**Exhibit 10.4**

 

NEITHERTHIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVEBEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIESCOMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THESECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOTBE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDERTHE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN ATRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACTAND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGALOPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICHSHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THISSECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OROTHER LOAN SECURED BY SUCH SECURITIES.

 

Original Issue Date: March       ,2008

Original Conversion Price (subject to adjustment herein): **$0.15**

 

$                              

 

**ORIGINALISSUE DISCOUNT SENIOR SECURED CONVERTIBLE DEBENTUREDUE MARCH       , 2009**

 

THIS ORIGINAL ISSUE DISCOUNT SENIOR SECURED CONVERTIBLE DEBENTURE is one of a series of duly authorized and validly issued Original Issue Discount Senior Secured Convertible Debentures of Advanced Cell Technology, Inc., a Delaware corporation, (the “Company”), having its principal place of business at Alameda, California designated as its Original Issue Discount Senior Secured Convertible Debenture due March       , 2009 (this debenture, the “Debenture” and, collectively with the other debentures of such series, the “Debentures”).

 

FOR VALUE RECEIVED, the Company promises topay to                                                or its registered assigns (the “Holder”), or shall have paid pursuant tothe terms hereunder, the principal sum of$                              on March       ,2009 (the “Maturity Date”) or such earlier date as this Debenture is required or permitted to berepaid as provided hereunder.  ThisDebenture is subject to the following additional provisions:

 

Section 1.               Definitions.  For the purposes hereof, in addition to theterms defined elsewhere in this Debenture, (a) capitalized terms nototherwise defined herein shall have the meanings set forth in the PurchaseAgreement and (b) the following terms shall have the following meanings:

 

1

----

 

“Alternate Consideration”shall have the meaning set forth in Section 5(e).

 

“Bankruptcy Event”means any of the following events: (a) the Company or any SignificantSubsidiary (as such term is defined in Rule 1-02(w) of RegulationS-X) thereof commences a case or other proceeding under any bankruptcy,reorganization, arrangement, adjustment of debt, relief of debtors,dissolution, insolvency or liquidation or similar law of any jurisdictionrelating to the Company or any Significant Subsidiary thereof, (b) thereis commenced against the Company or any Significant Subsidiary thereof any suchcase or proceeding that is not dismissed within 60 days after commencement, (c) theCompany or any Significant Subsidiary thereof is adjudicated insolvent orbankrupt or any order of relief or other order approving any such case orproceeding is entered, (d) the Company or any Significant Subsidiarythereof suffers any appointment of any custodian or the like for it or anysubstantial part of its property that is not discharged or stayed within 60calendar days after such appointment, (e) the Company or any SignificantSubsidiary thereof makes a general assignment for the benefit of creditors, (f) theCompany or any Significant Subsidiary thereof calls a meeting of its creditorswith a view to arranging a composition, adjustment or restructuring of itsdebts or (g) the Company or any Significant Subsidiary thereof, by any actor failure to act, expressly indicates its consent to, approval of oracquiescence in any of the foregoing or takes any corporate or other action forthe purpose of effecting any of the foregoing.

 

“Base Conversion Price”shall have the meaning set forth in Section 5(b).

 

“Beneficial OwnershipLimitation” shall have the meaning set forth in Section 4(c)(ii).

 

“Business Day” meansany day except any Saturday, any Sunday, any day which shall be a federal legalholiday in the United States or any day on which banking institutions in theState of New York are authorized or required by law or other governmentalaction to close.

 

“Buy-In” shall havethe meaning set forth in Section 4(d)(v).

 

“Change of ControlTransaction” means the occurrence after the date hereof of any of (a) anacquisition after the date hereof by an individual or legal entity or “group”(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act)of effective control (whether through legal or beneficial ownership of capitalstock of the Company, by contract or otherwise) of in excess of 33% of thevoting securities of the Company (other than by means of conversion or exerciseof the Debentures and the Securities issued together with the Debentures), (b) theCompany merges into or consolidates with any other Person, or any Person mergesinto or consolidates with the Company and, after giving effect to suchtransaction, the stockholders of the Company immediately prior to suchtransaction own less than 66% of the aggregate voting power of the Company orthe successor entity of such transaction, or (c) the Company sells ortransfers all or substantially all of its assets to another Person and thestockholders of the Company immediately prior to such transaction own less than66% of the aggregate voting power 

 

2

----

 

of the acquiring entity immediately after thetransaction, (d) a replacement at one time or within a three year periodof more than one-half of the members of the Board of Directors which is notapproved by a majority of those individuals who are members of the Board ofDirectors on the date hereof (or by those individuals who are serving asmembers of the Board of Directors on any date whose nomination to the Board ofDirectors was approved by a majority of the members of the Board of Directorswho are members on the date hereof), or (e) the execution by the Companyof an agreement to which the Company is a party or by which it is bound,providing for any of the events set forth in clauses (a) through (d) above.

 

“Conversion” shallhave the meaning ascribed to such term in Section 4.

 

“Conversion Date”shall have the meaning set forth in Section 4(a).

 

“Conversion Price”shall have the meaning set forth in Section 4(b).

 

“Conversion Schedule”means the Conversion Schedule in the form of Schedule 1 attached hereto.

 

“Conversion Shares”means, collectively, the shares of Common Stock issuable upon conversion ofthis Debenture in accordance with the terms hereof.

 

“Debenture Register”means the records of the Company regarding registration and transfers of thisDebenture.

 

“Dilutive Issuance”shall have the meaning set forth in Section 5(b).

 

“Dilutive Issuance Notice”shall have the meaning set forth in Section 5(b).

 

“Equity Conditions”means, during the period in question, (a) the Company shall have dulyhonored all conversions and redemptions scheduled to occur or occurring by virtueof one or more Notices of Conversion of the Holder, if any, (b) theCompany shall have paid all liquidated damages and other amounts owing to theHolder in respect of this Debenture, (c)(i) the Legend may be removed fromthe applicable Security pursuant to Section 4.1 of the Purchase Agreementor (ii) all of the Conversion Shares issuable pursuant to the TransactionDocuments may be resold pursuant to Rule 144 without volume ormanner-of-sale restrictions and the current public information requirementshave been met by the Company as determined by the counsel to the Companypursuant to a written opinion letter to such effect, addressed and acceptableto the Transfer Agent and the Holder, (d) the Common Stock is trading on aTrading Market and all of the shares issuable pursuant to the TransactionDocuments are listed or quoted for trading on such Trading Market (and theCompany believes, in good faith, that trading of the Common Stock on a TradingMarket will continue uninterrupted for the foreseeable future), (e) thereis a sufficient number of authorized but unissued and otherwise unreservedshares of Common Stock for the issuance of all of the shares issuable pursuantto the Transaction Documents, (f) there is no existing Event of Default orno existing event 

 

3

----

 

which, with the passage of time or the givingof notice, would constitute an Event of Default, (g) the issuance of theshares in question (or, in the case of a Monthly Redemption, the share issuableupon conversion in full of the Monthly Redemption Amount) to the Holder wouldnot violate the limitations set forth in Section 4(c) herein, (h) therehas been no public announcement of a pending or proposed FundamentalTransaction or Change of Control Transaction that has not been consummated, (i) theHolder is not in possession of any information provided by the Company thatconstitutes, or may constitute, material non-public information and (j) ina period of 20 consecutive Trading Days prior to the applicable date inquestion, the average daily trading volume for the Common Stock on theprincipal Trading Market exceeds 200,000 shares.

 

“Event of Default”shall have the meaning set forth in Section 8(a).

 

“Exempt Issuance”means the issuance of (a) options to employees, officers, directors orconsultants (provided, however, that issuances to consultants shall not exceed500,000 shares in any 12 month period, subject to adjustment for reverse andforward stock splits, stock interests, stock combinations and other similartransactions that occur after the date of the Purchase Agreement; provided,further, that the issuance price of such shares shall be equal to or greaterthan the VWAP on the Trading Day immediately prior to the date of suchissuance) of the Company pursuant to any stock or option plan currently ineffect or hereafter duly adopted by a majority of the non-employee members ofthe Board of Directors or a majority of the members of a committee ofnon-employee directors established for such purpose, provided that the exerciseprice of such options shall not be less than the VWAP on the Trading Dayimmediately prior to the grant of such option), (b) securities upon theexercise, conversion or redemption (amortization) of any securities issued pursuantto the Purchase Agreement, convertible securities, options or warrants issuedand outstanding on the date of the Purchase Agreement (including the issuanceof Debentures to service providers of the Company in lieu of cash payments dueas of the date of the Purchase Agreement, including the payment of placementagent fees hereunder and accrued but unpaid legal and consulting fees andexpenses), provided that such securities have not been amended since the dateof the Purchase Agreement to increase the number of such securities or todecrease the exercise, exchange or conversion price of any such securitiesexcept in accordance with their terms as in effect as of the date hereof or (c) securitiesissued pursuant to acquisitions or strategic transactions, provided any suchissuance shall only be made in connection with a transaction involving a Personwhich is, itself or through its subsidiaries, an operating company in abusiness synergistic with the business of the Company and in which the Companyreceives benefits in addition to the investment of funds, but shall not includea transaction in which the Company is issuing securities primarily for thepurpose of raising capital or to an entity whose primary business is investingin securities.  Notwithstanding anythingherein to the contrary, additional issuances of securities by the Company notreferenced above shall be deemed “Exempt Issuances” upon receipt by the Companyof the consent of each holder (including holdings by affiliates) of theDebentures with an original Subscription Amount of at least $300,000 under thePurchase Agreement on the Closing Date, and if no such holders hold anyDebentures or Warrants 

 

4

----

 

at such time, upon receipt by the Company ofthe consent of 51% of the holders of Debentures then outstanding.

 

“Forced Conversion”shall have the meaning set forth in Section 6(c).

 

“Forced Conversion Date”shall have the meaning set forth in Section 6(c).

 

“Forced Conversion Notice”shall have the meaning set forth in Section 6(c).

 

“Forced Conversion NoticeDate” shall have the meaning set forth in Section 6(c).

 

“Fundamental Transaction”shall have the meaning set forth in Section 5(e).

 

“Mandatory Default Amount”  means the sum of (a) the greater of (i) theoutstanding principal amount of this Debenture, divided by the Conversion Priceon the date the Mandatory Default Amount is either (A) demanded (if demandor notice is required to create an Event of Default) or otherwise due or (B) paidin full, whichever has a lower Conversion Price, multiplied by the VWAP on thedate the Mandatory Default Amount is either (x) demanded or otherwise dueor (y) paid in full, whichever has a higher VWAP, or (ii) 120% of theoutstanding principal amount of this Debenture and (b) all other amounts,costs, expenses and liquidated damages due in respect of this Debenture.

 

“Monthly ConversionPeriod” shall have the meaning set forth in Section 6(b) hereof.

 

“Monthly Conversion Price”shall have the meaning set forth in Section 6(b) hereof.

 

“Monthly Redemption”means the redemption of this Debenture pursuant to Section 6(b) hereof.

 

“Monthly RedemptionAmount” means, as to a Monthly Redemption,$          (1), plus accrued but unpaid interest, liquidateddamages and any other amounts then owing to the Holder in respect of thisDebenture.

 

“Monthly Redemption Date”means the 1st of each month, commencing on October 1, 2008, andterminating upon the full redemption of this Debenture.

 

“Monthly RedemptionNotice” shall have the meaning set forth in Section 6(b) hereof.

 

“New York Courts”shall have the meaning set forth in Section 9(d).

 

----

(1)           1/6th of theoriginal principal amount.

 

5

----

 

“Notice of Conversion”shall have the meaning set forth in Section 4(a).

 

“Original Issue Date”means the date of the first issuance of the Debentures, regardless of anytransfers of any Debenture and regardless of the number of instruments whichmay be issued to evidence such Debentures.

 

“Permitted Indebtedness”means trade payables, indebtedness consisting of capitalized lease obligationsand purchase money indebtedness incurred in connection with acquisition ofcapital assets and obligations under sale-leaseback arrangements with respect tonewly acquired or leased assets; provided, however, that in each case suchobligations are not secured by liens on any assets of the Company or itsSubsidiaries existing as of the date of the Purchase Agreement and may only besecured by the assets so acquired or leased thereafter.

 

“Permitted Lien” mean(a) Liens with respect to the payment of taxes or governmental charges inall cases which are not yet due or which are subject to a good faith contest; (b) anyLiens incurred in connection with Permitted Indebtedness provided that suchliens are not secured by assets of the Company or its Subsidiaries other thanthe assets so acquired or leased; (c) statutory Liens of landlords orequipment lessors against any property of the Company or its Subsidiaries existingas of the date of the Purchase Agreement in favor of suppliers, mechanics,carriers, materialmen, warehousemen or workmen; and (d) Liens createdunder the Security Agreement.

 

“Purchase Agreement”means the Securities Purchase Agreement, dated as of March       , 2008 among theCompany and the original Holders, as amended, modified or supplemented fromtime to time in accordance with its terms.

 

“Securities Act”means the Securities Act of 1933, as amended, and the rules andregulations promulgated thereunder.

 

“Share Delivery Date”shall have the meaning set forth in Section 4(d)(ii).

 

“Subsidiary” shallhave the meaning set forth in the Purchase Agreement.

 

“Threshold Period”shall have the meaning set forth in Section 6(c).

 

“Trading Day” means aday on which the New York Stock Exchange is open for business.

 

“Trading Market”means the following markets or exchanges on which the Common Stock is listed orquoted for trading on the date in question: the American Stock Exchange, theNasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global SelectMarket, the New York Stock Exchange or the OTC Bulletin Board.

 

“Transaction Documents”shall have the meaning set forth in the Purchase Agreement.

 

6

----

 

“VWAP” means, for anydate, the price determined by the first of the following clauses that applies: (a) ifthe Common Stock is then listed or quoted on a Trading Market, the daily volumeweighted average price of the Common Stock for such date (or the nearestpreceding date) on the Trading Market on which the Common Stock is then listedor quoted for trading as reported by Bloomberg L.P. (based on a Trading Dayfrom 9:30 a.m. (New York City time) to 4:02 p.m. (New York Citytime)); (b)  if the OTC Bulletin Board is not a Trading Market, the volumeweighted average price of the Common Stock for such date (or the nearestpreceding date) on the OTC Bulletin Board; (c) if the Common Stock is notthen quoted for trading on the OTC Bulletin Board and if prices for the CommonStock are then reported in the “Pink Sheets” published by Pink Sheets, LLC (ora similar organization or agency succeeding to its functions of reportingprices), the most recent bid price per share of the Common Stock so reported;or (d) in all other cases, the fair market value of a share of CommonStock as determined by an independent appraiser selected in good faith by theHolder and reasonably acceptable to the Company.

 

Section 2.               Interest and Prepayment.  This Debenture was issued for an originalissue discount. No regularly scheduled interest payments shall be made on thisDebenture. Except as otherwise set forth in this Debenture, the Company may notprepay any portion of the Principal Amount of this Debenture without the priorwritten consent of the Holder.

 

Section 3.               Registration of Transfers andExchanges.

 

a)             Different Denominations. This Debenture isexchangeable for an equal aggregate principal amount of Debentures of differentauthorized denominations, as requested by the Holder surrendering thesame.  No service charge will be payablefor such registration of transfer or exchange.

 

b)            Investment Representations. This Debenture hasbeen issued subject to certain investment representations of the originalHolder set forth in the Purchase Agreement and may be transferred or exchangedonly in compliance with the Purchase Agreement and applicable federal and statesecurities laws and regulations.

 

c)             Reliance on Debenture Register. Prior to duepresentment for transfer to the Company of this Debenture, the Company and anyagent of the Company may treat the Person in whose name this Debenture is dulyregistered on the Debenture Register as the owner hereof for the purpose ofreceiving payment as herein provided and for all other purposes, whether or notthis Debenture is overdue, and neither the Company nor any such agent shall beaffected by notice to the contrary.

 

Section 4.               Conversion.

 

a)             Voluntary Conversion. At any time after theOriginal Issue Date until this Debenture is no longer outstanding, thisDebenture shall be convertible, in whole or in part, into shares of CommonStock at the option of the Holder, at any time and from time 

 

7

----

 

to time (subject to the conversionlimitations set forth in Section 4(c) hereof).  The Holder shall effect conversions bydelivering to the Company a Notice of Conversion, the form of which is attachedhereto as Annex A (each, a “Notice of Conversion”), specifyingtherein the principal amount of this Debenture to be converted and the date onwhich such conversion shall be effected (such date, the “Conversion Date”).  If no Conversion Date is specified in aNotice of Conversion, the Conversion Date shall be the date that such Notice ofConversion is deemed delivered hereunder. To effect conversions hereunder, the Holder shall not be required tophysically surrender this Debenture to the Company unless the entire principalamount of this Debenture has been so converted. Conversions hereunder shallhave the effect of lowering the outstanding principal amount of this Debenturein an amount equal to the applicable conversion.  The Holder and the Company shall maintainrecords showing the principal amount(s) converted and the date of suchconversion(s).  The Company may deliveran objection to any Notice of Conversion within 1 Business Day of delivery ofsuch Notice of Conversion.  In the eventof any dispute or discrepancy, the records of the Holder shall be controlling anddeterminative in the absence of manifest error. **The Holder,and any assignee by acceptance of this Debenture, acknowledge and agree that,by reason of the provisions of this paragraph, following conversion of aportion of this Debenture, the unpaid and unconverted principal amount of thisDebenture may be less than the amount stated on the face hereof.**

 

b)            Conversion Price. The conversion price in effect on any Conversion Date shall be equal to **$0.15**, subject to adjustment herein (the “ConversionPrice”).

 

c)             Conversion Limitations.  The Company shall not effect any conversionof this Debenture, and a Holder shall not have the right to convert any portionof this Debenture, to the extent that after giving effect to the conversion setforth on the applicable Notice of Conversion, the Holder (together with theHolder’s Affiliates, and any other person or entity acting as a group togetherwith the Holder or any of the Holder’s Affiliates) would beneficially own inexcess of the Beneficial Ownership Limitation (as defined below).  Forpurposes of the foregoing sentence, the number of shares of Common Stockbeneficially owned by the Holder and its Affiliates shall include the number ofshares of Common Stock issuable upon conversion of this Debenture with respectto which such determination is being made, but shall exclude the number ofshares of Common Stock which are issuable upon (A) conversion of theremaining, unconverted principal amount of this Debenture beneficially owned bythe Holder or any of its Affiliates and (B) exercise or conversion of theunexercised or unconverted portion of any other securities of the Companysubject to a limitation on conversion or exercise analogous to the limitationcontained herein (including, without limitation, any other Debentures or theWarrants) beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 4(c),beneficial ownership shall be calculated in accordance with Section 13(d) ofthe Exchange Act and the rules and regulations promulgatedthereunder.  To the extent that thelimitation contained in this Section 4(c) applies, the determinationof whether this Debenture is convertible (in relation to other securities ownedby the Holder together with any Affiliates) and of which principal amount ofthis Debenture is convertible shall be in the 

 

8

----

 

sole discretion of the Holder, and thesubmission of a Notice of Conversion shall be deemed to be the Holder’sdetermination of whether this Debenture may be converted (in relation to othersecurities owned by the Holder together with any Affiliates) and whichprincipal amount of this Debenture is convertible, in each case subject to theBeneficial Ownership Limitation. To ensure compliance with this restriction,the Holder will be deemed to represent to the Company each time it delivers aNotice of Conversion that such Notice of Conversion has not violated therestrictions set forth in this paragraph and the Company shall have noobligation to verify or confirm the accuracy of such determination.  In addition, a determination as to any groupstatus as contemplated above shall be determined in accordance with Section 13(d) ofthe Exchange Act and the rules and regulations promulgated thereunder.   For purposes of this Section 4(c), indetermining the number of outstanding shares of Common Stock, the Holder mayrely on the number of outstanding shares of Common Stock as stated in the mostrecent of the following: (A) the Company’s most recent periodic or annualreport, as the case may be; (B) a more recent public announcement by theCompany; or (C) a more recent notice by the Company or the Company’stransfer agent setting forth the number of shares of Common Stockoutstanding.  Upon the written or oral request of a Holder, the Companyshall within two Trading Days confirm orally and in writing to the Holder thenumber of shares of Common Stock 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 Debenture, by the Holder or its Affiliates since the date as of which suchnumber of outstanding shares of Common Stock was reported. The “BeneficialOwnership Limitation” shall be 4.99% of the number of shares of the CommonStock outstanding immediately after giving effect to the issuance of shares ofCommon Stock issuable upon conversion of this Debenture held by theHolder.  The Holder, upon not less than61 days’ prior notice to the Company, may increase or decrease the BeneficialOwnership Limitation provisions of this Section 4(c), provided that theBeneficial Ownership Limitation in no event exceeds 9.99% of the number ofshares of the Common Stock outstanding immediately after giving effect to theissuance of shares of Common Stock upon conversion of this Debenture held bythe Holder and the Beneficial Ownership Limitation provisions of this Section 4(c) shallcontinue to apply.  Any such increase ordecrease will not be effective until the 61st day after such noticeis delivered to the Company.  TheBeneficial Ownership Limitation provisions of this paragraph shall be construedand implemented in a manner otherwise than in strict conformity with the terms ofthis Section 4(c) to correct this paragraph (or any portion hereof)which may be defective or inconsistent with the intended Beneficial OwnershipLimitation contained herein or to make changes or supplements necessary ordesirable to properly give effect to such limitation. The limitations containedin this paragraph shall apply to a successor holder of this Debenture.

 

d)            Mechanics of Conversion.

 

i.              Conversion Shares Issuable Upon Conversion ofPrincipal Amount.  The number ofConversion Shares issuable upon a conversion hereunder shall be determined bythe quotient obtained by dividing (x) the 

 

9

----

 

outstanding principal amount of thisDebenture to be converted by (y) the Conversion Price.

 

ii.             Delivery of Certificate Upon Conversion. Notlater than three Trading Days after each Conversion Date (the “ShareDelivery Date”), the Company shall deliver, or cause to be delivered, tothe Holder a certificate or certificates representing the Conversion Shareswhich on or after the six month anniversary of the Original Issue Date shall befree of restrictive legends and trading restrictions (other than those whichmay then be required by the Purchase Agreement) representing the number ofConversion Shares being acquired upon the conversion of this Debenture. On orafter the six month anniversary of the Original Issue Date, the Company shall,if available and if allowed under applicable securities laws, use its bestefforts to deliver any certificate or certificates required to be delivered bythe Company under this Section 4(d) electronically through theDepository Trust Company or another established clearing corporation performingsimilar functions.

 

iii.            Failure to Deliver Certificates.  If in the case of any Notice of Conversionsuch certificate or certificates are not delivered to or as directed by theapplicable Holder by the third Trading Day after the Conversion Date, theHolder shall be entitled to elect by written notice to the Company at any timeon or before its receipt of such certificate or certificates, to rescind suchConversion, in which event the Company shall promptly return to the Holder anyoriginal Debenture delivered to the Company and the Holder shall promptlyreturn to the Company the Common Stock certificates representing the principalamount of this Debenture unsuccessfully tendered for conversion to the Company.

 

iv.            Obligation Absolute; Partial Liquidated Damages.  The Company’s obligations to issue anddeliver the Conversion Shares upon conversion of this Debenture in accordancewith the terms hereof are absolute and unconditional, irrespective of anyaction or inaction by the Holder to enforce the same, any waiver or consentwith respect to any provision hereof, the recovery of any judgment against anyPerson or any action to enforce the same, or any setoff, counterclaim,recoupment, limitation or termination, or any breach or alleged breach by theHolder or any other Person of any obligation to the Company or any violation oralleged violation of law by the Holder or any other Person, and irrespective ofany other circumstance which might otherwise limit such obligation of theCompany to the Holder in connection with the issuance of such ConversionShares; provided, however, that such delivery shall not operateas a waiver by the Company of any such action the Company may have against theHolder.  In the event the Holder of thisDebenture shall elect to convert any or all of the outstanding principal amounthereof, the Company may not refuse conversion based on any claim that theHolder or anyone associated or affiliated with the Holder has been engaged inany violation of law, agreement or for any other reason, unless an injunctionfrom a court, on notice to Holder, restraining and or enjoining conversion ofall or part of this Debenture shall have been sought

 

10

----

 

and obtained, and the Company posts a suretybond for the benefit of the Holder in the amount of 150% of the outstandingprincipal amount of this Debenture, which is subject to the injunction, whichbond shall remain in effect until the completion of arbitration/litigation ofthe underlying dispute and the proceeds of which shall be payable to the Holderto the extent it obtains judgment.  In theabsence of such injunction, the Company shall issue Conversion Shares or, ifapplicable, cash, upon a properly noticed conversion.  If the Company fails for any reason todeliver to the Holder such certificate or certificates pursuant to Section 4(d)(ii) bythe third Trading Day after the Conversion Date, the Company shall pay to theHolder, in cash, as liquidated damages and not as a penalty, for each $1,000 ofprincipal amount being converted, $10 per Trading Day (increasing to $20 perTrading Day on the fifth (5th) Trading Day after such liquidateddamages begin to accrue) for each Trading Day after such third (3rd)Trading Day until such certificates are delivered.    Nothing herein shall limit a Holder’s rightto pursue actual damages or declare an Event of Default pursuant to Section 8hereof for the Company’s failure to deliver Conversion Shares within the periodspecified herein and the Holder shall have the right to pursue all remediesavailable to it hereunder, at law or in equity including, without limitation, adecree of specific performance and/or injunctive relief.  The exercise of any such rights shall notprohibit the Holder from seeking to enforce damages pursuant to any other Section hereofor under applicable law.

 

v.             Compensation for Buy-In on Failure to Timely DeliverCertificates Upon Conversion. In addition to any other rights available tothe Holder, if the Company fails for any reason to deliver to the Holder suchcertificate or certificates by the Share Delivery Date pursuant to Section 4(d)(ii),and if after such Share Delivery Date the Holder is required by its brokeragefirm to purchase (in an open market transaction or otherwise), or the Holder’sbrokerage firm otherwise purchases, shares of Common Stock to deliver insatisfaction of a sale by the Holder of the Conversion Shares which the Holderwas entitled to receive upon the conversion relating to such Share DeliveryDate (a “Buy-In”), then the Company shall (A) pay in cash to theHolder (in addition to any other remedies available to or elected by theHolder) the amount by which (x) the Holder’s total purchase price(including any brokerage commissions) for the Common Stock so purchased exceeds(y) the product of (1) the aggregate number of shares of Common Stockthat the Holder was entitled to receive from the conversion at issue multipliedby (2) the actual sale price at which the sell order giving rise to suchpurchase obligation was executed (including any brokerage commissions) and (B) atthe option of the Holder, either reissue (if surrendered) this Debenture in aprincipal amount equal to the principal amount of the attempted conversion ordeliver to the Holder the number of shares of Common Stock that would have beenissued if the Company had timely complied with its delivery requirements under Section 4(d)(ii).  For example, if the Holder purchases CommonStock having a total purchase price of $11,000 to cover a Buy-In with respectto an attempted conversion of this Debenture with respect to which the actualsale price

 

11

----

 

of the Conversion Shares (including anybrokerage commissions) giving rise to such purchase obligation was a total of$10,000 under clause (A) of the immediately preceding sentence, theCompany shall be required to pay the Holder $1,000.  The Holder shall provide the Company writtennotice indicating the amounts payable to the Holder in respect of the Buy-Inand, upon request of the Company, evidence of the amount of such loss.  Nothing herein shall limit a Holder’s rightto pursue any other remedies available to it hereunder, at law or in equityincluding, without limitation, a decree of specific performance and/orinjunctive relief with respect to the Company’s failure to timely delivercertificates representing shares of Common Stock upon conversion of thisDebenture as required pursuant to the terms hereof.

 

vi.            Reservation of Shares Issuable Upon Conversion.The Company covenants that it will at all times reserve and keep available outof its authorized and unissued shares of Common Stock for the sole purpose ofissuance upon conversion of this Debenture, as herein provided, free frompreemptive rights or any other actual contingent purchase rights of Personsother than the Holder (and the other holders of the Debentures), not less thansuch aggregate number of shares of the Common Stock as shall (subject to theterms and conditions set forth in the Purchase Agreement) be issuable (takinginto account the adjustments and restrictions of Section 5) upon the conversionof the outstanding principal amount of this Debenture.  The Company covenants that all shares ofCommon Stock that shall be so issuable shall, upon issue, be duly authorized,validly issued, fully paid and nonassessable.

 

vii.           Fractional Shares. No fractional shares or scriprepresenting fractional shares shall be issued upon the conversion of thisDebenture.  As to any fraction of a sharewhich Holder would otherwise be entitled to purchase upon such conversion, theCompany shall at its election, either pay a cash adjustment in respect of suchfinal fraction in an amount equal to such fraction multiplied by the ConversionPrice or round up to the next whole share.

 

viii.          Transfer Taxes. The issuance of certificates for shares of the Common Stock onconversion of this Debenture shall be made without charge to the Holder hereoffor any documentary stamp or similar taxes that may be payable in respect ofthe issue or delivery of such certificates, provided that, the Company shallnot be required to pay any tax that may be payable in respect of any transferinvolved in the issuance and delivery of any such certificate upon conversionin a name other than that of the Holder of this Debenture so converted and theCompany shall not be required to issue or deliver such certificates unless oruntil the person or persons requesting the issuance thereof shall have paid tothe Company the amount of such tax or shall have established to thesatisfaction of the Company that such tax has been paid.

 

12

----

 

Section 5.               Certain Adjustments.

 

a)             Stock Dividends and Stock Splits.  If the Company, at any time while thisDebenture is outstanding: (i) pays a stock dividend or otherwise makes adistribution or distributions payable in shares of Common Stock on shares ofCommon Stock or any Common Stock Equivalents (which, for avoidance of doubt,shall not include any shares of Common Stock issued by the Company uponconversion of the Debentures), (ii) subdivides outstanding shares ofCommon Stock into a larger number of shares, (iii) combines (including byway of a reverse stock split) outstanding shares of Common Stock into a smallernumber of shares or (iv) issues, in the event of a reclassification ofshares of the Common Stock, any shares of capital stock of the Company, thenthe Conversion Price shall be multiplied by a fraction of which the numeratorshall be the number of shares of Common Stock (excluding any treasury shares ofthe Company) outstanding immediately before such event and of which thedenominator shall be the number of shares of Common Stock outstandingimmediately after such event.  Anyadjustment made pursuant to this Section shall become effectiveimmediately after the record date for the determination of stockholdersentitled to receive such dividend or distribution and shall become effectiveimmediately after the effective date in the case of a subdivision, combinationor re-classification.

 

b)            Subsequent Equity Sales.  If, at any time while this Debenture isoutstanding,  the Company or anySubsidiary, as applicable, sells or grants any option to purchase or sells orgrants any right to reprice, or otherwise disposes of or issues (or announcesany sale, grant or any option to purchase or other disposition), any CommonStock or Common Stock Equivalents entitling any Person to acquire shares ofCommon Stock at an effective price per share that is lower than the thenConversion Price (such lower price, the “Base Conversion Price” and suchissuances, collectively, a “Dilutive Issuance”) (if the holder of theCommon Stock or Common Stock Equivalents so issued shall at any time, whetherby operation of purchase price adjustments, reset provisions, floatingconversion, exercise or exchange prices or otherwise, or due to warrants,options or rights per share which are issued in connection with such issuance,be entitled to receive shares of Common Stock at an effective price per sharethat is lower than the Conversion Price, such issuance shall be deemed to haveoccurred for less than the Conversion Price on such date of the DilutiveIssuance), then the Conversion Price shall be reduced to equal the BaseConversion Price.  Such adjustment shallbe made whenever such Common Stock or Common Stock Equivalents are issued.  Notwithstanding the foregoing, no adjustmentwill be made under this Section 5(b) in respect of an ExemptIssuance. If the Company enters into a Variable Rate Transaction, despite theprohibition set forth in the Purchase Agreement, the Company shall be deemed tohave issued Common Stock or Common Stock Equivalents at the lowest possibleconversion price at which such securities may be converted or exercised. TheCompany shall notify the Holder in writing, no later than 1 Business Dayfollowing the issuance of any Common Stock or Common Stock Equivalents subjectto this Section 5(b), indicating therein the applicable issuance price, orapplicable Conversion Price, exchange price, conversion price and other pricingterms (such notice, the “Dilutive Issuance Notice”).  For purposes of clarification, whether or notthe Company provides a Dilutive Issuance Notice

 

13

----

 

pursuant to this Section 5(b), upon theoccurrence of any Dilutive Issuance, the Holder is entitled to receive a numberof Conversion Shares based upon the Base Conversion Price on or after the dateof such Dilutive Issuance, regardless of whether the Holder accurately refersto the Base Conversion Price in the Notice of Conversion.

 

c)             Subsequent Rights Offerings.  If the Company, at any time while theDebenture is outstanding, shall issue rights, options or warrants to allholders of Common Stock (and not to Holders) entitling them to subscribe for orpurchase shares of Common Stock at a price per share that is lower than theVWAP on the record date referenced below, then the Conversion Price shall bemultiplied by a fraction of which the denominator shall be the number of sharesof the Common Stock outstanding on the date of issuance of such rights or warrantsplus the number of additional shares of Common Stock offered for subscriptionor purchase, and of which the numerator shall be the number of shares of theCommon Stock outstanding on the date of issuance of such rights or warrantsplus the number of shares which the aggregate offering price of the totalnumber of shares so offered (assuming delivery to the Company in full of allconsideration payable upon exercise of such rights, options or warrants) wouldpurchase at such VWAP.  Such adjustmentshall be made whenever such rights or warrants are issued, and shall becomeeffective immediately after the record date for the determination ofstockholders entitled to receive such rights, options or warrants.

 

d)            Pro Rata Distributions. If the Company, at anytime while this Debenture is outstanding, distributes to all holders of CommonStock (and not to the Holders) evidences of its indebtedness or assets(including cash and cash dividends) or rights or warrants to subscribe for orpurchase any security (other than the Common Stock, which shall be subject to Section 5(b)),then in each such case the Conversion Price shall be adjusted by multiplyingsuch Conversion Price in effect immediately prior to the record date fixed fordetermination of stockholders entitled to receive such distribution by afraction of which the denominator shall be the VWAP determined as of the recorddate mentioned above, and of which the numerator shall be such VWAP on suchrecord date less the then fair market value at such record date of the portionof such assets or evidence of indebtedness so distributed applicable to 1outstanding share of the Common Stock as determined by the Board of Directorsof the Company in good faith.  In eithercase the adjustments shall be described in a statement delivered to the Holderdescribing the portion of assets or evidences of indebtedness so distributed orsuch subscription rights applicable to 1 share of Common Stock.  Such adjustment shall be made whenever anysuch distribution is made and shall become effective immediately after therecord date mentioned above.

 

e)             Fundamental Transaction. If, at any time whilethis Debenture is outstanding, (i) the Company effects any merger orconsolidation of the Company with or into another Person, (ii) the Companyeffects any sale of all or substantially all of its assets in one transactionor a series of related transactions, (iii) any tender offer or exchangeoffer (whether by the Company or another Person) is completed pursuant to whichholders of Common Stock are permitted to tender or exchange their shares for 

 

14

----

 

other securities, cash or property, or (iv) theCompany effects any reclassification of the Common Stock or any compulsoryshare exchange pursuant to which the Common Stock is effectively converted intoor exchanged for other securities, cash or property (in any such case, a “FundamentalTransaction”), then, upon any subsequent conversion of this Debenture, theHolder shall have the right to receive, for each Conversion Share that wouldhave been issuable upon such conversion immediately prior to the occurrence ofsuch Fundamental Transaction, the same kind and amount of securities, cash orproperty as it would have been entitled to receive upon the occurrence of suchFundamental Transaction if it had been, immediately prior to such FundamentalTransaction, the holder of 1 share of Common Stock (the “AlternateConsideration”).  For purposes of anysuch conversion, the determination of the Conversion Price shall beappropriately adjusted to apply to such Alternate Consideration based on theamount of Alternate Consideration issuable in respect of 1 share of CommonStock in such Fundamental Transaction, and the Company shall apportion theConversion Price among the Alternate Consideration in a reasonable mannerreflecting the relative value of any different components of the AlternateConsideration.  If holders of CommonStock are given any choice as to the securities, cash or property to bereceived in a Fundamental Transaction, then the Holder shall be given the samechoice as to the Alternate Consideration it receives upon any conversion ofthis Debenture following such Fundamental Transaction.  To the extent necessary to effectuate theforegoing provisions, any successor to the Company or surviving entity in suchFundamental Transaction shall issue to the Holder a new debenture consistentwith the foregoing provisions and evidencing the Holder’s right to convert suchdebenture into Alternate Consideration. The terms of any agreement pursuant towhich a Fundamental Transaction is effected shall include terms requiring anysuch successor or surviving entity to comply with the provisions of this Section 5(e) andinsuring that this Debenture (or any such replacement security) will besimilarly adjusted upon any subsequent transaction analogous to a FundamentalTransaction.

 

f)                                        Calculations.  All calculations under this Section 5shall be made to the nearest cent or the nearest 1/100th of a share, as thecase may be.  For purposes of this Section 5,the number of shares of Common Stock deemed to be issued and outstanding as ofa given date shall be the sum of the number of shares of Common Stock(excluding any treasury shares of the Company) issued and outstanding.

 

g)                                     Notice to theHolder.

 

i.                                          Adjustment toConversion Price.  Wheneverthe Conversion Price is adjusted pursuant to any provision of this Section 5,the Company shall promptly deliver to each Holder a notice setting forth theConversion Price after such adjustment and setting forth a brief statement ofthe facts requiring such adjustment.

 

ii.                                       Notice to AllowConversion by Holder.  If (A) theCompany shall declare a dividend (or any other distribution in whatever form)on the Common Stock, (B) the Company shall declare a special nonrecurringcash dividend on or a

 

15

----

 

redemption of the Common Stock, (C) theCompany shall authorize the granting to all holders of the Common Stock ofrights or warrants to subscribe for or purchase any shares of capital stock ofany class or of any rights, (D) the approval of any stockholders of theCompany shall be required in connection with any reclassification of the CommonStock, any consolidation or merger to which the Company is a party, any sale ortransfer of all or substantially all of the assets of the Company, of any compulsoryshare exchange whereby the Common Stock is converted into other securities,cash or property or (E) the Company shall authorize the voluntary orinvoluntary dissolution, liquidation or winding up of the affairs of theCompany, then, in each case, the Company shall cause to be filed at each officeor agency maintained for the purpose of conversion of this Debenture, and shallcause to be delivered to the Holder at its last address as it shall appear uponthe Debenture Register, at least twenty (20) calendar days prior to theapplicable record or effective date hereinafter specified, a notice stating (x) thedate on which a record is to be taken for the purpose of such dividend,distribution, redemption, rights or warrants, or if a record is not to betaken, the date as of which the holders of the Common Stock of record to beentitled to such dividend, distributions, redemption, rights or warrants are tobe determined or (y) the date on which such reclassification,consolidation, merger, sale, transfer or share exchange is expected to becomeeffective or close, and the date as of which it is expected that holders of theCommon Stock of record shall be entitled to exchange their shares of the CommonStock for securities, cash or other property deliverable upon suchreclassification, consolidation, merger, sale, transfer or share exchange,provided that the failure to deliver such notice or any defect therein or inthe delivery thereof shall not affect the validity of the corporate actionrequired to be specified in such notice. The Holder is entitled to convert this Debenture during the 20-dayperiod commencing on the date of such notice through the effective date of theevent triggering such notice.

 

Section 6.                                            MonthlyRedemption and Forced Conversion.

 

a)                                      MonthlyRedemption.  On eachMonthly Redemption Date, the Company shall redeem the Monthly Redemption Amount(the “Monthly Redemption”). The Monthly Redemption Amount payable oneach Monthly Redemption Date shall be paid in cash; provided, however,as to any Monthly Redemption and upon 10 Trading Days’ prior writtenirrevocable notice (the “Monthly Redemption Notice”), in lieu of a cashredemption payment the Company may elect to pay all or part of a MonthlyRedemption Amount in Conversion Shares based on a conversion price equal to thelesser of (i) the then Conversion Price and (ii) **80% of theaverage of the VWAPs for the 10 consecutive Trading Days ending on the TradingDay that is immediately prior to the applicable Monthly Redemption Date**(subject to adjustment for any stock dividend, stock split, stock combinationor other similar event affecting the Common Stock during such 10 Trading Dayperiod) (the price calculated during the 10 Trading Day period immediatelyprior to the Monthly Redemption Date, the “Monthly Conversion Price” andsuch 10 Trading Day period, the “Monthly Conversion Period”); 

 

16

----

 

provided, further,that the Company may not pay the Monthly Redemption Amount in Conversion Sharesunless (y) from the date the Holder receives the duly delivered MonthlyRedemption Notice through and until the date such Monthly Redemption is paid infull, the Equity Conditions have been satisfied, unless waived in writing bythe Holder, and (z) as to such Monthly Redemption, prior to such MonthlyConversion Period (but not more than 5 Trading Days prior to the commencementof the Monthly Conversion Period), the Company shall have delivered to theHolder’s account with The Depository Trust Company a number of shares of CommonStock to be applied against such Monthly Redemption Amount equal to thequotient of (x) the applicable Monthly Redemption Amount divided by (y) thelesser of (A) the Conversion Price and (B) 80% of the average of the10 VWAPs during the period ending on the 3rd Trading Day immediatelyprior to the date of the Monthly Redemption Notice (the “Pre-Redemption Conversion Shares”).  The Holder may convert, pursuant to Section 4(a),any principal amount of this Debenture subject to a Monthly Redemption at anytime prior to the date that the Monthly Redemption Amount, plus accrued butunpaid interest, liquidated damages and any other amounts then owing to theHolder are due and paid in full.  Unlessotherwise indicated by the Holder in the applicable Notice of Conversion, anyprincipal amount of this Debenture converted during the applicable MonthlyConversion Period until the date the Monthly Redemption Amount is paid in fullshall be first applied to the principal amount subject to the Monthly RedemptionAmount payable in cash and then to the Monthly Redemption Amount payable inConversion Shares.  Any principal amountof this Debenture converted during the applicable Monthly Conversion Period inexcess of the Monthly Redemption Amount shall be applied against the lastprincipal amount of this Debenture scheduled to be redeemed hereunder, inreverse time order from the Maturity Date; provided, however, ifany such conversion is applied against such Monthly Redemption Amount, thePre-Redemption Conversion Shares, if any were issued in connection with suchMonthly Redemption or were not already applied to such conversions, shall befirst applied against such conversion. The Company covenants and agrees that it will honor all Notices ofConversion tendered up until such amounts are paid in full.  The Company’s determination to pay a MonthlyRedemption in cash, shares of Common Stock or a combination thereof shall beapplied ratably to all of the holders of the then outstanding Debentures basedon their (or their predecessor’s) initial purchases of Debentures pursuant tothe Purchase Agreement.  At any time theCompany delivers a notice to the Holder of its election to pay the MonthlyRedemption Amount in shares of Common Stock, the Company shall file aprospectus supplement pursuant to Rule 424 disclosing such election.  Notwithstanding anything herein to thecontrary, on 3 occasions at the election of the Holder by written notice to theCompany prior to Monthly Redemption Date that is to be paid in shares, theHolder may defer the pending Monthly Redemption to a subsequent date asdetermined by the Holder.  Upon thedeferment of a Monthly Redemption, the Holder shall give at least 5 TradingDays’ prior notice that such Monthly Redemption is due, including the deemedMonthly Redemption Date as to such Monthly Redemption, and the MonthlyConversion Price as to such Monthly Redemption shall be calculated off suchMonthly Redemption Date.

 

17

----

 

b)                                     Redemption Procedure.  The payment of cash or issuance of CommonStock, as applicable, pursuant to a Monthly Redemption shall be payable on theMonthly Redemption Date.  If any portionof the payment pursuant to an Monthly Redemption shall not be paid by theCompany by the applicable due date, interest shall accrue thereon at aninterest rate equal to the lesser of 18% per annum or the maximum ratepermitted by applicable law until such amount is paid in full.  Notwithstanding anything herein contained tothe contrary, if any portion of the Monthly Redemption Amount remains unpaidafter such date, the Holder may elect, by written notice to the Company givenat any time thereafter, to invalidate such Monthly Redemption, abinitio.  Notwithstanding anything to the contrary inthis Section 6, the Company’s determination to redeem in cash or itselections under Section 6(b) shall be applied ratably among theHolders of Debentures. The Holder may elect to convert the outstandingprincipal amount of the Debenture pursuant to Section 4 prior to actualpayment in cash for any redemption under this Section 6 by the delivery ofa Notice of Conversion to the Company.

 

c)                                      ForcedConversion. Notwithstanding anything herein to the contrary, if after the six monthanniversary of the Original Issue Date, (i) each of the Closing Prices forany 20 consecutive Trading Days (such period commencing only after the sixmonth anniversary of the Original Issue Date, such period the “ThresholdPeriod”)) exceeds the then Conversion Price by **$0.30**(subject to adjustment for reverse and forward stock splits, stock dividends,stock combinations and other similar transactions of the Common Stock thatoccur after the Original Issue Date) or (ii) the Company consummates abona fide firm commitment public underwritten offering of the Common Stock by anationally recognized investment bank of its Common Stock for an offering pricethat is equal to or exceeds the then Conversion Price by **$0.30**(subject to adjustment for reverse and forward stock splits, stock dividends,stock combinations and other similar transactions of the Common Stock thatoccur after the Original Issue Date), the Company may, within 1 Trading Dayafter the end of any such Threshold Period, deliver a written notice to theHolder (a “Forced Conversion Notice” and the date such notice isdelivered to the Holder, the “Forced Conversion Notice Date”) to causethe Holder to convert all or part of the then outstanding principal amount ofDebentures plus, if so specified in the Forced Conversion Notice, accrued butunpaid liquidated damages and other amounts owing to the Holder under thisDebenture, it being agreed that the “Conversion Date” for purposes of Section 4shall be deemed to occur on the third Trading Day following the ForcedConversion Notice Date (such third Trading Day, the “Forced Conversion Date”).  The Company may not deliver a ForcedConversion Notice, and any Forced Conversion Notice delivered by the Companyshall not be effective, unless all of the Equity Conditions are met (unlesswaived in writing by the Holder) on each Trading Day occurring during theapplicable Threshold Period through and including the later of the ForcedConversion Date and the Trading Day after the date such Conversion Sharespursuant to such conversion are delivered to the Holder.  Any Forced Conversion shall be appliedratably to all Holders based on their initial purchases of Debentures pursuantto the Purchase Agreement, provided that any voluntary conversions by a Holdershall be applied against the Holder’s pro rata allocation, thereby decreasingthe aggregate amount forcibly converted hereunder if only a portion of thisDebenture is forcibly converted.  

 

18

----

 

For purposes of clarification, a ForcedConversion shall be subject to all of the provisions of Section 4,including, without limitation, the provision requiring payment of liquidateddamages and limitations on conversions.

 

Section 7.                                            NegativeCovenants. As long as any portion of this Debenture remainsoutstanding, unless the holders of at least 67% in principal amount of the thenoutstanding Debentures shall have otherwise given prior written consent, theCompany shall not, and shall not permit any of its subsidiaries (whether or nota Subsidiary on the Original Issue Date) to, directly or indirectly:

 

a)                                      other thanPermitted Indebtedness, enter into, create, incur, assume, guarantee or sufferto exist any indebtedness for borrowed money of any kind, including, but notlimited to, a guarantee, on or with respect to any of its property or assetsnow owned or hereafter acquired or any interest therein or any income orprofits therefrom;

 

b)                                     other thanPermitted Liens, enter into, create, incur, assume or suffer to exist any Liensof any kind, on or with respect to any of its property or assets now owned orhereafter acquired or any interest therein or any income or profits therefrom;

 

c)                                      amend itscharter documents, including, without limitation, its certificate ofincorporation and bylaws, in any manner that materially and adversely affectsany rights of the Holder;

 

d)                                     repay,repurchase or offer to repay, repurchase or otherwise acquire more than a deminimis number of shares of its Common Stock or Common Stock Equivalents(other than Exempt Issuances under clause (b) thereof) other than as to (i) theConversion Shares or Warrant Shares as permitted or required under theTransaction Documents and (ii) repurchases of Common Stock or Common StockEquivalents of departing officers and directors of the Company, provided thatsuch repurchases shall not exceed an aggregate of $100,000 for all officers anddirectors during the term of this Debenture;

 

e)                                      repay,repurchase or offer to repay, repurchase or otherwise acquire any Indebtedness,other than the Debentures if on a pro-rata basis, other than regularlyscheduled principal payments as such terms are in effect as of the OriginalIssue Date, provided that such payments shall not be permitted if, at suchtime, or after giving effect to such payment, any Event of Default exist oroccur;

 

f)                                        pay cashdividends or distributions on any equity securities of the Company;

 

g)                                     enter into anytransaction with any Affiliate of the Company which would be required to bedisclosed in any public filing with the Commission, unless such transaction ismade on an arm’s-length basis and expressly approved by a majority of thedisinterested directors of the Company (even if less than a quorum otherwiserequired for board approval); or

 

19

----

 

h)                                     enter into anyagreement with respect to any of the foregoing.

 

Notwithstanding anything to the contrary setforth in this Debenture, under no circumstances shall any actions taken by theCompany that are necessary to comply with the Prior Transaction Documents (asdefined in the Purchase Agreement) be deemed to breach or trigger any defaultwith respect to any provision in this Debenture.

 

Section 8.                                            Events ofDefault.

 

a)                                      “Event ofDefault” means, wherever used herein, any of the following events (whateverthe reason for such event and whether such event shall be voluntary orinvoluntary or effected by operation of law or pursuant to any judgment, decreeor order of any court, or any order, rule or regulation of anyadministrative or governmental body):

 

i.                                          any default inthe payment of (A) the principal amount of any Debenture or (B) otherfees owing on any Debenture, or liquidated damages in respect of, anyDebenture, as and when the same shall become due and payable (whether on aConversion Date or the Maturity Date or by acceleration or otherwise) whichdefault, solely in the case of defaults under clause (B) above, is notcured, within 3 Trading Days;

 

ii.                                       the Companyshall fail to observe or perform any other covenant or agreement contained in theDebentures (other than a breach by the Company of its obligations to delivershares of Common Stock to the Holder upon conversion, which breach is addressedin clause (ix) below) which failure is not cured, if possible to cure,within the earlier to occur of (A) 5 Trading Days after notice of suchfailure sent by the Holder or by any other Holder to the Company and (B) 10Trading Days after the Company has become or should have become aware of suchfailure;

 

iii.                                    a default orevent of default (subject to any grace or cure period provided in theapplicable agreement, document or instrument) shall occur under (A) any ofthe Transaction Documents or (B) any other material agreement, lease,document or instrument to which the Company or any Subsidiary is obligated (andnot covered by clause (vi) below);

 

iv.                                   anyrepresentation or warranty made in this Debenture, any other TransactionDocuments, any written statement pursuant hereto or thereto or any otherreport, financial statement or certificate made or delivered to the Holder orany other Holder shall be untrue or incorrect in any material respect as of thedate when made or deemed made;

 

20

----

 

v.                                      the Company orany Significant Subsidiary (as such term is defined in Rule 1-02(w) ofRegulation S-X)  shall be subject to aBankruptcy Event;

 

vi.                                   the Company orany Subsidiary shall default on any of its obligations under any mortgage,credit agreement or other facility, indenture agreement, factoring agreement orother instrument under which there may be issued, or by which there may besecured or evidenced, any indebtedness for borrowed money or money due underany long term leasing or factoring arrangement that (a) involves anobligation greater than $150,000, whether such indebtedness now exists or shallhereafter be created, and (b) results in such indebtedness becoming orbeing declared due and payable prior to the date on which it would otherwisebecome due and payable;

 

vii.                                the CommonStock shall not be eligible for listing or quotation for trading on a TradingMarket and shall not be eligible to resume listing or quotation for tradingthereon within five Trading Days;

 

viii.                             the Companyshall be a party to any Change of Control Transaction or Fundamental Transactionor shall agree to sell or dispose of all or in excess of 33% of its assets inone transaction or a series of related transactions (whether or not such salewould constitute a Change of Control Transaction);

 

ix.                                     the Companyshall fail for any reason to deliver certificates to a Holder prior to thefifth Trading Day after a Conversion Date pursuant to Section 4(d) orany Forced Conversion Date pursuant to Section 6 or the Company shallprovide at any time notice to the Holder, including by way of publicannouncement, of the Company’s intention to not honor requests for conversionsof any Debentures in accordance with the terms hereof;

 

x.                                        the Companydoes not meet the current public information requirements under Rule 144in respect of the shares of Common Stock issuable pursuant to the TransactionDocuments; or

 

xi.                                     any monetaryjudgment, writ or similar final process shall be entered or filed against theCompany, any subsidiary or any of their respective property or other assets formore than [$100,000], and such judgment, writ or similar final process shallremain unvacated, unbonded or unstayed for a period of 45 calendar days.

 

b)                                     Remedies UponEvent of Default. If any Event of Default occurs, the outstandingprincipal amount of this Debenture, plus accrued but unpaid liquidated damagesand other amounts owing in respect thereof through the date of acceleration,shall become, at the Holder’s election, immediately due and payable in cash atthe Mandatory Default Amount.  Commencing5 days after the occurrence of any Event of 

 

21

----

 

Default that results in the eventualacceleration of this Debenture, the interest rate on this Debenture shallaccrue at an interest rate equal to the lesser of 18% per annum or the maximumrate permitted under applicable law. Upon the payment in full of the Mandatory Default Amount, the Holdershall promptly surrender this Debenture to or as directed by the Company.  In connection with such accelerationdescribed herein, the Holder need not provide, and the Company hereby waives,any presentment, demand, protest or other notice of any kind, and the Holdermay immediately and without expiration of any grace period enforce any and allof its rights and remedies hereunder and all other remedies available to itunder applicable law.  Such accelerationmay be rescinded and annulled by Holder at any time prior to payment hereunderand the Holder shall have all rights as a holder of the Debenture until suchtime, if any, as the Holder receives full payment pursuant to this Section 8(b).  No such rescission or annulment shall affectany subsequent Event of Default or impair any right consequent thereon.

 

Section 9.                                            Miscellaneous.

 

a)                                      Notices.  Any and all notices or other communicationsor deliveries to be provided by the Holder hereunder, including, withoutlimitation, any Notice of Conversion, shall be in writing and deliveredpersonally, by facsimile, or sent by a nationally recognized overnight courierservice, addressed to the Company, at the address set forth above, or suchother facsimile number or address as the Company may specify for such purposeby notice to the Holder delivered in accordance with this Section 9(a).  Any and all notices or other communicationsor deliveries to be provided by the Company hereunder shall be in writing anddelivered personally, by facsimile, or sent by a nationally recognizedovernight courier service addressed to each Holder at the facsimile number oraddress of the Holder appearing on the books of the Company, or if no suchfacsimile number or address appears, at the principal place of business of theHolder.  Any notice or othercommunication or deliveries hereunder shall be deemed given and effective onthe earliest of (i) the date of transmission, if such notice orcommunication is delivered via facsimile at the facsimile number specified onthe signature page prior to 5:30 p.m. (New York City time), (ii) thedate immediately following the date of transmission, if such notice orcommunication is delivered via facsimile at the facsimile number specified onthe signature page between 5:30 p.m. (New York City time) and 11:59 p.m.(New York City time) on any date, (iii) the second Business Day followingthe date of mailing, if sent by nationally recognized overnight courier serviceor (iv) upon actual receipt by the party to whom such notice is requiredto be given.

 

b)                                     AbsoluteObligation. Except as expressly provided herein, no provisionof this Debenture shall alter or impair the obligation of the Company, which isabsolute and unconditional, to pay the principal of and liquidated damages, asapplicable, on this Debenture at the time, place, and rate, and in the coin orcurrency, herein prescribed.  ThisDebenture is a direct debt obligation of the Company.  This Debenture ranks paripassuwith all other Debentures now or hereafter issued under the terms set forthherein.

 

22

----

 

c)                                      Lost orMutilated Debenture.  If thisDebenture shall be mutilated, lost, stolen or destroyed, the Company shallexecute and deliver, in exchange and substitution for and upon cancellation ofa mutilated Debenture, or in lieu of or in substitution for a lost, stolen ordestroyed Debenture, a new Debenture for the principal amount of this Debentureso mutilated, lost, stolen or destroyed, but only upon receipt of evidence ofsuch loss, theft or destruction of such Debenture, and of the ownership hereof,reasonably satisfactory to the Company.

 

d)                                     Governing Law.  All questions concerning the construction,validity, enforcement and interpretation of this Debenture shall be governed byand construed and enforced in accordance with the internal laws of the State ofNew York, without regard to the principles of conflict of laws thereof.  Each party agrees that all legal proceedingsconcerning the interpretation, enforcement and defense of the transactionscontemplated by any of the Transaction Documents (whether brought against aparty hereto or its respective Affiliates, directors, officers, shareholders,employees or agents) shall be commenced in the state and federal courts sittingin the City of New York, Borough of Manhattan (the “New York Courts”).  Each party hereto hereby irrevocably submitsto the exclusive jurisdiction of the New York Courts for the adjudication ofany dispute hereunder or in connection herewith or with any transactioncontemplated hereby or discussed herein (including with respect to theenforcement of any of the Transaction Documents), and hereby irrevocably waives,and agrees not to assert in any suit, action or proceeding, any claim that itis not personally subject to the jurisdiction of such New York Courts, or suchNew York Courts are improper or inconvenient venue for such proceeding.  Each party hereby irrevocably waives personalservice of process and consents to process being served in any such suit,action or proceeding by mailing a copy thereof via registered or certified mailor overnight delivery (with evidence of delivery) to such party at the addressin effect for notices to it under this Debenture and agrees that such serviceshall constitute good and sufficient service of process and noticethereof.  Nothing contained herein shallbe deemed to limit in any way any right to serve process in any other mannerpermitted by applicable law. Each party hereto hereby irrevocably waives, tothe fullest extent permitted by applicable law, any and all right to trial byjury in any legal proceeding arising out of or relating to this Debenture orthe transactions contemplated hereby. If either party shall commence an actionor proceeding to enforce any provisions of this Debenture, then the prevailingparty in such action or proceeding shall be reimbursed by the other party forits attorneys fees and other costs and expenses incurred in the investigation,preparation and prosecution of such action or proceeding.

 

e)                                      Amendments andWaivers.  This Debenture, or anyprovisions hereof, may be modified or amended or the provisions hereof waivedwith the prior written consent of the Company and the Holder.  Any waiver by the Company or the Holder of abreach of any provision of this Debenture shall not operate as or be construedto be a waiver of any other breach of such provision or of any breach of anyother provision of this Debenture.  Thefailure of the Company or the Holder to insist upon strict adherence to anyterm of this Debenture on one or more occasions shall not be considered awaiver 

 

23

----

 

or deprive that party of the right thereafterto insist upon strict adherence to that term or any other term of thisDebenture.

 

f)                                        Severability.  If any provision of this Debenture isinvalid, illegal or unenforceable, the balance of this Debenture shall remainin effect, and if any provision is inapplicable to any Person or circumstance,it shall nevertheless remain applicable to all other Persons andcircumstances.  If it shall be found thatany interest or other amount deemed interest due hereunder violates theapplicable law governing usury, the applicable rate of interest due hereundershall automatically be lowered to equal the maximum rate of interest permittedunder applicable law. The Company covenants (to the extent that it may lawfullydo so) that it shall not at any time insist upon, plead, or in any mannerwhatsoever claim or take the benefit or advantage of, any stay, extension orusury law or other law which would prohibit or forgive the Company from payingall or any portion of the principal of this Debenture as contemplated herein,wherever enacted, now or at any time hereafter in force, or which may affectthe covenants or the performance of this indenture, and the Company (to theextent it may lawfully do so) hereby expressly waives all benefits or advantageof any such law, and covenants that it will not, by resort to any such law,hinder, delay or impede the execution of any power herein granted to theHolder, but will suffer and permit the execution of every such as though nosuch law has been enacted.

 

g)                                     Next BusinessDay.  Whenever any payment or otherobligation hereunder shall be due on a day other than a Business Day, suchpayment shall be made on the next succeeding Business Day.

 

h)                                     Headings.  The headings contained herein are forconvenience only, do not constitute a part of this Debenture and shall not bedeemed to limit or affect any of the provisions hereof.

 

i)                                         Assumption.  Anysuccessor to the Company or any surviving entity in a Fundamental Transactionshall (i) assume, prior to such Fundamental Transaction, all of theobligations of the Company under this Debenture and the other TransactionDocuments pursuant to written agreements in form and substance satisfactory tothe Holder (such approval not to be unreasonably withheld or delayed) and (ii) issueto the Holder a new debenture of such successor entity evidenced by a writteninstrument substantially similar in form and substance to this Debenture,including, without limitation, having a principal amount equal to the principalamount of this Debenture and having similar ranking to this Debenture, whichshall be satisfactory to the Holder (any such approval not to be unreasonablywithheld or delayed).  The provisions of this Section 9(i) shallapply similarly and equally to successive Fundamental Transactions and shall beapplied without regard to any limitations of this Debenture.

 

j)                                         SecuredObligation.  Theobligations of the Company under this Debenture are secured by all assets ofthe Company and each Subsidiary pursuant to the 

 

24

----

 

Security Agreement, dated as of March       ,2008 between the Company, the Subsidiaries of the Company and the SecuredParties (as defined therein).

 

*********************

 

## *(Signature Pages Follow)*

 

25

----

 

IN WITNESS WHEREOF, the Company has causedthis Debenture to be duly executed by a duly authorized officer as of the datefirst above indicated.

 

 
| ** ** | **ADVANCED CELL TECHNOLOGY, INC.**                                                                                                                                                                                                                                         |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                       |   |
|       |                                                                                                                                                                                                                                                                       |   |
|       | By:                                                                                                                                                                                                                                                                        |   |
|       |                                                                                                                                                                                                                                                                       | Name: |
|       |                                                                                                                                                                                                                                                                       | Title: |
|       | Facsimile No. for  delivery of Notices:                                      |

 

26

----

 

**ANNEX A**

** **

**NOTICE OFCONVERSION**

** **

The undersigned hereby elects to convertprincipal under the Original Issue Discount Senior Secured ConvertibleDebenture due March     , 2009 of Advanced CellTechnology, Inc., a Delaware corporation (the “Company”), into shares of common stock (the “CommonStock”), of the Company according to the conditions hereof, as of the datewritten below.  If shares of Common Stockare to be issued in the name of a person other than the undersigned, theundersigned will pay all transfer taxes payable with respect thereto and isdelivering herewith such certificates and opinions as reasonably requested bythe Company in accordance therewith.  Nofee will be charged to the holder for any conversion, except for such transfertaxes, if any.

 

By the delivery of this Notice of Conversionthe undersigned represents and warrants to the Company that its ownership ofthe Common Stock does not exceed the amounts specified under Section 4 ofthis Debenture, as determined in accordance with Section 13(d) of theExchange Act.

 

The undersigned agrees to comply with theprospectus delivery requirements under the applicable securities laws inconnection with any transfer of the aforesaid shares of Common Stock.

 

Conversion calculations:

 
|   | Date to Effect Conversion:                               |
|--------|----------------------------------------------------------|
|   |                                                     |
|   | Principal Amount of Debenture to be Converted: |
|   |                                                     |
|   | Number of shares of Common Stock to be issued: |
|   |                                                     |
|   |                                                     |
|   | Signature:                                               |
|   |                                                     |
|   | Name:                                                    |
|   |                                                     |
|   | Address for Delivery of Common Stock Certificates:       |
|   |                                                     |
|   | Or                                                       |
|   |                                                     |
|   | DWAC Instructions:                                       |
|   |                                                     |
|   | Broker No:                                               |                                  |
|   | Account No:                                              |                                 |
|        |                                                          |  |  |

 

27

----

 

**Schedule 1**

 

**CONVERSIONSCHEDULE**

 

The Original Issue DiscountSenior Secured Convertible Debentures due on March       ,2009 in the aggregate principal amount of$                        are issued by Advanced Cell Technology, Inc.,a Delaware corporation.  This ConversionSchedule reflects conversions made under Section 4 of the above referencedDebenture.

 

Dated:

 
| **Date of Conversion  (or for first entry,  Original Issue Date)** | ** ** | **Amount of  Conversion** | ** ** | **Aggregate  Principal  Amount  Remaining  Subsequent to  Conversion  (or original  Principal  Amount)** | ** ** | **Company Attest** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
|                                                                                                  |       |                           |       |                                                                                                               |       |                    |       |
|                                                                                                  |       |                           |       |                                                                                                               |       |                    |       |
|                                                                                                  |       |                           |       |                                                                                                               |       |                    |       |

 

28

----