and the Registration Rights
Agreement, 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.

 

(21)                            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.

 

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(22)                            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.

 

(23)                            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.

 

(24)                            DISPUTE RESOLUTION.  In the case of a dispute as
to the determination of the Redemption Price or the arithmetic calculation of
the Conversion Rate or the Redemption Price, the Company shall submit the
disputed determinations or arithmetic calculations via facsimile within one
Business Day of 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 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 or the Closing Sale Price to an independent, reputable investment bank
selected by the Company and approved by the Holder or (b) the disputed
arithmetic calculation of the Conversion Rate or the Redemption Price to the
Company’s independent, outside accountant.  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 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.

 

(25)                            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 and Exchange
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 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 Change
of Control, 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.  Notwithstanding the foregoing,
Section 4(i) of the Securities Purchase and Exchange Agreement shall apply to
all notices given pursuant to this Note.

 

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(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 and Exchange
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.

 

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

 

(27)                            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 and Exchange Agreement.

 

(28)                            GOVERNING LAW.  This Note shall be construed and
enforced in accordance with, and all questions concerning the construction,
validity, interpretation and performance of this Note shall be governed by, the
internal laws of the State of New York, without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of New York or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York.

 

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

 

(a)                                  “Approved Stock Plan” means any employee
benefit, option or incentive plan which has been approved by the Board of
Directors and shareholders of the Company, pursuant to which the Company’s
securities may be issued to any employee, consultant, officer or director for
services provided to the Company; provided that the number of shares of the
Company’s Common Stock issuable pursuant to such plans, in the aggregate, shall
not exceed 10% of the shares of the Company’s Common Stock outstanding on a
fully-diluted basis on the date of the First Closing (as defined in the
Securities Purchase and Exchange Agreement) after giving effect to the First
Closing and the full exercise of the Series A-1 Option

 

24

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(as defined in the Securities Purchase and Exchange Agreement), as adjusted for
stock splits, reverse stock splits, and the like, unless such increased amount
of shares is approved by the holders of the Company’s Common Stock and the
holders of the Company’s Series A-1 Preferred Stock and Series A-2 Preferred
Stock voting together as a single class.  For purposes of this definition,
“fully-diluted basis” shall take into account all outstanding shares of Common
Stock as well as all shares of Common Stock issuable upon the conversion of all
outstanding convertible securities of the Company, including all options and
warrants granted.

 

(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)                                 “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 p.m., New York Time, as reported by
Bloomberg, or, if the Principal Market is not the principal securities exchange
or trading market for such security, the last closing bid price or last trade
price, respectively, of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg,
or if the foregoing do not apply, the last closing bid price or last trade
price, respectively, of such security in the over-the-counter market on the
electronic bulletin board for such security as reported by Bloomberg, or, if no
closing bid price or last trade price, respectively, is reported for such
security by Bloomberg, the average of the bid prices, or the ask prices,
respectively, of any market makers for such security as reported in the “pink
sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, 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 24.  All such determinations to be appropriately adjusted for any stock
dividend, stock split, stock combination or other similar transaction during the
applicable calculation period.

 

(e)                                  “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.

 

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(f)                                    “Convertible Securities” means any stock
or securities (other than Options) directly or indirectly convertible into or
exercisable or exchangeable for Common Stock.

 

(g)                                 “Excluded Security” means any share of
Common Stock issued or issuable: (i) in connection with any Approved Stock Plan;
(ii) upon conversion or exercise of any Notes, Other Notes, warrants or shares
of Series A-1 Preferred Stock or Series A-2 Preferred Stock of the Company
issued (A) pursuant to the Securities Purchase and Exchange Agreement, (B) as
dividends on the Series A Preferred Stock, or (C) as interest under the Notes or
Other Notes; (iii) upon conversion or exercise of any Options or Convertible
Securities which are outstanding on the Issuance Date, (iv) pursuant to or in
connection with commercial credit arrangements, equipment lease financings,
acquisitions of other assets or businesses, and strategic transactions not
primarily for financing purposes (including licensing or development
agreements), but only to the extent the transactions described in this clause
(iv) are entered into with non-affiliates of the Company.

 

(h)                                 “Indebtedness” of any Person means, without
duplication (A) all indebtedness for borrowed money, (B) all obligations issued,
undertaken or assumed as the deferred purchase price of property or services,
(C) all reimbursement or payment obligations with respect to letters of credit,
surety bonds and other similar instruments, (D) 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, (E) 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), (F) all monetary obligations under any leasing or similar
arrangement which, in connection with generally accepted accounting principles,
consistently applied for the periods covered thereby, is classified as a capital
lease, (G) off-balance sheet liabilities retained in connection with asset
securitization programs, synthetic leases, sale and leaseback transactions or
other similar obligations arising with respect to any other transaction which is
the functional equivalent of or takes the place of borrowing but which does not
constitute a liability on the consolidated balance sheet of such Person and its
subsidiaries, and (H) all indebtedness referred to in clauses (A) through
(G) 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 (I) all Contingent Obligations
in respect of indebtedness or obligations of others of the kinds referred to in
clauses (A) through (H) above.  Notwithstanding the foregoing, trade payables
incurred in the ordinary course of business shall not constitute “Indebtedness”
for purposes of this Note.

 

(i)                                     “Issuance Date” means November 1, 2009.

 

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

 

(k)                                  “Original Issuance Date” means the First
Closing Date, as defined in the Securities Purchase and Exchange Agreement.

 

(l)                                     “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.

 

(m)                               “Principal Market” means the OTC Bulletin
Board.

 

(n)                                 “Registration Rights Agreement” means that
certain Registration Rights Agreement, dated May 1, 2009, between the Company
and the initial Holders of the Original Notes.

 

(o)                                 “SEC” means the United States Securities and
Exchange Commission.

 

(p)                                 “Securities Purchase and Exchange Agreement”
means the Securities Purchase and Exchange Agreement, dated May 1, 2009, among
the Company and the initial Holders of the Original Notes pursuant to which the
Company issued the Original Notes.

 

(q)                                 “Senior Indebtedness” means the principal of
(and premium, if any), interest on, and all fees and other amounts (including,
without limitation, any reasonable costs, enforcement expenses (including
reasonable legal fees and disbursements, collateral protection expenses and
other reimbursement or indemnity obligations relating thereto)), and all other
obligations of the Company under (i) any of the agreements or instruments
evidencing any Indebtedness of the Company and its Subsidiaries arising after
the Original Issuance Date to an unaffiliated, third-party commercial lender
(together with any renewals, refundings, refinancings or other extensions
thereof) for purposes of purchasing equipment (which debt shall be secured only
by the assets purchased with such financing), and (ii) Indebtedness not to
exceed $4,000,000 in the aggregate that is secured solely by the Company’s
and/or its Subsidiaries’ accounts receivable and/or inventory.

 

(r)                                    “Subsidiary” means any business entity as
to which the Company directly or indirectly owns or has the power to vote or
control 50% or more of any class or series of capital stock or other equity
securities of such entity.

 

(s)                                  “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

 

27

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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).

 

(t)                                    “Warrants” means the warrants issued
under the Securities Purchase and Exchange Agreement to the initial Holders of
the Original Notes.

 

(u)                                 “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 “pink sheets” by Pink Sheets LLC (formerly the
National Quotation Bureau, 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 24.  All such
determinations to be appropriately adjusted for any stock dividend, stock split,
stock combination or other similar transaction during the applicable calculation
period.

 

[Signature Page Follows]

 

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

 

 

LIQUIDMETAL TECHNOLOGIES, INC.

 

 

 

 

 

 

 

By:

 

 

Name:

Tony Chung

 

Title:

Chief Financial Officer

 

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EXHIBIT I

 

LIQUIDMETAL TECHNOLOGIES, INC.

CONVERSION NOTICE

 

Reference is made to the 8% Senior Secured Convertible Note (the “Note”) issued
to the undersigned by Liquidmetal Technologies, Inc. (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:

 

 

The undersigned hereby certifies to the Company that the undersigned’s
conversion of the amount set forth above in accordance with Section 3(a) of the
Note will not directly result in the undersigned (together with the
undersigned’s affiliates) beneficially owning in excess of 4.99% of the number
of shares of Common Stock outstanding immediately after giving effect to such
conversion, calculated in accordance with Section 3(d)(i) of the Note; provided
that if the undersigned has previously waived the 4.99% beneficial ownership
limitation upon no less than sixty one (61) days prior written notice, the
undersigned certifies to the Company that the undersigned’s conversion of the
amount set forth above will not directly result in the undersigned (together
with the undersigned’s affiliates) beneficially owning in excess of 9.99% of the
number of shares of Common Stock outstanding immediately after giving effect to
such conversion, calculated in accordance with Section 3(d)(i) of the Note. 
Notwithstanding the foregoing, the certification set forth in this paragraph
shall not apply to, and shall not be deemed to be made by, any Affiliated
Investor (as that term is defined in the Purchase Agreement referred to in the
Note).

 

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)

 

 

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ACKNOWLEDGMENT

 

The Company hereby acknowledges this Conversion Notice and hereby directs
American Stock Transfer & Trust Co. to issue the above indicated number of
shares of Common Stock in accordance with the Transfer Agent Instructions dated
May 1, 2009, from the Company.

 

 

LIQUIDMETAL TECHNOLOGIES, INC.

 

 

 

 

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

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