**Exhibit 10.52**

 

**NEITHER THEISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THESECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTEREDUNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FORSALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF (A) AN EFFECTIVEREGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, ASAMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLEFORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT.  ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLYREVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 19(a) HEREOF.  THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTEAND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BELESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OFTHIS NOTE.**

 

**8% SENIOR SECURED CONVERTIBLE NOTE**

 
| Issuance Date:  November 1, 2009 |   | Principal:  U.S. $XXXX |
|---------------------------------------|--------|------------------------|

 

**FOR VALUERECEIVED,** LIQUIDMETAL TECHNOLOGIES, INC., a Delawarecorporation (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 hereofpursuant to redemption, conversion or otherwise, the **“Principal”**) when due, whether upon the Maturity Date (asdefined below), acceleration, redemption or otherwise (in each case inaccordance with the terms hereof) and to pay interest (**“Interest”**) on any outstanding Principal atthe rate of interest as determined pursuant to Section 2, from the dateset out above as the Issuance Date (the **“IssuanceDate”**) until the same becomes due and payable, whether upon anInterest Date (as defined below), the Maturity Date, acceleration, conversion,redemption or otherwise (in each case in accordance with the termshereof).  This 8% Senior SecuredConvertible 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**”) pursuantto the Securities Purchase and Exchange Agreement (the “**OriginalNotes**”) or issued after May 1, 2009 in satisfaction of interestand/or other amounts owing by the Company to the holders of the Original Notes(the “**Interest Notes**”) (the Original Notesand 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**”).  ThisNote is deemed to be issued pursuant to Section 2 of the Holder’s OriginalNote and is subject to the terms and provisions of the Securities PurchaseAgreement.  Certain capitalized terms aredefined in Section 29.

 

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(1)                                  MATURITY.  On January 3, 2011 (the **“Maturity Date”**), the Company shall pay tothe Holder an amount in cash representing all outstanding Principal and accruedand unpaid Interest, and following receipt of such payment, the Holder shallmark this Note as “Cancelled” and shall surrender such cancelled Note to theCompany by courier, registered mail, or other traceable means.  The Company may, upon thirty (30) calendardays 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) ifthe cash redemption price is being paid, in whole or in part, from the proceedsof sales of the Company’s assets, which shall include fees received fromlicensing the Company’s intellectual property assets, One Hundred Percent(100%) of the portion of the principal amount being redeemed plus all accruedand unpaid interest on the portion of the principal amount being redeemed or (ii) ifthe cash redemption price is being paid solely from the Company’s income fromcontinuing operations, One Hundred Three Percent (103%) of the portion of theprincipal amount being redeemed plus all accrued and unpaid interest on theportion of the principal amount being redeemed; provided that (as to both clauses(i) and (ii) above) following such notice the Holder may convert allor any part of the portion of the Note to be redeemed so long as the Companyreceives a duly executed Conversion Notice pursuant to Section 3 of thisNote prior to the date on which prepayment is actually made.

 

(2)                                  INTEREST;INTEREST RATE.  Interest onthis Note shall commence accruing on the Issuance Date and shall be computed onthe basis of a 365-day year and actual days elapsed and shall be payable inarrears on the first Business Day of November and May during theperiod beginning on the Issuance Date and ending on, and including, theMaturity Date (each, an **“Interest Date”**).  Interest shall be payable on each InterestDate at the option of the Company (i) in cash at the rate of 8.00% perannum (the **“Cash Interest Rate”**)or (ii) at the rate of 10.00% per annum (the **“Note Interest Rate”**, and together with the Cash InterestRate, referred to sometimes herein as the **“InterestRate”**) in the form of one or more additional 8% Senior SecuredConvertible 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 onthis Note shall accrue at the Cash Interest Rate and be payable by way ofinclusion of the Interest in the Conversion Amount in accordance with Section 3(b)(i).  From and after the occurrence of an Event ofDefault, the Interest Rate shall be increased so that the Cash Interest Rateshall be twelve percent (12.00%) per annum and the Note Interest Rate per annumshall be fifteen percent (15%) per annum. In the event that such Event of Default is subsequently cured, theadjustment referred to in the preceding sentence shall cease to be effective asof the date of such cure; provided that the Interest as calculated at suchincreased rate during the continuance of such Event of Default shall continueto apply to the extent relating to the days after the occurrence of such Eventof Default through and including the date of cure of such Event of Default.

 

(3)                                  CONVERSION OFNOTES.  This Note shall be convertibleinto shares of the Company’s common stock, par value $0.001 per share (the **“Common Stock”**), on the terms andconditions set forth in this Section 3.

 

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(a)                                  ConversionRight.  Subject to the provisions of Section 3(d),at any time or times on or after the Issuance Date, the Holder shall beentitled to convert any portion of the outstanding and unpaid Conversion Amount(as defined below) into fully paid and nonassessable shares of Common Stock inaccordance with Section 3(c), at the Conversion Rate (as definedbelow).  The Company shall not issue anyfraction of a share of Common Stock upon any conversion.  If the issuance would result in the issuanceof a fraction of a share of Common Stock, the Company shall round such fractionof a share of Common Stock up to the nearest whole share.  The Company shall pay any and all taxes thatmay be payable with respect to the issuance and delivery of Common Stock uponconversion of any Conversion Amount.

 

(b)                                 Conversion Rate.  The number of shares of Common Stock issuableupon conversion of any Conversion Amount (as defined below) pursuant to Section 3(a) shallbe determined by dividing (x) such Conversion Amount by (y) theConversion Price (as defined below) (the **“ConversionRate”**).

 

(i)                                     **“Conversion Amount”** means the sum of (A) the portion of thePrincipal to be converted, redeemed or otherwise with respect to which thisdetermination is being made, plus (B) accrued and unpaid Interest withrespect to such Principal, plus (C) any fees and penalties (if any) thatbecome due under this Note and that are not paid by the Company within three (3) daysof written demand therefor.

 

(ii)                                  **“Conversion Price”** means, as of any Conversion Date (as definedbelow) or other date of determination, and subject to adjustment as providedherein, $0.60.

 

(c)                                  Mechanics ofConversion.

 

(i)                                     OptionalConversion.  To convertany Conversion Amount into shares of Common Stock on any date (a **“Conversion Date”**), the Holder shall (A) transmitby 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 theform attached hereto as Exhibit I (the **“Conversion Notice”**) to the Company and (B) if requiredby Section 3(c)(iii), surrender this Note to a common carrier for deliveryto the Company as soon as practicable on or following such date (or anindemnification undertaking with respect to this Note in the case of its loss,theft or destruction).  On or before thefirst Business Day following the date of receipt of a Conversion Notice, theCompany shall transmit by facsimile a confirmation of receipt of suchConversion Notice to the Holder and the Company’s transfer agent (the “**Transfer Agent**”).  On or before the second Business Dayfollowing the date of receipt of a Conversion Notice (the **“Share Delivery Date”**), the Company shall (X) creditsuch aggregate number of shares of Common Stock to which the Holder shall beentitled to the Holder’s or its designee’s balance account with DepositoryTrust Company (“**DTC**”) through itsDeposit/Withdrawal At Custodian system or (Y) if the Transfer Agent is notparticipating in DTC Fast Automated Securities Transfer Program, issue anddeliver to the address as specified in the Conversion Notice, 

 

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a certificate, registered inthe name of the Holder or its designee, for the number of shares of Common Stockto which the Holder shall be entitled. If this Note is physically surrendered for conversion as required by Section 3(c)(iii) andthe outstanding Principal of this Note is greater than the Principal portion ofthe Conversion Amount being converted, then the Company shall as soon aspracticable and in no event later than five Business Days after receipt of thisNote and at its own expense, issue and deliver to the Holder a new Note (inaccordance with Section 19(d)) representing the outstanding Principal notconverted.  The Person or Personsentitled to receive the shares of Common Stock issuable upon a conversion ofthis Note shall be treated for all purposes as the record holder or holders ofsuch shares of Common Stock on the Conversion Date.

 

(ii)                                  Company’sFailure to Timely Convert.  Ifthe Company shall fail to issue a certificate to the Holder or credit theHolder’s balance account with DTC for the number of shares of Common Stock towhich the Holder is entitled upon conversion of any Conversion Amount on orprior to the date which is five Business Days after the Conversion Date (a **“Conversion Failure”**), then (A) theCompany shall pay liquidated damages to the Holder for each day of suchConversion Failure in an amount equal to 1.0%****of the product of (I) the sum of the number of shares of CommonStock not issued to the Holder on or prior to the Share Delivery Date and towhich the Holder is entitled, and (II) the Closing Sale Price of theCommon Stock on the Share Delivery Date and (B) the Holder, upon writtennotice to the Company, may void its Conversion Notice with respect to, andretain or have returned, as the case may be, any portion of this Note that hasnot been converted pursuant to such Conversion Notice; provided that thevoiding of a Conversion Notice shall not affect the Company’s obligations tomake any payments which have accrued prior to the date of such notice pursuantto 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 aConversion Notice the Company shall fail to issue and deliver a certificate tothe Holder or credit the Holder’s balance account with DTC for the number ofshares of Common Stock to which the Holder is entitled upon such Holder’sconversion of any Conversion Amount, and if on or after such Trading Day theHolder purchases (in an open market transaction or otherwise) Common Stock todeliver in satisfaction of a sale by the Holder of Common Stock issuable uponsuch conversion that the Holder anticipated receiving from the Company (a “**Buy-In**”), then the Company shall, withinfive (5) Business Days after the Holder’s request and in the Holder’sdiscretion, either (i) pay cash to the Holder in an amount equal to theHolder’s total purchase price (including brokerage commissions and otherout-of-pocket expenses, if any) for the shares of Common Stock so purchased(the **“Buy-In Price”**), at whichpoint the Company’s obligation to deliver such certificate (and to issue suchCommon Stock) shall terminate, or (ii) promptly honor its obligation todeliver to the Holder a certificate or certificates representing such CommonStock and pay cash to the Holder in an amount equal to the excess (if any) ofthe Buy-In Price over the product of (A) such number of shares of CommonStock, 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 ofany portion of this Note in accordance with the terms hereof, the Holder shallnot be required to physically surrender this Note to the Company unless (A) thefull Conversion Amount represented by this Note is being converted or (B) theHolder has provided the Company with prior written notice (which notice may beincluded in a Conversion Notice) requesting physical surrender and reissue ofthis Note.  The Holder and the Companyshall maintain records showing the Principal and Interest converted and thedates of such conversions or shall use such other method, reasonablysatisfactory to the Holder and the Company, so as not to require physicalsurrender of this Note upon conversion.

 

(iv)                              Pro RataConversion; Disputes.  In theevent that the Company receives a Conversion Notice from more than one Holderof Notes for the same Conversion Date and the Company can convert some, but notall, of such portions of the Notes submitted for conversion, the Company,subject to Section 3(d), shall convert from each Holder of Notes electingto have Notes converted on such date a pro rata amount of such Holder’s portionof its Notes submitted for conversion based on the principal amount of Notessubmitted for conversion on such date by such Holder relative to the aggregateprincipal amount of all Notes submitted for conversion on such date.  In the event of a dispute as to the number ofshares of Common Stock issuable to the Holder in connection with a conversionof this Note, the Company shall issue to the Holder the number of shares ofCommon Stock not in dispute and resolve such dispute in accordance with Section 24.

 

(d)                                 Limitations onConversions.

 

(i)                                     BeneficialOwnership.  Unlesswaived by the Holder upon no less than sixty one (61) days prior written noticeto the Company, the Company shall not effect any conversion of this Notepursuant to Section 3(a) to the extent that after giving effect tosuch conversion the Holder (together with the Holder’s affiliates) wouldbeneficially own in excess of 4.99% of the number of shares of Common Stockoutstanding immediately after giving effect to such conversion.  Even if the Holder waives the limitation setforth in the preceding sentence, the Company shall in no event effect anyconversion of this Note, and the Holder of this Note shall not have the rightto convert any portion of this Note pursuant to Section 3(a), to theextent that after giving effect to such conversion, the Holder (together withthe Holder’s affiliates) would beneficially own in excess of 9.99% of thenumber of shares of Common Stock outstanding immediately after giving effect tosuch conversion.  For purposes of theforegoing sentences, the number of shares of Common Stock beneficially owned bythe Holder and its affiliates shall include the number of shares of CommonStock issuable upon conversion of this Note with respect to which thedetermination of such sentence is being made, but shall exclude the number ofshares of Common Stock which would be issuable upon (A) conversion of theremaining, nonconverted portion of this Note beneficially owned by the Holderor any of its affiliates and (B) exercise or conversion of the unexercisedor 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 onconversion or exercise analogous to the limitation contained hereinbeneficially owned by the Holder or any of its affiliates.  Except as set forth in the precedingsentence, for purposes of this Section 3(d)(i), beneficial ownership shallbe calculated in accordance with Section 13(d) of the SecuritiesExchange Act of 1934, as amended.  Forpurposes of this Section 3(d)(i), in determining the number of outstandingshares of Common Stock, the Holder may rely on the number of outstanding sharesof Common Stock as reflected in (x) the Company’s most recent Form 10-Qor 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 forththe number of shares of Common Stock outstanding.  For any reason at any time, upon the writtenor oral request of the Holder, the Company shall within two Business Daysconfirm orally and in writing to the Holder the number of shares of CommonStock then outstanding.  In any case, thenumber of outstanding shares of Common Stock shall be determined after givingeffect to the conversion or exercise of securities of the Company, includingthis Note, by the Holder or its affiliates since the date as of which suchnumber of outstanding shares of Common Stock was reported.  Notwithstanding the foregoing, thelimitations of this paragraph shall not apply to any Holder who is anAffiliated Investor (as that term is defined in the Securities Purchase andExchange Agreement).

 

(ii)                                  **INTENTIONALLYOMITTED**.

 

(4)                                  RIGHTS UPONEVENT OF DEFAULT.

 

(a)                                  Event ofDefault.  Each of the following eventsshall constitute an **“Event of Default”**:

 

(i)                                     the Company’sfailure to pay to the Holder any amount of Principal or Interest when and asdue under this Note if such failure continues for a period of at least fiveBusiness Days;

 

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

 

(iii)                               any defaultunder, redemption prior to maturity of, or acceleration prior to maturity ofany Indebtedness (as defined below) of the Company or any of its Subsidiaries(as defined in the Securities Purchase and Exchange Agreement) other than withrespect to (A) the Other Notes and (B) the default by Liquidmetal KoreaCo. Ltd., the Company’s subsidiary organized under the laws of the Republic ofKorea, in existence as of the Original Issuance Date under its loan fromKookmin Bank; provided that in the case of a payment default of suchIndebtedness, such default is not cured within applicable cure periods; furtherprovided that in the case of a non-payment default of such Indebtedness thathas not resulted in an acceleration or redemption of such Indebtedness prior toits maturity, only upon acceleration or redemption of such Indebtedness;

 

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(iv)                              the Companyshall fail to observe or perform any other material covenant or agreementcontained in the Securities Purchase and Exchange Agreement or the otherTransaction Documents (as defined in the Securities Purchase and ExchangeAgreement), which failure is not cured within ten Business Days after notice ofsuch default sent by the Holder to the Company;

 

(v)                                 the Company orany 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) commencesa voluntary case, (B) consents to the entry of an order for relief againstit 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 ofcompetent jurisdiction enters an order or decree under any Bankruptcy Law that (A) isfor relief against the Company or any of its Subsidiaries in an involuntarycase that remains undismissed for a period of 90 days, (B) appoints aCustodian of the Company or any of its Subsidiaries that remains undischargedor unstayed for a period of 90 days, or (C) orders the liquidation of theCompany or any of its Subsidiaries;

 

(vii)                           a finaljudgment or judgments for the payment of money aggregating in excess of$250,000 are rendered against the Company or any of its Subsidiaries and whichjudgments are not, within 60 days after the entry thereof, bonded, dischargedor stayed pending appeal, or are not discharged within 60 days after theexpiration of such stay; provided, however, that any judgment which is coveredby insurance or an indemnity from a credit worthy party shall not be includedin calculating the $250,000 amount set forth above;

 

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

 

(ix)                              **INTENTIONALLYOMITTED**;

 

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

 

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

 

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

 

(b)                                 RedemptionRight.  Promptly after the occurrenceof an Event of Default with respect to this Note or any Other Note, the Companyshall deliver written notice thereof via facsimile and overnight courier (an **“Event of Default Notice”**) to theHolder.  At any time after the earlier ofthe Holder’s receipt of an Event of Default Notice and the Holder becomingaware of an Event of Default, the Holder may require the Company to redeem allor any portion of this Note by delivering written notice thereof (the **“Event of Default Redemption Notice”**) tothe Company, which Event of Default Redemption Notice shall indicate theportion of this Note the Holder is electing to redeem.  Each portion of this Note subject toredemption by the Company pursuant to this Section 4(b) shall beredeemed by the Company at a price equal to the greater of (i) theConversion Amount to be redeemed and (ii) the product of (A) theConversion Rate with respect to such Conversion Amount in effect at such timeas the Holder delivers an Event of Default Redemption Notice and (B) theClosing Sale Price of the Common Stock on the date immediately preceding suchEvent of Default (the **“Event of DefaultRedemption Price”**). Redemptions required by this Section 4(b) shall be made inaccordance with the provisions of Section 12.

 

(5)                                  RIGHTS UPONCHANGE OF CONTROL.

 

(a)                                  Change ofControl.  Each of the following eventsshall constitute a **“Change of Control”**:

 

(i)                                     theconsolidation, merger or other business combination (including, withoutlimitation, a reorganization or recapitalization) of the Company with or intoanother Person (other than (A) a consolidation, merger or other businesscombination (including, without limitation, reorganization or recapitalization)in which Holders of the Company’s voting power immediately prior to thetransaction continue after the transaction to hold, directly or indirectly, thevoting power of the surviving entity or entities necessary to elect a majorityof the members of the board of directors (or their equivalent if other than acorporation) of such entity or entities, or (B) pursuant to a migratorymerger effected solely for the purpose of changing the jurisdiction ofincorporation of the Company);

 

(ii)                                  the sale ortransfer 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 the50% of the outstanding shares of Common Stock.

 

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No sooner than 15 days norlater than 10 days prior to the consummation of a Change of Control, but notprior to the public announcement of such Change of Control, the Company shalldeliver written notice thereof via facsimile and overnight courier to theHolder (a **“Change of Control Notice”**).  The transactions contemplated by theSecurities Purchase and Exchange Agreement shall not be deemed to constitute aChange of Control for purposes of this Agreement.

 

(b)                                 Assumption.  Prior to the consummation of any Change ofControl, the Company will secure from any Person purchasing the Company’sassets 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 Notesrepresenting at least a majority of the aggregate principal amount of the Notesthen outstanding) to deliver to each Holder of Notes in exchange for suchNotes, a security of the Acquiring Entity evidenced by a written instrumentsubstantially similar in form and substance to the Notes, including, withoutlimitation, having a principal amount and interest rate equal to the principalamounts and the interest rates of the Notes held by such Holder, andsatisfactory to the Holders of Notes representing at least a majority of theprincipal amount of the Notes then outstanding. In the event that an Acquiring Entity is directly or indirectlycontrolled by a company or entity whose common stock or similar equity interestis listed, designated or quoted on a securities exchange or trading market, theHolders of Notes representing at least a majority of the aggregate principalamount of the Notes then outstanding may elect to treat such Person as theAcquiring Entity for purposes of this Section 5(b).

 

(c)                                  RedemptionRight.  At any time during the periodbeginning after the Holder’s receipt of a Change of Control Notice and endingon the date of the consummation of such Change of Control (or, in the event aChange of Control Notice is not delivered at least 10 days prior to a Change ofControl, at any time on or after the date which is 10 days prior to a Change ofControl 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 bydelivering written notice thereof (**“Change ofControl Redemption Notice”**) to the Company, which Change of ControlRedemption Notice shall indicate the Conversion Amount the Holder is electingto redeem; provided, however, that the Company shall not be under anyobligation to redeem all or any portion of this Note or to deliver theapplicable Change of Control Redemption Price unless and until the applicableChange of Control is consummated.  Theportion of this Note subject to redemption pursuant to this Section 5shall be redeemed by the Company in cash at a price equal to the sum of (i) theConversion Amount of the portion to be redeemed, plus (ii) the BlackScholes Value, as of the date immediately preceding the date the Change ofControl is consummated, of the Holder’s right to convert the Conversion Amounthereunder 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 reasonablycalculated by the Company, of this Note, which shall be determined by use ofthe Black Scholes Option Pricing Model reflecting (i) a risk-free interestrate corresponding to the U.S. Treasury rate for a period equal to theremaining term of this Note as of such date of request and (ii) anexpected volatility equal to the greater of 60% 

 

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

 

(6)                                  RIGHTS UPONISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.

 

(a)                                  Purchase Rights.  If at any time the Company grants, issues orsells any Options, Convertible Securities or rights to purchase stock,warrants, securities or other property pro rata to the record holders of anyclass of Common Stock (the **“Purchase Rights”**),then the Holder will be entitled to acquire, upon the terms applicable to suchPurchase Rights, the aggregate Purchase Rights which the Holder could haveacquired if the Holder had held the number of shares of Common Stock acquirableupon complete conversion of this Note (without taking into account anylimitations or restrictions on the convertibility of this Note) immediatelybefore the date on which a record is taken for the grant, issuance or sale ofsuch Purchase Rights, or, if no such record is taken, the date as of which therecord holders of Common Stock are to be determined for the grant, issue or saleof such Purchase Rights.

 

(b)                                 Other CorporateEvents. Prior to the consummation of any recapitalization, reorganization,consolidation, merger, spin-off or other business combination (other than aChange of Control) pursuant to which holders of Common Stock are entitled toreceive securities or other assets with respect to or in exchange for CommonStock (a **“Corporate Event”**), theCompany shall make appropriate provision to insure that the Holder willthereafter have the right to receive upon a conversion of this Note, (i) inaddition to the shares of Common Stock receivable upon such conversion, suchsecurities or other assets to which the Holder would have been entitled withrespect to such shares of Common Stock had such shares of Common Stock been heldby the Holder upon the consummation of such Corporate Event or (ii) inlieu of the shares of Common Stock otherwise receivable upon such conversion,such securities or other assets received by the holders of Common Stock inconnection with the consummation of such Corporate Event in such amounts as theHolder would have been entitled to receive had this Note initially been issuedwith conversion rights for the form of such consideration (as opposed to sharesof Common Stock) at a conversion rate for such consideration commensurate withthe Conversion Rate.  Provision madepursuant to the preceding sentence shall be in a form and substancesatisfactory to the Holders of Notes representing at least a majority of the aggregateprincipal amount of the Notes then outstanding.

 

(7)                                  RIGHTS UPONISSUANCE OF OTHER SECURITIES.

 

(a)                                  Adjustment ofConversion Price upon Issuance of Common Stock.  If and whenever on or after the IssuanceDate, the Company issues or sells, or in accordance with this Section 7(a) isdeemed to have issued or sold, any shares of Common Stock (including theissuance or sale of shares of Common Stock owned or held by or for the accountof the

 

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Company, but excludingshares of Common Stock deemed to have been issued or sold by the Company inconnection with any Excluded Security) for a consideration per share (the “**New Securities Issuance Price**”) less than the ConversionPrice in effect immediately prior to such issue or sale (the foregoing a **“Dilutive Issuance”**), then immediatelyafter such Dilutive Issuance, the Conversion Price then in effect shall bereduced effective concurrently with such Dilutive Issuance to an amount equalto 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 inOption Price or Rate of Conversion.  If the purchase price provided for in anyOptions, the additional consideration, if any, payable upon the issue,conversion, exchange or exercise of any Convertible Securities, or the rate atwhich any Convertible Securities are convertible into or exchangeable orexercisable for Common Stock changes at any time, the Conversion Price ineffect at the time of such change shall be adjusted to the Conversion Pricewhich would have been in effect at such time had such Options or ConvertibleSecurities provided for such changed purchase price, additional considerationor changed conversion rate, as the case may be, at the time initially granted,issued or sold in the Dilutive Issuance.

 

(ii)                                  Calculation ofConsideration Received.  Incase any Option is issued in connection with the issue or sale of othersecurities of the Company, together comprising one integrated transaction inwhich no specific consideration is allocated to such Options by the partiesthereto, the Options will be deemed to have been issued for a consideration of$.01.  If any Common Stock, Options orConvertible Securities are issued or sold or deemed to have been issued or soldfor cash, the consideration received therefor will be deemed to be the netamount received by the Company therefor. If any Common Stock, Options or Convertible Securities are issued orsold for a consideration other than cash, the amount of the consideration otherthan cash received by the Company will be the fair value of such consideration,except where such consideration consists of securities, in which case theamount of consideration received by the Company will be the Closing Sale Priceof such securities on the date of receipt. If any Common Stock, Options or Convertible Securities are issued to theowners of the non-surviving entity in connection with any merger in which theCompany is the surviving entity, the amount of consideration therefor will bedeemed to be the fair value of such portion of the net assets and business ofthe non-surviving entity as is attributable to such Common Stock, Options orConvertible Securities, as the case may be. The fair value of any consideration other than cash or securities willbe determined jointly by the Company and the Holders of Notes representing atleast a majority of the principal amounts of the Notes then outstanding.  If such parties are unable to reach agreementwithin ten days after the occurrence of an event requiring valuation (the **“Valuation Event”**), the fair value of suchconsideration will be determined within five Business Days after the tenth dayfollowing the Valuation Event by an independent, reputable appraiser jointlyselected by the Company and the Holders of Notes representing at least amajority of the principal amounts of the Notes then outstanding.  The determination of such appraiser shall be 

 

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deemed binding upon allparties absent manifest error and the fees and expenses of such appraiser shallbe borne equally by the Company, on the hand, and the Holders of the Notes, onthe other hand.

 

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

 

(b)                                 Adjustment ofConversion Price upon Subdivision or Combination of Common Stock.  If the Company at any time subdivides (by anystock split, stock dividend, recapitalization or otherwise) one or more classesof its outstanding shares of Common Stock into a greater number of shares, theConversion Price in effect immediately prior to such subdivision will beproportionately reduced.  If the Companyat any time combines (by combination, reverse stock split or otherwise) one ormore classes of its outstanding shares of Common Stock into a smaller number ofshares, the Conversion Price in effect immediately prior to such combinationwill be proportionately increased.

 

(c)                                  Other Events.  If any event occurs of the type contemplatedby the provisions of this Section 7 but not expressly provided for by suchprovisions (including, without limitation, the granting of stock appreciationrights, phantom stock rights or other rights with equity features), then theCompany’s Board of Directors will make an appropriate adjustment in theConversion Price so as to protect the rights of the Holder under this Note;provided that no such adjustment will increase the Conversion Price as otherwisedetermined pursuant to this Section 7.

 

(8)                                 **INTENTIONALLYOMITTED.**

 

(9)                                 COMPANY’S RIGHTOF MANDATORY CONVERSION.  (a) MandatoryConversion.  If at any time from andafter the Issuance Date, the Weighted Average Price of the Common Stock exceeds250% of the conversion price of the Original Notes as of the Original IssuanceDate (subject to appropriate adjustments for stock splits, stock dividends,stock combinations and other similar transactions after the Original IssuanceDate) 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 theright to require the Holder to convert all or any such portion of theConversion Amount of this Note designated in the Mandatory Conversion Noticeinto fully paid, validly issued and nonassessable shares of Common Stock in accordancewith Section 3(c) hereof at the Conversion Rate as of the MandatoryConversion Date (as defined below) (a “**MandatoryConversion**”).  The Company mayexercise its right to 

 

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require conversion underthis Section 9(a) by delivering within not more than five TradingDays following the end of such Mandatory Conversion Measuring Period a writtennotice thereof by facsimile and overnight courier to all, but not less thanall, of the Holders of Notes and the Transfer Agent (the **“Mandatory Conversion Notice”** and the dateall of the Holders received such notice is referred to as the “**Mandatory Conversion Notice Date**”).  The Mandatory Conversion Notice shall beirrevocable.

 

(b)                                 Pro RataConversion Requirement.  Ifthe Company elects to cause a conversion of all or any portion of theConversion Amount of this Note pursuant to Section 9(a), then it mustsimultaneously take the same action with respect to the Other Notes (exceptthat the Company is not required to take the same action with respect to theOther Notes to the extent limited by Section 3(d) in this Note orsimilar provisions under the Other Notes). If the Company elects to cause the conversion of this Note pursuant to Section 9(a) (orsimilar provisions under the Other Notes) with respect to less than all of theConversion Amounts of the Notes then outstanding, then the Company shallrequire conversion of a Conversion Amount from each of the Holders of the Notesequal to the product of (I) the aggregate Conversion Amount of Notes whichthe 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 theaggregate principal amount of the Original Notes purchased by such Holderpursuant to the Securities Purchase and Exchange Agreement and the denominatorof which is the sum of the aggregate principal amount of the Original Notespurchased by all Holders pursuant to the Securities Purchase and ExchangeAgreement (except to the extent limited by Section 3(d) in this Noteor similar provisions under the Other Notes) (such fraction with respect toeach Holder is referred to as its “**AllocationPercentage**,” and such amount with respect to each Holder is referredto as its “**Pro Rata Conversion Amount**”).  In the event that the initial Holder of anyNotes shall sell or otherwise transfer any of such Holder’s Notes, thetransferee shall be allocated a pro rata portion of such Holder’s AllocationPercentage.  The Mandatory ConversionNotice shall state (i) the Trading Day selected for the Mandatory Conversionin accordance with Section 9(a), which Trading Day shall be at least 10Business Days but not more than 60 Business Days following the MandatoryConversion Notice Date (the “**MandatoryConversion Date**”), (ii) the aggregate Conversion Amount of theNotes which the Company has elected to be subject to mandatory conversion fromall of the Holders of the Notes pursuant to this Section 9 (and analogousprovisions under the Other Notes), (iii) each Holder’s Pro Rata ConversionAmount of the Conversion Amount of the Notes the Company has elected to causeto be converted pursuant to this Section 9 (and analogous provisions underthe Other Notes) and (iv) the number of shares of Common Stock to beissued to such Holder as of the Mandatory Conversion Date.  All Conversion Amounts converted by theHolder after the Mandatory Conversion Notice Date shall reduce the ConversionAmount of this Note required to be converted on the Mandatory ConversionDate.  If the Company has elected aMandatory Conversion, the mechanics of conversion set forth in Section 3(c) shallapply, to the extent applicable, as if the Company and the Transfer Agent hadreceived from the Holder on the Mandatory Conversion Date a Conversion Noticewith respect to the Conversion Amount being converted pursuant to the MandatoryConversion.

 

(c)                                  Conditions toMandatory Conversion.  Forpurposes of this Section 

 

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

 

(10)                          NONCIRCUMVENTION.  The Company hereby covenants and agrees thatthe Company will not, by amendment of its Certificate of Incorporation orthrough any reorganization, transfer of assets, consolidation, merger,dissolution, issue or sale of securities, or any other voluntary action, avoidor seek to avoid the observance or performance of any of the terms of thisNote, and will at all times in good faith carry out all of the provisions ofthis Note and take all action as may be required to protect the rights of theHolder of this Note.

 

(11)                          RESERVATION OFAUTHORIZED SHARES.

 

(a)                                 Reservation.  Upon the filing of the Charter Amendment (asdefined in the Securities Purchase and Exchange Agreement) with the DelawareSecretary of State, the Company shall initially reserve out of its authorizedand unissued Common Stock a number of shares of Common Stock for each of theNotes equal to 125% of the Conversion Rate with respect to the ConversionAmount of each such Note as of the Issuance Date.  Thereafter, the Company, so long as any ofthe Notes are outstanding, shall use commercially reasonable efforts to reserveand keep available out of its authorized and unissued Common Stock, solely forthe purpose of effecting the conversion of the Notes, 125% of the number ofshares of Common Stock as shall from time to time be necessary to effect theconversion of all of the Notes then outstanding (without regard to anylimitations on conversions) (the **“RequiredReserve Amount”**).  The numberof shares of Common Stock reserved for conversions of the Notes shall beallocated pro rata among the Holders of the Notes based on the principal amountof the Notes held by each Holder at the time of Issuance Date or increase inthe number of reserved shares, as the case may be (the **“Authorized Share Allocation”**).  In the event that a Holder shall sell or otherwisetransfer any of such Holder’s Notes, each transferee shall be allocated a prorata portion of such Holder’s Authorized Share Allocation.  Any shares of Common Stock reserved andallocated to any Person which ceases to hold any Notes shall be allocated tothe remaining Holders of Notes, pro rata based on the principal amount of theNotes then held by such Holders.

 

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(b)                                 InsufficientAuthorized Shares.  If at anytime after the filing of the Charter Amendment with the Delaware Secretary ofState and while any of the Notes remain outstanding the Company does not have asufficient number of authorized and unreserved shares of Common Stock tosatisfy its obligation to reserve for issuance upon conversion of the Notes atleast 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 reasonableefforts to increase the Company’s authorized shares of Common Stock to anamount sufficient to allow the Company to reserve the Required Reserve Amountfor the Notes then outstanding.

 

(12)                          HOLDER’SREDEMPTIONS.

 

(a)                                 Mechanics.  In the event that the Holder has sent anEvent of Default Redemption Notice or a Change of Control Redemption Notice tothe 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 ofDefault Redemption Notice in accordance with Section 4(b), the Companyshall deliver the applicable Event of Default Redemption Price to the Holderwithin five Business Days after the Company’s receipt of the Holder’s Event ofDefault Redemption Notice.  If the Holderhas submitted a Change of Control Redemption Notice in accordance with Section 5(c),the Company shall deliver the applicable Change of Control Redemption Price tothe Holder concurrently with the consummation of such Change of Control if suchnotice is received prior to the consummation of such Change of Control andwithin five Business Days after the Company’s receipt of such notice if suchnotice is received after the consummation of such Change of Control.  In the event of a redemption of less than allof the Conversion Amount of this Note, the Company shall promptly cause to beissued and delivered to the Holder, at the Holder’s request, a new Note (inaccordance with Section 19(d)) representing the outstanding Principalwhich has not been redeemed.  In theevent that the Company does not pay the Event of Default Redemption Price orthe Change of Control Redemption Price (each, the **“Redemption Price”**), as applicable, to the Holder (or deliverany Common Stock to be issued pursuant to a Redemption Notice) within the timeperiod required, at any time thereafter and until the Company pays such unpaidRedemption Price (and issues any Common Stock required pursuant to a RedemptionNotice) in full, the Holder shall have the option, in lieu of redemption, torequire the Company to promptly return to the Holder all or any portion of thisNote representing the Conversion Amount that was submitted for redemption andfor which the applicable Redemption Price (or any Common Stock required to beissued pursuant to a Redemption Notice) has not been paid.  Upon the Company’s receipt of such notice, (x) theRedemption Notice shall be null and void with respect to such ConversionAmount, (y) the Company shall immediately return this Note, or issue a newNote (in accordance with Section 19(d)) to the Holder representing suchConversion Amount and (z) the Conversion Price of this Note or such new Notesshall be adjusted to the lesser of (A) the Conversion Price as in effecton the date on which the Redemption Notice is voided and (B) the ClosingBid Price on the date on which the Redemption Notice is voided.

 

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(b)                                 Redemption byOther Holders.  Upon theCompany’s receipt of notice from any of the Holders of the Other Notes forredemption or repayment as a result of an event or occurrence substantiallysimilar to the events or occurrences described in Section 4(b) or Section 5(c) (each,an **“Other Redemption Notice”**), theCompany shall immediately forward to the Holder by facsimile a copy of suchnotice.  If the Company receives aRedemption Notice and one or more Other Redemption Notices during the sevenBusiness Day period beginning on and including the date which is three BusinessDays prior to the Company’s receipt of the Holder’s Redemption Notice andending on and including the date which is three Business Days after the Company’sreceipt of the Holder’s Redemption Notice and the Company is unable to redeemall principal, interest and other amounts designated in such Redemption Noticeand such Other Redemption Notices received during such seven Business Dayperiod, then the Company shall redeem a pro rata amount from each Holder of theNotes (including the Holder) based on the principal amount of the Notes submittedfor redemption pursuant to such Redemption Notice and such Other RedemptionNotices received by the Company during such seven Business Day period.

 

(13)                          SUBORDINATIONTO SENIOR INDEBTEDNESS.

 

(a)                                 General.  The Company and the Holder covenant and agreethat this Note shall be subject to the provisions of this Section 13 andto the extent and in the manner set forth in this Section 13, theindebtedness 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 expresslymade subordinate and junior and subject in right of payment to the priorpayment in full in cash of all Senior Indebtedness of the Company nowoutstanding or hereinafter incurred. However, notwithstanding anything to the contrary set forth in thisNote, the provisions of this Section 13 shall apply only to SeniorIndebedness described in clause (ii) of Section 29(q) of thisNote.

 

(b)                                 No Payment ifDefault in Senior Indebtedness.

 

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

 

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shall not have been cured orwaived, permitting the holder or holders thereof to declare such SeniorIndebtedness due and payable, but in the case of this clause (B), only for theperiod (the “**Payment Blockage Period**”)commencing on the date of receipt of the Payment Blockage Notice and ending onthe date such default shall have been cured or waived.  The Company shall resume payments on anddistributions in respect of this Note, including any past scheduled payments ofthe principal of (and premium, if any) and interest on this Note to which theHolder 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 Defaultis cured or waived or ceases to exist or the date on which the Payment BlockagePeriod ends (and if payment is made within such time period, any Event ofDefault with respect to such nonpayment shall be cured).

 

(c)                                  Payment uponDissolution, Etc.  Inthe event of any bankruptcy, insolvency, reorganization, receivership,composition, assignment for benefit of creditors or other similar proceedinginitiated by or against the Company or any dissolution or winding up or totalor partial liquidation or reorganization of the Company (being hereinafterreferred to as a “**Proceeding**”),the Holder agrees that such Holder shall, upon request of a holder of SeniorIndebtedness, and at such holder of Senior Indebtedness’ own expense, take allreasonable actions (including but not limited to the execution and filing ofdocuments and the giving of testimony in any Proceeding, whether or not suchtestimony could have been compelled by process) necessary to prove the full amountof all its claims in any Proceeding, and the Holder shall not waive any claimin any Proceeding without the written consent of such holder.  If the Holder does not file a proper proof ofclaim 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 ofany Senior Indebtedness are hereby authorized to file an appropriate claim forand on behalf of the Holder.

 

The Holder shall retain theright 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 planof partial or complete liquidation, reorganization, arrangement, composition orextension); provided that the Holder shallnot vote with respect to any such plan or take any other action in any way soas to (i) contest the validity of any Senior Indebtedness or anycollateral therefor or guaranties thereof, (ii) contest the relativerights and duties of any of the lenders under the Senior Indebtednessestablished in any instruments or agreement creating or evidencing the SeniorIndebtedness with respect to any of such collateral or guaranties, or (iii) contestthe Holders’ obligations and agreements set forth in this Section 13.

 

Upon payment or distributionto 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 uponany Senior Indebtedness shall first be paid in full before the Holder shall beentitled to receive or, if received, to retain any payment or distribution onaccount of this Note, and upon any such Proceeding, any payment or distributionof assets of the Company of any kind or character, whether in cash, property orsecurities, to which the Holder would be entitled except for the provisions ofthis Section 13, shall be paid by the Company or by any receiver, trusteein 

 

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

 

(d)                                 Payments onNotes.  Subject to Sections 13(b) and13(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 thisNote, 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 orelsewhere in this Note is intended to or shall impair, as among the Company,its creditors including the holders of Senior Indebtedness and the Holder, theright, which is absolute and unconditional, of the Holder to convert this Notein accordance herewith.

 

(f)                                   Subrogation.  Subject to payment in full in cash of allSenior Indebtedness, the rights of the Holder shall be subrogated to the rightsof the holders of Senior Indebtedness to receive payments or distributions ofthe assets of the Company made on such Senior Indebtedness until all principal andinterest on this Note shall be paid in full in cash; and for purposes of suchsubrogation, no payments or distributions to the holders of Senior Indebtednessof any cash, property or securities to which the Holder would be entitledexcept for the subordination provisions of this Section 13 shall, asbetween the Holder and the Company and/or its creditors other than the holdersof the Senior Indebtedness, be deemed to be a payment on account of the SeniorIndebtedness.

 

(g)                                  Rights ofHolders Unimpaired.  Theprovisions of this Section 13 are and are intended solely for the purposesof defining the relative rights of the Holder and the holders of SeniorIndebtedness and nothing in this Section 13 shall impair, as between theCompany and the Holder, the obligation of the Company, which is unconditionaland 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 ofSenior Indebtedness.  Theseprovisions regarding subordination will constitute a continuing offer to allPersons who, in reliance upon such provisions, become holders of, or continueto hold, Senior Indebtedness; such provisions are made for the benefit of theholders of Senior Indebtedness, and such holders are hereby made obligees undersuch provisions to the same extent as if they were named therein, and they orany of them may proceed to enforce such subordination and no amendment ormodification of the provisions contained herein shall diminish the rights ofsuch holders unless such holders have agreed in writing thereto.  The holders of Senior Indebtedness may, atany time and from time to 

 

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time, without the consent ofor notice to the Holder, without incurring responsibility to the Holder andwithout 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 SeniorIndebtedness, or otherwise amend, modify, restate or supplement the same(provided that any such modified indebtedness continues to be constitute SeniorIndebedness within the meaning of this Agreement), (ii) sell, exchange orrelease any collateral mortgaged, pledged or otherwise securing the SeniorIndebtedness, (iii) release any Person liable in any manner for the SeniorIndebtedness and (iv) exercise or refrain from exercising any rightsagainst the Company or any other Person.

 

(i)                                     Proceeds Heldin Trust.  In theevent that notwithstanding the foregoing, any payment or distribution of assetsof the Company of any kind or character, whether in cash, property orsecurities (including, without limitation, by way of setoff or otherwise)prohibited by the provisions hereof shall be received by the Holder before allSenior Indebtedness if paid in full in cash, such payment or distribution shallbe held in trust for the benefit of and shall be paid over or delivered to theholders of Senior Indebtedness, as their respective interests may appear, ascalculated by the Company, for application to, or to be held as collateral for,the payment of any Senior Indebtedness remaining unpaid to the extent necessaryto pay all Senior Indebtedness in full in cash after giving effect to anyconcurrent payment or distribution to or for the holders of such SeniorIndebtedness.

 

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

 

(k)                                 SubsequentSenior Indebtedness Requested Modifications.  In connection with the incurrence of anyfuture Senior Indebtedness, the Holder agrees that it shall act reasonably andnegotiate in good faith any modifications to the provisions of this Section 13reasonably requested by the holder of such Senior Indebtedness; provided thatnothing in this section shall restrict the holders of Notes representing atleast a majority of the aggregate principal amount of the Notes then outstandingfrom changing or amending this Section 13 pursuant to Section 17hereof upon the request of the Company.

 

(l)                                     Failure to MakePayment.  In the event that the Companyis prohibited or restricted from making any payment required under this Note byreason of the provisions of this Section 13, such prohibition orrestriction shall not preclude the failure to make such payment from being anEvent of Default under Section 4(a) of this Note.

 

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

 

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

 

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

 

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

 

(c)                                  Incurrence ofCertain Indebtedness.  So long asthis Note is outstanding, the Company shall not, and the Company shall notpermit any of its Subsidiaries to, directly or indirectly, incur or guarantee,assume or suffer to exist any Indebtedness which shall rank senior to theNotes, other than Senior Indebtedness and Qualified Subsidiary Indebtedness.  “**Qualified SubsidiaryIndebtedness**” means: (i) Indebtedness incurred by LiquidmetalCoatings, LLC or its Subsidiaries, but only to the extent not guaranteed by, orsecured by the assets of, the Company or any other Company Subsidiary, and (ii) Indebtednessincurred by the Company’s foreign subsidiaries, but only to the extent notguaranteed by, or secured by the assets of, the Company or any CompanySubsidiary incorporated in the United States. “**Qualified Subsidiary Indebtedness**”shall not include any Indebtedness incurred by Liquidmetal Korea Co. Ltd., asubsidiary of the Company organized under the laws of the Republic of Korea (“**LMK**”), after the date of the Securities Purchase andExchange Agreement except to the extent that such Indebtedness is incurred torefinance Indebtedness existing prior to the date of the Securities Purchaseand Exchange Agreement on terms than are more favorable or the same to LMK asthe terms of such existing Indebtedness.

 

(d)                                 RestrictedPayments.  The Companyshall not, and the Company shall not permit any of its Subsidiaries to,directly or indirectly, redeem, defease, repurchase, repay or make any paymentsin 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 orotherwise), all or any portion of any Indebtedness, other than SeniorIndebtedness, Pari Passu Indebtedness, or Qualified Subsidiary Indebtedness,whether by way of payment in respect of principal of (or premium, if any) or intereston, such Indebtedness if at the time such payment is due or is otherwise madeor, after giving effect to such payment, an event constituting an Event ofDefault has occurred and is continuing.

 

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

 

(17)                          AMENDMENT TOTHE TERMS OF NOTES; LIKE TREATMENT OF NOTES.  This Note shall not be modified, amended,changed, terminated, supplemented, or any term or condition hereof waivedexcept in writing signed by the Company and Holder.  In addition, neither the Company nor any ofits affiliates shall, directly or indirectly, pay or cause to be paid anyconsideration (immediate or contingent), whether by way of interest, fee,payment for the redemption or conversion of the Notes, or otherwise, to anyHolder of Notes, for or as an inducement to, or in connection with thesolicitation of, any consent, waiver or amendment of any terms or provisions ofthe Notes, unless such consideration is required to be paid to all Holders ofNotes.  The Company shall not, directlyor indirectly, redeem any Notes unless such offer of redemption is made prorata to all Holders of Notes on identical terms.  For clarification purposes, this provisionconstitutes a separate right granted by the Company to each Holder of Notes andnegotiated separately by each Holder of Notes, is intended for the Company totreat the Holders of Notes as a class, and shall not in any way be construed asthe Holders of Notes acting in concert or as a group with respect to thepurchase, disposition or voting of Notes or otherwise.

 

(18)                          TRANSFER.  This Note may be offered, sold, assigned ortransferred by the Holder without the consent of the Company, subject only tothe provisions of Section 2(f) of the Securities Purchase andExchange Agreement.

 

(19)                          REISSUANCE OFTHIS NOTE.

 

(a)                                 Transfer.  If this Note is to be transferred, the Holdershall surrender this Note to the Company, whereupon the Company will forthwithissue 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 Principalbeing transferred by the Holder and, if less then the entire outstandingPrincipal is being transferred, a new Note (in accordance with Section 19(d))to the Holder representing the outstanding Principal not beingtransferred.  The Holder and anyassignee, by acceptance of this Note, acknowledge and agree that, by reason ofthe provisions of Section 3(c)(iii) and this Section 19(a),following conversion or redemption of any portion of this Note, the outstandingPrincipal represented by this Note may be less than the Principal stated on theface of this Note.

 

(b)                                 Lost, Stolen orMutilated Note.  Uponreceipt by the Company of evidence reasonably satisfactory to the Company ofthe loss, theft, destruction or mutilation of this Note, and, in the case ofloss, theft or destruction, of any indemnification undertaking by the Holder tothe Company in customary form and, in the case of mutilation, upon surrenderand cancellation of this Note, the Company shall execute and deliver to theHolder a new Note (in accordance with Section 19(d)) representing theoutstanding Principal.

 

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(c)                                  NoteExchangeable for Different Denominations.  This Note is exchangeable, upon the surrenderhereof by the Holder at the principal office of the Company, for a new Note orNotes (in accordance with Section 19(d) and in principal amounts ofat least $100,000) representing in the aggregate the outstanding Principal ofthis Note, and each such new Note will represent such portion of suchoutstanding Principal as is designated by the Holder at the time of suchsurrender.

 

(d)                                 Issuance of NewNotes.  Whenever the Company isrequired to issue a new Note pursuant to the terms of this Note, such new Note (i) shallbe of like tenor with this Note, (ii) shall represent, as indicated on theface of such new Note, the Principal remaining outstanding (or in the case of anew Note being issued pursuant to Section 19(a) or Section 19(c),the Principal designated by the Holder which, when added to the principalrepresented by the other new Notes issued in connection with such issuance,does not exceed the Principal remaining outstanding under this Note immediatelyprior 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 IssuanceDate of this Note, (iv) shall have the same rights and conditions as thisNote, and (v) shall represent accrued Interest on the Principal andInterest of this Note, from the Issuance Date.

 

(20)                            REMEDIES,CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.  The remedies provided in this Note shall becumulative and in addition to all other remedies available under this Note, theSecurities Purchase and Exchange Agreement and the Registration RightsAgreement, at law or in equity (including a decree of specific performanceand/or other injunctive relief), and nothing herein shall limit the Holder’sright to pursue actual and consequential damages for any failure by the Companyto 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 tobe received by the Holder and shall not, except as expressly provided herein,be subject to any other obligation of the Company (or the performancethereof).  The Company acknowledges thata breach by it of its obligations hereunder will cause irreparable harm to theHolder and that the remedy at law for any such breach may be inadequate.  The Company therefore agrees that, in theevent of any such breach or threatened breach, the Holder shall be entitled, inaddition to all other available remedies, to an injunction restraining anybreach, without the necessity of showing economic loss and without any bond orother security being required.

 

(21)                            PAYMENT OFCOLLECTION, ENFORCEMENT AND OTHER COSTS.  If (a) this Note is placed in the handsof an attorney for collection or enforcement or is collected or enforcedthrough any legal proceeding or the Holder otherwise takes action to collectamounts due under this Note or to enforce the provisions of this Note or (b) thereoccurs any bankruptcy, reorganization, receivership of the Company or otherproceedings affecting Company creditors’ rights and involving a claim underthis Note, then the Company shall pay the costs incurred by the Holder for suchcollection, enforcement or action or in connection with such bankruptcy,reorganization, receivership or other proceeding, including, but not limitedto, attorneys’ fees and disbursements.

 

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(22)                            CONSTRUCTION;HEADINGS.  This Noteshall be deemed to be jointly drafted by the Company and all the Purchasers andshall not be construed against any person as the drafter hereof.  The headings of this Note are for convenienceof reference and shall not form part of, or affect the interpretation of, thisNote.

 

(23)                            FAILURE ORINDULGENCE NOT WAIVER.  Nofailure or delay on the part of the Holder in the exercise of any power, rightor privilege hereunder shall operate as a waiver thereof, nor shall any singleor partial exercise of any such power, right or privilege preclude other orfurther exercise thereof or of any other right, power or privilege.

 

(24)                            DISPUTERESOLUTION.  In the caseof a dispute as to the determination of the Redemption Price or the arithmeticcalculation of the Conversion Rate or the Redemption Price, the Company shallsubmit the disputed determinations or arithmetic calculations via facsimilewithin one Business Day of receipt of the Conversion Notice or RedemptionNotice or other event giving rise to such dispute, as the case may be, to theHolder.  If the Holder and the Companyare unable to agree upon such determination or calculation within one BusinessDay of such disputed determination or arithmetic calculation being submitted tothe Holder, then the Company shall, within one Business Day submit viafacsimile (a) the disputed determination of the Closing Bid Price or theClosing Sale Price to an independent, reputable investment bank selected by theCompany and approved by the Holder or (b) the disputed arithmeticcalculation of the Conversion Rate or the Redemption Price to the Company’sindependent, outside accountant.  TheCompany, at the Company’s expense, shall cause the investment bank or theaccountant, as the case may be, to perform the determinations or calculationsand notify the Company and the Holder of the results no later than fiveBusiness Days from the time it receives the disputed determinations orcalculations.  Such investment bank’s oraccountant’s determination or calculation, as the case may be, shall be bindingupon all parties absent demonstrable error.

 

(25)                            NOTICES;PAYMENTS.

 

(a)                                  Notices.  Whenever notice is required to be given underthis Note, unless otherwise provided herein, such notice shall be given inaccordance with Section 9(f) of the Securities Purchase and ExchangeAgreement.  The Company shall provide theHolder 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 theforegoing, the Company will give written notice to the Holder (i) immediatelyupon any adjustment of the Conversion Price, setting forth in reasonabledetail, and certifying, the calculation of such adjustment and (ii) atleast twenty days prior to the date on which the Company closes its books ortakes a record (A) with respect to any dividend or distribution upon theCommon Stock, (B) with respect to any pro rata subscription offer toholders of Common Stock or (C) for determining rights to vote with respectto any Change of Control, dissolution or liquidation, provided in each casethat such information shall be made known to the public prior to or inconjunction with such notice being provided to the Holder.  Notwithstanding the foregoing, Section 4(i) ofthe Securities Purchase and Exchange Agreement shall apply to all notices givenpursuant to this Note.

 

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(b)                                 Payments.  Whenever any payment of cash is to be made bythe Company to any Person pursuant to this Note, such payment shall be made inlawful money of the United States of America by a check drawn on the account ofthe Company and sent via overnight courier service to such Person at suchaddress as previously provided to the Company in writing (which address, in thecase of each of the Purchasers, shall initially be as set forth on the Scheduleof Buyers attached to the Securities Purchase and Exchange Agreement); providedthat the Holder may elect to receive a payment of cash via wire transfer ofimmediately available funds by providing the Company with prior written noticesetting out such request and the Holder’s wire transfer instructions.  Whenever any amount expressed to be due bythe terms of this Note is due on any day which is not a Business Day, the sameshall instead be due on the next succeeding day which is a Business Day and, inthe case of any Interest Date which is not the date on which this Note is paidin full, the extension of the due date thereof shall not be taken into accountfor purposes of determining the amount of Interest due on such date.

 

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

 

(27)                            WAIVER OFNOTICE.  To the extent permitted bylaw, the Company hereby waives demand, notice, protest and all other demandsand notices in connection with the delivery, acceptance, performance, defaultor enforcement of this Note and the Securities Purchase and Exchange Agreement.

 

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

 

(29)                            CERTAINDEFINITIONS.  Forpurposes 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 andshareholders of the Company, pursuant to which the Company’s securities may beissued to any employee, consultant, officer or director for services providedto the Company; provided that the number of shares of the Company’s CommonStock 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 basison the date of the First Closing (as defined in the Securities Purchase andExchange Agreement) after giving effect to the First Closing and the fullexercise of the Series A-1 Option 

 

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(as defined in the SecuritiesPurchase and Exchange Agreement), as adjusted for stock splits, reverse stocksplits, and the like, unless such increased amount of shares is approved by theholders of the Company’s Common Stock and the holders of the Company’s Series A-1Preferred Stock and Series A-2 Preferred Stock voting together as a singleclass.  For purposes of this definition, “fully-dilutedbasis” shall take into account all outstanding shares of Common Stock as wellas all shares of Common Stock issuable upon the conversion of all outstandingconvertible securities of the Company, including all options and warrantsgranted.

 

(b)                                 “**Bloomberg**” means Bloomberg FinancialMarkets.

 

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

 

(d)                                 **“Closing Bid Price”** and **“ClosingSale Price”** means, for any security as of any date, the last closingbid price and last closing trade price, respectively, for such security on thePrincipal Market, as reported by Bloomberg, or, if the Principal Market beginsto operate on an extended hours basis and does not designate the closing bidprice or the closing trade price, as the case may be, then the last bid priceor 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 theprincipal securities exchange or trading market for such security, the lastclosing bid price or last trade price, respectively, of such security on theprincipal securities exchange or trading market where such security is listedor traded as reported by Bloomberg, or if the foregoing do not apply, the lastclosing bid price or last trade price, respectively, of such security in theover-the-counter market on the electronic bulletin board for such security asreported by Bloomberg, or, if no closing bid price or last trade price,respectively, is reported for such security by Bloomberg, the average of thebid prices, or the ask prices, respectively, of any market makers for suchsecurity as reported in the “pink sheets” by Pink Sheets LLC (formerly theNational Quotation Bureau, Inc.). If the Closing Bid Price or the Closing Sale Price cannot be calculatedfor a security on a particular date on any of the foregoing bases, the ClosingBid Price or the Closing Sale Price, as the case may be, of such security onsuch date shall be the fair market value as mutually determined by the Companyand the Holder.  If the Company and theHolder are unable to agree upon the fair market value of such security, thensuch dispute shall be resolved pursuant to Section 24.  All such determinations to be appropriatelyadjusted for any stock dividend, stock split, stock combination or othersimilar 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 withrespect to any indebtedness, lease, dividend or other obligation of anotherPerson 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 suchliability that such liability will be paid or discharged, or that any agreementsrelating thereto will be complied with, or that the holders of such liabilitywill be protected (in whole or in part) against loss with respect thereto.

 

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

 

(g)                                 **“Excluded Security”** means any share of Common Stock issued orissuable: (i) in connection with any Approved Stock Plan; (ii) uponconversion or exercise of any Notes, Other Notes, warrants or shares of Series A-1Preferred Stock or Series A-2 Preferred Stock of the Company issued (A) pursuantto the Securities Purchase and Exchange Agreement, (B) as dividends on theSeries A Preferred Stock, or (C) as interest under the Notes or OtherNotes; (iii) upon conversion or exercise of any Options or ConvertibleSecurities which are outstanding on the Issuance Date, (iv) pursuant to orin connection with commercial credit arrangements, equipment lease financings,acquisitions of other assets or businesses, and strategic transactions notprimarily for financing purposes (including licensing or developmentagreements), but only to the extent the transactions described in this clause (iv) areentered into with non-affiliates of the Company.

 

(h)                                 **“Indebtedness”** of any Person means, without duplication (A) allindebtedness for borrowed money, (B) all obligations issued, undertaken orassumed as the deferred purchase price of property or services, (C) allreimbursement or payment obligations with respect to letters of credit, suretybonds and other similar instruments, (D) all obligations evidenced bynotes, bonds, debentures or similar instruments, including obligations soevidenced incurred in connection with the acquisition of property, assets orbusinesses, (E) all indebtedness created or arising under any conditionalsale or other title retention agreement, or incurred as financing, in eithercase with respect to any property or assets acquired with the proceeds of suchindebtedness (even though the rights and remedies of the seller or bank undersuch agreement in the event of default are limited to repossession or sale ofsuch property), (F) all monetary obligations under any leasing or similararrangement which, in connection with generally accepted accounting principles,consistently applied for the periods covered thereby, is classified as acapital lease, (G) off-balance sheet liabilities retained in connectionwith asset securitization programs, synthetic leases, sale and leasebacktransactions or other similar obligations arising with respect to any othertransaction which is the functional equivalent of or takes the place ofborrowing but which does not constitute a liability on the consolidated balancesheet of such Person and its subsidiaries, and (H) all indebtednessreferred to in clauses (A) through (G) above secured by (or for whichthe holder of such Indebtedness has an existing right, contingent or otherwise,to be secured by) any mortgage, lien, pledge, charge, security interest orother encumbrance upon or in any property or assets (including accounts andcontract rights) owned by any Person, even though the Person which owns suchassets or property has not assumed or become liable for the payment of suchindebtedness, and (I) all Contingent Obligations in respect ofindebtedness or obligations of others of the kinds referred to in clauses (A) through(H) above.  Notwithstanding theforegoing, trade payables incurred in the ordinary course of business shall notconstitute “Indebtedness” for purposes of this Note.

 

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

 

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

 

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

 

(l)                                     **“Person”** means an individual, a limited liability company, apartnership, 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 BulletinBoard.

 

(n)                                 “**Registration Rights Agreement”** means thatcertain Registration Rights Agreement, dated May 1, 2009, between theCompany and the initial Holders of the Original Notes.

 

(o)                                 **“SEC”** means the United States Securities and ExchangeCommission.

 

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

 

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

 

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

 

(s)                                  **“Trading Day”** means any day on which the Common Stock is tradedon the Principal Market, or, if the Principal Market is not the principaltrading market for the Common Stock, then on the principal securities exchangeor securities market on which the Common Stock is then traded; provided that “TradingDay” shall not include any day on which 

 

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the Common Stock isscheduled to trade on such exchange or market for less than 4.5 hours or anyday that the Common Stock is suspended from trading during the final hour oftrading on such exchange or market (or if such exchange or market does notdesignate 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 SecuritiesPurchase and Exchange Agreement to the initial Holders of the Original Notes.

 

(u)                                 **“Weighted Average Price”** means, for any security asof any date, the dollar volume-weighted average price for such security on thePrincipal Market during the period beginning at 9:30:01 a.m., New YorkTime (or such other time as the Principal Market publicly announces is theofficial open of trading), and ending at 4:00:00 p.m., New York Time (orsuch other time as the Principal Market publicly announces is the officialclose of trading) as reported by Bloomberg through its “Volume at Price”functions, or, if the foregoing does not apply, the dollar volume-weightedaverage price of such security in the over-the-counter market on the electronicbulletin 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 theofficial open of trading), and ending at 4:00:00 p.m., New York Time (orsuch other time as such market publicly announces is the official close oftrading) as reported by Bloomberg, or, if no dollar volume-weighted averageprice is reported for such security by Bloomberg for such hours, the average ofthe highest closing bid price and the lowest closing ask price of any of themarket makers for such security as reported in the “pink sheets” by Pink SheetsLLC (formerly the National Quotation Bureau, Inc.).  If the Weighted Average Price cannot becalculated 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 fairmarket value as mutually determined by the Company and the Holder.  If the Company and the Holder are unable toagree upon the fair market value of such security, then such dispute shall beresolved pursuant to Section 24. All such determinations to be appropriately adjusted for any stockdividend, stock split, stock combination or other similar transaction duringthe applicable calculation period.

 

**[Signature Page Follows]**

 

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**IN WITNESSWHEREOF,** the Company has caused this Note to be dulyexecuted 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 herebyelects to convert the Conversion Amount (as defined in the Note) of the Noteindicated below into shares of Common Stock, par value $0.001 per share (the **“Common Stock”**), of the Company as of thedate specified below.

 
| Date of Conversion:                           |   |   |
|-----------------------------------------------|--------|--------|
|                                          |   |
| Aggregate Conversion  Amount to be converted: |   |

 

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

 

Please confirm the followinginformation:

 
| Conversion Price:                               |   |   |
|-------------------------------------------------|--------|--------|
|                                            |   |
| Number of shares of Common  Stock to be issued: |   |

 

Please issue the CommonStock into which the Note is being converted in the following name and to thefollowing 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 herebyacknowledges this Conversion Notice and hereby directs American Stock Transfer &Trust Co. to issue the above indicated number of shares of Common Stock inaccordance with the Transfer Agent Instructions dated May 1, 2009, fromthe Company.

 
|   | **LIQUIDMETAL  TECHNOLOGIES, INC.** |
|--------|------------------------------------------|
|   |                                     |   |
|   |                                     |   |
|   | By:                                      |   |
|   | Name:                                    |   |
|   | Title:                                   |   |

 

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