Exhibit 10.6

 

NEITHER THESE SECURITIES NOR THE SECURITIESISSUABLE UPON THE EXERCISE OR CONVERSION OF THESE SECURITIES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED(THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS. THE SECURITIES REPRESENTED HEREBY MAY NOT BE EXERCISED,CONVERTED, OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE ASSIGNED (EACH A “TRANSFER”) EXCEPT(A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR INA TRANSFER NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (B) TO THE EXTENT THE TRANSFER DOES NOT CONSTITUTEAND WILL NOT RESULT IN A VIOLATION OF APPLICABLE FEDERAL OR STATE SECURITIES LAWS, AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TOTHE TRANSFEROR TO SUCH EFFECT (TO THE EXTENT REQUESTED BY COUNSEL OF THE COMPANY), THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLETO THE COMPANY. THE HOLDER HEREOF AGREES THAT IT WILL DELIVER, OR CAUSE TO BE DELIVERED, TO EACH PERSON TO WHOM THE SECURITIESHEREBY REPRESENTED ARE TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THESE SECURITIES AND THE SECURITIES ISSUABLEUPON EXERCISE OR CONVERSION OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES.

 

10% SECURED SUBORDINATED CONVERTIBLEPROMISSORY NOTE

 

 

THIS 10% SECURED SUBORDINATEDCONVERTIBLE NOTE is one of a series of duly authorized and validly issued 10% Secured Subordinated Convertible Notes of BalqonCorporation, a Nevada corporation, (the “Company”), having its principal place of business at 1420 240thStreet, Harbor City, CA 90710, issued pursuant to the terms and conditions contained in those certain Securities Purchase Agreementsentered into between the Company and the investors that purchased securities of the Company pursuant to the Company’s ConfidentialPrivate Placement Memorandum (the “Memorandum”) dated March 21, 2012 (this note, the “Note”and, collectively with the other notes of such series, the “Notes”).

 

**THE OBLIGATIONSDUE UNDER THIS NOTE ARE SECURED BY A SECURITY AGREEMENT (THE “SECURITY AGREEMENT”) DATED AS OF THE ORIGINALISSUE DATE. ADDITIONAL RIGHTS OF THE HOLDER ARE SET FORTH IN THE SECURITY AGREEMENT.**

 

FOR VALUE RECEIVED,BALQON CORPORATION, a Nevada corporation (“Company”), promises to pay to «Name» (“Holder”),or its registered assigns, the principal sum of [_________] DOLLARS ($[_________]), or such lesser amount as shall equal the outstandingprincipal amount hereof, together with interest from the date of this 10% Secured Subordinated Convertible Promissory Note (this“Note”) on the unpaid principal balance at a rate equal to 10% per annum, computed on the basis of the actualnumber of days elapsed and a year of three hundred sixty-five (365) days. Interest on the outstanding principal balance of thisNote shall be payable quarterly as described in Section 2. Subject to Section 6, all unpaid principal,together with any then unpaid and accrued interest and other amounts payable hereunder, shall be due and payable on the Note MaturityDate (as defined below). Subject to Section 6, any unpaid principal and accrued and unpaid interest on the Note MaturityDate shall be payable in cash. Upon payment in full of all principal and interest payable hereunder, this Note shall be surrenderedto the Company for cancellation.

 

The following is astatement of the rights of the Holder and the conditions to which this Note is subject, and to which the Holder, by the acceptanceof this Note, agrees:

 

1.            **CertainDefinitions**. For purposes of this Note, the following terms shall have the following respective meanings:

 

“BusinessDay” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States orany day on which banking institutions in the State of California are authorized or required by law or other governmental actionto close.

 

ClosingBid Price” and “Closing Sales Price” means, for any security as of any date, the last closing bidprice and last closing trade price, respectively, for such security on the principal securities exchange or trading market wheresuch security is listed or traded as reported by Bloomberg, or, if such principal market begins to operate on an extended hoursbasis and does not designate the closing bid price or the closing trade price, as the case may be, then the last bid price or thelast trade price, respectively, of such security prior to 4:00:00 p.m., New York time, as reported by Bloomberg, or, if the foregoingdo not apply, the last closing bid price or last trade price, respectively, of such security in the OTC Bulletin Board for suchsecurity as reported by Bloomberg, or, if no closing bid price or last trade price, respectively, is reported for such securityby Bloomberg, the average of the bid prices, or the ask prices, respectively, of any market makers for such security as reportedin the “pink sheets” by Pink OTC Markets. If the Closing Bid Price or the Closing Sale Price cannot be calculated fora security on a particular date on any of the foregoing bases, the Closing Bid Price or the Closing Sale Price, as the case maybe, of such security on such date shall be the fair market value as mutually determined by the Company and the Holder. All suchdeterminations to be appropriately adjusted for any stock dividend, stock split, stock combination or other similar transactionduring the applicable calculation period.

 

“CommonStock” means the common stock of the Company, par value $0.001 per share, and any other class of securities into whichsuch securities may hereafter be reclassified or changed.

 

 

 

“CommonStock Equivalents” means any securities of the Company which would entitle the holder thereof to acquire at any timeCommon Stock, including, without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is atany time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.

 

“ConversionShares” means the shares of Common Stock issuable upon conversion of this Note.

 

“Eventof Default” means any of the events specified as such in Section 5.1.

 

“ExemptIssuance” means the issuance of (a) shares of Common Stock or options to employees, consultants, officers or directorsof the Company pursuant to any stock or option plan duly adopted for such purpose, by a majority of the non-employee members ofthe Board of Directors or a majority of the members of a committee of non-employee directors established for such purpose, (b)securities upon the exercise or exchange of or conversion of any Securities issued hereunder and/or other securities exercisableor exchangeable for or convertible into shares of Common Stock issued and outstanding on the date of this Agreement, provided thatsuch securities have not been amended since the date of this Agreement to increase the number of such securities or to decreasethe exercise price, exchange price or conversion price of such securities, and (c) securities issued pursuant to acquisitions orstrategic transactions approved by a majority of the disinterested directors of the Company, provided, however, thatany such issuance shall only be to a Person (or to the equity-holders of a Person) which is an operating company or an asset ina business synergistic with the business of the Company and shall provide to the Company additional benefits in addition to theinvestment of funds, but shall not include a transaction in which the Company is issuing securities primarily for the purpose ofraising capital or to an entity whose primary business is investing in securities.

 

“GAAP”means the United States generally accepted accounting principles applied on a consistent basis during the periods involved.

 

“Holder”means the person or entity specified in the introductory paragraph of this Note or any transferee that is at the time the registeredholder of this Note. The Holder or any transferee is an “accredited investor” as defined under U.S. federal securitieslaws or otherwise will qualify to allow this offering to take place as a private placement under applicable securities laws.

 

“Indebtedness”means (x) any liabilities for borrowed money or amounts owed in excess of $50,000 (other than trade accounts payables incurredin the ordinary course of business), (y) all guaranties, endorsements and other contingent obligations in respect of indebtednessof others, whether or not the same are or should be reflected in the Company’s balance sheet (or the notes thereto), exceptguaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course ofbusiness; and (z) the present value of any lease payments in excess of $50,000 due under leases required to be capitalized in accordancewith GAAP.

 

“Insolvencyor Liquidation Proceeding” shall mean (i) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation,reorganization or other similar case or proceeding, relative to the Company or to its creditors, as such, or to its assets, or(ii) any liquidation, dissolution, reorganization or winding up of the Company, whether voluntary or involuntary and whether ornot involving insolvency or bankruptcy, or (iii) any assignment for the benefit of creditors or any other marshaling of assetsand liabilities of the Company.

 

“NoteMaturity Date” shall mean the earlier of (i) March 31, 2013, or (ii) the date as of which the outstanding principaland accrued interest on this Note and all other payments payable hereunder are due and payable to the Holder pursuant to Section 5.2.

 

“OriginalIssue Date” means the date of the first issuance of this Note, regardless of any transfers of this Note and regardlessof the number of instruments which may be issued to evidence this Note.

 

“Person”means any individual, corporation, partnership, trust, limited liability company, association or other entity.

 

“ReorganizationSecurities” shall mean shares of stock of the Company, or its successor, as reorganized, or other securities of the Companyor any other person provided for by a plan of reorganization, the payment of which is subordinated, at least to the same extentas this Note, to the payment of all Senior Indebtedness which may at the time be outstanding and the principal of which is dueno earlier than the principal of this Note, provided that the rights of the holders of the Senior Indebtedness are not impairedthereby or such holders as a class shall have approved such plan of reorganization.

 

“Representative”shall mean the trustee, agent or other representative for holders of all or any of the Senior Indebtedness, if any, designatedin the indenture, agreement or other document creating, evidencing or governing such Senior Indebtedness or pursuant to which itwas issued, or otherwise duly designated by the holders of such Senior Indebtedness.

 

“SeniorIndebtedness” shall mean the principal of and unpaid interest on all Indebtedness of the Company (i) incurred on, beforeor after the date of this Note for money borrowed from any bank, savings and loan or other commercial or financial institutionin an amount of up to $2,500,000 in the aggregate, and is evidenced by promissory notes, bonds, debentures or other written obligations,(ii) incurred before the date of this Note and listed on Schedule A to this Note, and (iii) incurred on, before or afterthe date of this Note in connection with any renewals or extensions of any Indebtedness described in (i) and (ii) above; provided,however, that the term shall not include (a) any lease financing arrangement involving the Company and (b) Indebtednesswhich by the terms of the instrument creating or evidencing it is subordinated to or on parity with this Note. For the avoidanceof doubt, Senior Indebtedness shall include Indebtedness of the Company incurred pursuant to the Company’s agreement withBridge Bank, National Association, as such agreement may be amended from time to time.

 

“TradingDay” means a day on which the principal Trading Market is open for trading.

 

“TradingMarket” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading onthe date in question: the NYSE AMEX, the NASDAQ Capital Market, the NASDAQ Global Market, the NASDAQ Global Select Market, theNew York Stock Exchange or the OTC Bulletin Board (or any successors to any of the foregoing).

 

Other capitalized termsnot defined in this Note have the same meaning as in the Securities Purchase Agreement.

 

2.            **Interest**.This Note will bear interest at a rate of 10% per annum. Accrued interest on this Note shall be due and payable quarterly on thefifth (5th) day after the last Business Day of each calendar quarter beginning with the quarter ended June 30,2012, with a final installment due on the Note Maturity Date, whether by acceleration, scheduled maturity or otherwise, unlesssuch amounts are converted into Common Stock pursuant to the terms set forth herein. Subject to Section 6, any accruedinterest on this Note that is due on or prior to the Note Maturity Date shall be payable in cash.

 

3.            **Prepayment**.At any time upon fifteen (15) days prior written notice to the Holder, the Company may prepay this Note in whole or in part;provided, however, that: (i) any prepayment of this Note may only be made in connection with the prepayment of all Noteson a pro rata basis, based on the respective aggregate outstanding principal amounts of each such Note, and (ii) any such prepaymentwill be applied first to the payment of expenses due under this Note, second to interest accrued on this Note and third, if theamount of prepayment exceeds the amount of all such expenses and accrued interest, to the payment of principal of this Note.

 

4.            **Subordination**.

 

4.1            **SubordinatedNotes Subordinate to Senior Indebtedness**. The provisions of this Section 4 apply notwithstanding anything tothe contrary contained in this Note. The Company covenants and agrees, and the Holder, by such Holder’s acceptance hereof,likewise covenants and agrees, that, to the extent and in the manner hereinafter set forth in this Section, the indebtedness representedby this Note and the payment of the principal of and interest on this Note are hereby expressly made subordinate and subject inright of the prior payment in full of all Senior Indebtedness. This Section 4 constitutes a continuing offer to allpersons who become holders of, or continue to hold, Senior Indebtedness, each of whom is an obligee hereunder and is entitled toenforce such holder’s rights hereunder, subject to the provisions hereof, without any act or notice of acceptance hereofor reliance hereon.

 

4.2            **PaymentOver of Proceeds Upon Dissolution, Etc.**

 

(a)            Inthe event of any Insolvency or Liquidation Proceeding, all Senior Indebtedness shall first be paid in full before the Holder isentitled to receive any direct or indirect payment or distribution of any cash, property or securities (excluding ReorganizationSecurities) on account of the principal of or interest on this Note.

 

(b)            Theholders of Senior Indebtedness (or their respective Representatives) shall be entitled to receive directly, for application tothe payment thereof (to the extent necessary to pay all such Senior Indebtedness in full after giving effect to any substantiallyconcurrent payment or distribution to the holders of such Senior Indebtedness), any payment or distribution of any kind or character,whether in cash, property or securities (excluding Reorganization Securities but including any payment or distribution, exceptReorganization Securities, which may be payable or deliverable by reason of the payment of any other indebtedness of the Companybeing subordinated to the payment of this Note) which may be payable or deliverable in respect of this Note in any such Insolvencyor Liquidation Proceeding.

 

(c)            Inthe event that, notwithstanding the foregoing provisions of this Section 4.2, the Holder shall have received any paymentfrom or distribution of assets of the Company in an Insolvency or Liquidation Proceeding or the estate created by the commencementof any such Insolvency or Liquidation Proceeding, of any kind or character in respect of this Note whether in cash, property orsecurities (excluding Reorganization Securities but including any payment or distribution, except Reorganization Securities, whichmay be payable or deliverable by reason of the payment of any other indebtedness of the Company being subordinated to the paymentof this Note) before all Senior Indebtedness is paid in full, then and in such event such payment or distribution shall be receivedand held in trust for and shall be paid over to the holders of the Senior Indebtedness remaining unpaid (or their respective Representatives),to the extent necessary to pay all such Senior Indebtedness in full after giving effect to any substantially concurrent paymentor distribution to the holders of such Senior Indebtedness, for application to the payment in full of such Senior Indebtedness.

 

4.3            **Defaulton Senior Indebtedness**.

 

(a)            Ifthere exists a default in the payment when due (whether at maturity or upon acceleration or mandatory repayment, or on any principalinstallment payment date or interest payment date, or otherwise) of any Senior Indebtedness (a “Payment Default”)and such default shall not have been cured or waived in writing by or on behalf of the requisite percentage of the holders of suchSenior Indebtedness (or their Representative, if any), then any payment on account of principal of or interest on this Note whichthe Holder would then be entitled to receive, but for the provisions of this Section 4.3(a), shall instead be paidover to the holders of such Senior Indebtedness (or their Representative, if any) until all amounts of Senior Indebtedness thendue and payable have been paid in full, prior to any direct or indirect payment by or on behalf of the Company to the holder ofany principal of or interest on this Note.

 

(b)            TheCompany may not, directly or indirectly, make, and the Holder may not ask, demand, take or receive from or on behalf of the Company,any payment on account of the principal of or interest on this Note during the period (a “Deferral Period”)from the date the Company and/or the Holder receive from a holder of Senior Indebtedness a notice (a “Deferral Notice”)of:

 

(i)            theexistence of a Payment Default; or

 

(ii)            theexistence of any event of default (other than a Payment Default) under any agreement or instrument pursuant to which any SeniorIndebtedness is issued, in each instance as now in effect or as hereafter from time to time modified or amended, without the necessityof any consent by or notice to the Holders (a “Specified Covenant Default”);

 

until the earlier of (i) the datesuch Payment Default or Specified Covenant Default is cured, waived in writing or otherwise ceases to exist and (ii) the one hundredeightieth (180th) day after receipt by the Company and/or by the holder of this Note of such Deferral Notice; provided,however, that (x) only one Deferral Notice relating to the same Payment Default or Specified Covenant Default may be given,(y) no subsequent Deferral Notice may be given with respect to any Payment Default or Specified Covenant Default existing at thetime an effective Deferral Notice is given and (z) if any such Deferral Notice has been given, no subsequent Deferral Notice withrespect to any number of different Payment Defaults or Specified Covenant Defaults shall be effective until the later of (1) thedate such subsequent Deferral Notice is received by the Company and the holders of Subordinated Notes and (2) the three hundredsixty-fifth (365th) day after receipt of the then most recent prior effective Deferral Notice. So long as any SeniorIndebtedness is outstanding, the Holder shall give the holders of the Senior Indebtedness five (5) Business Days prior writtennotice of any proposed demand for payment or institution of proceedings with respect to this Note (which notice may be given duringa Deferral Period provided that the proposed demand for payment is not to be made or the proposed proceedings are not to be instituteduntil the expiration of such Deferral Period).

 

(c)            Upontermination of any Deferral Period the Company shall resume payments on account of the principal of and interest on this Note subjectto the obligation of the Company and the Holder to pay over to the holders of Senior Indebtedness amounts otherwise payable onaccount of the principal of and interest on this Note pursuant to the provisions of, and in the circumstances specified in, thisSection 4.

 

(d)            Duringthe first one hundred twenty (120) days of any Deferral Period, payment on account of this Note may not be accelerated unless avoluntary Insolvency or Liquidation Proceeding shall be instituted by the Company or an involuntary Insolvency or Liquidation Proceedingshall be instituted against the Company and such proceeding remains undismissed for a period of sixty (60) days. So long as anySenior Indebtedness is outstanding, the Holder shall give the holders of the Senior Indebtedness five (5) Business Days’prior written notice of any proposed acceleration with respect to this Note (which notice may be given during a Deferral Periodprovided that the proposed acceleration is not to be effective until the expiration of such Deferral Period).

 

(e)            Inthe event that, notwithstanding the foregoing provisions of this Section 4.3, any payment shall be made by or on behalfof the Company and received by the Holder at a time after the giving of a Deferral Notice and during a Deferral Period, then suchpayment shall be held in trust for the benefit of and shall be immediately paid over to the holders of Senior Indebtedness remainingunpaid or their respective Representatives, for application to the payment in full of all Senior Indebtedness in accordance withits terms (after giving effect to any prior or substantially concurrent payment to the holders of such Senior Indebtedness).

 

4.4            **Subrogationto Rights of Holders of Senior Indebtedness**. After all amounts payable under or in respect of Senior Indebtedness are paidin full, the Holder shall be subrogated to the extent of the payments or distributions made to the holders of, or otherwise appliedto payment of, such Senior Indebtedness pursuant to the provisions of this Section 4 (equally and ratably with theholders of all indebtedness of the Company which by its express terms is subordinate and subject in right of payment to SeniorIndebtedness to substantially the same extent as this Note is so subordinate and subject in right of payment and which is entitledto like rights of subrogation), to the rights of the holders of such Senior Indebtedness (or their respective Representatives)to receive payments and distributions of cash, property and securities applicable to the Senior Indebtedness until the principalof and interest on this Note shall be paid in full. For purposes of such subrogation, no payments or distributions to the holdersof the Senior Indebtedness (or their respective Representatives) of any cash, property or securities to which the Holder wouldbe entitled except for the provisions of this Section 4, and no payments over pursuant to the provisions of this Section 4to the holders of Senior Indebtedness (or their respective Representatives) by the Company or the Holder shall, as among the Companyand its creditors (other than holders of Senior Indebtedness and the Holder), be deemed to be a payment or distribution by theCompany to or on account of Senior Indebtedness it being understood that the provisions of this Section 4 are solelyfor the purpose of defining the relative rights of the holders of Senior Indebtedness on the one hand and the Holder on the otherhand.

 

If any paymentor distribution to which the Holder would otherwise have been entitled but for the provisions of this Section 4 shallhave been applied, pursuant to the provisions of this Section 4, to the payment of all amounts payable under the SeniorIndebtedness, then and in such case, the Holder shall be entitled to receive (equally and ratably with the holders of all indebtednessof the Company which by its express terms is subordinate and subject in right of payment to Senior Indebtedness to substantiallythe same extent as this Note is subordinate and subject in right of payment and which is entitled to like rights) from the holdersof such Senior Indebtedness (or their respective Representatives) any substantially contemporaneous payments or distributions receivedby such holders of Senior Indebtedness (or their respective Representatives) in excess of the amount sufficient to pay in fullall obligations payable under or in respect of such Senior Indebtedness.

 

4.5            **Rightsof Holders Not to Be Impaired**. Nothing contained in this Section 4 or elsewhere in this Note is intended toor shall:

 

(a)            impair,as among the Company, its creditors other than holders or Senior Indebtedness and the Holder, the obligation of the Company, whichis absolute and unconditional, to pay to the Holder the principal of and premium, if any, and interest on this Note as and whenthe same shall become due and payable in accordance with their terms; or

 

(b)            affectthe relative rights against the Company of the Holder of this Note and creditors of the Company other than the holders of SeniorIndebtedness; or

 

(c)            preventthe Holder from exercising all remedies otherwise permitted by applicable law upon default subject to the rights, if any, underthis Section 4 of the holders of Senior Indebtedness to receive payments or distributions otherwise payable or deliverableto, or received by, such holder upon the exercise of any such remedy and subject to the restriction on acceleration set forth inSection 4.3(d).

 

4.6            **Effectuationof Subordination**. If the Holder does not file a proper claim or proof of debt in the form required in any Insolvency orLiquidation Proceeding prior to thirty (30) days before the expiration of the time to file such claims or proofs, then the holdersof the Senior Indebtedness, or their Representatives, are hereby authorized, and shall have the right (without any duty), to filean appropriate claim for and on behalf of such holder.

 

4.7            **NoWaiver of Subordination Provisions**. No right of any present or future holder of any Senior Indebtedness, or Representativethereof, to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failureto act on the part of the Company or by any act or failure to act by any such holder or Representative thereof, or by any noncomplianceby the Company with the terms, provisions and covenants of this Note regardless of any knowledge thereof which any such holderor Representative thereof may have or be otherwise charged with.

 

Without inany way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness (or their Representatives, if applicable)may, at any time and from time to time, without the consent of or notice to the Holder, without incurring responsibility to theHolder and without impairing or releasing the subordination and other benefits provided in this Section 4 or the obligationshereunder of the Holder to the holders of Senior Indebtedness, do any one or more of the following all without notice to the Holderand even if any right of reimbursement or subrogation or other right or remedy of the Holder is affected, impaired or extinguishedthereby:

 

(a)            changethe manner, place or terms of payment or change or extend the time of payment of, or renew, exchange, amend or alter, the termsof any Senior Indebtedness, any security therefor or guaranty thereof or any liability of the Company or any guarantor to suchholder, or any liability incurred directly or indirectly in respect thereof, or otherwise amend, renew, exchange, modify or supplementin any manner Senior Indebtedness or any instrument evidencing or guaranteeing or securing the same or any agreement under whichSenior Indebtedness is outstanding;

 

(b)            sell,exchange, release, surrender, realize upon, enforce or otherwise deal with in any manner and any order any property pledged, mortgagedor otherwise securing Senior Indebtedness or any liability of the Company or any guarantor to such holder, or any liability incurreddirectly or indirectly in respect thereof;

 

(c)            settleor compromise any Senior Indebtedness or any other liability of the Company or any guarantor of the Senior Indebtedness to suchholder or any security therefor or any liability incurred directly or indirectly in respect thereof and apply any sums by whomsoeverpaid and however realized to any liability (including, without limitation, Senior Indebtedness) in any manner or order; and

 

(d)            failto take or to record or otherwise perfect, for any reason or for no reason, any lien or security interest securing Senior Indebtednessby whomsoever granted, exercise or delay in or refrain from exercising any right or remedy against the Company or any securityor any guarantor or any other person, elect any remedy and otherwise deal freely with the Company and any security and any guarantorof the Senior Indebtedness or any liability of the Company or any guarantor to such holder or any liability incurred directly orindirectly in respect thereof.

 

4.8            **Relianceon Court Orders; Evidence of Status**. Upon any payment or distribution of assets of the Company referred to in Section 4.2,the Holder shall be entitled to rely upon a certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent or otherperson making such payment or distribution delivered to the Holder for the purpose of ascertaining the persons entitled to participatein such payment or distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof orpayable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Section 4.

 

In the absenceof any such receiver, trustee in bankruptcy, liquidating trustee, agent or other person, the holder of this Note shall be entitledto rely upon a written notice by a person representing himself to be a holder of Senior Indebtedness (or a Representative on behalfof such holder) as evidence that such person is a holder of Senior Indebtedness (or is such a Representative) for any relevantpurpose. In the event that any holder determines in good faith that further evidence is required with respect to the right of anyperson as a holder of Senior Indebtedness (or such a Representative), as to the extent to which such person is entitled to participatein such payment or distribution, and as to other facts pertinent to the rights of such person under this Section 4,such holder may request such person to furnish evidence to the reasonable satisfaction of such holder as to the amount of SeniorIndebtedness held by such person, the extent to which such person is entitled to participate in such payment or distribution andany other facts pertinent to the rights of such person under this Section 4, and if such evidence is not furnishedsuch holder may defer (without liability to any holder of Senior Indebtedness or any Representative of such holder) any paymentto such person pending judicial determination as to the right of such person to receive such payment or until such time as suchholder shall be otherwise satisfied as to the right of such person to receive such payment.

 

4.9            **Notto Prevent Events of Default**. The failure to make a payment on account of the principal of or interest on this Note byreason of any provision of this Section 4 shall not be construed as preventing the occurrence of a default or an Eventof Default under this Note. Except as expressly provided in Section 4.3(d), nothing in this Section 4 shallaffect the rights of the Holder to accelerate the maturity of this Note in accordance with its terms.

 

4.10            **Amendments**.Without the prior written consent of the holders of the Senior Indebtedness, the Company and the Holder shall not amend, supplementor otherwise modify any provision of this Section 4 if such amendment would have a material adverse effect on the holdersof the Senior Indebtedness, amend, supplement or otherwise modify any other provision of this Note.

 

5.            **Default**.

 

5.1            **Eventsof Default**. If any of the following events (each, an “Event of Default” and collectively, “Eventsof Default”) shall occur:

 

(a)            theCompany shall default in the payment of any part of the principal of this Note or the other Notes;

 

(b)            theCompany shall default in the payment of any installment of interest on this Note or the other Notes for more than fifteen (15)days after the same shall become due and payable;

 

(c)            theCompany shall breach or default in the performance of any covenant or warranty of the Company in this Note, and continuance ofsuch breach for a period of thirty (30) days after there has been given, by registered or certified mail, to the Company by theholder of this Note, a written notice specifying such breach or default and requiring it to be remedied;

 

(d)            acourt having jurisdiction in the premises shall enter a decree or order for relief in respect of the Company in an involuntarycase under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator,assignee, custodian, trustee, sequestrator (or similar official) of the Company or for any substantial part of its property, orordering the winding-up or liquidation of its affairs, and such decree or order shall remain unstayed and in effect for a periodof sixty (60) consecutive days; or

 

(e)            theCompany shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect,shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointmentof or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of theCompany or for any substantial part of its property, or shall make any general assignment for the benefit of creditors, or shallfail generally to pay its debts as they become due, or shall take any corporate action in furtherance of any of the foregoing;

 

then and in any such event theHolder of this Note may at any time (unless all defaults theretofore or thereupon shall have been remedied) at its option, by writtennotice to the Company, declare this Note to be due and payable, whereupon the same shall forthwith mature and become due and payablewithout presentment, demand, protest or other notice, all of which are hereby waived.

 

5.2            **Remedieson and Notices of Default**. Subject to the provisions of Section 4, in case any one or more Events of Defaultshall occur, the Holder may, with the consent of the holders of 67% of the then outstanding principal amount of the Notes, proceedto protect and enforce the rights of such holder by a suit in equity, action at law or other appropriate proceeding, whether forthe specific performance of any agreement contained in this Note, or for an injunction against a violation of any of the termsor provisions hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law. In case of a defaultunder this Note, the Company will pay to the Holder such further amount as shall be sufficient to cover the reasonable cost andexpense of enforcement, including, without limitation, reasonable attorneys’ fees. If the Holder shall give any notice ortake any other action in respect of a claimed default, the Company shall forthwith give written notice thereof to all other holdersof similarly subordinated notes at the time outstanding, describing the notice or action and the nature of the claimed default.No course of dealing and no delay on the part of any Holder of this Note in exercising any right shall operate as a waiver thereofor otherwise prejudice such Holder’s rights or the rights of the holder of any similarly subordinated notes. No remedy conferredby this Note upon the Holder shall be exclusive of any other remedy referred to herein or now or hereafter available at law, inequity, by statute or otherwise. In addition to the foregoing remedies, upon the occurrence or existence of any Event of Default,the Holder may exercise any other right, power or remedy granted to the Holder as set forth in the Security Agreement.

 

6.            **Conversion**.

 

6.1            **AutomaticConversion**. If at any time after one hundred eighty (180) days after the issuance of this Note the Closing Bid Price orClosing Sales Price, as the case may be, of a share of the Company’s Common Stock equals or exceeds $4.50 (subject to appropriateadjustment in the event of a stock split, stock dividend, combination or similar event) for twenty (20) consecutive Trading Days,then the principal amount of this Note shall automatically convert into shares of Common Stock at the Conversion Price (as definedbelow). Accrued and unpaid interest on the date of such automatic conversion shall be paid in cash by the Company. The conversionwill be deemed to have occurred as of the close of business on such twentieth (20th) consecutive Trading Day. The Companyshall notify the Holder in writing within one (1) Trading Day after any automatic conversion, and will cause certificate representingthe Conversion Shares to be issued within three (3) Trading Days after automatic conversion, and will deliver those certificatesto the Holder by overnight courier immediately after receipt of the original of this Note for cancellation.

 

6.2            **ConversionProcedure in the Event of Automatic Conversion**. In the event of automatic conversion, the outstanding principal under thisNote will convert automatically without any further action by the Company whether or not the Note is surrendered to the Companyor its transfer agent. The Company will not be obligated to issue certificates evidencing the securities issuable upon automaticconversion of this Note unless this Note is either delivered to the Company or its transfer agent, or the Holder notifies the Companyor its transfer agent that this Note has been mutilated, lost, stolen or destroyed and executes an agreement reasonably satisfactoryto the Company to indemnify the Company from any loss incurred by it in connection with this Note. At its expense, the Companywill, as soon as reasonably practicable thereafter, issue and deliver to the Holder a certificate for the number of shares of CommonStock to which the Holder will be entitled upon conversion (bearing such legends as are required by applicable state and federalsecurities laws in the opinion of counsel to the Company), together with a check payable to the Holder for any cash amounts payableas described in Section 6.1 (with respect to accrued and unpaid interest) and Section 6.5 (with respectto fractional shares).

 

6.3            **VoluntaryConversion**. The Holder may, at any time before this Note has been repaid in full, elect to convert all or any portion ofthe outstanding principal into shares of Common Stock at the Conversion Price.

 

6.4            **ConversionProcedure in the Event of Voluntary Conversion**.

 

(a)            Eachvoluntary conversion of this Note shall be effected by the surrender of this Note at the principal office of the Company at anytime during normal business hours, together with a written notice by the Holder stating that the Holder desires to convert theentire, or a specified increment of, principal of this Note into Common Stock. Each conversion of a Note will be deemed to havebeen effected as of the close of business on the date on which this Note has been surrendered and the notice has been received,and at that time, the rights of the Holder of this Note will cease and the person or persons in whose name or names any certificateor certificates for Common Stock are to be issued upon conversion will be deemed to have become the Holder or Holders of recordof the shares of Common Stock represented thereby.

 

(b)            Withintwo (2) Trading Days after a conversion has been effected, the Company will deliver to the converting Holder:

 

(i)            acertificate or certificates representing the number of shares of Common Stock issuable by reason of conversion in such name ornames and such denomination or denominations as the converting Holder has specified; and

 

(ii)          areplacement Note representing the principal amount of this Note delivered to the Company in connection with the conversion butwhich was not converted.

 

(c)            Theissuance of certificates for Common Stock upon conversion of this Note will be made without charge to the Holder for any tax inrespect thereof or other cost incurred by the Company in connection with conversion and the related issuance of Common Stock. Uponconversion of any portion of this Note, the Company will take all actions as are necessary in order to ensure that the Common Stockissuable with respect to conversion will be validly issued, fully paid and nonassessable.

 

(d)            TheCompany will not close its books against the transfer of this Note or of the shares of Common Stock issued or issuable upon conversionof this Note in any manner which interferes with the timely conversion of this Note, and will at all times reserve for issuancethe maximum number of shares of Common Stock into which this Note is convertible.

 

6.5            **FractionalShares; Interest**. No fractional shares shall be issued upon conversion of this Note. In lieu of the Company issuing anyfractional shares to Holder upon the conversion of this Note, the Company shall pay to Holder an amount in cash equal to the productobtained by multiplying the Conversion Price applied to effect such conversion by the fraction of a share not issued pursuant tothe previous sentence. Upon conversion of this Note in full or the payment of outstanding amounts specified in this Note, the Companyshall be released from all its obligations and liabilities under this Note.

 

6.6            **ConversionPrice**. The initial Conversion Price shall be $0.40 per share of Common Stock. The Conversion Price shall be subject toadjustment as described in Section 7.

 

7.            **ConversionPrice Adjustments**.

 

7.1            **Adjustmentsfor Stock Splits and Subdivisions**. In the event the Company should at any time or from time to time after the date of issuancehereof fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determinationof holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock withoutpayment of any consideration by such holders for the additional shares of Common Stock, then, as of such record date (or the dateof such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price shall be appropriately decreasedso that the number of shares of Common Stock issuable upon conversion of this Note shall be increased in proportion to such increaseof outstanding shares.

 

7.2            **Adjustmentsfor Reverse Stock Splits**. If the number of shares of Common Stock outstanding at any time after the date hereof is decreasedby a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the ConversionPrice shall be appropriately increased so that the number of shares of Common Stock issuable on conversion hereof shall be decreasedin proportion to such decrease in outstanding shares.

 

7.3            **SubsequentEquity Sales.**

 

(a)            If,at any time while this Note is outstanding, the Company sells or grants any option to purchase or sells or grants any right toreprice, or otherwise disposes of or issues (or announces any sale, grant or any option to purchase or other disposition), anyCommon Stock or Common Stock Equivalents entitling any Person to acquire shares of Common Stock at an effective price per sharethat is lower than the then Conversion Price (such lower price, the “Base Conversion Price” and such issuances,collectively, a “Dilutive Issuance”) (if the holder of the Common Stock or Common Stock Equivalents so issuedshall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchangeprices or otherwise, or due to warrants, options or rights per share which are issued in connection with such issuance, be entitledto receive shares of Common Stock at an effective price per share that is lower than the Conversion Price, such issuance shallbe deemed to have occurred for less than the Conversion Price on such date of the Dilutive Issuance), then the Conversion Priceshall be reduced to equal the Base Conversion Price. Such adjustments shall be made whenever such Common Stock or Common StockEquivalents are issued.

 

(b)            Notwithstandingthe foregoing, no adjustment will be made under this Section 7.3 in respect of an Exempt Issuance. The Company shallnotify the Holder in writing, no later than the Trading Day following the issuance of any Common Stock or Common Stock Equivalentssubject to this Section 7.3, indicating therein the applicable issuance price, or applicable reset price, exchangeprice, conversion price and other pricing terms (such notice, the “Dilutive Issuance Notice”). For purposesof clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 7.3, uponthe occurrence of any Dilutive Issuance, the Holder is entitled to receive a number of Conversion Shares based upon the Base ConversionPrice on or after the date of such Dilutive Issuance.

 

(c)            Calculations.All calculations under this Section 7 shall be made to the nearest cent or the nearest 1/100th of a share, as the casemay be. For purposes of this Section 7, the number of shares of Common Stock deemed to be issued and outstanding asof a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.

 

7.4            **Noticesof Record Date, Etc**. In the event of:

 

(a)            Anytaking by the Company of a record of the holders of any class of securities of the Company for the purpose of determining the holdersthereof who are entitled to receive any dividend (other than a cash dividend payable out of earned surplus at the same rate asthat of the last such cash dividend theretofore paid) or other distribution or any right to subscribe for, purchase or otherwiseacquire any shares of stock of any class or any other securities or property, or to receive any other right; or

 

(b)            Anycapital reorganization of Company, any reclassification or recapitalization of the capital stock of Company or any transfer ofall or substantially all of the assets of the Company to any other Person or any consolidation or merger involving the Company;or

 

(c)            Anyvoluntary or involuntary dissolution, liquidation or winding-up of the Company,

 

the Company will mail to theHolder at least ten (10) days prior to the earliest date specified therein, a notice specifying (A) the date on which any suchrecord is to be taken for the purpose of such dividend, distribution or right and the amount and character of such dividend, distributionor right; and (B) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidationor winding-up is expected to become effective and the record date for determining shareholders entitled to vote thereon.

 

7.5            **Reservationof Stock Issuable Upon Conversion**. The Company shall at all times reserve and keep available out of its authorized butunissued shares of Common Stock for the purpose of effecting the conversion of this Note such number of its shares of Common Stockas shall from time to time be sufficient to effect the conversion of this Note; and if at any time the number of authorized butunissued shares of Common Stock shall not be sufficient to effect the conversion of the entire outstanding principal amount ofthis Note, without limitation of such other remedies as shall be available to the Holder of this Note, the Company will use itsbest efforts to take such corporate action as may, in the opinion of counsel, be necessary to increase its authorized but unissuedshares of Common Stock to such number of shares as shall be sufficient for such purposes.

 

8.            **Successorsand Assigns**. Subject to the restrictions on transfer described in Sections 10 and 11, the rights and obligationsof Company and the Holder shall be binding upon and benefit the successors, assigns, heirs, administrators and transferees of theparties.

 

9.            **Waiverand Amendment**. Any provision of this Note may be amended, waived or modified upon the written consent of Company and theholders of a majority in principal amount of the Notes.

 

10.            **Transferof this Note or Securities Issuable on Conversion Hereof**. With respect to any offer, sale or other disposition of thisNote or securities into which such Note may be converted, the Holder will give written notice to the Company prior thereto, describingbriefly the manner thereof, together with a written opinion of the Holder’s counsel, or other evidence if reasonably satisfactoryto the Company, to the effect that such offer, sale or other distribution may be effected without registration or qualification(under any federal or state law then in effect). Upon receiving such written notice and reasonably satisfactory opinion, if sorequested, or other evidence, the Company, as promptly as practicable, shall notify the Holder that the Holder may sell or otherwisedispose of this Note or such securities, all in accordance with the terms of the notice delivered to Company. If a determinationhas been made pursuant to this Section 10 that the opinion of counsel for the Holder, or other evidence, is not reasonablysatisfactory to the Company, the Company shall so notify the Holder promptly after such determination has been made. Each Notethus transferred and each certificate representing the securities thus transferred shall bear a legend as to the applicable restrictionson transferability in order to ensure compliance with the Securities Act, unless in the opinion of counsel for the Company suchlegend is not required in order to ensure compliance with the Securities Act. The Company may issue stop transfer instructionsto its transfer agent in connection with such restrictions. Subject to the foregoing transfers of this Note shall be registeredupon registration books maintained for such purpose by or on behalf of the Company as provided in the Securities Purchase Agreement.Prior to presentation of this Note for registration of transfer, the Company shall treat the registered Holder hereof as the ownerand the Holder of this Note for the purpose of receiving all payments of principal and interest hereon and for all other purposeswhatsoever, whether or not this Note shall be overdue and the Company shall not be affected by notice to the contrary.

 

11.            **Assignmentby the Company**. Neither this Note nor any of the rights, interests or obligations hereunder may be assigned, by operationof law or otherwise, in whole or in part, by Company without the prior written consent of the Holder.

 

12.            **Notices**.All notices, requests, demands, consents, instructions or other communications required or permitted hereunder shall in writingand faxed, mailed or delivered to each party at the respective addresses of the parties as set forth in the Securities PurchaseAgreement, or at such other address or facsimile number as the Company shall have furnished to Holder in writing. All such noticesand communications shall be effective (i) when sent by Federal Express or other overnight service of recognized standing, on theBusiness Day following the deposit with such service; (ii) when mailed, by registered or certified mail, first class postage prepaidand addressed as aforesaid through the United States Postal Service, upon receipt; (iii) when delivered by hand, upon delivery;and (iv) when faxed, upon confirmation of receipt.

 

13.            **SecuredObligation**. The obligations of the Company under this Note are secured by all assets of the Company and pursuant to theSecurity Agreement between the Company and the Secured Parties (as defined therein).

 

14.            **PariPassu Notes**. This Note ranks paripassu with all other Notes now or hereafter issued in connection with theMemorandum. The Holder acknowledges and agrees that the payment of all or any portion of the outstanding principal amount of thisNote and all interest hereon shall be paripassu in right of payment and in all other respects to the other Notes.In the event the Holder receives payments in excess of its pro rata share of the Company’s payments to the holders of allof the Notes, then the Holder shall hold in trust all such excess payments for the benefit of the holders of the other Notes andshall pay such amounts held in trust to such other holders upon demand by such holders.

 

15.            **Payment**.Payment shall be made in lawful tender of the United States.

 

16.            **Usury**.In the event any interest is paid on this Note which is deemed to be in excess of the then legal maximum rate, then that portionof the interest payment representing an amount in excess of the then legal maximum rate shall be deemed a payment of principaland applied against the principal of this Note.

 

17.            **Waivers**.The Company hereby waives notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor andall other notices or demands relative to this instrument.

 

18.            **GoverningLaw**. This Note and all actions arising out of or in connection with this Note shall be governed by and construed in accordancewith the laws of the State of California, without regard to the conflicts of law provisions of the State of California, or of anyother state.

 

[signature page follows]

 

IN WITNESS WHEREOF,the Company has caused this Note to be issued as of the date first written above.