Exhibit 4.2


 


THIS NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAW, AND
MAY NOT BE OFFERED FOR SALE OR SOLD UNLESS A REGISTRATION STATEMENT UNDER SUCH
ACT AND APPLICABLE STATE SECURITIES LAWS SHALL BE EFFECTIVE WITH RESPECT
THERETO, OR AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND
APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER OR SALE.


 


THIS NOTE DOES NOT REQUIRE PHYSICAL SURRENDER
HEREOF IN ORDER TO EFFECT A PARTIAL PAYMENT, REDEMPTION OR CONVERSION HEREOF.
ACCORDINGLY, THE OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE MAY BE LESS THAN THE
PRINCIPAL AMOUNT SHOWN BELOW.


 


EARTH
BIOFUELS, INC.


 


8% SENIOR CONVERTIBLE NOTE


 


	
  New York, New York

  	
   

  	
  $5,000,000

  	
   

  
	
  Issue Date: May 26, 2006

  	
   

  	
   

  



 


FOR
VALUE RECEIVED, EARTH BIOFUELS, INC., a Delaware corporation (the “Company”), hereby
promises to pay to the order of EVOLUTION MASTER FUND, LTD or its permitted
successors or assigns (the “Holder”) the sum of FIVE MILLION AND 00/100 DOLLARS
($5,000,000) in same day funds, on or before the Maturity Date (as defined
below). Upon the occurrence of the Conversion Trigger Event (as defined below),
the Holder may convert principal of and interest accrued on this Note into
shares (“Conversion
Shares”) of the Company’s common stock, par value $.001 per
share (the “Common Stock”),
on the terms set forth herein.


 


The Company
has issued this Note pursuant to a Securities Purchase Agreement, dated as of
May 26, 2006 (the “Securities
Purchase Agreement”). The Notes issued by the Company pursuant
to the Securities Purchase Agreement, including this Note, are collectively
referred to herein as the “Notes”.


 

















 


The following
terms shall apply to this Note:


 


1.             DEFINITIONS.


 


“Approved Stock Plan”
means any employee benefit plan which has been approved by the Board of
Directors of the Company (including a majority of the independent members of
the Board), pursuant to which the Company’s securities may be issued to any
employee, officer, director or consultant for services provided to the Company.


 


“Business Day” means
any day other than a Saturday, a Sunday or a day on which the New York Stock
Exchange is closed or on which banks are authorized by law to close in New
York, New York.


 


“Change of Control”
means the existence or occurrence of any of the following: (a) the sale,
conveyance or disposition of all or substantially all of the assets of the
Company; (b) the effectuation of a transaction or series of transactions in
which more than fifty percent (50%) of the voting power of the Company is
disposed of; (c) the consolidation, merger or other business combination of the
Company with or into any other entity, immediately following which the prior
stockholders of the Company fail to own, directly or indirectly, at least fifty
percent (50%) of the surviving entity; (d) a transaction or series of
transactions in which any Person or group acquires more than fifty percent
(50%) of the voting equity of the Company; and (e) the Continuing Directors do
not at any time constitute at least a majority of the Board of Directors of the
Company.


 


“Common Stock Equivalent”
means, collectively, Options and Convertible Securities.


 


“Continuing Director”
means at any date a member of the Company’s Board of Directors (i) who was a
member of such board on the date of the Securities Purchase Agreement or (ii)
who was nominated or elected by at least a majority of the directors who were
Continuing Directors at the time of such nomination or election or whose
election to the Company’s Board of Directors was recommended or endorsed by at
least a majority of the directors who were Continuing Directors at the time of
such nomination or election or such lesser number comprising a majority of a
nominating committee if authority for such nominations or elections has been
delegated to a nominating committee whose authority and composition have been
approved by at least a majority of the directors who were continuing directors
at the time such committee was formed.


 


“Conversion Price”
means, as of any date, the lower of the Fixed Conversion Price and the Floating
Conversion Price on such date, subject to adjustment as provided herein.


 


“Conversion Trigger Event”
means that, as of the Initial Maturity Date, this Note has not been repaid in
full either (i) in cash or (ii) through an Exchange effected in accordance with
Section 2(c)
below.


 


“Convertible Securities” means any stock or securities (other than
Options) of the Company convertible into or exercisable or exchangeable for
Common Stock.


 


2

















 


“Debt” means as to any
Person at any time: (a) all indebtedness, liabilities and obligations of such
Person for borrowed money; (b) all indebtedness, liabilities and obligations of
such Person to pay the deferred purchase price of Property or services, except
trade accounts payable of such Person arising in the ordinary course of
business that are not past due by more than 90 days; (c) all capital lease
obligations of such Person; (d) all Debt of others guaranteed by such Person;
(e) all indebtedness, liabilities and obligations secured by a Lien (other than
a Permitted Lien) existing on Property owned by such Person, whether or not the
indebtedness, liabilities or obligations secured thereby have been assumed by
such Person or are non-recourse to such Person; (f) all reimbursement
obligations of such Person (whether contingent or otherwise) in respect of
letters of credit, bankers’ acceptances, surety or other bonds and similar
instruments; and (g) all liabilities and obligations of such Person to redeem
or retire shares of capital stock of such Person (other than the Company’s
obligation to redeem the Securities under the circumstances specified therein).
Debt shall not include any liability for (i) federal, state, local or other
taxes imposed by a Governmental Authority, (ii) endorsements of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business or (iii) any indebtedness that has been fully and finally
defeased in accordance with the terms of the documents governing such
indebtedness.


 


“Default Interest Rate”
means the lower of sixteen (16%) and the maximum rate permitted by applicable
law or by the applicable rules or regulations of any governmental agency or of
any stock exchange or other self-regulatory organization having jurisdiction
over the Company or the trading of its securities.


 


“Exchange” means that
all outstanding principal of and interest (and other amounts) accrued on this
Note have been exchanged for the securities issued in a New Offering on a
dollar-for-dollar basis and otherwise with the same terms granted to other
purchasers in the New Offering.


 


“Fixed Conversion Price”
means the greater of (i) the Floor Price and (ii) seventy five percent (75%) of
the Market Price on the Initial Maturity Date; in either case, subject to
adjustment as provided herein.


 


“Floating Conversion Price”
means, as of any date, the greater of (i) the Floor Price and (ii) seventy five
percent (75%) of the Market Price on such date; in either case, subject to
adjustment as provided herein.


 


“Floor Price” means
the least of (i) $1.00, (ii) the lowest floor price for any conversion or exercise
price in any other security of the Company issued after the date hereof, and
(iii) the lowest per share consideration for which the Company issues or sells,
or in accordance with Section
5(e)(ii) is deemed to have issued or sold, any shares of Common
Stock.


 


“Governmental Authority”
means any nation or government, any state, provincial or political subdivision
thereof and any entity exercising executive, legislative, judicial, regulatory
or administrative functions of or pertaining to government, including without
limitation any stock exchange, securities market or self-regulatory
organization.


 


3

















 


“Initial Maturity Date”
means the ninetieth (90th) calendar day following the Issue Date.


 


“Issue Date” means the
date on which this Note is issued pursuant to the Securities Purchase
Agreement.


 


“Lien” and “Permitted Lien” shall
have the respective meanings set forth in the Securities Purchase Agreement.


 


“Liquidation Event”
means the (x) institution of any insolvency or bankruptcy proceedings, or any
receivership, liquidation, reorganization or other similar proceedings in
connection therewith, relative to the Company, the Company Subsidiaries or to
its or their creditors, as such, or to its or their assets, or (y) the
dissolution or other winding up of the Company or the Company Subsidiaries,
whether voluntary or involuntary and whether or not involving insolvency or
bankruptcy proceedings, or (z) any assignment for the benefit of creditors or
any marshalling of the material assets or material liabilities of the Company
or any Company Subsidiary.


 


“Major Transaction”
means a merger, consolidation, business combination, tender offer, exchange of
shares, recapitalization, reorganization, redemption or other similar event, as
a result of which shares of Common Stock shall be changed into the same or a
different number of shares of the same or another class or classes of stock or
securities or other assets of the Company or another entity or the Company
shall sell all or substantially all of its assets.


 


“Market Price” means,
as of a particular date, the lower of (i) the average of daily VWAP for each of
the five (5) consecutive Trading Days occurring immediately prior to (but not
including) such date and (ii) the daily VWAP on the Trading Day occurring
immediately prior to (but not including) such date.


 


“Maturity Date” means
the Initial Maturity Date and, if the Holder exercises the Maturity Extension
Option, the Subsequent Maturity Date.


 


“Maturity Extension Option”
has the meaning set forth in Section 2(b) below.


 


“New Offering” means a
private offering and sale by the Company of its equity securities with gross
cash proceeds to the Company of at least forty million dollars ($40,000,000).


 


“Obligations” shall
have the meaning set forth in Section 2(a) below.


 


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


 


4

















 


“Person” means any
individual, corporation, trust, association, company, partnership, joint
venture, limited liability company, joint stock company, Governmental Authority
or other entity.


 


“Principal Market”
means the principal securities exchange or market on which the Common Stock is
listed or traded.


 


“Registrable Securities”
has the meaning set forth in the Registration Rights Agreement.


 


“Registration Rights Agreement”
means the agreement between the Holder and the Company pursuant to which the
Company has agreed to register the shares of Common Stock issuable under the
Notes and the Warrants.


 


“Registration Statement”
means the Registration Statement (as defined in the Registration Rights
Agreement) covering the resale of the Conversion Shares issuable under this
Note.


 


“Subsequent Maturity Date”
means the one hundred and eightieth (180th) calendar day following
the Issue Date.


 


“Trading Day” means a
Business Day on which shares of Common Stock is purchased and sold on the
Principal Market.


 


“VWAP” on a Trading
Day means the volume weighted average price of the Common Stock for such
Trading Day on the Principal Market as reported by Bloomberg Financial Markets
or, if Bloomberg Financial Markets is not then reporting such prices, by a
comparable reporting service of national reputation selected by the Holders and
reasonably satisfactory to the Company. If VWAP cannot be calculated for the
Common Stock on such Trading Day on any of the foregoing bases, then the
Company shall submit such calculation to an independent investment banking firm
of national reputation reasonably acceptable to the Investors, and shall cause
such investment banking firm to perform such determination and notify the
Company and the Investors of the results of determination no later than two (2)
Business Days from the time such calculation was submitted to it by the Company.
All such determinations shall be appropriately adjusted for any stock dividend,
stock split or other similar transaction during such period.


 


“Warrants” means the
warrants issued pursuant to the Securities Purchase Agreement.


 


All
definitions contained in this Note are equally applicable to the singular and
plural forms of the terms defined. The words “hereof”, “herein” and “hereunder”
and words of similar import referring to this Note refer to this Note as a
whole and not to any particular provision of this Note. Any capitalized term
used but not defined herein has the meaning specified in the Securities
Purchase Agreement.


 


5

















 


2.             MATURITY DATE; EXTENSION OF MATURITY.


 


(a)           Initial Maturity Date. On the
Initial Maturity Date, and subject to the Maturity Extension Option (as defined
below), the Company shall pay to the Holder all principal of and interest (and
other amounts) accrued on this Note (collectively, the “Obligations”) either
(i) in cash or (ii) through an Exchange in accordance with Section 2(c) below.


 


(b)           Subsequent Maturity Date;
Extension. In the event that the Company does not pay the entire amount of
the Obligations on the Initial Maturity Date either (i) in cash or (ii) through
an Exchange, the Holder shall have the option to extend the Maturity Date as to
all or any part of the Obligations from the Initial Maturity Date to the
Subsequent Maturity Date (the “Maturity Extension Option”). If the Holder exercises the
Maturity Extension Option, the Obligations shall become due on the Subsequent
Maturity Date instead of the Initial Maturity Date, and Interest (and any other
amounts) shall continue to accrue hereon through the full and final payment
(through cash or an Exchange) of all Obligations. In order to exercise the
Maturity Extension Option, the Holder must deliver written notice thereof no
later than the fifth (5th) Business Day prior to the Initial
Maturity Date specifying the amount of Obligations to which the Maturity
Extension Option applies. If the Holder does not exercise the Maturity
Extension Option, the Obligations shall be deemed due and payable on the
Initial Maturity Date. Any Obligations (including accrued and unpaid Interest) not
paid in full when due shall bear interest at the Default Interest Rate from the
due date through the date on which payment in full is made.


 


(c)           Exchange. In order to pay the
Obligations through an Exchange, the Company must deliver written notice thereof
at least five (5) Business Days prior to the date on which the Exchange is to
be effected (the “Exchange
Date”). On the Exchange Date, this Note shall be automatically
exchanged for a portion of the securities issued in a New Offering, such
Exchange to be effected on a dollar-for-dollar basis so that each dollar of
Obligations (including all Interest accrued through the Exchange Date) shall be
deemed payment for the securities issued in the New Offering on the same terms
and conditions granted to other purchasers in the New Offering. Unless and
until an Exchange occurs (or payment in full of all Obligations is made in
cash), the Holder shall have all of its rights and remedies hereunder
(including without limitation its right to convert this Note if the Conversion
Trigger Event has occurred) through the Exchange Date (or the date on which
payment in full is made).


 


(d)           Remedies for Non-payment. Until
all Obligations have been paid in full, either in cash or through an Exchange
effected in accordance with Section 2(c) above, the Holder shall have all rights and
remedies set forth in this Note and the other Transaction Documents and which
it may otherwise have under any law or in equity with respect to amounts due
and unpaid hereunder. The Holder and its permitted successors and assigns shall
be entitled to enforce such rights specifically, to recover damages by reason
of any non-payment of the Obligations when due or the breach of any provision
of this Note or the Transaction Documents and to exercise all other rights
granted by law or in equity, if available. The Company recognizes and agrees
that in the event that it fails to perform, observe, or discharge any or all of
its obligations under this Note, any remedy at law may prove to be inadequate
relief to the Holder and, therefore, the Holder shall be entitled to seek
temporary and permanent injunctive relief in any such case without the
necessity of proving actual damages and without posting a bond or other
security.


 


6

















 


3.             INTEREST.


 


This Note
shall bear interest on the unpaid principal amount hereof (“Interest”) at an
annual rate equal to eight percent (8%); provided,
however, that if a New Offering is not completed within sixty (60)
calendar days following the Issue Date, Interest shall be computed at an annual
rate of twelve percent (12%), such computation to be retroactive to the Issue
Date as though Interest had accrued from such date at an annual rate of twelve
percent. Interest shall be computed on the basis of a 360-day year and
calculated using the actual number of days elapsed since the Issue Date, and if
not timely paid as provided herein, compounded monthly until paid.


 


4.             CONVERSION.


 


(a)           Right
to Convert. If the Conversion Trigger Event occurs, the Holder shall have
the right to convert, at any time thereafter and from time to time until the
Obligations are paid in full, (i) all or any part of the outstanding and unpaid
principal amount of this Note and (ii) at the Holder’s option, in its sole discretion,
all or any part of unpaid Interest (and any other amounts) accrued hereon, into
such number of fully paid and non-assessable Conversion Shares as is determined
in accordance with the terms hereof (a “Conversion”).


 


(b)           Conversion Notice. In order to
convert principal of (and, if the Holder so elects, Interest accrued on) this
Note, the Holder shall send by facsimile transmission, at any time prior to
5:00 p.m., eastern time, on the Business Day on which the Holder wishes to
effect such Conversion (the “Conversion Date”), a properly completed notice of
conversion to the Company, in the form set forth on Annex I hereto,
stating the amount of principal (and accrued Interest, if applicable) to be
converted and a calculation of the number of shares of Common Stock issuable
upon such Conversion (a “Conversion
Notice”). The Conversion Notice shall also state the name or
names (with address) in which the shares of Common Stock that are issuable on
such conversion shall be issued. The Holder shall not be required to physically
surrender this Note to the Company in order to effect a Conversion. The Company
shall maintain a record showing, at any given time, the unpaid principal amount
of this Note and the date of each Conversion or other payment of principal hereof.
The Holder shall amend Annex
II hereto upon any such Conversion or payment of principal to
reflect the unpaid principal amount hereof. In the case of a dispute as to the
number of Conversion Shares issuable upon a Conversion (including without
limitation as a result of adjustments to the Fixed Conversion Price made in
accordance with Section
4 below), the Company shall promptly issue to the Holder the
number of Conversion Shares that are not disputed and shall submit the disputed
calculations to a certified public accounting firm of national recognition
(other than the Company’s independent accountants) within two (2) Business Days
of receipt of the Holder’s Conversion Notice. The Company shall use its best
efforts to cause such accountants to calculate the Fixed Conversion Price as
provided herein and to notify the Company and the Holder of the results in
writing no later than two (2) Business Days following the day on which such
accountant received the disputed calculations (the “Dispute Procedure”).
Such accountant’s calculation shall be deemed conclusive absent manifest error.
The fees of any such accountant shall be borne by the party whose calculations
are most at variance with those of such accountant.


 


(c)           Number of Conversion Shares;
Conversion Price. The number of Conversion Shares to be delivered by the
Company pursuant to a Conversion shall be equal to the principal amount of
(and, if the Holder so elects, Interest and any other amounts accrued on) this
Note being converted divided by the Conversion Price in effect on the
Conversion Date.


 


7

















 


(d)           Delivery of Common Stock Upon
Conversion. Upon receipt of a Conversion Notice, the Company shall, no
later than the close of business on the third (3rd) Business Day following the
Conversion Date set forth in such Conversion Notice (the “Delivery Date”),
issue and deliver or cause to be delivered to the Holder the number of
Conversion Shares determined pursuant to Section 3(c) above, provided, however,
that any Conversion Shares that are the subject of a Dispute Procedure shall be
delivered no later than the close of business on the third (3rd) Business Day
following the determination made pursuant thereto. The Company shall effect
delivery of Conversion Shares to the Holder, as long as the Company’s
designated transfer agent or co-transfer agent in the United States for the
Common Stock (the “Transfer
Agent”) participates in the Depository Trust Company (“DTC”) Fast Automated
Securities Transfer program (“FAST”), by crediting the account of the Holder or its
nominee at DTC (as specified in the applicable Conversion Notice) with the
number of Conversion Shares required to be delivered, no later than the close
of business on such Delivery Date. In the event that the Transfer Agent is not
a participant in FAST or if the Holder so specifies in a Conversion Notice or
otherwise in writing on or before the Conversion Date, the Company shall effect
delivery of Conversion Shares by delivering to the Holder or its nominee
physical certificates representing such Conversion Shares, no later than the
close of business on such Delivery Date. If any Conversion would create a
fractional Conversion Share, such fractional Conversion Share shall be
disregarded and the number of Conversion Shares issuable upon such Conversion,
in the aggregate, shall be the nearest whole number of Conversion Shares. Conversion
Shares delivered to the Holder shall not contain any restrictive legend unless
such legend is required pursuant to the terms of the Securities Purchase
Agreement.


 


(e)           Failure to Deliver Conversion
Shares.


 


(i)            In the event that the Company fails
for any reason to deliver to the Holder the number of Conversion Shares
specified in a Conversion Notice (without any restrictive legend to the extent
permitted by the terms of the Securities Purchase Agreement) on or before the
second (2nd) Business Day following the Delivery Date therefor (a “Conversion Default”),
the Holder shall have the right to receive from the Company an amount equal to
(i) (N/365) multiplied by (ii) the principal amount of, and any Interest
accrued on, this Note represented by the Conversion Shares which remain the
subject of such Conversion Default multiplied by (iii) the Default
Interest Rate, where “N” equals the number of days elapsed between the original
Delivery Date of such Conversion Shares and the date on which such Conversion
Default has been cured. In the event that shares of Common Stock are purchased
by or on behalf of the Holder in order to make delivery on a sale effected in
anticipation of receiving Conversion Shares upon a Conversion, the Holder shall
have the right to receive from the Company, in addition to the foregoing
amounts, (i) the aggregate amount paid by or on behalf of the Holder for such
shares of Common Stock minus (ii) the aggregate amount of net proceeds,
if any, received by the Holder from the sale of the Conversion Shares issued by
the Company pursuant to such Conversion. Amounts payable under this Section 4(e)(i) shall
be paid to the Holder in immediately available funds on or before the fifth
(5th) Business Day following written notice from the Holder to the Company
specifying the amount owed to it by the Company pursuant to this Section 4(e)(i).


 


(ii)           In addition to its rights under Section 4(e)(i)
above, upon a Conversion Default, the Conversion Price applicable to the
applicable Conversion shall be automatically be adjusted to the lower of (i)
the Conversion Price in effect on the Conversion Date and (ii) the lowest
Conversion Price occurring from the first date of such Conversion Default


 


8

















 


through the date on which all Conversion
Shares to which the Holder is entitled have been delivered in accordance with
the terms of this Note. The Holder shall have the right to pursue all other
remedies available to it at law or in equity (including, without limitation, a
decree of specific performance and/or injunctive relief).


 


(f)            Limitations on Right to Convert.
In no event shall the Holder be permitted to convert principal of or Interest
on this Note if, upon such conversion, (x) the number of Conversion Shares to
be issued pursuant to such Conversion plus (y) the number of shares of
Common Stock beneficially owned by the Holder (other than Common Stock which
may be deemed beneficially owned except for being subject to a limitation on
conversion or exercise analogous to the limitation contained in this Section 4(f)) would
exceed 4.99% of the number of shares of Common Stock then issued and outstanding,
it being the intent of the Company and the Holder that the Holder not be deemed
at any time to have the power to vote or dispose of greater than 4.99% of the
number of shares of Common Stock issued and outstanding at any time. Nothing
contained herein shall be deemed to restrict the right of the Holder to convert
such excess principal amount at such time as such Conversion will not violate
the provisions of this Section4(f).
As used herein, beneficial ownership shall be determined in accordance with
Section 13(d) of (i) Securities Exchange Act of 1934, as amended, and the rules
thereunder. To the extent that the limitation contained in this Section4(f)(i)
applies (and without limiting any rights the Company may otherwise have), the
Company may rely on the Holder’s determination of whether this Note is
convertible pursuant to the terms hereof, the Company shall have no obligation
whatsoever to verify or confirm the accuracy of such determination, and the
submission of a Conversion Notice by the Holder shall be deemed to be the
Holder’s representation that this Note is convertible pursuant to the terms
hereof. The Company shall have no liability to any person if the Holder’s
determination of whether this Note is convertible pursuant to the terms hereof
is incorrect. The holders of Common Stock are to be deemed third-party
beneficiaries of the limitation imposed hereby and, accordingly, this Section 4(f) may not
be amended without the consent of the holders of a majority of the shares of
Common Stock then outstanding; provided,
however, that the Holder shall
have the right, upon sixty (60) days’ prior written notice to the Company, to
waive the provisions of this Section 4(f)(i) in the event that either a Fundamental
Change or Liquidation Event is announced or occurs, without obtaining such
consent.


 


5.             ADJUSTMENTS TO FIXED CONVERSION PRICE.


 


(a)           Stock Splits, Stock Interests, Etc.
If, at any time on or after the Issue Date, the number of outstanding shares of
Common Stock is increased by a stock split, stock dividend, combination,
reclassification or other similar event, the Conversion Price shall be
proportionately reduced, or if the number of outstanding shares of Common Stock
is decreased by a reverse stock split, combination, reclassification or other
similar event, the Fixed Conversion Price shall be proportionately increased.
In such event, the Company shall notify the Company’s transfer agent of such
change on or before the effective date thereof.


 


(b)           Major Transactions. If, at any
time after the Issue Date, any Major Transaction shall occur, then the Holder
shall thereafter have the right to receive upon Conversion, in lieu of the
shares of Common Stock otherwise issuable, such shares of stock, securities
and/or other property as would have been issued or payable upon such Major
Transaction with respect to or in exchange for the number of shares of Common
Stock which would have been issuable upon


 


9

















 


Conversion had such Major Transaction not
taken place (without giving effect to any limitations on such Conversion
contained in this Note or the Securities Purchase Agreement). The Company shall
not effect any Major Transaction unless (i) the Holder has received written
notice of such transaction at least thirty (30) days prior thereto (which
period shall be increased to sixty one (61) days if, at such time, without
giving effect to the limitation on conversion contained in Section 4(f)(i)
hereof, the Holder would beneficially own more than 4.9% of the Common Stock
then outstanding, and the Holder has notified the Company in writing of such
circumstance) but in no event later than fifteen (15) days prior to the record
date for the determination of stockholders entitled to vote with respect
thereto; provided, however, that the Company shall publicly
disclose the material terms of any such Major Transaction on or before the date
on which it delivers notice of a Major Transaction to the Holder, and (ii) the
resulting successor or acquiring entity (if not the Company) assumes by written
instrument (in form and substance reasonable satisfactory to the Holder) the
obligations of the Company under this Note (including, without limitation, the
obligation to make payments of Interest accrued but unpaid through the date of
such consolidation, merger or sale and accruing thereafter). The above
provisions shall apply regardless of whether or not there would have been a
sufficient number of shares of Common Stock authorized and available for
issuance upon conversion of this Note as of the date of such transaction, and
shall similarly apply to successive Major Transactions.


 


(c)           Distributions. If, at any time
after the Issue Date, the Company declares or makes any distribution of cash or
any other assets (or rights to acquire such assets) to holders of Common Stock,
including without limitation any dividend or distribution to the Company’s
stockholders in shares (or rights to acquire shares) of capital stock of a
subsidiary) (a “Distribution”),
the Company shall deliver written notice of such Distribution (a “Distribution Notice”)
to the Holder at least fifteen (15) days prior to the earlier to occur of (i)
the record date for determining stockholders entitled to such Distribution (the
“Record Date”)
and (ii) the date on which such Distribution is made (the “Distribution Date”)(the
earlier of such dates being referred to as the “Determination Date”). Upon receipt of
the Distribution Notice, the Holder shall promptly (but in no event later than
three (3) Business Days) notify the Company whether it has elected (A) to
receive the same amount and type of assets (including, without limitation,
cash) being distributed as though the Holder were, on the Determination Date, a
holder of a number of shares of Common Stock into which this Note is
convertible as of such Determination Date (such number of shares to be
determined without giving effect to any limitations on such conversion) or (B)
upon any exercise of this Note on or after the Distribution Date, to reduce the
Conversion Price applicable to such conversion by reducing the Conversion Price
in effect on the Business Day immediately preceding the Record Date by an
amount equal to the fair market value of the assets to be distributed divided
by the number of shares of Common Stock as to which such Distribution is to
be made, such fair market value to be reasonably determined in good faith by
the independent members of the Company’s Board of Directors. Upon receipt of
such election notice from the Holder, the Company shall timely effectuate the
transaction or adjustment contemplated in the foregoing clause (A) or (B), as
applicable. If the Holder does not notify the Company of its election pursuant
to the preceding sentence on or prior to the Determination Date, the Holder
shall be deemed to have elected clause (A) of the preceding sentence.


 


In the
Distribution Notice to the Holder, the Company shall indicate whether the
Company has elected (A) to deliver to the Holder the same amount and type of
assets (including, without limitation, cash) being distributed as though the
Holder were, on the Determination Date, a holder of


 


10

















 


a number of shares of Common Stock into which
this Note is convertible as of such Determination Date (such number of shares
to be determined without giving effect to any limitations on such conversion)
or (B) upon any Conversion of this Note on or after the Distribution Date, to
reduce the Fixed Conversion Price applicable to such Conversion by reducing the
Fixed Conversion Price in effect on the Business Day immediately preceding the
Record Date by an amount equal to the fair market value of the assets to be
distributed divided by the number of shares of Common Stock as to which
such Distribution is to be made, such fair market value to be reasonably
determined in good faith by the independent members of the Company’s Board of
Directors. If the Company does not notify the Holders of its election pursuant
to the preceding sentence on or prior to the Determination Date, the Company
shall be deemed to have elected clause (A) of the preceding sentence.


 


(d)           Convertible Securities; Options.
If, at any time after the Issue Date, the Company issues Convertible Securities
or Options to the record holders of the Common Stock, whether or not such
Convertible Securities or Options are immediately convertible, exercisable or
exchangeable, then the Holders shall be entitled, upon any Conversion of this
Note after the date of record for determining stockholders entitled to receive
such Convertible Securities or Options (or if no such record is taken, the date
on which such Convertible Securities or Options are issued), to receive the
aggregate number of Convertible Securities or Options which the Holder would
have received with respect to the shares of Common Stock issuable upon such
conversion (without giving effect to any limitations on such Conversion
contained in this Note or the Securities Purchase Agreement) had the Holder
been the holder of such shares of Common Stock on the record date for the
determination of stockholders entitled to receive such Convertible Securities
or Options (or if no such record is taken, the date on which such Convertible
Securities or Options were issued).


 


(e)           Dilutive Issuances.


 


(i)            Adjustment Upon Dilutive Issuance.
If, at any time after the Issue Date, the Company issues or sells, or in
accordance with Section
5(e)(ii) is deemed to have issued or sold, any shares of Common
Stock for no consideration or for a consideration per share less than the Fixed
Conversion Price on the date of such issuance or sale (or deemed issuance or
sale) (a “Dilutive
Issuance”), then the Fixed Conversion Price shall be adjusted so
as to equal the consideration received or receivable by the Company (on a per
share basis) for the additional shares of Common Stock so issued, sold or
deemed issued or sold in such Dilutive Issuance (which, in the case of a deemed
issuance or sale, shall be calculated in accordance with Section 5(e)(ii)
below). Notwithstanding the foregoing, no adjustment shall be made pursuant
hereto if such adjustment would result in an increase in the Fixed Conversion
Price.


 


(ii)           Effect On Fixed Conversion Price
Of Certain Events. For purposes of determining the adjusted Fixed
Conversion Price under Section
5(e)(i), the following will be applicable:


 


(A)          Issuance Of Options. If the
Company issues or sells any Options, whether or not immediately exercisable,
and the price per share for which Common Stock is issuable upon the exercise of
such Options (and the price of any conversion of Convertible Securities, if
applicable) is less than the Fixed Conversion Price in effect on the date of
issuance or sale of such Options, then the maximum total number of shares of
Common Stock issuable upon the exercise of all such Options (assuming full
conversion, exercise or


 


11

















 


exchange of
Convertible Securities, if applicable) shall, as of the date of the issuance or
sale of such Options, be deemed to be outstanding and to have been issued and
sold by the Company for such price per share. For purposes of the preceding
sentence, the “price per share for which Common Stock is issuable upon the
exercise of such Options” shall be determined by dividing (x) the total amount,
if any, received or receivable by the Company as consideration for the issuance
or sale of all such Options, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the exercise of all such
Options, plus, in the case of Convertible Securities issuable upon the
exercise of such Options, the minimum aggregate amount of additional
consideration payable upon the conversion, exercise or exchange thereof
(determined in accordance with the calculation method set forth in Section 5(e)(ii)(B)
below) at the time such Convertible Securities first become convertible,
exercisable or exchangeable, by (y) the maximum total number of shares of
Common Stock issuable upon the exercise of all such Options (assuming full
conversion, exercise or exchange of Convertible Securities, if applicable). No
further adjustment to the Fixed Conversion Price shall be made upon the actual
issuance of such Common Stock upon the exercise of such Options or upon the
conversion, exercise or exchange of Convertible Securities issuable upon
exercise of such Options. To the extent that shares of Common Stock or
Convertible Securities are not delivered pursuant to such Options, upon the
expiration or termination of such Options, the Fixed Conversion Price shall be
readjusted to the Fixed Conversion Price that would then be in effect had the
adjustments made upon the issuance of such Options been made on the basis of
delivery of only the number of shares of Common Stock actually delivered.


 


(B)           Issuance Of Convertible Securities.
If the Company issues or sells any Convertible Securities, whether or not
immediately convertible, exercisable or exchangeable, and the price per share
for which Common Stock is issuable upon such conversion, exercise or exchange
is less than the Fixed Conversion Price in effect on the date of issuance or
sale of such Convertible Securities, then the maximum total number of shares of
Common Stock issuable upon the conversion, exercise or exchange of all such
Convertible Securities shall, as of the date of the issuance or sale of such
Convertible Securities, be deemed to be outstanding and to have been issued and
sold by the Company for such price per share. If the Convertible Securities so
issued or sold do not have a fluctuating conversion or exercise price or
exchange ratio, then for the purposes of the immediately preceding sentence,
the “price per share for which Common Stock is issuable upon such conversion,
exercise or exchange” shall be determined by dividing (A) the total amount, if
any, received or receivable by the Company as consideration for the issuance or
sale of all such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the conversion,
exercise or exchange thereof (determined in accordance with the calculation
method set forth in this Section
5(e)(ii)(B)) at the time such Convertible Securities first
become convertible, exercisable or exchangeable, by (B) the maximum total
number of shares of Common Stock issuable upon the exercise, conversion or
exchange of all such Convertible Securities. If the Convertible Securities so
issued or sold have a fluctuating conversion or exercise price or exchange
ratio (a “Variable Rate
Convertible Security”), then for purposes of the first sentence
of this Section
5(e)(ii)(B), the “price per share for which Common Stock is
issuable upon such conversion, exercise or exchange” shall be deemed to be the
lowest price per share which would be applicable (assuming all holding period
and other conditions to any discounts


 


12

















 


contained in
such Variable Rate Convertible Security have been satisfied) if the conversion
price of such Variable Rate Convertible Security on the date of issuance or sale
thereof were equal to the actual conversion price on such date (or such higher
minimum conversion price if such Variable Rate Convertible Security is subject
to a minimum conversion price) (the “Assumed Variable Market Price”), and,
further, if the conversion price of such Variable Rate Convertible Security at
any time or times thereafter is less than or equal to the Assumed Variable
Market Price last used for making any adjustment under this Section 5(e) with
respect to any Variable Rate Convertible Security, the Fixed Conversion Price
in effect at such time shall be readjusted to equal the Fixed Conversion Price
which would have resulted if the Assumed Variable Market Price at the time of
issuance of the Variable Rate Convertible Security had been equal to the actual
conversion price of such Variable Rate Convertible Security existing at the
time of the adjustment required by this sentence; provided, however, that if the conversion or exercise price
or exchange ratio of a Convertible Security may fluctuate solely as a result of
provisions designed to protect against dilution, such Convertible Security
shall not be deemed to be a Variable Rate Convertible Security. No further
adjustment to the Fixed Conversion Price shall be made upon the actual issuance
of such Common Stock upon conversion, exercise or exchange of such Convertible
Securities.


 


(C)           Change In Option Price Or
Conversion Rate. If there is a change at any time in (x) the amount of
additional consideration payable to the Company upon the exercise of any
Options; (y) the amount of additional consideration, if any, payable to the
Company upon the conversion, exercise or exchange of any Convertible
Securities; or (z) the rate at which any Convertible Securities are convertible
into or exercisable or exchangeable for Common Stock (in each such case, other
than under or by reason of provisions designed to protect against dilution),
the Fixed Conversion Price in effect at the time of such change shall be
readjusted to the Fixed Conversion Price which would have been in effect at
such time had such Options or Convertible Securities still outstanding provided
for such changed additional consideration or changed conversion, exercise or
exchange rate, as the case may be, at the time initially issued or sold.


 


(D)          Calculation Of Consideration
Received. If any Common Stock, Options or Convertible Securities are issued
or sold for cash, the consideration received therefor will be the amount
received by the Company therefor. In case any Common Stock, Options or Convertible
Securities are issued or sold for a consideration part or all of which shall be
other than cash, including in the case of a strategic or similar arrangement in
which the other entity will provide services to the Company, purchase services
from the Company or otherwise provide intangible consideration to the Company,
the amount of the consideration other than cash received by the Company
(including the net present value of the consideration expected by the Company
for the provided or purchased services) shall be the fair market value of such
consideration. In case any Common Stock, Options or Convertible Securities are
issued in connection with any merger or consolidation in which the Company is
the surviving corporation, the amount of consideration therefor will be deemed
to be the fair market value of such portion of the net assets and business of
the non-surviving corporation as is attributable to such Common Stock, Options
or Convertible Securities, as the case may be. The independent members of the
Company’s Board of


 


13

















 


Directors
shall calculate reasonably and in good faith, using standard commercial
valuation methods appropriate for valuing such assets, the fair market value of
any consideration.


 


(iii)          Exceptions To Adjustment Of Fixed
Conversion Price. Notwithstanding the foregoing, no adjustment to the Fixed
Conversion Price shall be made pursuant to this Section 5(e) upon the issuance of any
Excluded Securities.


 


 (iv)         Notice
Of Adjustments. Upon the occurrence of each adjustment or readjustment of
the Fixed Conversion Price pursuant to this Section 5(e) resulting in a change in
the Fixed Conversion Price by more than one percent (1%), or any change in the
number or type of stock, securities and/or other property issuable upon
Conversion of this Note, the Company, at its expense, shall promptly compute
such adjustment, readjustment or change and prepare and furnish to the Holder a
certificate setting forth such adjustment, readjustment or change and showing
in detail the facts upon which such adjustment, readjustment or change is based.
The Company shall, upon the written request at any time of the Holder, furnish
to the Holder a like certificate setting forth (i) such adjustment,
readjustment or change, (ii) the Fixed Conversion Price at the time in effect
and (iii) the number of shares of Common Stock and the amount, if any, of other
securities or property which at the time would be received upon Conversion of
this Note.


 


6.             EVENTS OF DEFAULT; ACCELERATION.


 


(a)           Acceleration. In the event
that an Event of Default (as defined below) or a Change of Control occurs, the
Holder shall have the right, upon written notice to the Company (an “Acceleration Notice”),
to require that all or any portion of the unpaid principal amount of this Note,
plus all accrued and unpaid Interest (and any other amounts) thereon, be
immediately paid in full in cash. The Acceleration Notice shall specify the
date on which all Obligations must be paid, (the “Acceleration Date”), which date may be
the Business Day on which the Acceleration Notice is delivered to the Company,
and the amount of principal and Interest (and other amounts) to be accelerated.
The Holder must deliver an Acceleration Notice no later than the close of business
on the Business Day immediately following the first Business Day on which an
Event of Default is no longer continuing; provided,
however, that with respect to a
Change of Control, the Holder must deliver an Acceleration Notice no later than
the close of business on the third (3rd) Business Day following the
date on which the Change of Control is effected or when it is publicly
announced, whichever is later.


 


(b)  Payment. Upon delivery of an
Acceleration Notice to the Company, the Company shall pay all outstanding
Obligations in full on the Acceleration Date. If the Company fails to pay the
Obligations in full on the Acceleration Date, the Holder shall be entitled to
interest thereon at the Default Interest Rate from the Acceleration Date until
the date on which all Obligations have been paid in full.


 


(c)           Events of Default. Each of the
following events shall be deemed an “Event of Default”:


 


(i)            a Liquidation Event occurs or is
publicly announced;


 


14

















 


(ii)           the Company breaches or provides
notice of its intent to breach, in a material respect, any covenant or other
material term or condition of this Note (including without limitation any
payment obligation thereunder) or any other Transaction Document, including but
not limited to the Company’s failure to deliver Conversion Shares and Warrant
Shares on or before the required delivery date therefor, and such breach
continues for a period of three (3) Business Days following written notice
thereof from the Holder;


 


(iii)          any representation or warranty made by
the Company in this Note or any other Transaction Document was inaccurate or
misleading in any material respect as of the date such representation or
warranty was made; and


 


(iv)          a default occurs or is declared, or
any amounts are accelerated, under or with respect to any instrument that
evidences Debt of the Company or any of its Subsidiaries in a principal amount
exceeding $100,000.


 


7.             PREPAYMENT.


 


The Company
shall be entitled to prepay principal of and interest (and any other amounts)
accrued on this Note, either in cash or through an Exchange in accordance with Section  2(c), at any time
without the prior written consent of the Holder; provided, however, that if the Holder exercises the Maturity
Extension Option, the Company may not prepay this Note prior to the Subsequent
Maturity Date without the prior consent of the Holder, which consent may be
withheld for any reason (or no reason) in the Holder’s sole discretion.


 


8.             MISCELLANEOUS.


 


(a)           Failure
to Exercise Rights not Waiver. No failure or delay on the part of the
Holder in the exercise of any power, right or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such
power, right or privilege preclude any other or further exercise thereof. All
rights and remedies of the Holder hereunder are cumulative and not exclusive of
any rights or remedies otherwise available. In the event that the Company does
not pay any amount of the Obligations when such amount becomes due (either in
cash or through an Exchange in accordance with Section  2(c)), the Company shall bear all costs
incurred by the Holder in collecting such amount, including without limitation
reasonable legal fees and expenses.


 


(b)           Notices.
Any notices, consents, waivers or other communications required or permitted to
be given under the terms of this Note must be in writing and will be deemed to
have been delivered: (i) upon receipt, when delivered personally; (ii) upon
receipt, when sent by facsimile (provided confirmation of transmission is
mechanically or electronically generated and kept on file by the sending
party); or (iii) one Business Day after deposit with an overnight courier
service, in each case properly addressed to the party to receive the same. The
addresses and facsimile numbers for such communications shall be:


 


	
   

  	
  if to the Company:

  
	
   

  	
   

  	
   

  
	
   

  	
  Earth Biofuels, Inc.

  
	
   

  	
  3001 Knox Street, Suite 403,

  
					



 


15

















 


	
   

  	
  Dallas, Texas 75205

  
	
   

  	
  Telephone:

  	
  214.389.9800

  
	
   

  	
  Facsimile:

  	
  214.389.9806

  
	
   

  	
  Attention:

  	
  Dennis McLaughlin

  
	
   

  	
   

  	
   

  
	
   

  	
  with a copy (for informational purposes
  only) to:

  
	
   

  	
   

  	
   

  
	
   

  	
  Scheef & Stone, LLP

  
	
   

  	
  Telephone:

  	
  214.706.4200

  
	
   

  	
  Facsimile:

  	
  214.706.4242

  
	
   

  	
  Attention:

  	
  Roger A. Crabb, Esq.

  
						



 


and if to the Holder, to the address and
facsimile number as to which the Holder has notified the Company in writing.
Written confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communication, (B) mechanically or electronically
generated by the sender’s facsimile machine containing the time, date,
recipient facsimile number and an image of the first page of such transmission
or (C) provided by an overnight courier service shall be rebuttable evidence of
personal service, receipt by facsimile or receipt from an overnight courier
service in accordance with clause (i), (ii) or (iii) above, respectively.


 


(c)           Amendments.
No amendment, modification or other change to, or waiver of any provision of,
this Note may be made unless such amendment, modification or change is (A) set
forth in writing and is signed by the Company and the Holder and (B) agreed to
in writing by the holders of at least sixty-six percent (66%) of the unpaid
principal amount of the Notes, it being understood that, notwithstanding
anything to the contrary contained in any Note, upon the satisfaction of the
conditions described in (A) and (B) above, each Note (including any Note held
by the Holder who did not execute the agreement specified in (B) above) shall
be deemed to incorporate any amendment, modification, change or waiver effected
thereby as of the effective date thereof.


 


(d)           Transfer
of Note. The Holder may sell, transfer or otherwise dispose of all or any
part of this Note (including without limitation pursuant to a pledge) to any
person or entity as long as such sale, transfer or disposition is the subject
of an effective registration statement under the Securities Act of 1933, as
amended, and applicable state securities laws, or is exempt from registration
thereunder, and is otherwise made in accordance with the applicable provisions
of the Securities Purchase Agreement. From and after the date of any such sale,
transfer or disposition, the transferee hereof shall be deemed to be the holder
of a Note in the principal amount acquired by such transferee, and the Company
shall, as promptly as practicable, issue and deliver to such transferee a new
Note identical in all respects to this Note, in the name of such transferee.
The Company shall be entitled to treat the original Holder as the holder of
this entire Note unless and until it receives written notice of the sale,
transfer or disposition hereof.


 


(e)           Lost
or Stolen Note. Upon receipt by the Company of evidence of the loss, theft,
destruction or mutilation of this Note, and (in the case of loss, theft or
destruction) of indemnity or security reasonably satisfactory to the Company,
and upon surrender and cancellation of the Note, if mutilated, the Company
shall execute and deliver to the Holder a new Note identical in all respects to
this Note.


 


16

















 


(f)            Governing
Law. This Note shall be governed by and construed in accordance with the
laws of the State of New York applicable to contracts made and to be performed
entirely within the State of New York.


 


(g)           Successors and Assigns. The
terms and conditions of this Note shall inure to the benefit of and be binding
upon the respective successors (whether by merger or otherwise) and permitted
assigns of the Company and the Holder. The Company may not assign its rights or
obligations under this Note except as specifically required or permitted
pursuant to the terms hereof.


 


(h)           Usury. This Note is subject to
the express condition that at no time shall the Company be obligated or required
to pay interest hereunder at a rate which could subject the Holder to either
civil or criminal liability as a result of being in excess of the maximum
interest rate which the Company is permitted by applicable law to contract or
agree to pay. If by the terms of this Note, the Company is at any time required
or obligated to pay interest hereunder at a rate in excess of such maximum
rate, the rate of interest under this Note shall be deemed to be immediately
reduced to such maximum rate and the interest payable shall be computed at such
maximum rate and all prior interest payments in excess of such maximum rate
shall be applied and shall be deemed to have been payments in reduction of the
principal balance of this Note.


 


[Signature
Page to Follow]


 


17

















 


IN WITNESS
WHEREOF, the Company has caused this Note to be signed in its name by its duly
authorized officer on the date first above written.


 


EARTH BIOFUELS, INC.


 


 


	
  By:

  	
   

  	
   

  
	
  Name:

  
	
  Title:

  



 


18

















 


ANNEX I


 


NOTICE OF CONVERSION


 


The undersigned hereby elects to convert
principal of the 8% Senior Convertible Note (the “Note”) issued by EARTH BIOFUELS, INC.
(the “Company”)
into shares of common stock (“Common Stock”) of the Company according to the terms and
conditions of the Note. Capitalized terms used herein and not otherwise defined
shall have the respective meanings set forth in the Note.


 


 


	
   

  	
  Date of Conversion:

  	
   

  
	
   

  	
   

  
	
   

  	
  Principal Amount of

  
	
   

  	
  Note to be Converted:

  	
   

  
	
   

  	
   

  
	
   

  	
  Amount of Interest

  
	
   

  	
  to be Converted:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Number of Shares of

  
	
   

  	
  Common Stock to be Issued:

  	
   

  
	
   

  	
   

  
	
   

  	
  Name of Holder:

  	
   

  
	
   

  	
   

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Signature:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
							



 


Holder Requests Delivery to be made:
(check one)


 


o                                    By
Delivery of Physical Certificates to the Above Address


 


o                                    Through
Depository Trust Corporation


(Account
                                                      )


 

















 


ANNEX II


 


Schedule of


Decreases


of Principal Amount


 


	
  Principal

  	
   

  	
  Amount of

  	
   

  	
   

  	
   

  
	
  Balance

  	
   

  	
  Decrease

  	
   

  	
  Date

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  $

  	
  5,000,000