**Exhibit 10.1**

 

**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: May 1,  2010 | Principal:  U.S.                 |
|----------------------------------|------------------------------------------------------------------------------------------------------------------|

 

**FOR VALUERECEIVED,** LIQUIDMETAL TECHNOLOGIES, INC., a Delawarecorporation (the **“Company”**),hereby promises to pay to the order of                        (**“Holder”**) the amount set outabove as the Principal (as reduced pursuant to the terms hereof pursuant toredemption, conversion or otherwise, the **“Principal”**)when due, whether upon the Maturity Date (as defined below), acceleration,redemption or otherwise (in each case in accordance with the terms hereof) andto pay interest (**“Interest”**) onany outstanding Principal at the rate of interest as determined pursuant to Section 2,from the date set out above as the Issuance Date (the **“Issuance Date”**) until the same becomes dueand payable, whether upon an Interest Date (as defined below), the MaturityDate, acceleration, conversion, redemption or otherwise (in each case inaccordance with the terms hereof).  This8% Senior Secured Convertible Note (including all 8% Senior Secured ConvertibleNotes issued in exchange, transfer or replacement hereof, this **“Note”**) is one of an issue of 8% SeniorSecured Convertible Notes issued on May 1, 2009 (the “**OriginalIssuance Date**”) pursuant to the Securities Purchase and ExchangeAgreement (the “**Original Notes**”) or issued after May 1,2009 in satisfaction of interest and/or other amounts owing by the Company tothe holders of the Original Notes (the “**Interest Notes**”)(the Original Notes and Interest Notes are collectively referred to as the “**Notes**” herein, and any Notes other than this Note arecollectively referred to as the “**Other****Notes**”).  This Note isdeemed to be issued pursuant to Section 2 of the Holder’s Original Noteand is subject to the terms and provisions of the Securities PurchaseAgreement.  Certain capitalized terms aredefined in Section 29.

 

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(1)           MATURITY.  OnJanuary 3, 2011 (the **“Maturity Date”**),the Company shall pay to the Holder an amount in cash representing alloutstanding Principal and accrued and unpaid Interest, and following receipt ofsuch payment, the Holder shall mark this Note as “Cancelled” and shall surrendersuch cancelled Note to the Company by courier, registered mail, or othertraceable means.  The Company may, uponthirty (30) calendar days prior written notice to Holder and at the soleelection of the Company, prepay this Note in whole or in part for a cashredemption price equal to: (i) if the cash redemption price is being paid,in whole or in part, from the proceeds of sales of the Company’s assets, whichshall include fees received from licensing the Company’s intellectual propertyassets, One Hundred Percent (100%) of the portion of the principal amount beingredeemed plus all accrued and unpaid interest on the portion of the principalamount being redeemed or (ii) if the cash redemption price is being paidsolely from the Company’s income from continuing operations, One Hundred ThreePercent (103%) of the portion of the principal amount being redeemed plus allaccrued and unpaid interest on the portion of the principal amount beingredeemed; provided that (as to both clauses (i) and (ii) above) followingsuch notice the Holder may convert all or any part of the portion of the Noteto be redeemed so long as the Company receives a duly executed ConversionNotice pursuant to Section 3 of this Note prior to the date on whichprepayment is actually made.

 

(2)           INTEREST; INTEREST RATE.  Interest on this Note shall commence accruingon the Issuance Date and shall be computed on the basis of a 365-day year andactual days elapsed and shall be payable in arrears on the first Business Dayof November and May during the period beginning on the Issuance Dateand ending on, and including, the Maturity 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 OF NOTES.  This Note shall be convertible into shares ofthe 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)           Conversion Right. Subject to the provisions of Section 3(d), at any time or times onor after the Issuance Date, the Holder shall be entitled to convert any portionof the outstanding and unpaid Conversion Amount (as defined below) into fullypaid and nonassessable shares of Common Stock in accordance with Section 3(c),at the Conversion Rate (as defined below). The Company shall not issue any fraction of a share of Common Stock uponany conversion.  If the issuance wouldresult in the issuance of a fraction of a share of Common Stock, the Companyshall round such fraction of a share of Common Stock up to the nearest wholeshare.  The Company shall pay any and alltaxes that may be payable with respect to the issuance and delivery of CommonStock upon conversion of any Conversion Amount.

 

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

 

(i)            **“Conversion Amount”**means the sum of (A) the portion of the Principal to be converted,redeemed or otherwise with respect to which this determination is being made,plus (B) accrued and unpaid Interest with respect to such Principal, plus (C)any fees and penalties (if any) that become due under this Note and that arenot paid by the Company within three (3) days of written demand therefor.

 

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

 

(c)           Mechanics of Conversion.

 

(i)            Optional Conversion.  To convert any Conversion Amount into sharesof Common Stock on any date (a **“ConversionDate”**), the Holder shall (A) transmit by facsimile (orotherwise deliver), for receipt on or prior to 5:00 p.m., New York Time,on such date, a copy of an executed notice of conversion in the form attachedhereto as Exhibit I (the **“ConversionNotice”**) to the Company and (B) if required by Section 3(c)(iii),surrender this Note to a common carrier for delivery to the Company as soon aspracticable on or following such date (or an indemnification undertaking withrespect to this Note in the case of its loss, theft or destruction).  On or before the first Business Day followingthe date of receipt of a Conversion Notice, the Company shall transmit byfacsimile a confirmation of receipt of such Conversion Notice to the Holder andthe Company’s transfer agent (the “**TransferAgent**”).  On or before thesecond Business Day following 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, a certificate,registered in the name of the Holder or its designee, for the number of shares

 

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of Common Stock to which theHolder shall be entitled.  If this Noteis 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’s Failure to Timely Convert.  If the Company shall fail to issue acertificate to the Holder or credit the Holder’s balance account with DTC forthe number of shares of Common Stock to which the Holder is entitled uponconversion of any Conversion Amount on or prior to the date which is fiveBusiness Days after the Conversion Date (a **“ConversionFailure”**), then (A) the Company shall pay liquidated damages tothe Holder for each day of such Conversion Failure in an amount equal to 1.0%****of the product of (I) the sum of thenumber of shares of Common Stock not issued to the Holder on or prior to theShare Delivery Date and to which the Holder is entitled, and (II) theClosing Sale Price of the Common Stock on the Share Delivery Date and (B) theHolder, upon written notice to the Company, may void its Conversion Notice withrespect to, and retain or have returned, as the case may be, any portion ofthis Note that has not been converted pursuant to such Conversion Notice;provided that the voiding of a Conversion Notice shall not affect the Company’sobligations to make any payments which have accrued prior to the date of suchnotice pursuant to this Section 3(c)(ii) or otherwise.  In addition to the foregoing, if within three(3) Trading Days after the Company’s receipt of the facsimile copy of 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.

 

(iii)          Book-Entry. Notwithstanding anything to the contraryset forth herein, upon

 

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conversion of any portion ofthis Note in accordance with the terms hereof, the Holder shall not be requiredto physically surrender this Note to the Company unless (A) the fullConversion Amount represented by this Note is being converted or (B) the Holderhas 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 Rata Conversion; Disputes.  In the event that the Company receives aConversion Notice from more than one Holder of Notes for the same ConversionDate and the Company can convert some, but not all, of such portions of theNotes submitted for conversion, the Company, subject to Section 3(d),shall convert from each Holder of Notes electing to have Notes converted onsuch date a pro rata amount of such Holder’s portion of its Notes submitted forconversion based on the principal amount of Notes submitted for conversion onsuch date by such Holder relative to the aggregate principal amount of allNotes submitted for conversion on such date. In the event of a dispute as to the number of shares of Common Stockissuable to the Holder in connection with a conversion of this Note, theCompany shall issue to the Holder the number of shares of Common Stock not indispute and resolve such dispute in accordance with Section 24.

 

(d)           Limitations on Conversions.

 

(i)            Beneficial Ownership.  Unless waived by the Holder upon no less thansixty one (61) days prior written notice to the Company, the Company shall noteffect any conversion 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 4.99% of thenumber of shares of Common Stock outstanding immediately after giving effect tosuch conversion.  Even if the Holderwaives the limitation set forth in the preceding sentence, the Company shall inno event effect any conversion of this Note, and the Holder of this Note shallnot have the right to convert any portion of this Note pursuant to Section 3(a),to the extent that after giving effect to such conversion, the Holder (togetherwith the 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) subject to a limitation onconversion or exercise analogous to the limitation contained

 

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herein beneficially owned bythe Holder or any of its affiliates. Except as set forth in the preceding sentence, for purposes of this Section 3(d)(i),beneficial ownership shall be calculated in accordance with Section 13(d) ofthe Securities Exchange Act of 1934, as amended.  For purposes of this Section 3(d)(i), indetermining the number of outstanding shares of Common Stock, the Holder mayrely on the number of outstanding shares of Common Stock as reflected in (x) theCompany’s most recent Form 10-Q or Form 10-K, (y) a more recentpublic announcement by the Company or (z) any other notice by the Companyor the Transfer Agent setting forth the number of shares of Common Stockoutstanding.  For any reason at any time,upon the written or oral request of the Holder, the Company shall within twoBusiness Days confirm orally and in writing to the Holder the number of sharesof Common Stock then outstanding.  In anycase, the number of outstanding shares of Common Stock shall be determinedafter giving effect to the conversion or exercise of securities of the Company,including this Note, by the Holder or its affiliates since the date as of whichsuch number 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 of Default. Each of the following events shall constitute an **“Event of Default”**:

 

(i)                                     the Company’sfailure to pay to the Holder any amount of Principal or Interest when and as dueunder 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 LiquidmetalKorea Co. Ltd., the Company’s subsidiary organized under the laws of theRepublic of Korea, in existence as of the Original Issuance Date under its loanfrom Kookmin 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

 

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Indebtedness;

 

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

 

(v)           the Company or any of its Subsidiaries, pursuant to orwithin the meaning of Title 11, U.S. Code, or any similar Federal or state lawfor the relief of debtors (collectively, **“BankruptcyLaw”**), (A) commences a voluntary case, (B) consents to theentry of an order for relief against it in an involuntary case, (C) consentsto the appointment of a receiver, trustee, assignee, liquidator or similarofficial (a “**Custodian**”), or (D) makes ageneral assignment for the benefit of its creditors;

 

(vi)          a court of competent jurisdiction enters an order or decreeunder any Bankruptcy Law that (A) is for relief against the Company or anyof its Subsidiaries in an involuntary case that remains undismissed for aperiod of 90 days, (B) appoints a Custodian of the Company or any of itsSubsidiaries that remains undischarged or unstayed for a period of 90 days, or (C)orders the liquidation of the Company or any of its Subsidiaries;

 

(vii)         a final judgment or judgments for the payment of moneyaggregating in excess of $250,000 are rendered against the Company or any ofits Subsidiaries and which judgments are not, within 60 days after the entrythereof, bonded, discharged or stayed pending appeal, or are not dischargedwithin 60 days after the expiration of such stay; provided, however, that anyjudgment which is covered by insurance or an indemnity from a credit worthyparty shall not be included in calculating the $250,000 amount set forth above;

 

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

 

(ix)           **INTENTIONALLY OMITTED**;

 

(x)            any security interest created by the Security Agreementshall at any time not constitute a valid and perfected first priority securityinterest on the collateral intended to be covered thereby (to the extentperfection by filing, registration, recordation or possession is requiredherein or therein) in favor of the Holder, or any of the security interestsgranted pursuant to the Security Agreement shall be determined to be void,voidable, invalid or unperfected, are subordinated or are ineffective toprovide the Holder with a perfected, first priority security interest in thecollateral covered by the Security Agreement (except to the extent expresslysubordinated under the terms of the Security Agreement),  or, except for expiration or termination inaccordance with its terms, the Security Agreement shall for whatever reason beterminated or cease to be in full force and effect, or the enforceabilitythereof shall be contested 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)           Redemption Right. Promptly after the occurrence of an Event of Default with respect tothis Note or any Other Note, the Company shall deliver written notice thereofvia facsimile and overnight courier (an **“Eventof Default Notice”**) to the Holder. At any time after the earlier of the Holder’s receipt of an Event ofDefault Notice and the Holder becoming aware of an Event of Default, the Holdermay require the Company to redeem all or any portion of this Note by deliveringwritten notice thereof (the **“Event of DefaultRedemption Notice”**) to the Company, which Event of DefaultRedemption Notice shall indicate the portion of this Note the Holder iselecting to redeem.  Each portion of thisNote subject to redemption by the Company pursuant to this Section 4(b) shallbe redeemed 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 of Control. Each of the following events shall 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 of Control, the Company willsecure from any Person purchasing the Company’s assets or Common Stock or anysuccessor resulting from such Change of Control (in each case, an **“Acquiring Entity”**) a written agreement (inform and substance satisfactory to the Holders of Notes representing at least amajority of the aggregate principal amount of the Notes then outstanding) todeliver to each Holder of Notes in exchange for such Notes, a security of theAcquiring Entity evidenced by a written instrument substantially similar inform and substance to the Notes, including, without limitation, having aprincipal amount and interest rate equal to the principal amounts and theinterest rates of the Notes held by such Holder, and satisfactory to theHolders of Notes representing at least a majority of the principal amount ofthe Notes then outstanding.  In the eventthat an Acquiring Entity is directly or indirectly controlled by a company orentity whose common stock or similar equity interest is listed, designated orquoted on a securities exchange or trading market, the Holders of Notesrepresenting at least a majority of the aggregate principal amount of the Notesthen outstanding may elect to treat such Person as the Acquiring Entity forpurposes of this Section 5(b).

 

(c)           Redemption Right. At any time during the period beginning after the Holder’s receipt of aChange of Control Notice and ending on the date of the consummation of suchChange of Control (or, in the event a Change of Control Notice is not deliveredat least 10 days prior to a Change of Control, at any time on or after the datewhich is 10 days prior to a Change of Control and ending ten days after theconsummation of such Change of Control), the Holder may require the Company toredeem all or any portion of this Note by delivering written notice thereof (**“Change of Control Redemption Notice”**) tothe Company, which Change of Control Redemption Notice shall indicate theConversion Amount the Holder is electing to redeem; provided, however, that theCompany shall not be under any obligation to redeem all or any portion of thisNote or to deliver the applicable Change of Control Redemption Price unless anduntil the applicable Change of Control is consummated.  The portion of this Note subject toredemption pursuant to this Section 5 shall be redeemed by the Company incash at a price equal to the sum of (i) the Conversion Amount of theportion to be redeemed, plus (ii) the Black Scholes Value, as of the dateimmediately preceding the date the Change of Control is consummated, of theHolder’s right to convert the Conversion Amount hereunder upon the terms setforth herein (the “**Change of ControlRedemption Price**”).  For thepurpose of this Note, “**Black Scholes Value**”means the value, as reasonably calculated by the Company, of this Note, whichshall be determined by use of the Black Scholes Option Pricing Model reflecting(i) a risk-free interest rate corresponding to the U.S. Treasury rate fora period equal to the remaining term of this Note as of such date of requestand (ii) an expected volatility equal to the greater of 60% and the 100day volatility obtained from the HVT function on Bloomberg; provided that the

 

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Black Scholes Value of thisNote shall not for this purpose exceed an amount equal to $2.50 multiplied bythe number of shares of Common Stock for which this Note may be converted atthe time the Change of Control is consummated (with such $2.50 cap beingsubject to adjustment for stock dividends, stock splits, reverse stock splits,and the like).

 

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

 

(a)           Purchase Rights. If at any time the Company grants, issues or sells any Options,Convertible Securities or rights to purchase stock, warrants, securities orother property pro rata to the record holders of any class of Common Stock (the**“Purchase Rights”**), then theHolder will be entitled to acquire, upon the terms applicable to such PurchaseRights, the aggregate Purchase Rights which the Holder could have acquired ifthe Holder had held the number of shares of Common Stock acquirable uponcomplete conversion of this Note (without taking into account any limitationsor restrictions on the convertibility of this Note) immediately before the dateon which a record is taken for the grant, issuance or sale of such PurchaseRights, or, if no such record is taken, the date as of which the record holdersof Common Stock are to be determined for the grant, issue or sale of suchPurchase Rights.

 

(b)           Other Corporate Events. Prior to the consummationof any recapitalization, reorganization, consolidation, merger, spin-off orother business combination (other than a Change of Control) pursuant to whichholders of Common Stock are entitled to receive securities or other assets withrespect to or in exchange for Common Stock (a **“CorporateEvent”**), the Company shall make appropriate provision to insure thatthe Holder will thereafter have the right to receive upon a conversion of thisNote, (i) in addition to the shares of Common Stock receivable upon suchconversion, such securities or other assets to which the Holder would have beenentitled with respect to such shares of Common Stock had such shares of CommonStock been held by 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 theaggregate principal amount of the Notes then outstanding.

 

(7)                                  RIGHTS UPONISSUANCE OF OTHER SECURITIES.

 

(a)           Adjustment of Conversion Price upon Issuance of CommonStock.  If and whenever on or afterthe Issuance Date, 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 Company, but excluding shares of Common Stock deemed to have been issuedor sold by the

 

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Company in connection withany Excluded Security) for a consideration per share (the “**NewSecurities Issuance Price**”) less than the Conversion Price in effectimmediately prior to such issue or sale (the foregoing a **“Dilutive Issuance”**), then immediately aftersuch Dilutive Issuance, the Conversion Price then in effect shall be reducedeffective concurrently with such Dilutive Issuance to an amount equal to theNew Securities Issuance Price.  Forpurposes of determining the adjusted Conversion Price under this Section 7(a),the following shall be applicable:

 

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

 

(ii)           Calculation of Consideration Received.  In case any Option is issued in connectionwith the issue or sale of other securities of the Company, together comprisingone integrated transaction in which no specific consideration is allocated tosuch Options by the parties thereto, the Options will be deemed to have beenissued for a consideration of $.01.  Ifany Common Stock, Options or Convertible Securities are issued or sold ordeemed to have been issued or sold for cash, the consideration receivedtherefor will be deemed to be the net amount received by the Companytherefor.  If any Common Stock, Optionsor Convertible Securities are issued or sold for a consideration other thancash, the amount of the consideration other than cash received by the Companywill be the fair value of such consideration, except where such considerationconsists of securities, in which case the amount of consideration received bythe Company will be the Closing Sale Price of such securities on the date ofreceipt.  If any Common Stock, Options orConvertible Securities are issued to the owners of the non-surviving entity inconnection with any merger in which the Company is the surviving entity, theamount of consideration therefor will be deemed to be the fair value of suchportion of the net assets and business of the non-surviving entity as isattributable to such Common Stock, Options or Convertible Securities, as thecase may be.  The fair value of any considerationother than cash or securities will be determined jointly by the Company and theHolders of Notes representing at least a majority of the principal amounts ofthe Notes then outstanding.  If suchparties are unable to reach agreement within ten days after the occurrence ofan event requiring valuation (the **“ValuationEvent”**), the fair value of such consideration will be determinedwithin five Business Days after the tenth day following the Valuation Event byan independent, reputable appraiser jointly selected by the Company and the Holdersof Notes representing at least a majority of the principal amounts of the Notesthen outstanding.  The determination ofsuch appraiser shall be deemed binding upon all parties absent manifest errorand the fees and expenses of such

 

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appraiser shall be borneequally by the Company, on the hand, and the Holders of the Notes, on the otherhand.

 

(iii)          Record Date. If the Company takes a record of the holders of Common Stock for thepurpose of entitling them (A) to receive a dividend or other distributionpayable in Common Stock, Options or in Convertible Securities or (B) tosubscribe for or purchase Common Stock, Options or Convertible Securities, thensuch record date will be deemed to be the date of the issue or sale of theshares of Common Stock deemed to have been issued or sold upon the declarationof such dividend or the making of such other distribution or the date of thegranting of such right of subscription or purchase, as the case may be.

 

(b)           Adjustment of Conversion Price upon Subdivision orCombination of Common Stock.  If theCompany at any time subdivides (by any stock split, stock dividend,recapitalization or otherwise) one or more classes of its outstanding shares ofCommon Stock into a greater number of shares, the Conversion Price in effectimmediately prior to such subdivision will be proportionately reduced.  If the Company at any time combines (bycombination, reverse stock split or otherwise) one or more classes of itsoutstanding shares of Common Stock into a smaller number of shares, theConversion Price in effect immediately prior to such combination will beproportionately increased.

 

(c)           Other Events. If any event occurs of the type contemplated by the provisions of this Section 7but not expressly provided for by such provisions (including, withoutlimitation, the granting of stock appreciation rights, phantom stock rights orother rights with equity features), then the Company’s Board of Directors willmake an appropriate adjustment in the Conversion Price so as to protect therights of the Holder under this Note; provided that no such adjustment willincrease the Conversion Price as otherwise determined 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 inaccordance with Section 3(c) hereof at the Conversion Rate as of theMandatory Conversion Date (as defined below) (a “**Mandatory Conversion**”). The Company may exercise its right to require conversion under this Section 9(a) bydelivering within not more than five Trading Days

 

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following the end of suchMandatory Conversion Measuring Period a written notice thereof by facsimile andovernight courier to all, but not less than all, of the Holders of Notes andthe Transfer Agent (the **“Mandatory ConversionNotice”** and the date all of the Holders received such notice isreferred to as the “**Mandatory Conversion NoticeDate**”).  The MandatoryConversion Notice shall be irrevocable.

 

(b)           Pro Rata Conversion Requirement.  If the Company elects to cause a conversionof all or any portion of the Conversion Amount of this Note pursuant to Section 9(a),then it must simultaneously take the same action with respect to the OtherNotes (except that the Company is not required to take the same action withrespect to the Other Notes to the extent limited by Section 3(d) inthis Note or similar provisions under the Other Notes).  If the Company elects to cause the conversionof this Note pursuant to Section 9(a) (or similar provisions underthe Other Notes) with respect to less than all of the Conversion Amounts of theNotes then outstanding, then the Company shall require conversion of aConversion Amount from each of the Holders of the Notes equal to the product of(I) the aggregate Conversion Amount of Notes which the Company has electedto cause to be converted pursuant to Section 9(a), multiplied by (II) thefraction, the numerator of which is the sum of the aggregate principal amountof the Original Notes purchased by such Holder pursuant to the SecuritiesPurchase and Exchange Agreement and the denominator of which is the sum of theaggregate principal amount of the Original Notes purchased by all Holderspursuant to the Securities Purchase and Exchange Agreement (except to theextent limited by Section 3(d) in this Note or similar provisionsunder the Other Notes) (such fraction with respect to each Holder is referredto as its “**Allocation Percentage**,”and such amount with respect to each Holder is referred to as its “**Pro Rata Conversion Amount**”).  In the event that the initial Holder of 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 MandatoryConversion in accordance with Section 9(a), which Trading Day shall be atleast 10 Business Days but not more than 60 Business Days following theMandatory Conversion 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 to Mandatory Conversion.  For purposes of this Section 9, “**Conditions to Mandatory Conversion**” means****the following conditions: (i) duringthe

 

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period beginning on the datethat is six months prior to the Mandatory Conversion Date and ending on andincluding the Mandatory Conversion Date, the Company shall have deliveredshares of Common Stock upon any conversion of Conversion Amounts as set forthin Section 3(c)(i); (ii) on each day during the period beginning onthe first Trading Day of the Mandatory Conversion Measuring Period and endingon and including the Mandatory Conversion Date, the Common Stock shall betraded, listed, or quoted (as applicable) on the Principal Market, the NASDAQGlobal Market or Global Select Market, the NASDAQ Capital Market, the New YorkStock Exchange, or the American Stock Exchange; (iii) on the MandatoryConversion Date either (x) the Registration Statement or RegistrationStatements required pursuant to the Registration Rights Agreement shall beeffective and available for the sale for all of the Registrable Securities inaccordance with the terms of the Registration Rights Agreement or (y) allshares of Common Stock issuable upon conversion of the Notes shall be eligiblefor sale without restriction and without the need for registration under anyapplicable federal or state securities laws; (iv) on the MandatoryConversion Date, an Authorized Share Failure shall not be in effect; and (v) theaverage number of shares of Common Stock traded on the Principal Market for the20 Trading Days prior to the Mandatory Conversion Date shall equal or exceed200,000 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 (as defined in the SecuritiesPurchase and Exchange Agreement) with the Delaware Secretary of State, theCompany shall initially reserve out of its authorized and unissued Common Stocka number of shares of Common Stock for each of the Notes equal to 125% of theConversion Rate with respect to the Conversion Amount of each such Note as ofthe Issuance Date.  Thereafter, theCompany, so long as any of the Notes are outstanding, shall use commerciallyreasonable efforts to reserve and keep available out of its authorized andunissued Common Stock, solely for the purpose of effecting the conversion ofthe Notes, 125% of the number of shares of Common Stock as shall from time totime be necessary to effect the conversion of all of the Notes then outstanding(without regard to any limitations on conversions) (the **“Required Reserve Amount”**).  The number of shares of Common Stock reservedfor conversions of the Notes shall be allocated pro rata among the Holders ofthe Notes based on the principal amount of the Notes held by each Holder at thetime of Issuance Date or increase in the number of reserved shares, as the casemay be (the **“Authorized Share Allocation”**).  In the event that a Holder shall sell orotherwise transfer any of such Holder’s Notes, each transferee shall beallocated a pro rata 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

 

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Holders of Notes, pro ratabased on the principal amount of the Notes then held by such Holders.

 

(b)           Insufficient Authorized Shares.  If at any time after the filing of theCharter Amendment with the Delaware Secretary of State and while any of theNotes remain outstanding the Company does not have a sufficient number ofauthorized and unreserved shares of Common Stock to satisfy its obligation toreserve for issuance upon conversion of the Notes at least a number of sharesof Common Stock equal to the Required Reserve Amount (an **“Authorized Share Failure”**), then theCompany shall as soon as practicable use commercially reasonable efforts toincrease the Company’s authorized shares of Common Stock to an amountsufficient to allow the Company to reserve the Required Reserve Amount for theNotes then outstanding.

 

(12)                            HOLDER’SREDEMPTIONS.

 

(a)           Mechanics. In the event that the Holder has sent an Event of Default RedemptionNotice or a Change of Control Redemption Notice to the Company pursuant to Section 4(b) orSection 5(c), respectively (each, a **“RedemptionNotice”**), the Holder shall promptly submit this Note to theCompany.  If the Holder has submitted anEvent of Default Redemption Notice in accordance with Section 4(b), theCompany shall deliver the applicable Event of Default Redemption Price to theHolder within five Business Days after the Company’s receipt of the Holder’sEvent of Default Redemption Notice.  Ifthe Holder has submitted a Change of Control Redemption Notice in accordancewith Section 5(c), the Company shall deliver the applicable Change ofControl Redemption Price to the Holder concurrently with the consummation ofsuch Change of Control if such notice is received prior to the consummation ofsuch Change of Control and within five Business Days after the Company’sreceipt of such notice if such notice is received after the consummation ofsuch Change of Control.  In the event ofa redemption of less than all of the Conversion Amount of this Note, theCompany shall promptly cause to be issued and delivered to the Holder, at theHolder’s request, a new Note (in accordance with Section 19(d))representing the outstanding Principal which has not been redeemed.  In the event that the Company does not paythe Event of Default Redemption Price or the Change of Control Redemption Price(each, the **“Redemption Price”**), asapplicable, to the Holder (or deliver any Common Stock to be issued pursuant toa Redemption Notice) within the time period required, at any time thereafterand until the Company pays such unpaid Redemption Price (and issues any CommonStock required pursuant to a Redemption Notice) in full, the Holder shall havethe option, in lieu of redemption, to require the Company to promptly return tothe Holder all or any portion of this Note representing the Conversion Amountthat was submitted for redemption and for which the applicable Redemption Price(or any Common Stock required to be issued pursuant to a Redemption Notice) hasnot been paid.  Upon the Company’s receiptof such notice, (x) the Redemption Notice shall be null and void withrespect to such Conversion Amount, (y) the Company shall immediatelyreturn this Note, or issue a new Note (in accordance with Section 19(d))to the Holder representing such Conversion Amount and (z) the ConversionPrice of this Note or such new Notes shall be adjusted to the lesser of (A) theConversion Price as in effect on the date on which the Redemption Notice isvoided and (B) the Closing Bid Price on the date on which the RedemptionNotice is voided.

 

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(b)           Redemption by Other Holders.  Upon the Company’s receipt of notice from anyof the Holders of the Other Notes for redemption or repayment as a result of anevent or occurrence substantially similar to the events or occurrencesdescribed in Section 4(b) or Section 5(c) (each, an **“Other Redemption Notice”**), the Companyshall 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 Notessubmitted for redemption pursuant to such Redemption Notice and such OtherRedemption Notices received by the Company during such seven Business Dayperiod.

 

(13)                            SUBORDINATIONTO SENIOR INDEBTEDNESS.

 

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

 

(b)           No Payment if Default in Senior Indebtedness.

 

(i)            no cash payment on account of Principal or RedemptionPrice of, or Interest on, this Note or any other payment payable with respectto this Note shall be made, and no portion of this Note shall be redeemed orpurchased directly or indirectly by the Company, if at the time of such paymentor purchase or immediately after giving effect thereto, (A) a default inthe payment of principal, premium, if any, interest or other obligations inrespect of any Senior Indebtedness occurs and is continuing (or, in the case ofSenior Indebtedness for which there is a period of grace, in the event of sucha default that continues beyond the period of grace, if any, specified in theinstrument evidencing such Senior Indebtedness) (a “**PaymentDefault**”), unless and until such Payment Default shall have beencured or waived or shall have ceased to exist or (B) the Company shallhave received notice (a “**Payment Blockage Notice**”)from the holder or holders of Senior Indebtedness that there exists under suchSenior Indebtedness a default, which shall not have been cured or waived,permitting the holder or holders thereof to declare

 

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such Senior Indebtedness dueand payable, but in the case of this clause (B), only for the period (the “**Payment Blockage Period**”) commencing on the date of receiptof the Payment Blockage Notice and ending on the date such default shall havebeen cured or waived.  The Company shallresume payments on and distributions in respect of this Note, including anypast scheduled payments of the principal of (and premium, if any) and intereston this Note to which the Holder would have been entitled but for theprovisions of this Section 13(b)(ii), within five (5) Business Daysof the date upon which such Payment Default is cured or waived or ceases toexist or the date on which the Payment Blockage Period ends (and if payment ismade within such time period, any Event of Default with respect to suchnonpayment shall be cured).

 

(c)           Payment upon Dissolution, Etc.  In the event of any bankruptcy, insolvency,reorganization, receivership, composition, assignment for benefit of creditorsor other similar proceeding initiated by or against the Company or anydissolution or winding up or total or partial liquidation or reorganization ofthe Company (being hereinafter referred to as a “**Proceeding**”), the Holder agrees that such Holder shall, uponrequest of a holder of Senior Indebtedness, and at such holder of SeniorIndebtedness’ own expense, take all reasonable actions (including but notlimited to the execution and filing of documents and the giving of testimony inany Proceeding, whether or not such testimony could have been compelled byprocess) necessary to prove the full amount of all its claims in anyProceeding, and the Holder shall not waive any claim in any Proceeding withoutthe written consent of such holder.  Ifthe Holder does not file a proper proof of claim or proof of debt in the formrequired in any Proceeding at least thirty (30) days before the expiration ofthe time to file such claim, the holders of any Senior Indebtedness are herebyauthorized to file an appropriate claim for and 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 bankruptcy, liquidating trustee, agent or other Person making such paymentor distribution, or by

 

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the Holder who shall havereceived such payment or distribution, directly to the holders of the SeniorIndebtedness (pro rata to each such holder on the basis of the respectiveamounts of such Senior Indebtedness held by such holder) or theirrepresentatives to the extent necessary to pay all such Senior Indebtedness infull after giving effect to any concurrent payment or distribution to or forthe holders of such Senior Indebtedness, before any payment or distribution ismade to the Holder or any Holders of the Notes.

 

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

 

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

 

(f)            Subrogation. Subject to payment in full in cash of all Senior Indebtedness, therights of the Holder shall be subrogated to the rights of the holders of SeniorIndebtedness to receive payments or distributions of the assets of the Companymade on such Senior Indebtedness until all principal and interest on this Noteshall be paid in full in cash; and for purposes of such subrogation, nopayments or distributions to the holders of Senior Indebtedness of any cash,property or securities to which the Holder would be entitled except for thesubordination provisions of this Section 13 shall, as between the Holderand the Company and/or its creditors other than the holders of the SeniorIndebtedness, be deemed to be a payment on account of the Senior Indebtedness.

 

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

 

(h)           Holders of Senior Indebtedness.  These provisions regarding subordination willconstitute a continuing offer to all Persons who, in reliance upon such provisions,become holders of, or continue to hold, Senior Indebtedness; such provisionsare made for the benefit of the holders of Senior Indebtedness, and suchholders are hereby made obligees under such provisions to the same extent as ifthey were named therein, and they or any of them may proceed to enforce suchsubordination and no amendment or modification of the provisions containedherein shall diminish the rights of such holders unless such holders haveagreed in writing thereto.  The holdersof Senior Indebtedness may, at any time and from time to time, without theconsent of or notice to the Holder, without incurring responsibility to the

 

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Holder and without impairingor releasing the subordination provisions of this Section 13, (i) subjectto the limitations set forth herein, increase the amount of, change the manner,terms or place of payment of, or renew or alter, any Senior Indebtedness, orotherwise amend, modify, restate or supplement the same (provided that any suchmodified indebtedness continues to be constitute Senior Indebedness within themeaning of this Agreement), (ii) sell, exchange or release any collateralmortgaged, pledged or otherwise securing the Senior Indebtedness, (iii) releaseany Person liable in any manner for the Senior Indebtedness and (iv) exerciseor refrain from exercising any rights against the Company or any other Person.

 

(i)            Proceeds Held in Trust.  In the event that notwithstanding theforegoing, any payment or distribution of assets of the Company of any kind orcharacter, whether in cash, property or securities (including, withoutlimitation, by way of setoff or otherwise) prohibited by the provisions hereofshall be received by the Holder before all Senior Indebtedness if paid in fullin cash, such payment or distribution shall be held in trust for the benefit ofand shall be paid over or delivered to the holders of Senior Indebtedness, astheir respective interests may appear, as calculated by the Company, for applicationto, or to be held as collateral for, the payment of any Senior Indebtednessremaining unpaid to the extent necessary to pay all Senior Indebtedness in fullin cash after giving effect to any concurrent payment or distribution to or forthe holders of such Senior Indebtedness.

 

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

 

(k)           Subsequent Senior 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 thenoutstanding from changing or amending this Section 13 pursuant to Section 17hereof upon the request of the Company.

 

(l)            Failure to Make Payment.  In the event that the Company is prohibitedor restricted from making any payment required under this Note by reason of theprovisions of this Section 13, such prohibition or restriction shall notpreclude the failure to make such payment from being an Event of Default under Section 4(a) ofthis Note.

 

(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

 

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Corporation Law, and asexpressly provided in this Note.

 

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

 

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

 

(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 of Certain Indebtedness.  So long as this Note is outstanding, theCompany shall not, and the Company shall not permit any of its Subsidiaries to,directly or indirectly, incur or guarantee, assume or suffer to exist anyIndebtedness which shall rank senior to the Notes, other than SeniorIndebtedness 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)           Restricted Payments.  The Company shall not, and the Company shallnot permit any of its Subsidiaries to, directly or indirectly, redeem, defease,repurchase, repay or make any payments in respect of, by the payment of cash orcash equivalents (in whole or in part, whether by way of open market purchases,tender offers, private transactions or otherwise), all or any portion of anyIndebtedness, other than Senior Indebtedness, Pari Passu Indebtedness, orQualified Subsidiary Indebtedness, whether by way of payment in respect ofprincipal of (or premium, if any) or interest on, such Indebtedness if at thetime such payment is due or is otherwise made or, after giving effect to suchpayment, an event constituting an Event of Default has occurred and iscontinuing.

 

(16)                            PARTICIPATION.  The Holder, as the holder of this Note, shallbe entitled to such dividends paid and distributions made to the holders of CommonStock (each, a **“Distribution”**), ineach 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

 

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or elsewhere) and had heldsuch shares of Common Stock on the record date for such dividends anddistributions.  Payments (if any) underthe preceding sentence shall be made concurrently with the dividend or distributionto 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.  Ifthis Note is to be transferred, the Holder shall surrender this Note to theCompany, whereupon the Company will forthwith issue and deliver upon the orderof the Holder a new Note (in accordance with Section 19(d)), registered asthe Holder may request, representing the outstanding Principal beingtransferred by the Holder and, if less then the entire outstanding Principal isbeing transferred, a new Note (in accordance with Section 19(d)) to theHolder representing the outstanding Principal not being transferred.  The Holder and any assignee, by acceptance ofthis Note, acknowledge and agree that, by reason of the provisions of Section 3(c)(iii) andthis Section 19(a), following conversion or redemption of any portion ofthis Note, the outstanding Principal represented by this Note may be less thanthe Principal stated on the face of this Note.

 

(b)           Lost, Stolen or Mutilated Note.  Upon receipt by the Company of evidencereasonably satisfactory to the Company of the loss, theft, destruction ormutilation of this Note, and, in the case of loss, theft or destruction, of anyindemnification undertaking by the Holder to the Company in customary form and,in the case of mutilation, upon surrender and cancellation of this Note, theCompany shall execute and deliver to the Holder a new Note (in accordance with Section 19(d))representing the outstanding Principal.

 

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(c)           Note Exchangeable 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 New Notes.  Whenever the Company is required to issue anew Note pursuant to the terms of this Note, such new Note (i) shall be oflike tenor with this Note, (ii) shall represent, as indicated on the faceof such new Note, the Principal remaining outstanding (or in the case of a newNote 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, asindicated on the face of such new Note, which is the same as the Issuance Dateof this Note, (iv) shall have the same rights and conditions as this Note, and (v) shallrepresent accrued Interest on the Principal and Interest of this Note, from theIssuance 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 OR INDULGENCENOT WAIVER.  No failureor delay on the part of the Holder in the exercise of any power, right orprivilege hereunder shall operate as a waiver thereof, nor shall any single orpartial 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 via facsimile(a) the disputed determination of the Closing Bid Price or the ClosingSale Price to an independent, reputable investment bank selected by the Companyand approved by the Holder or (b) the disputed arithmetic calculation of theConversion Rate or the Redemption Price to the Company’s independent, outsideaccountant.  The Company, at the Company’sexpense, shall cause the investment bank or the accountant, as the case may be,to perform the determinations or calculations and notify the Company and the Holderof the results no later than five Business Days from the time it receives thedisputed determinations or calculations. Such investment bank’s or accountant’s determination or calculation, asthe case may be, shall be binding upon all parties absent demonstrable error.

 

(25)                            NOTICES;PAYMENTS.

 

(a)           Notices. Whenever notice is required to be given under this Note, unlessotherwise provided herein, such notice shall be given in accordance with Section 9(f) ofthe Securities Purchase and Exchange Agreement. The Company shall provide the Holder with prompt written notice of allactions taken pursuant to this Note, including in reasonable detail a descriptionof such action and the reason therefore. Without limiting the generality of the foregoing, the Company will givewritten notice to the Holder (i) immediately upon any adjustment of theConversion Price, setting forth in reasonable detail, and certifying, thecalculation of such adjustment and (ii) at least twenty days prior to thedate on which the Company closes its books or takes a record (A) with respectto any dividend or distribution upon the Common Stock, (B) with respect toany pro rata subscription offer to holders of Common Stock or (C) fordetermining rights to vote with respect to any Change of Control, dissolutionor liquidation, provided in each case that such information shall be made knownto the public prior to or in conjunction with such notice being provided to theHolder.  Notwithstanding the foregoing, Section 4(i) ofthe Securities Purchase and Exchange Agreement shall apply to all

 

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notices given pursuant tothis Note.

 

(b)           Payments. Whenever any payment of cash is to be made by the Company to any Personpursuant to this Note, such payment shall be made in lawful money of the UnitedStates of America by a check drawn on the account of the Company and sent viaovernight courier service to such Person at such address as previously providedto the Company in writing (which address, in the case of each of thePurchasers, shall initially be as set forth on the Schedule of Buyers attachedto the Securities Purchase and Exchange Agreement); provided that the Holdermay elect to receive a payment of cash via wire transfer of immediately availablefunds by providing the Company with prior written notice setting out suchrequest 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 Noteshall automatically 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 bythe Board of Directors and shareholders of the Company, pursuant to which theCompany’s securities may be issued to any employee, consultant, officer ordirector for services provided to the Company; provided that the number ofshares of the Company’s Common Stock issuable pursuant to such plans, in theaggregate, shall not exceed 10% of the shares of the Company’s Common Stockoutstanding on a fully-diluted basis on the date of the First Closing (asdefined in the Securities Purchase and Exchange Agreement) after giving effectto the First Closing and the full exercise of the Series A-1 Option (asdefined in the Securities Purchase and Exchange Agreement), as adjusted forstock splits,

 

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reverse stock splits, andthe like, unless such increased amount of shares is approved by the holders ofthe 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 Financial Markets.

 

(c)           **“Business Day”**means any day other than Saturday, Sunday or other day on which commercialbanks in The City of New York are authorized or required by law to remainclosed.

 

(d)           **“Closing Bid Price”**and **“Closing Sale Price”** means,for any security as of any date, the last closing bid price and last closingtrade price, respectively, for such security on the Principal Market, asreported by Bloomberg, or, if the Principal Market begins to operate on anextended hours basis and does not designate the closing bid price or theclosing trade price, as the case may be, then the last bid price or last tradeprice, respectively, of such security prior to 4:00 p.m., New York Time,as reported by Bloomberg, or, if the Principal Market is not the principalsecurities exchange or trading market for such security, the last closing bidprice or last trade price, respectively, of such security on the principalsecurities exchange or trading market where such security is listed or tradedas reported by Bloomberg, or if the foregoing do not apply, the last closingbid 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 such securityas reported in the “pink sheets” by Pink Sheets LLC (formerly the NationalQuotation Bureau, Inc.).  If theClosing Bid Price or the Closing Sale Price cannot be calculated for a securityon a particular date on any of the foregoing bases, the Closing Bid Price orthe Closing Sale Price, as the case may be, of such security on such date shallbe the fair market value as mutually determined by the Company and theHolder.  If the Company and the Holderare unable to agree upon the fair market value of such security, then suchdispute 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 orotherwise, of that Person with respect to any indebtedness, lease, dividend orother obligation of another Person if the primary purpose or intent of the Personincurring such liability, or the primary effect thereof, is to provideassurance to the obligee of such liability that such liability will be paid ordischarged, or that any agreements relating thereto will be complied with, orthat the holders of such liability will be protected (in whole or in part)against loss with respect thereto.

 

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

 

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

 

(h)           **“Indebtedness”**of any Person means, without duplication (A) all indebtedness for borrowedmoney, (B) all obligations issued, undertaken or assumed as the deferredpurchase price of property or services, (C) all reimbursement or paymentobligations with respect to letters of credit, surety bonds and other similarinstruments, (D) all obligations evidenced by notes, bonds, debentures orsimilar instruments, including obligations so evidenced incurred in connectionwith the acquisition of property, assets or businesses, (E) allindebtedness created or arising under any conditional sale or other titleretention agreement, or incurred as financing, in either case with respect toany property or assets acquired with the proceeds of such indebtedness (eventhough the rights and remedies of the seller or bank under such agreement inthe event of default are limited to repossession or sale of such property), (F) allmonetary obligations under any leasing or similar arrangement which, inconnection with generally accepted accounting principles, consistently appliedfor the periods covered thereby, is classified as a capital lease, (G) off-balancesheet liabilities retained in connection with asset securitization programs,synthetic leases, sale and leaseback transactions or other similar obligationsarising with respect to any other transaction which is the functionalequivalent of or takes the place of borrowing but which does not constitute aliability on the consolidated balance sheet of such Person and itssubsidiaries, and (H) all indebtedness referred to in clauses (A) through(G) above secured by (or for which the holder of such Indebtedness has anexisting right, contingent or otherwise, to be secured by) any mortgage, lien,pledge, charge, security interest or other encumbrance upon or in any propertyor assets (including accounts and contract rights) owned by any Person, eventhough the Person which owns such assets or property has not assumed or becomeliable for the payment of such indebtedness, and (I) all ContingentObligations in respect of indebtedness or obligations of others of the kindsreferred to in clauses (A) through (H) above.  Notwithstanding the foregoing, trade payablesincurred in the ordinary course of business shall not constitute “Indebtedness”for purposes of this Note.

 

(i)            **“Issuance Date”**means May 1, 2010.

 

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

 

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

 

(l)            **“Person”**means an individual, a limited liability company, a partnership, a jointventure, a corporation, a trust, an unincorporated organization, any otherentity and a government or any department or agency thereof.

 

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

 

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

 

(o)           **“SEC”** meansthe United States Securities and Exchange Commission.

 

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

 

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

 

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

 

(s)           **“Trading Day”**means any day on which the Common Stock is traded on the Principal Market, or,if the Principal Market is not the principal trading market for the CommonStock, then on the principal securities exchange or securities market on whichthe Common Stock is then traded; provided that “Trading Day” shall not includeany day on which the Common Stock is scheduled to trade on such exchange ormarket for less than 4.5 hours or

 

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any day that the CommonStock is suspended from trading during the final hour of trading on suchexchange or market (or if such exchange or market does not designate in advancethe closing time of trading on such exchange or market, then during the hourending at 4:00:00 p.m., New York Time).

 

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

 

(u)           **“Weighted Average Price”**means, for any security as of any date, the dollar volume-weighted averageprice for such security on the Principal Market during the period beginning at9:30:01 a.m., New York Time (or such other time as the Principal Marketpublicly announces is the official open of trading), and ending at 4:00:00 p.m.,New York Time (or such other time as the Principal Market publicly announces isthe official close of trading) as reported by Bloomberg through its “Volume atPrice” functions, or, if the foregoing does not apply, the dollarvolume-weighted average price of such security in the over-the-counter marketon the electronic bulletin board for such security during the period beginningat 9:30:01 a.m., New York Time (or such other time as such market publiclyannounces is the official open of trading), and ending at 4:00:00 p.m.,New York Time (or such other time as such market publicly announces is theofficial close of trading) as reported by Bloomberg, or, if no dollarvolume-weighted average price is reported for such security by Bloomberg forsuch hours, the average of the highest closing bid price and the lowest closingask price of any of the market makers for such security as reported in the “pinksheets” by Pink Sheets LLC (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 appropriatelyadjusted for any stock dividend, stock split, stock combination or othersimilar transaction during the 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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