Exhibit 10.2

 

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 Amendment and Exchange Agreements(collectively, the “Exchange Agreements”), dated effective as of March 30, 2012, entered into between the Companyand each of the holders of $916,500 in aggregate principal amount outstanding under those certain Unsecured Subordinated ConvertiblePromissory Notes issued pursuant to the Company’s Confidential Private Placement Memorandum dated March 23, 2009 (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 AND EXECUTED BY THE COMPANY FOR THE BENEFIT OF THE HOLDERS OF THE NOTES. ADDITIONAL RIGHTS OF THE HOLDER ARE SET FORTHIN 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 «IPrincipal2» THOUSAND DOLLARS ($«IPrincipal»), or suchlesser amount as shall equal the outstanding principal amount hereof, together with interest from the date of this 10% SecuredSubordinated Convertible Promissory Note (this “Note”) on the unpaid principal balance at a rate equal to 10%per annum, computed on the basis of the actual number of days elapsed and a year of three hundred sixty-five (365) days. Intereston the outstanding principal balance of this Note shall be payable quarterly as described in Section 2. Subject toSection 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 Maturity Date (as defined below). Subject to Section 6, any unpaid principal andaccrued and unpaid interest on the Note Maturity Date shall be payable in cash. Upon payment in full of all principal and interestpayable hereunder, this Note shall be surrendered to 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.              **Certain Definitions**. 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 bedue and payable quarterly on the fifth (5th) day after the last Business Day of each calendar quarter beginning withthe quarter ended June 30, 2012, with a final installment due on the Note Maturity Date, whether by acceleration, scheduledmaturity or otherwise, unless such amounts are converted into Common Stock pursuant to the terms set forth herein. Subject to Section 6,any accrued interest 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 prepaythis Note in whole or in part; provided, however, that: (i) any prepayment of this Note may only be made in connectionwith the prepayment of all Notes on a pro rata basis, based on the respective aggregate outstanding principal amounts of each suchNote, and (ii) any such prepayment will be applied first to the payment of expenses due under this Note, second to interest accruedon this Note and third, if the amount of prepayment exceeds the amount of all such expenses and accrued interest, to the paymentof principal of this Note.

 

4.              **Subordination**.

 

4.1           **Subordinated Notes Subordinate to Senior Indebtedness**. The provisions of this Section 4 applynotwithstanding anything to the contrary contained in this Note. The Company covenants and agrees, and the Holder, by such Holder’sacceptance hereof, likewise covenants and agrees, that, to the extent and in the manner hereinafter set forth in this Section,the indebtedness represented by this Note and the payment of the principal of and interest on this Note are hereby expressly madesubordinate and subject in right of the prior payment in full of all Senior Indebtedness. This Section 4 constitutesa continuing offer to all persons who become holders of, or continue to hold, Senior Indebtedness, each of whom is an obligee hereunderand is entitled to enforce such holder’s rights hereunder, subject to the provisions hereof, without any act or notice ofacceptance hereof or reliance hereon.

 

4.2           **Payment Over of Proceeds Upon Dissolution, Etc.**

 

(a)            In the event of any Insolvency or Liquidation Proceeding, all Senior Indebtedness shall first be paid in full before theHolder is entitled 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)           The holders of Senior Indebtedness (or their respective Representatives) shall be entitled to receive directly, for applicationto the 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)            In the event that, notwithstanding the foregoing provisions of this Section 4.2, the Holder shall have receivedany payment from or distribution of assets of the Company in an Insolvency or Liquidation Proceeding or the estate created by thecommencement of any such Insolvency or Liquidation Proceeding, of any kind or character in respect of this Note whether in cash,property or securities (excluding Reorganization Securities but including any payment or distribution, except Reorganization Securities,which may be payable or deliverable by reason of the payment of any other indebtedness of the Company being subordinated to thepayment of this Note) before all Senior Indebtedness is paid in full, then and in such event such payment or distribution shallbe received and held in trust for and shall be paid over to the holders of the Senior Indebtedness remaining unpaid (or their respectiveRepresentatives), 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, for application to the payment in full of such SeniorIndebtedness.

 

4.3           **Default on Senior Indebtedness**.

 

(a)            If there exists a default in the payment when due (whether at maturity or upon acceleration or mandatory repayment, or onany principal installment payment date or interest payment date, or otherwise) of any Senior Indebtedness (a “PaymentDefault”) and such default shall not have been cured or waived in writing by or on behalf of the requisite percentageof the holders of such Senior Indebtedness (or their Representative, if any), then any payment on account of principal of or intereston this Note which the Holder would then be entitled to receive, but for the provisions of this Section 4.3(a), shallinstead be paid over to the holders of such Senior Indebtedness (or their Representative, if any) until all amounts of Senior Indebtednessthen due and payable have been paid in full, prior to any direct or indirect payment by or on behalf of the Company to the holderof any principal of or interest on this Note.

 

(b)           The Company may not, directly or indirectly, make, and the Holder may not ask, demand, take or receive from or on behalfof 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)             the existence of a Payment Default; or

 

(ii)           the existence of any event of default (other than a Payment Default) under any agreement or instrument pursuant to whichany Senior Indebtedness is issued, in each instance as now in effect or as hereafter from time to time modified or amended, withoutthe necessity of 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)            Upon termination of any Deferral Period the Company shall resume payments on account of the principal of and interest onthis Note subject to the obligation of the Company and the Holder to pay over to the holders of Senior Indebtedness amounts otherwisepayable on account of the principal of and interest on this Note pursuant to the provisions of, and in the circumstances specifiedin, this Section 4.

 

(d)           During the first one hundred twenty (120) days of any Deferral Period, payment on account of this Note may not be acceleratedunless a voluntary Insolvency or Liquidation Proceeding shall be instituted by the Company or an involuntary Insolvency or LiquidationProceeding shall be instituted against the Company and such proceeding remains undismissed for a period of sixty (60) days. Solong as any Senior Indebtedness is outstanding, the Holder shall give the holders of the Senior Indebtedness five (5) BusinessDays’ prior written notice of any proposed acceleration with respect to this Note (which notice may be given during a DeferralPeriod provided that the proposed acceleration is not to be effective until the expiration of such Deferral Period).

 

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

 

4.4           **Subrogation to Rights of Holders of Senior Indebtedness**. After all amounts payable under or in respect ofSenior Indebtedness are paid in full, the Holder shall be subrogated to the extent of the payments or distributions made to theholders of, or otherwise applied to payment of, such Senior Indebtedness pursuant to the provisions of this Section 4(equally and ratably with the holders of all indebtedness of the Company which by its express terms is subordinate and subjectin right of payment to Senior Indebtedness to substantially the same extent as this Note is so subordinate and subject in rightof payment and which is entitled to like rights of subrogation), to the rights of the holders of such Senior Indebtedness (or theirrespective Representatives) to receive payments and distributions of cash, property and securities applicable to the Senior Indebtednessuntil the principal of and interest on this Note shall be paid in full. For purposes of such subrogation, no payments or distributionsto the holders of the Senior Indebtedness (or their respective Representatives) of any cash, property or securities to which theHolder would be entitled except for the provisions of this Section 4, and no payments over pursuant to the provisionsof this Section 4 to the holders of Senior Indebtedness (or their respective Representatives) by the Company or theHolder shall, as among the Company and its creditors (other than holders of Senior Indebtedness and the Holder), be deemed to bea payment or distribution by the Company to or on account of Senior Indebtedness it being understood that the provisions of thisSection 4 are solely for the purpose of defining the relative rights of the holders of Senior Indebtedness on the onehand and the Holder on the other hand.

 

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           **Rights of Holders Not to Be Impaired**. Nothing contained in this Section 4 or elsewhere in thisNote is intended to or shall:

 

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

 

(b)           affect the relative rights against the Company of the Holder of this Note and creditors of the Company other than the holdersof Senior Indebtedness; or

 

(c)            prevent the Holder from exercising all remedies otherwise permitted by applicable law upon default subject to the rights,if any, under this Section 4 of the holders of Senior Indebtedness to receive payments or distributions otherwise payableor deliverable to, or received by, such holder upon the exercise of any such remedy and subject to the restriction on accelerationset forth in Section 4.3(d).

 

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

 

4.7           **No Waiver of Subordination Provisions**. No right of any present or future holder of any Senior Indebtedness,or Representative thereof, to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired byany act or failure to 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 noncompliance by the Company with the terms, provisions and covenants of this Note regardless of any knowledge thereofwhich any such holder or 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)            change the manner, place or terms of payment or change or extend the time of payment of, or renew, exchange, amend or alter,the terms of any Senior Indebtedness, any security therefor or guaranty thereof or any liability of the Company or any guarantorto such holder, or any liability incurred directly or indirectly in respect thereof, or otherwise amend, renew, exchange, modifyor supplement in any manner Senior Indebtedness or any instrument evidencing or guaranteeing or securing the same or any agreementunder which Senior Indebtedness is outstanding;

 

(b)           sell, exchange, release, surrender, realize upon, enforce or otherwise deal with in any manner and any order any propertypledged, mortgaged or otherwise securing Senior Indebtedness or any liability of the Company or any guarantor to such holder, orany liability incurred directly or indirectly in respect thereof;

 

(c)            settle or compromise any Senior Indebtedness or any other liability of the Company or any guarantor of the Senior Indebtednessto such holder or any security therefor or any liability incurred directly or indirectly in respect thereof and apply any sumsby whomsoever paid and however realized to any liability (including, without limitation, Senior Indebtedness) in any manner ororder; and

 

(d)           fail to take or to record or otherwise perfect, for any reason or for no reason, any lien or security interest securingSenior Indebtedness by whomsoever granted, exercise or delay in or refrain from exercising any right or remedy against the Companyor any security or any guarantor or any other person, elect any remedy and otherwise deal freely with the Company and any securityand any guarantor of the Senior Indebtedness or any liability of the Company or any guarantor to such holder or any liability incurreddirectly or indirectly in respect thereof.

 

4.8           **Reliance on Court Orders; Evidence of Status**. Upon any payment or distribution of assets of the Company referredto in Section 4.2, the Holder shall be entitled to rely upon a certificate of the receiver, trustee in bankruptcy,liquidating trustee, agent or other person making such payment or distribution delivered to the Holder for the purpose of ascertainingthe persons entitled to participate in such payment or distribution, the holders of Senior Indebtedness and other indebtednessof the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinentthereto 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           **Not to Prevent Events of Default**. The failure to make a payment on account of the principal of or intereston this Note by reason of any provision of this Section 4 shall not be construed as preventing the occurrence of adefault or an Event of Default under this Note. Except as expressly provided in Section 4.3(d), nothing in this Section 4shall affect 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 theHolder shall not amend, supplement or otherwise modify any provision of this Section 4 if such amendment would havea material adverse effect on the holders of the Senior Indebtedness, amend, supplement or otherwise modify any other provisionof this Note.

 

5.              **Default**.

 

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

 

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

 

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

 

(d)           a court 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)            the Company shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafterin effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to theappointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official)of the Company or for any substantial part of its property, or shall make any general assignment for the benefit of creditors,or shall fail 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           **Remedies on and Notices of Default**. Subject to the provisions of Section 4, in case any one ormore Events of Default shall occur, the Holder may, with the consent of the holders of 67% of the then outstanding principal amountof the Notes, proceed to protect and enforce the rights of such holder by a suit in equity, action at law or other appropriateproceeding, whether for the specific performance of any agreement contained in this Note, or for an injunction against a violationof any of the terms or provisions hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law.In case of a default under this Note, the Company will pay to the Holder such further amount as shall be sufficient to cover thereasonable cost and expense of enforcement, including, without limitation, reasonable attorneys’ fees. If the Holder shallgive any notice or take any other action in respect of a claimed default, the Company shall forthwith give written notice thereofto all other holders of similarly subordinated notes at the time outstanding, describing the notice or action and the nature ofthe claimed default. No course of dealing and no delay on the part of any Holder of this Note in exercising any right shall operateas a waiver thereof or otherwise prejudice such Holder’s rights or the rights of the holder of any similarly subordinatednotes. No remedy conferred by this Note upon the Holder shall be exclusive of any other remedy referred to herein or now or hereafteravailable at law, in equity, by statute or otherwise. In addition to the foregoing remedies, upon the occurrence or existence ofany Event of Default, the Holder may exercise any other right, power or remedy granted to the Holder as set forth in the SecurityAgreement.

 

6.              **Conversion**.

 

6.1           **Automatic Conversion**. If at any time after one hundred eighty (180) days after the issuance of this Note theClosing Bid Price or Closing Sales Price, as the case may be, of a share of the Company’s Common Stock equals or exceeds$4.50 (subject to appropriate adjustment 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 atthe Conversion Price (as defined below). Accrued and unpaid interest on the date of such automatic conversion shall be paid incash by the Company. The conversion will be deemed to have occurred as of the close of business on such twentieth (20th)consecutive Trading Day. The Company shall notify the Holder in writing within one (1) Trading Day after any automatic conversion,and will cause certificate representing the Conversion Shares to be issued within three (3) Trading Days after automatic conversion,and will deliver those certificates to the Holder by overnight courier immediately after receipt of the original of this Note forcancellation.

 

6.2           **Conversion Procedure in the Event of Automatic Conversion**. In the event of automatic conversion, the outstandingprincipal under this Note will convert automatically without any further action by the Company whether or not the Note is surrenderedto the Company or its transfer agent. The Company will not be obligated to issue certificates evidencing the securities issuableupon automatic conversion of this Note unless this Note is either delivered to the Company or its transfer agent, or the Holdernotifies the Company or its transfer agent that this Note has been mutilated, lost, stolen or destroyed and executes an agreementreasonably satisfactory to the Company to indemnify the Company from any loss incurred by it in connection with this Note. At itsexpense, the Company will, as soon as reasonably practicable thereafter, issue and deliver to the Holder a certificate for thenumber of shares of Common Stock to which the Holder will be entitled upon conversion (bearing such legends as are required byapplicable state and federal securities laws in the opinion of counsel to the Company), together with a check payable to the Holderfor any cash amounts payable as described in Section 6.1 (with respect to accrued and unpaid interest) and Section 6.5(with respect to fractional shares).

 

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

 

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

 

(a)            Each voluntary conversion of this Note shall be effected by the surrender of this Note at the principal office of the Companyat any time during normal business hours, together with a written notice by the Holder stating that the Holder desires to convertthe entire, or a specified increment of, principal of this Note into Common Stock. Each conversion of a Note will be deemed tohave been 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)           Within two (2) Trading Days after a conversion has been effected, the Company will deliver to the converting Holder:

 

(i)             a certificate or certificates representing the number of shares of Common Stock issuable by reason of conversion in suchname or names and such denomination or denominations as the converting Holder has specified; and

 

(ii)           a replacement Note representing the principal amount of this Note delivered to the Company in connection with the conversionbut which was not converted.

 

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

 

(d)           The Company will not close its books against the transfer of this Note or of the shares of Common Stock issued or issuableupon conversion of this Note in any manner which interferes with the timely conversion of this Note, and will at all times reservefor issuance the maximum number of shares of Common Stock into which this Note is convertible.

 

6.5           **Fractional Shares; Interest**. No fractional shares shall be issued upon conversion of this Note. In lieu ofthe Company issuing any fractional shares to Holder upon the conversion of this Note, the Company shall pay to Holder an amountin cash equal to the product obtained by multiplying the Conversion Price applied to effect such conversion by the fraction ofa share not issued pursuant to the previous sentence. Upon conversion of this Note in full or the payment of outstanding amountsspecified in this Note, the Company shall be released from all its obligations and liabilities under this Note.

 

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

 

7.              **Conversion Price Adjustments**.

 

7.1           **Adjustments for Stock Splits and Subdivisions**. In the event the Company should at any time or from time totime after the date of issuance hereof fix a record date for the effectuation of a split or subdivision of the outstanding sharesof Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable inadditional shares of Common Stock without payment of any consideration by such holders for the additional shares of Common Stock,then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), theConversion Price shall be appropriately decreased so that the number of shares of Common Stock issuable upon conversion of thisNote shall be increased in proportion to such increase of outstanding shares.

 

7.2           **Adjustments for Reverse Stock Splits**. If the number of shares of Common Stock outstanding at any time afterthe date hereof is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of suchcombination, the Conversion Price shall be appropriately increased so that the number of shares of Common Stock issuable on conversionhereof shall be decreased in proportion to such decrease in outstanding shares.

 

7.3           **Subsequent Equity Sales.**

 

(a)            If, at any time while this Note is outstanding, the Company sells or grants any option to purchase or sells or grants anyright to reprice, or otherwise disposes of or issues (or announces any sale, grant or any option to purchase or other disposition),any Common 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)           Notwithstanding the foregoing, no adjustment will be made under this Section 7.3 in respect of an Exempt Issuance.The Company shall notify the Holder in writing, no later than the Trading Day following the issuance of any Common Stock or CommonStock Equivalents subject to this Section 7.3, indicating therein the applicable issuance price, or applicable resetprice, exchange price, conversion price and other pricing terms (such notice, the “Dilutive Issuance Notice”).For purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 7.3,upon the occurrence of any Dilutive Issuance, the Holder is entitled to receive a number of Conversion Shares based upon the BaseConversion Price 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 nearest1/100th of a share, as the case may be. For purposes of this Section 7, the number of shares of Common Stock deemedto be issued and outstanding as of 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           **Notices of Record Date, Etc**. In the event of:

 

(a)            Any taking by the Company of a record of the holders of any class of securities of the Company for the purpose of determiningthe holders thereof who are entitled to receive any dividend (other than a cash dividend payable out of earned surplus at the samerate as that of the last such cash dividend theretofore paid) or other distribution or any right to subscribe for, purchase orotherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right; or

 

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

 

(c)            Any voluntary 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           **Reservation of Stock Issuable Upon Conversion**. The Company shall at all times reserve and keep available outof its authorized but unissued shares of Common Stock for the purpose of effecting the conversion of this Note such number of itsshares of Common Stock as shall from time to time be sufficient to effect the conversion of this Note; and if at any time the numberof authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of the entire outstanding principalamount of this Note, without limitation of such other remedies as shall be available to the Holder of this Note, the Company willuse its best efforts to take such corporate action as may, in the opinion of counsel, be necessary to increase its authorized butunissued shares of Common Stock to such number of shares as shall be sufficient for such purposes.

 

8.              **Successors and Assigns**. Subject to the restrictions on transfer described in Sections 10 and 11,the rights and obligations of Company and the Holder shall be binding upon and benefit the successors, assigns, heirs, administratorsand transferees of the parties.

 

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

 

10.           **Transfer of this Note or Securities Issuable on Conversion Hereof**. With respect to any offer, sale or otherdisposition of this Note or securities into which such Note may be converted, the Holder will give written notice to the Companyprior thereto, describing briefly the manner thereof, together with a written opinion of the Holder’s counsel, or other evidenceif reasonably satisfactory to the Company, to the effect that such offer, sale or other distribution may be effected without registrationor qualification (under any federal or state law then in effect). Upon receiving such written notice and reasonably satisfactoryopinion, if so requested, or other evidence, the Company, as promptly as practicable, shall notify the Holder that the Holder maysell or otherwise dispose of this Note or such securities, all in accordance with the terms of the notice delivered to Company.If a determination has been made pursuant to this Section 10 that the opinion of counsel for the Holder, or other evidence,is not reasonably satisfactory to the Company, the Company shall so notify the Holder promptly after such determination has beenmade. Each Note thus transferred and each certificate representing the securities thus transferred shall bear a legend as to theapplicable restrictions on transferability in order to ensure compliance with the Securities Act, unless in the opinion of counselfor the Company such legend is not required in order to ensure compliance with the Securities Act. The Company may issue stop transferinstructions to its transfer agent in connection with such restrictions. Subject to the foregoing transfers of this Note shallbe registered upon registration books maintained for such purpose by or on behalf of the Company as provided in the SecuritiesPurchase Agreement. Prior to presentation of this Note for registration of transfer, the Company shall treat the registered Holderhereof as the owner and the Holder of this Note for the purpose of receiving all payments of principal and interest hereon andfor all other purposes whatsoever, whether or not this Note shall be overdue and the Company shall not be affected by notice tothe contrary.

 

11.           **Assignment by the Company**. Neither this Note nor any of the rights, interests or obligations hereunder maybe assigned, by operation of 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 permittedhereunder shall in writing and faxed, mailed or delivered to each party at the respective addresses of the parties as set forthin the Securities Purchase Agreement, or at such other address or facsimile number as the Company shall have furnished to Holderin writing. All such notices and communications shall be effective (i) when sent by Federal Express or other overnight serviceof recognized standing, on the Business Day following the deposit with such service; (ii) when mailed, by registered or certifiedmail, first class postage prepaid and addressed as aforesaid through the United States Postal Service, upon receipt; (iii) whendelivered by hand, upon delivery; and (iv) when faxed, upon confirmation of receipt.

 

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

 

14.           **Pari Passu Notes**. This Note ranks paripassu with all other Notes now or hereafter issued inconnection with the Exchange Agreements. The Holder acknowledges and agrees that the payment of all or any portion of the outstandingprincipal amount of this Note and all interest hereon shall be paripassu in right of payment and in all other respectsto the other Notes. In the event the Holder receives payments in excess of its pro rata share of the Company’s payments tothe holders of all of the Notes, then the Holder shall hold in trust all such excess payments for the benefit of the holders ofthe other Notes and shall 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 maximumrate, then that portion of the interest payment representing an amount in excess of the then legal maximum rate shall be deemeda payment of principal and applied against the principal of this Note.

 

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

 

18.           **Governing Law**. This Note and all actions arising out of or in connection with this Note shall be governedby and construed in accordance with the laws of the State of California, without regard to the conflicts of law provisions of theState of California, or of any other state.

 

[signature page follows]

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**ScheduleA**

 

Certain SeniorIndebtedness