Exhiibt 10.2



 









EXHIBIT 10.2




FORM OF CONVERTIBLE NOTE



NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED
FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF
COUNSEL IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II)
UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE
TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iv) AND 17(a) HEREOF. THE PRINCIPAL AMOUNT REPRESENTED
BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE
AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iv) OF THIS NOTE.




NGAS Resources, Inc.




Convertible Note




					
	 	 	 	 	 
	Issuance Date: December 14, 2005
	 	
	Principal: U.S. $[___]






          FOR VALUE RECEIVED, NGAS Resources, Inc., a British Columbia corporation, (the “Company”),
hereby promises to pay to [KINGS ROAD INVESTMENTS LTD.] [OTHER BUYERS] or registered assigns
(“Holder”) the amount set out above as the Principal (as reduced pursuant to the terms hereof
pursuant to redemption, conversion or otherwise, the “Principal”) when due, whether upon the
Maturity Date, (each, as defined herein), acceleration, redemption or otherwise (in each case in
accordance with the terms hereof) and to pay interest (“Interest”) on any outstanding Principal at
the rate of 6.0% per annum (the “Interest Rate”), from the date set out above as the Issuance Date
(the “Issuance Date”) until the same becomes due and payable, whether upon an Interest Date (as
defined below), the Maturity Date, acceleration, conversion, redemption or otherwise (in each case,
in accordance with the terms hereof). This Convertible Note (including all Convertible Notes
issued in exchange, transfer or replacement hereof, this “Note”) is one of an issue of Convertible
Notes issued pursuant to the Securities Purchase Agreement (as defined below) on the Closing Date
(collectively, the “Notes” and such other Convertible Notes, the “Other Notes”). Certain
capitalized terms used herein are defined in Section 29.




     1. MATURITY. 



          (a) On the Maturity Date, the Holder shall surrender the Note to the Company and the Company
shall pay to the Holder, (i) an amount in Common Shares, or, at the option of the Company, in cash,
representing all outstanding Principal and (ii) an amount in cash equal to the accrued and unpaid
Interest thereon; provided that Principal shall be payable in Common Shares on the Maturity Date
if, and only if, there has been no Equity Conditions Failure during the applicable period. On or
prior to the tenth (10th) Trading Day prior to the Maturity Date (the “Maturity Election
Notice Due Date”), the Company shall deliver a written notice to the Holder (x) specifying whether
the Principal shall not be paid on the Maturity Date in Common Shares but rather in cash and (y)
certifying that there has been no Equity Conditions Failure. Principal to be paid on the Maturity
Date in Common Shares shall be paid in a number of fully paid and non-assessable (rounded to the
nearest whole share in accordance with Section 3(a)) Common Shares. If the Company shall pay the
Principal on the Maturity Date in Common Shares, then on the Maturity Date (i) (A) provided that
the Company’s transfer agent (the “Transfer Agent”) is participating in the Depository Trust
Company (“DTC”) Fast Automated Securities Transfer Program,




 









 








the Company shall, or shall cause the Transfer Agent to, credit a number of Common Shares
equal to the quotient of the outstanding Principal due on such date and the Maturity Conversion
Price (the “Maturity Conversion Shares”) to which the Holder shall be entitled to the Holder’s or
its designee’s balance account with DTC through its Deposit Withdrawal Agent Commission system, or
(B) if the foregoing shall not apply, the Company shall issue and deliver, to the address set forth
in the register maintained by the Company for such purpose pursuant to the Securities Purchase
Agreement or to such address as specified by the Holder in writing to the Company at least three
(3) Trading Days prior to the Maturity Date, a certificate, registered in the name of the Holder or
its designee, for the number of Maturity Conversion Shares to which the Holder shall be entitled
and (ii) the Company shall pay to the Holder, in cash by wire transfer of immediately available
funds, the amount of any accrued and unpaid interest on such Principal. If the Principal shall be
paid in cash, then the Company shall make such payment on the Maturity Date, together with the
amount of any accrued and unpaid interest on such Principal, by wire transfer of immediately
available funds to an account designated in writing by the Holder.




               (b) Notwithstanding anything to the contrary herein, the Company shall not be entitled to pay
any portion of the Principal on the Maturity Date in Common Shares under this Section 1 in excess
of the Holder’s Pro Rata Amount of the applicable Volume Limitation; provided, however, if the
Company is prohibited from paying any portion of the Principal in Common Shares (the “Maturity
Deficiency Shares”) due to the Volume Limitation, the Maturity Date with respect to the delivery of
those Maturity Deficiency Shares shall be automatically extended in 30-day increments until such
date when the Company shall have delivered to the Holder, following application of the applicable
Volume Limitation, all of the Maturity Deficiency Shares; provided, further, however, that in the
event that the Holder has not received all of the Maturity Deficiency Shares after three (3) such
30-day extensions, the Holder may, at its option, require the Company to deliver cash to the Holder
for the Principal amount (including any unpaid interest thereon) of this Note represented by the
undelivered Maturity Deficiency Shares.



          2. INTEREST; INTEREST RATE. Interest on this Note shall commence accruing on the Issuance
Date and shall be computed on the basis of a 360-day year comprised of twelve 30-day months and
shall be payable in arrears for each Calendar Quarter on the first day of the succeeding Calendar
Quarter during the period beginning on the Issuance Date and ending on, and including, the Maturity
Date (each, an “Interest Date”) with the first Interest Date being April 1, 2006 (each, an
“Interest Date”). Interest shall be payable on each Interest Date in cash. Prior to the payment
of Interest on an Interest Date, Interest on this Note shall accrue at the Interest Rate and be
payable in cash upon any conversion in accordance with Section 3(b)(i). Upon the occurrence and
during the continuance of an Event of Default, the Interest Rate shall be increased to twelve
percent (12.0%) per annum (the “Default Rate”). In the event that such Event of Default is
subsequently cured, the adjustment referred to in the preceding sentence shall cease to be
effective as of the date of such cure; provided that the Interest as calculated at such increased
rate during the continuance of such Event of Default shall continue to apply to the extent relating
to the days after the occurrence of such Event of Default through and including the date of cure of
such Event of Default. Interest on overdue interest shall accrue at the same rate compounded
quarterly.




          3. CONVERSION OF NOTES. This Note shall be convertible into common shares of the Company,
without par value (the “Common Shares”), on the terms and conditions set forth in this Section 3.




          (a) Conversion Right. Subject to the provisions of Section 3(d), at any time or times on or
after the Issuance Date, the Holder shall be entitled to convert any portion of the outstanding and
unpaid Conversion Amount (as defined below) into fully paid and nonassessable Common Shares in
accordance with Section 3(c), at the Conversion Rate (as defined below). The Company shall not
issue any fraction of a Common Share upon any conversion. If the issuance would result in the
issuance of a fraction of a Common Share, the Company shall round such fraction of a Common Share
up to the nearest whole share.




          (b) Conversion Rate. The number of Common Shares issuable upon conversion of any
Conversion Amount pursuant to Section 3(a) shall be determined by dividing (x) such Conversion
Amount by (y) the Conversion Price (such number of shares, the “Conversion Rate”).




                    (i) “Conversion Amount” means the portion of the Principal to be converted, redeemed or
otherwise with respect to which this determination is being made.



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                    (ii) “Conversion Price” means, as of any Conversion Date (as defined below) or other date of
determination a price equal to $14.34, subject to adjustment as provided herein.



               (c) Mechanics of Conversion.



                    (i) Optional Conversion. To convert any Conversion Amount into Common Shares on any
date (a “Conversion Date”), the Holder shall (A) transmit by facsimile (or otherwise deliver), for
receipt on or prior to 11:59 p.m., New York Time, on such date, a copy of an executed notice of
conversion in the form attached hereto as Exhibit I (the “Conversion Notice”) to the
Company and (B) if required by Section 3(c)(iv), surrender this Note to a common carrier for
delivery to the Company as soon as practicable on or following such date (or an indemnification
undertaking with respect to this Note in the case of its loss, theft or destruction). On or before
the first (1st) Trading Day following the date of receipt of a Conversion Notice, the
Company shall transmit by facsimile a confirmation of receipt of such Conversion Notice to the
Holder and the Transfer Agent. On or before the third (3rd) Trading Day following the
date of receipt of a Conversion Notice (the “Share Delivery Date”), the Company shall (1) (x)
provided that the Transfer Agent is participating in the DTC Fast Automated Securities Transfer
Program, credit such aggregate number of Common Shares to which the Holder shall be entitled to the
Holder’s or its designee’s balance account with DTC through its Deposit Withdrawal Agent Commission
system or (y) if the Transfer Agent is not participating in the DTC Fast Automated Securities
Transfer Program, issue and deliver to the address as specified in the Conversion Notice, a
certificate, registered in the name of the Holder or its designee, for the number of Common Shares
to which the Holder shall be entitled, (2) pay to the Holder in cash an amount equal to the accrued
and unpaid Interest on the Conversion Amount up to and including the Conversion Date and (3) for
any conversions prior to the second (2nd) anniversary of the Issuance Date, pay any
applicable Make-Whole Amount in accordance with Section 3(c)(ii). If this Note is physically
surrendered for conversion as required by Section 3(c)(iv) and the outstanding Principal of this
Note is greater than the Principal portion of the Conversion Amount being converted, then the
Company shall as soon as practicable and in no event later than five (5) Trading Days after receipt
of this Note and at its own expense, issue and deliver to the holder a new Note (in accordance with
Section 17(d)) representing the outstanding Principal not converted. The Person or Persons
entitled to receive the Common Shares issuable upon a conversion of this Note shall be treated for
all purposes as the record holder or holders of such Common Shares on the Conversion Date.



                    (ii) Make-Whole Amount.



                    (1) If prior to the second (2nd) anniversary of the Issuance Date, the Holder
converts all or any portion of this Note pursuant to Section 3(c)(i), then upon such conversion,
the Holder shall receive the Make-Whole Amount; provided, however, that in the event that the
Closing Sale Price of the Common Shares exceeds 160% of the Conversion Price then in effect for
each of twenty (20) Trading Days out of the thirty (30) consecutive Trading Day period ended on the
Trading Day immediately prior to the Conversion Date, then the Holder shall not be entitled to
receive the Make-Whole Amount. The Company shall pay the Make-Whole Amount in Common Shares or, at
the Company’s option, in cash. Following receipt of any Conversion Notice during the period when a
Holder is entitled to receive a Make-Whole Amount hereunder, the Company shall, in its confirmation
of receipt of such Conversion Notice as required by Section 3(c)(i) (the “Conversion Notice
Confirmation”), (x) specify whether the Make-Whole Amount shall not be paid in Common Shares but
rather in cash and (y) certify that there has been no Equity Conditions Failure. Any Make-Whole
Amount to be paid upon a conversion in Common Shares shall be paid in a number of fully paid and
nonassessable Common Shares equal to the quotient of (A) the Make-Whole Amount and (B) the
Make-Whole Conversion Price. If the Make-Whole Amount shall be paid in Common Shares on the Share
Delivery Date, the Company shall (I) provided the Transfer Agent is participating in the DTC Fast
Automated Securities Transfer Program, credit such aggregate number of Common Shares to which the
Holder shall be entitled to the Holder or its designee’s balance account with DTC through its
Deposit Withdrawal Agent Commission system, or (II) if the Transfer Agent is not participating in
the DTC Fast Automated Securities Transfer Program, issue and deliver to the address as specified
in the Conversion Notice or in the register maintained by the Company for such purpose pursuant to
the Securities Purchase Agreement, a certificate, registered in the name of the Holder or its
designee, for the number of Common Shares to which the Holder shall be entitled. If the Make-Whole
Amount shall be paid in cash, then the Company shall make such payment on the Share Delivery Date
by wire transfer of immediately available funds to an account designated in writing by the Holder.
Notwithstanding the foregoing the Company shall not be entitled to pay the Make-Whole Amount in
Common Share and shall be required to pay such Make-Whole Amount in cash on the applicable Share



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Delivery Date, if, unless consented to in writing by the Holder, during the period commencing
on the applicable Conversion Date through the applicable Share Delivery Date, the Equity Conditions
have not been satisfied.




                    (2) Notwithstanding anything to the contrary herein, the Company shall not be entitled to pay
any portion of the Make-Whole Amount in Common Shares under this Section 2(c)(ii) in excess of the
Holder’s Pro Rata Amount of the applicable Volume Limitation; provided, however, if the Company is
prohibited from paying any portion of the Make-Whole Amount in Common Shares (the “Make-Whole
Deficiency Shares”) due to the Volume Limitation, the Share Delivery Date with respect to delivery
of those Make-Whole Deficiency Shares shall be automatically extended in 30-day increments until
such date when the Company shall have delivered to the Holder, following application of the
applicable Volume Limitation, all of the Make-Whole Deficiency Shares; provided, further, however,
that in the event that the Holder has not received all of the Make-Whole Deficiency Shares after
three (3) such 30-day extensions, the Holder may, at its option, require the Company to deliver
cash to the Holder for the Principal amount (including any unpaid interest thereon) of this Note
represented by the undelivered Make-Whole Deficiency Shares.



                    (iii) Failure to Timely Convert. If the Company shall fail to issue a certificate to
the Holder or credit the Holder’s balance account with DTC for the number of Common Shares to which
the Holder is entitled upon conversion of any Conversion Amount on or prior to the date which is
three (3) Trading Days after the Conversion Date (a “Conversion Failure”), then (A) the Company
shall pay damages to the Holder for each day of such Conversion Failure in an amount equal to 1.5%
of the product of (I) the sum of the number of Common Shares not issued to the Holder on or prior
to the Share Delivery Date and to which the Holder is entitled, and (II) the Closing Sale Price of
the Common Shares on the Share Delivery Date and (B) the Holder, upon written notice to the
Company, may void its Conversion Notice with respect to, and retain or have returned, as the case
may be, any portion of this Note that has not been converted pursuant to such Conversion Notice;
provided that the voiding of a Conversion Notice shall not affect the Company’s obligations
to make any payments which have accrued prior to the date of such notice pursuant to this Section
3(c)(iii) or otherwise. In addition to the foregoing, if within three (3) Trading Days after the
Company’s receipt of the facsimile copy of a Conversion Notice, the Company shall fail to issue and
deliver a certificate to the Holder or credit the Holder’s balance account with DTC for the number
of Common Shares to which the Holder is entitled upon such holder’s conversion of any Conversion
Amount, and if on or after such Trading Day the Holder purchases (in an open market transaction or
otherwise) Common Shares to deliver in satisfaction of a sale by the Holder of Common Shares
issuable upon such conversion that the Holder anticipated receiving from the Company (a “Buy-In”),
then the Company shall, within three (3) Trading Days after the Holder’s request and in the
Holder’s discretion, either (i) pay cash to the Holder in an amount equal to the Holder’s total
purchase price (including brokerage commissions and other out-of-pocket expenses, if any) for the
Common Shares so purchased (the “Buy-In Price”), at which point the Company’s obligation to deliver
such certificate (and to issue such Common Shares) shall terminate, or (ii) promptly honor its
obligation to deliver to the Holder a certificate or certificates representing such Common Shares
and pay cash to the Holder in an amount equal to the excess (if any) of the Buy-In Price over the
product of (A) such number of Common Shares times (B) the Closing Bid Price on the Conversion Date.



                    (iv) Book-Entry. Notwithstanding anything to the contrary set forth herein, upon
conversion of any portion of this Note in accordance with the terms hereof, the Holder shall not be
required to physically surrender this Note to the Company unless (A) the full Conversion Amount
represented by this Note is being converted or (B) the Holder has provided the Company with prior
written notice (which notice may be included in a Conversion Notice) requesting reissuance of this
Note upon physical surrender. The Holder and the Company shall maintain records showing the
Principal converted and the dates of such conversions or shall use such other method, reasonably
satisfactory to the Holder and the Company, so as not to require physical surrender of this Note
upon conversion.



                    (v) Pro Rata Conversion; Disputes. In the event that the Company receives a
Conversion Notice from more than one holder of Notes for the same Conversion Date and the Company
can convert some, but not all, of such portions of the Notes submitted for conversion, the Company,
subject to Section 3(d), shall convert from each holder of Notes electing to have Notes converted
on such date a pro rata amount of such holder’s portion of its Notes submitted for conversion based
on the principal amount of Notes submitted for conversion on such date by such holder relative to
the aggregate principal amount of all Notes submitted for conversion on such date. In the event of
a dispute as to the number of Common Shares issuable to the Holder in



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connection with a conversion of this Note, the Company shall issue to the Holder the number of
Common Shares not in dispute and resolve such dispute in accordance with Section 22.




               (d) Limitations on Conversions.



                    (i) Beneficial Ownership. The Company shall not effect any conversion of this Note,
and the Holder of this Note shall not have the right to convert any portion of this Note pursuant
to Section 3(a), to the extent that after giving effect to such conversion, the Holder (together
with the Holder’s affiliates) would beneficially own in excess of 9.99% (the “Maximum Percentage”)
of the number of Common Shares outstanding immediately after giving effect to such conversion. For
purposes of the foregoing sentence, the number of Common Shares beneficially owned by the Holder
and its affiliates shall include the number of Common Shares issuable upon conversion of this Note
with respect to which the determination of such sentence is being made, but shall exclude the
number of Common Shares which would be issuable upon (A) conversion of the remaining, nonconverted
portion of this Note beneficially owned by the Holder or any of its affiliates and (B) exercise or
conversion of the unexercised or nonconverted portion of any other securities of the Company
(including, without limitation, any Other Notes or warrants) subject to a limitation on conversion
or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of
its affiliates. Except as set forth in the preceding sentence, for purposes of this Section
3(d)(i), beneficial ownership shall be calculated in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended. For purposes of this Section 3(d)(i), in determining
the number of outstanding Common Shares, the Holder may rely on the number of outstanding Common
Shares as reflected in (x) the Company’s most recent Form 10-KSB,Form 10-K, Form 10-QSB, Form 10-Q
or Form 8-K, as the case may be (y) a more recent public announcement by the Company or (z) any
other notice by the Company or the Transfer Agent setting forth the number of Common Shares
outstanding. For any reason at any time, upon the written or oral request of the Holder, the
Company shall within one (1) Trading Day confirm orally and in writing to the Holder the number of
Common Shares then outstanding. In any case, the number of outstanding Common Shares shall be
determined after giving effect to the conversion or exercise of securities of the Company,
including this Note, by the Holder or its affiliates since the date as of which such number of
outstanding Common Shares was reported. By written notice to the Company, the Holder may from time
to time increase or decrease the Maximum Percentage to any other percentage not in excess of 9.99%
specified in such notice; provided that (i) any such increase will not be effective until the
sixty-first (61st) day after such notice is delivered to the Company, and (ii) any such
increase or decrease will apply only to the Holder and not to any other holder of Notes.



                    (ii) Principal Market Regulation. The Company shall not be obligated to issue any
Common Shares upon conversion of this Note and the Holder of this Note shall not have the right to
receive upon conversion of this Note any Common Shares if the issuance of such Common Shares would
exceed the aggregate number of Common Shares which the Company may issue upon conversion or
exercise, as applicable, of the Notes and Warrants or otherwise under the Notes without breaching
the Company’s obligations under the rules or regulations of the Principal Market (the “Exchange
Cap”), except that such limitation shall not apply in the event that the Company (A) obtains the
approval of its shareholders as required by the applicable rules of the Principal Market for
issuances of Common Shares in excess of such amount or (B) obtains a written opinion from outside
counsel to the Company that such approval is not required, which opinion shall be reasonably
satisfactory to the Required Holders. Until such approval or written opinion is obtained, no
purchaser of the Notes pursuant to the Securities Purchase Agreement (the “Purchasers”) shall be
issued in the aggregate, upon conversion or exercise, as applicable, of Notes or Warrants, Common
Shares in an amount greater than the product of the Exchange Cap multiplied by a fraction, the
numerator of which is the principal amount of Notes issued to each Purchaser pursuant to the
Securities Purchase Agreement on the Closing Date and the denominator of which is the aggregate
principal amount of all Notes issued to the Purchasers pursuant to the Securities Purchase
Agreement on the Closing Date (with respect to each Purchaser, the “Exchange Cap Allocation”). In
the event that any Purchaser shall sell or otherwise transfer any of such Purchaser’s Notes, the
transferee shall be allocated a pro rata portion of such Purchaser’s Exchange Cap Allocation, and
the restrictions of the prior sentence shall apply to such transferee with respect to the portion
of the Exchange Cap Allocation allocated to such transferee. In the event that any holder of Notes
shall convert all of such holder’s Notes into a number of Common Shares which, in the aggregate, is
less than such holder’s Exchange Cap Allocation, then the difference between such holder’s Exchange
Cap Allocation and the number of Common Shares actually issued to such holder shall be allocated to
the respective Exchange Cap Allocations of the remaining holders of Notes on a pro rata basis in
proportion to the aggregate principal amount of the Notes then held by each such holder.



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          4. RIGHTS UPON EVENT OF DEFAULT.




               (a) Event of Default. Each of the following events shall constitute an “Event of
Default”:



                    (i) the failure of the applicable Registration Statement required to be filed pursuant to the
Registration Rights Agreement to be declared effective by the SEC on or prior to the date that is
sixty (60) days after the applicable Effectiveness Deadline (as defined in the Registration Rights
Agreement), or, while the applicable Registration Statement is required to be maintained effective
pursuant to the terms of the Registration Rights Agreement, the effectiveness of the applicable
Registration Statement lapses for any reason (including, without limitation, the issuance of a stop
order) or is unavailable to any holder of the Notes for sale of all of such holder’s Registrable
Securities (as defined in the Registration Rights Agreement) in accordance with the terms of the
Registration Rights Agreement, and such lapse or unavailability continues for a period of ten (10)
consecutive days or for more than an aggregate of thirty (30) days in any 365-day period (other
than days during an Allowable Grace Period (as defined in the Registration Rights Agreement));



                    (ii) the suspension from trading or failure of the Common Shares to be listed on an Eligible
Market for a period of five (5) consecutive Trading Days or for more than an aggregate of ten (10)
Trading Days in any 365-day period;



                    (iii) the Company’s (A) failure to cure a Conversion Failure by delivery of the required
number of Common Shares within ten (10) Trading Days after the applicable Conversion Date or (B)
notice, written or oral, to any holder of the Notes, including by way of public announcement or
through any of its agents, at any time, of its intention not to comply with a request for
conversion of any Notes into Common Shares that is tendered in accordance with the provisions of
the Notes;



                    (iv) at any time following the tenth (10th) consecutive Trading Day that the number
of Common Shares that are available for issuance to the Holder is less than the number of Common
Shares that the Holder would be entitled to receive upon a conversion of the full Conversion Amount
of this Note (without regard to any limitations on conversion set forth in Section 3(d) or
otherwise);



                    (v) the Company’s failure to pay to the Holder any amount of Principal (including, without
limitation, the Company’s failure to pay any redemption or make-whole payments), Interest or other
amounts when and as due under this Note or any other Transaction Document (as defined in the
Securities Purchase Agreement), except, in the case of a failure to pay Interest when and as due,
in which case only if such failure continues for a period of at least three (3) Trading Days;



                    (vi) the occurrence of any default under, redemption of or acceleration prior to maturity of
Indebtedness of the Company or any of its Subsidiaries (as defined in Section 3(a) of the
Securities Purchase Agreement) that, individually or in the aggregate, has a principal amount equal
to or exceeding $100,000, other than with respect to any Other Notes;



                    (vii) the Company or any of its Subsidiaries, pursuant to or within the meaning of Title 11,
U.S. Code, or any similar U.S. or Canadian Federal, foreign, state or provincial law for the
relief of debtors (collectively, “Bankruptcy Law”), (A) commences a voluntary case, (B) consents to
the entry of an order for relief against it in an involuntary case, (C) consents to the appointment
of a receiver, trustee, assignee, liquidator or similar official (a “Custodian”), (D) makes a
general assignment for the benefit of its creditors or (E) admits in writing that it is generally
unable to pay its debts as they become due;



                    (viii) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law
that (A) is for relief against the Company or any of its Subsidiaries in an involuntary case, (B)
appoints a Custodian of the Company or any of its Subsidiaries or (C) orders the liquidation of the
Company or any of its Subsidiaries;



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                    (ix) a final judgment or judgments for the payment of money aggregating in excess of $100,000
are rendered against the Company or any of its Subsidiaries and which judgments are not, within
sixty (60) days after the entry thereof, bonded, discharged or stayed pending appeal, or are not
discharged within sixty (60) days after the expiration of such stay; provided, however, that any
judgment which is covered by insurance or an indemnity from a credit worthy party shall not be
included in calculating the $100,000 amount set forth above so long as the Company provides the
Holder a written statement from such insurer or indemnity provider (which written statement shall
be reasonably satisfactory to the Holder) to the effect that such judgment is clearly covered by
insurance or an indemnity and the Company will receive the proceeds of such insurance or indemnity
within thirty (30) days of the issuance of such judgment;



                    (x) the Company breaches any representation, warranty, covenant or other term or condition of
any Transaction Document, except, in the case of a breach of a covenant which is curable, only if
such breach continues for a period of at least fifteen (15) consecutive Trading Days; or



                    (xi) any Event of Default (as defined in the Other Notes) occurs with respect to any Other
Notes.



               (b) Redemption Right. Promptly after the occurrence of an Event of Default with
respect to this Note or any Other Note, the Company shall deliver written notice thereof via
facsimile and overnight courier (an “Event of Default Notice”) to the Holder. At any time after
the earlier of the Holder’s receipt of an Event of Default Notice and the Holder becoming aware of
an Event of Default, the Holder may require the Company to redeem all or any portion of this Note
by delivering written notice thereof (the “Event of Default Redemption Notice”) to the Company,
which Event of Default Redemption Notice shall indicate the portion of this Note the Holder is
electing to redeem. Each portion of this Note subject to redemption by the Company pursuant to
this Section 4(b) shall be redeemed by the Company at a price equal to the greater of (i) the
product of (x) the Conversion Amount to be redeemed and (y) the Redemption Premium and (ii) the
product of (A) the Conversion Rate with respect to such Conversion Amount in effect at such time as
the Holder delivers an Event of Default Redemption Notice and (B) the Closing Sale Price of the
Common Shares on the date immediately preceding such Event of Default (the “Event of Default
Redemption Price”). Redemptions required by this Section 4(b) shall be made in accordance with the
provisions of Section 12. To the extent redemptions required by this Section 4(b) are deemed or
determined by a court of competent jurisdiction to be prepayments of the Note by the Company, such
redemptions shall be deemed to be voluntary prepayments. The parties hereto agree that in the
event of the Company’s redemption of any portion of the Note under this Section 4(b), the Holder’s
damages would be uncertain and difficult to estimate because of the parties’ inability to predict
future interest rates and the uncertainty of the availability of a suitable substitute investment
opportunity for the Holder. Accordingly, any Redemption Premium due under this Section 4(b) is
intended by the parties to be, and shall be deemed, a reasonable estimate of the Holder’s actual
loss of its investment opportunity and not as a penalty.



          5. RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.




               (a) Assumption. The Company shall not enter into or be party to a Fundamental
Transaction unless (i) the Successor Entity assumes in writing all of the obligations of the
Company under this Note and the other Transaction Documents in accordance with the provisions of
this Section 5(a) pursuant to written agreements in form and substance satisfactory to the Required
Holders and approved by the Required Holders prior to such Fundamental Transaction, including
agreements to deliver to each holder of Notes in exchange for such Notes a security of the
Successor Entity evidenced by a written instrument substantially similar in form and substance to
the Notes, including, without limitation, having a principal amount and interest rate equal to the
Principal amounts and the Interest Rates of the Notes held by such holder, having similar
conversion rights as the Notes, having similar ranking to the Notes, and satisfactory to the
Required Holders and (ii) the Successor Entity is a publicly traded corporation whose common shares
are quoted on or listed for trading on an Eligible Market. Upon the occurrence of any Fundamental
Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after
the date of such Fundamental Transaction, the provisions of this Note referring to the “Company”
shall refer instead to the Successor Entity), and may exercise every right and power of the Company
and shall assume all of the obligations of the Company under this Note with the same effect as if
such Successor Entity had been named as the Company herein. Upon consummation of the Fundamental
Transaction, the Successor Entity (if other than the Company) shall deliver to the Holder
confirmation that there shall be issued upon conversion or



7









 




redemption of this Note at any time after the consummation of the Fundamental Transaction, in
lieu of the Company’s Common Shares (or other securities, cash, assets or other property)
purchasable upon the conversion or redemption of the Notes prior to such Fundamental Transaction,
such publicly traded common shares (or their equivalent) of the Successor Entity, as adjusted in
accordance with the provisions of this Note. The provisions of this Section shall apply similarly
and equally to successive Fundamental Transactions and shall be applied without regard to any
limitations on the conversion or redemption of this Note.




               (b) Redemption Right. No sooner than fifteen (15) days nor later than ten (10) days
prior to the consummation of a Change of Control, but not prior to the public announcement of such
Change of Control, the Company shall deliver written notice thereof via facsimile and overnight
courier to the Holder (a “Change of Control Notice”). At any time during the period (the “Change
of Control Period”) beginning after the Holder’s receipt of a Change of Control Notice and ending
on the date that is twenty (20) Trading Days after the consummation of such Change of Control, the
Holder may require the Company to redeem all or any portion of this Note by delivering written
notice thereof (“Change of Control Redemption Notice”) to the Company, which Change of Control
Redemption Notice shall indicate the Conversion Amount the Holder is electing to redeem. The
portion of this Note subject to redemption pursuant to this Section 5 shall be redeemed by the
Company in cash at a price equal to the greater of (x) 110% of the sum of (1) the Conversion Amount
being redeemed and (2) the amount of any accrued but unpaid Interest thereon through the date of
such redemption payment and (y) 110% of the sum of (1) the product of (A) the Conversion Amount
being redeemed multiplied by (B) the quotient determined by dividing (I) the aggregate cash
consideration and the aggregate cash value of any non-cash consideration per Common Share to be
paid to the holders of the Common Shares upon consummation of the Change of Control (any such
non-cash consideration consisting of marketable securities to be valued at the higher of the
Closing Sale Price of such securities as of the Trading Day immediately prior to or the Trading Day
following the public announcement of such proposed Change of Control) by (II) the Conversion Price
plus (2) the amount of any accrued but unpaid Interest on such Conversion Amount being redeemed
through the date of such redemption payment (the “Change of Control Redemption Price”).
Redemptions required by this Section 5 shall be made in accordance with the provisions of Section
12 and shall have priority to payments to shareholders in connection with a Change of Control. To
the extent redemptions required by this Section 5(b) are deemed or determined by a court of
competent jurisdiction to be prepayments of the Note by the Company, such redemptions shall be
deemed to be voluntary prepayments. Notwithstanding anything to the contrary in this Section 5,
until the Change of Control Redemption Price (together with any interest thereon) is paid in full,
the Conversion Amount submitted for redemption under this Section 5(c) may be converted, in whole
or in part, by the Holder into Common Shares, or in the event the Conversion Date is after the
consummation of the Change of Control, shares or equity interests of the Successor Entity
substantially equivalent to the Company’s Common Shares pursuant to Section 3. The parties hereto
agree that in the event of the Company’s redemption of any portion of the Note under this Section
5(b), the Holder’s damages would be uncertain and difficult to estimate because of the parties’
inability to predict future interest rates and the uncertainty of the availability of a suitable
substitute investment opportunity for the Holder. Accordingly, any redemption premium due under
this Section 5(b) is intended by the parties to be, and shall be deemed, a reasonable estimate of
the Holder’s actual loss of its investment opportunity and not as a penalty.



          6. RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.




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



               (b) Other Corporate Events. In addition to and not in substitution for any other
rights hereunder, prior to the consummation of any Fundamental Transaction pursuant to which
holders of Common Shares are entitled to receive securities or other assets with respect to or in
exchange for Common Shares (a



8









 





“Corporate Event”), the Company shall make appropriate provision to insure that the Holder
will thereafter have the right to receive upon a conversion of this Note, at the Holder’s option,
(i) in addition to the Common Shares receivable upon such conversion, such securities or other
assets to which the Holder would have been entitled with respect to such Common Shares had such
Common Shares been held by the Holder upon the consummation of such Corporate Event (without taking
into account any limitations or restrictions on the convertibility of this Note) or (ii) in lieu of
the Common Shares otherwise receivable upon such conversion, such securities or other assets
received by the holders of Common Shares in connection with the consummation of such Corporate
Event in such amounts as the Holder would have been entitled to receive had this Note initially
been issued with conversion rights for the form of such consideration (as opposed to Common Shares)
at a conversion rate for such consideration commensurate with the Conversion Rate. Provision made
pursuant to the preceding sentence shall be in a form and substance satisfactory to the Required
Holders. The provisions of this Section shall apply similarly and equally to successive Corporate
Events and shall be applied without regard to any limitations on the conversion or redemption of
this Note.




          7. RIGHTS UPON ISSUANCE OF OTHER SECURITIES.




               (a) Adjustment of Conversion Price upon Issuance of Common Shares. If and whenever on
or after the Subscription Date, the Company issues or sells, or in accordance with this Section
7(a) is deemed to have issued or sold, any Common Shares (including the issuance or sale of Common
Shares owned or held by or for the account of the Company, but excluding Common Shares deemed to
have been issued or sold by the Company in connection with any Excluded Security) for a
consideration per share (the “New Issuance Price”) less than a price (the “Applicable Price”) equal
to the Conversion Price in effect immediately prior to such issue or sale or deemed issuance or
sale (the foregoing a “Dilutive Issuance”), then immediately after such Dilutive Issuance, the
Conversion Price then in effect shall be reduced to an amount equal to the product of (A) the
Conversion Price in effect immediately prior to such Dilutive Issuance and (B) the quotient
determined by dividing (1) the sum of (I) the product derived by multiplying the Conversion Price
in effect immediately prior to such Dilutive Issuance and the number of Common Shares Deemed
Outstanding immediately prior to such Dilutive Issuance plus (II) the consideration, if any,
received by the Company upon such Dilutive Issuance, by (2) the product derived by multiplying (I)
the Conversion Price in effect immediately prior to such Dilutive Issuance by (II) the number of
Common Shares Deemed Outstanding immediately after such Dilutive Issuance. For purposes of
determining the adjusted Conversion Price under this Section 7(a), the following shall be
applicable:



                    (i) Issuance of Options. If the Company in any manner grants or sells any Options and
the lowest price per share for which one Common Share is issuable upon the exercise of any such
Option or upon conversion or exchange or exercise of any Convertible Securities issuable upon
exercise of such Option is less than the Applicable Price, then such Common Share shall be deemed
to be outstanding and to have been issued and sold by the Company at the time of the granting or
sale of such Option for such price per share. For purposes of this Section 7(a)(i), the “lowest
price per share for which one Common Share is issuable upon the exercise of any such Option or upon
conversion or exchange or exercise of any Convertible Securities issuable upon exercise of such
Option” shall be equal to the sum of the lowest amounts of consideration (if any) received or
receivable by the Company with respect to any one Common Share upon granting or sale of the Option,
upon exercise of the Option and upon conversion or exchange or exercise of any Convertible Security
issuable upon exercise of such Option. No further adjustment of the Conversion Price shall be made
upon the actual issuance of such Common Shares or of such Convertible Securities upon the exercise
of such Options or upon the actual issuance of such Common Shares upon conversion or exchange or
exercise of such Convertible Securities.



                    (ii) Issuance of Convertible Securities. If the Company or the Company in any manner
issues or sells any Convertible Securities and the lowest price per share for which one Common
Share is issuable upon such conversion or exchange or exercise thereof is less than the Applicable
Price, then such Common Share shall be deemed to be outstanding and to have been issued and sold by
the Company at the time of the issuance or sale of such Convertible Securities for such price per
share. For the purposes of this Section 7(a)(ii), the “lowest price per share for which one Common
Share is issuable upon such conversion or exchange or exercise” shall be equal to the sum of the
lowest amounts of consideration (if any) received or receivable by the Company with respect to any
one Common Share upon the issuance or sale of the Convertible Security and upon the conversion or
exchange or exercise of such Convertible Security. No further adjustment of the Conversion Price
shall be made upon the actual issuance of such Common Shares upon conversion or exchange or
exercise of such



9









 




Convertible Securities, and if any such issue or sale of such Convertible Securities is made
upon exercise of any Options for which adjustment of the Conversion Price had been or are to be
made pursuant to other provisions of this Section 7(a), no further adjustment of the Conversion
Price shall be made by reason of such issue or sale.




                    (iii) Change in Option Price or Rate of Conversion. If the purchase price provided
for in any Options, the additional consideration, if any, payable upon the issue, conversion,
exchange or exercise of any Convertible Securities, or the rate at which any Convertible Securities
are convertible into or exchangeable or exercisable for Common Shares changes at any time, the
Conversion Price in effect at the time of such change shall be adjusted to the Conversion Price
which would have been in effect at such time had such Options or Convertible Securities provided
for such changed purchase price, additional consideration or changed conversion rate, as the case
may be, at the time initially granted, issued or sold. For purposes of this Section 7(a)(iii), if
the terms of any Option or Convertible Security that was outstanding as of the Subscription Date
are changed in the manner described in the immediately preceding sentence, then such Option or
Convertible Security and the Common Shares deemed issuable upon exercise, conversion or exchange
thereof shall be deemed to have been issued as of the date of such change. No adjustment shall be
made if such adjustment would result in an increase of the Conversion Price then in effect.



                    (iv) Calculation of Consideration Received. In case any Option is issued in
connection with the issue or sale of other securities of the Company, together comprising one
integrated transaction in which no specific consideration is allocated to such Options by the
parties thereto, the Options will be deemed to have been issued for a consideration of $.01. If
any Common Shares, Options or Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor will be deemed to be the net amount
received by the Company therefor. If any Common Shares, Options or Convertible Securities are
issued or sold for a consideration other than cash, the amount of the consideration other than cash
received by the Company will be the fair value of such consideration, except where such
consideration consists of securities, in which case the amount of consideration received by the
Company will be the closing sale price of such securities on the date of receipt. If any Common
Shares, Options or Convertible Securities are issued to the owners of the non-surviving entity in
connection with any merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion of the net assets and
business of the non-surviving entity as is attributable to such Common Shares, Options or
Convertible Securities, as the case may be. The fair value of any consideration other than cash or
securities will be determined jointly by the Company and the Required Holders. If such parties are
unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation
(the “Valuation Event”), the fair value of such consideration will be determined within five (5)
Trading Days after the tenth (10th) day following the Valuation Event by an independent, reputable
appraiser jointly selected by the Company and the Required Holders. The determination of such
appraiser shall be deemed binding upon all parties absent manifest error and the fees and expenses
of such appraiser shall be borne by the Company.



                    (v) Record Date. If the Company takes a record of the holders of Common Shares for
the purpose of entitling them (A) to receive a dividend or other distribution payable in Common
Shares, Options or in Convertible Securities or (B) to subscribe for or purchase Common Shares,
Options or Convertible Securities, then such record date will be deemed to be the date of the issue
or sale of the Common Shares deemed to have been issued or sold upon the declaration of such
dividend or the making of such other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.



               (b) Adjustment of Conversion Price upon Subdivision or Combination of Common Shares.
If the Company at any time on or after the Subscription Date subdivides (by any share split, share
dividend, recapitalization or otherwise) one or more classes of its outstanding Common Shares into
a greater number of shares, the Conversion Price in effect immediately prior to such subdivision
will be proportionately reduced. If the Company at any time on or after the Subscription Date
combines (by combination, reverse share split or otherwise) one or more classes of its outstanding
Common Shares into a smaller number of shares, the Conversion Price in effect immediately prior to
such combination will be proportionately increased.



               (c) Other Events. If any event occurs of the type contemplated by the provisions of
this Section 7 but not expressly provided for by such provisions (including, without limitation,
the granting of share appreciation rights, phantom share rights or other rights with equity
features), then the Company’s Board of Directors will make an appropriate adjustment in the
Conversion Price so as to protect the rights of the Holder under



10









 





this Note; provided that no such adjustment will increase the Conversion Price as otherwise
determined pursuant to this Section 7.




          8. OPTIONAL REDEMPTION AT THE COMPANY’S ELECTION. 




               (a) General. If at any time from and after the second (2nd) anniversary of
the Issuance Date (the “Optional Redemption Eligibility Date”), (i) the Closing Sale Price of the
Common Shares exceeds 160% of the Conversion Price then in effect for each of twenty (20) Trading
Days out of any thirty (30) consecutive Trading Days following the Optional Redemption Eligibility
Date (the “Optional Redemption Condition”) and (ii) there has been no Equity Conditions Failure,
the Company shall have the right, provided the Optional Redemption Condition is also met on and as
of the Optional Redemption Date, to redeem all or any portion of the Conversion Amount then
remaining under this Note (the “Optional Redemption Amount”) as designated in the Optional
Redemption Notice, as of the Optional Redemption Date (an “Optional Redemption”). The portion of
this Note subject to redemption pursuant to this Section 8 shall be redeemed by the Company in cash
at a price equal to the Conversion Amount being redeemed plus any accrued and unpaid interest
threreon through the Optional Redemption Date (the “Optional Redemption Price”) on the Optional
Redemption Date. The Company may exercise its right to require redemption under this Section 8 by
delivering a written notice thereof by facsimile and overnight courier to all, but not less than
all, of the holders of Notes (the “Optional Redemption Notice” and the date all of the holders
received such notice is referred to as the “Optional Redemption Notice Date”) and each Optional
Redemption Notice shall be irrevocable. The Optional Redemption Notice shall state (A) the date on
which the Optional Redemption shall occur (the “Optional Redemption Date”) which date shall be not
less than ten (10) Trading Days nor more than thirty (30) Trading Days after the Optional
Redemption Notice Date, and (B) the aggregate Conversion Amount of the Notes which the Company has
elected to be subject to Optional Redemption from all of the holders of the Notes pursuant to this
Section 8 (and analogous provisions under the Other Notes) on the Optional Redemption Date;
provided, however, that the Company shall not redeem a Conversion Amount under this Section in
excess of the Holder’s Pro Rata Amount of the aggregate dollar trading volume (as reported on
Bloomberg) of the Common Shares over the ten (10) consecutive Trading Day period ending on the
Trading Day immediately preceding the Optional Redemption Notice Date. The Company may not effect
more than one Optional Redemption during any consecutive thirty (30) Trading Day period.
Notwithstanding anything to the contrary in this Section 8, until the Optional Redemption Price is
paid, in full, the Optional Redemption Amount may be converted, in whole or in part, by the Holders
into Common Shares pursuant to Section 3. All Conversion Amounts converted by the Holder after the
Optional Redemption Notice Date shall reduce the Optional Redemption Amount of this Note required
to be redeemed on the Optional Redemption Date. Redemptions made pursuant to this Section 8 shall
be made in accordance with Section 12.



               (b) Pro Rata Redemption Requirement. If the Company elects to cause an Optional
Redemption pursuant to Section 8(a), then it must simultaneously take the same action with respect
to the Other Notes. If the Company elects to cause an Optional Redemption pursuant to Section 8(a)
(or similar provisions under the Other Notes) with respect to less than all of the Conversion
Amounts of the Notes then outstanding, then the Company shall require redemption of a Conversion
Amount from each of the holders of the Notes equal to the product of (i) the aggregate Conversion
Amount of Notes which the Company has elected to cause to be redeemed pursuant to Section 8(a),
multiplied by (ii) the fraction, the numerator of which is the sum of the aggregate initial
principal amount of the Notes purchased by such holder of outstanding Notes and the denominator of
which is the sum of the aggregate initial principal amount of the Notes purchased by all holders
holding outstanding Notes (such fraction with respect to each holder is referred to as its
“Redemption Allocation Percentage”, and such amount with respect to each holder is referred to as
its “Pro Rata Redemption Amount”); provided, however that in the event that any holder’s Pro Rata
Redemption Amount exceeds the outstanding Principal amount of such holder’s Note, then such excess
Pro Rata Redemption Amount shall be allocated amongst the remaining holders of Notes in accordance
with the foregoing formula. In the event that the initial holder of any Notes shall sell or
otherwise transfer any of such holder’s Notes, the transferee shall be allocated a pro rata portion
of such holder’s Redemption Allocation Percentage and Pro Rata Redemption Amount.



          9. TAXES.




               (a) Any and all payments made by the Company hereunder, including any amounts received on a
conversion or redemption of the Note and any amounts on account of interest or deemed interest,
must



11









 




be made by it without any Tax Deduction, unless a Tax Deduction is required by law. If the
Company is aware that it must make a Tax Deduction (or that there is a change in the rate or the
basis of a Tax Deduction), it must notify the Holder promptly.




               (b) If a Tax Deduction is required by law to be made by the Company, subject to Section 9(a)
above, the amount of the payment due from the Company will be increased to an amount which (after
making the Tax Deduction) leaves an amount equal to the payment which would have been due if no Tax
Deduction had been required. If the Company is required to make a Tax Deduction, it must make the
minimum Tax Deduction allowed by law and must make any payment required in connection with that Tax
Deduction within the time allowed by law.



               (c) As soon as practicable after making a Tax Deduction or a payment required in connection
with a Tax Deduction, the Company must deliver to the Holder any official receipt or form, if any,
provided by or required by the taxing authority to whom the Tax Deduction was paid.



               (d) In addition, the Company agrees to pay in accordance with applicable law any present or
future stamp or documentary taxes or any other excise or property taxes, charges or similar levies
that arise from any payment made hereunder or in connection with the execution, delivery,
registration or performance of, or otherwise with respect to, this Note (“Other Taxes”). As soon
as practicable after making a payment of Other Taxes, the Company must deliver to the Holder any
official receipt or form, if any, provided by or required by the taxing authority to whom the Tax
Deduction was paid.



               (e) The obligations of the Company under this Section 9 shall survive the termination of this
Note and the payment of the Note and all other amounts payable hereunder.



          10. NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company will not,
by amendment of its Notice of Articles, Articles or through any reorganization, transfer of assets,
consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities, or any
other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of
this Note, and will at all times in good faith carry out all of the provisions of this Note and
take all action as may be required to protect the rights of the Holder of this Note. 




          11. RESERVATION OF AUTHORIZED SHARES.




               (a) Reservation. The Company shall have sufficient authorized and unissued Common
Shares for each of the Notes equal to 150% of the number of Common Shares necessary to effect the
conversion at the Conversion Rate with respect to the Conversion Amount of each such Note as of the
Issuance Date. So long as any of the Notes are outstanding, the Company shall take all action
necessary to reserve and keep available out of its authorized and unissued Common Shares, solely
for the purpose of effecting the conversion of the Notes, 150% of the number of Common Shares as
shall from time to time be necessary to effect the conversion of all of the Notes then outstanding;
provided that at no time shall the number of Common Shares so available be less than the number of
shares required to be reserved by the previous sentence (without regard to any limitations on
conversions) (the “Required Amount”).



               (b) Insufficient Authorized Shares. If at any time while any of the Notes remain
outstanding the Company does not have a sufficient number of authorized and unissued Common Shares
to satisfy its obligation to have available for issuance upon conversion of the Notes at least a
number of Common Shares equal to the Required Amount (an “Authorized Share Failure”), then the
Company shall as promptly as practicable take all action necessary to increase the Company’s
authorized Common Shares to an amount sufficient to allow the Company to have available the
Required Amount for the Notes then outstanding.



          12. HOLDER’S REDEMPTIONS.




               (a) Mechanics. The Company shall deliver the applicable Event of Default Redemption
Price to the Holder within five (5) Trading Days after the Company’s receipt of the Holder’s Event
of Default



12









 




Redemption Notice. If the Holder has submitted a Change of Control Redemption Notice in
accordance with Section 5(b), the Company shall deliver the applicable Change of Control Redemption
Price to the Holder concurrently with the consummation of such Change of Control if such notice is
received prior to the consummation of such Change of Control and within five (5) Trading Days after
the Company’s receipt of such notice otherwise (the “Change of Control Redemption Date”). The
Company shall deliver the Optional Redemption Price to the Holder on the Optional Redemption Date.
In the event of a redemption of less than all of the Conversion Amount of this Note, the Company
shall promptly cause to be issued and delivered to the Holder a new Note (in accordance with
Section 17(d)) representing the outstanding Principal which has not been redeemed. In the event
that the Company does not pay the applicable Redemption Price to the Holder within the time period
required, at any time thereafter and until the Company pays such unpaid Redemption Price in full,
the Holder shall have the option, in lieu of redemption, to require the Company to promptly return
to the Holder all or any portion of this Note representing the Conversion Amount that was submitted
for redemption and for which the applicable Redemption Price has not been paid. Upon the Company’s
receipt of such notice, (x) the Redemption Notice shall be null and void with respect to such
Conversion Amount, (y) the Company shall immediately return this Note, or issue a new Note (in
accordance with Section 17(d)) to the Holder representing such Conversion Amount and (z) the
Conversion Price of this Note or such new Notes shall be adjusted to the lesser of (A) the
Conversion Price as in effect on the date on which the Redemption Notice is voided and (B) the
lowest Closing Bid Price of the Common Shares during the period beginning on and including the date
on which the Redemption Notice is delivered to the Company and ending on and including the date on
which the Redemption Notice is voided.




               (b) Redemption by Other Holders. Upon the Company’s receipt of notice from any of the
holders of the Other Notes for redemption or repayment as a result of an event or occurrence
substantially similar to the events or occurrences described in Section 4(b) or Section 5(b) (each,
an “Other Redemption Notice”), the Company shall immediately, but no later than one (1) Trading Day
of its receipt thereof, forward to the Holder by facsimile a copy of such notice. If the Company
receives a Redemption Notice and one or more Other Redemption Notices, during the seven (7) Trading
Day period beginning on and including the date which is three (3) Trading Days prior to the
Company’s receipt of the Holder’s Redemption Notice and ending on and including the date which is
three (3) Trading Days after the Company’s receipt of the Holder’s Redemption Notice and the
Company is unable to redeem all principal, interest and other amounts designated in such Redemption
Notice and such Other Redemption Notices received during such seven (7) Trading Day period, then
the Company shall redeem a pro rata amount from each holder of the Notes (including the Holder)
based on the principal amount of the Notes submitted for redemption pursuant to such Redemption
Notice and such Other Redemption Notices received by the Company during such seven (7) Trading Day
period.



          13. VOTING RIGHTS. The Holder shall have no voting rights as the holder of this Note,
except as provided by law, the Business Corporations Act (British Columbia) and as expressly
provided in this Note.




          14. RIGHTS UPON DISTRIBUTION OF ASSETS. Subject to the provisions of Section 4(j) of
the Securities Purchase Agreement, if the Company shall declare or make any dividend or other
distribution of its assets (or rights to acquire its assets) to holders of Common Shares, by way of
return of capital or otherwise (including, without limitation, any distribution of cash, shares or
other securities, property or options by way of a dividend, spin off, reclassification, corporate
rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at any time
after the issuance of this Note, then, in each such case any Conversion Price in effect immediately
prior to the close of business on the record date fixed for the determination of holders of Common
Shares entitled to receive the Distribution shall be reduced, effective as of the close of business
on such record date, to a price determined by multiplying such Conversion Price by a fraction of
which (i) the numerator shall be the Closing Bid Price of the Common Shares on the trading day
immediately preceding such record date minus the value of the Distribution (as determined in good
faith by the Company’s Board of Directors) applicable to one Common Share, and (ii) the denominator
shall be the Closing Bid Price of the Common Shares on the trading day immediately preceding such
record date.




          15. VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote, at a meeting
duly called for such purpose or the written consent without a meeting, of the Required Holders
shall be required for any change or amendment to this Note or the Other Notes. Any change or
amendment so approved shall be binding upon all existing and future holders of this Note and any
Other Notes.




13









 








          16. TRANSFER. This Note and any Common Shares issued upon conversion of this Note may be
offered, sold, assigned or transferred by the Holder without the consent of the Company, subject
only to the provisions of Section 2(f) of the Securities Purchase Agreement.




          17. REISSUANCE OF THIS NOTE.




               (a) Transfer. If this Note is to be transferred, the Holder shall surrender this Note
to the Company, whereupon the Company will forthwith issue and deliver upon the order of the Holder
a new Note (in accordance with Section 17(d)), registered as the Holder may request, representing
the outstanding Principal being transferred by the Holder and, if less then the entire outstanding
Principal is being transferred, a new Note (in accordance with Section 17(d)) to the Holder
representing the outstanding Principal not being transferred. The Holder and any assignee, by
acceptance of this Note, acknowledge and agree that, by reason of the provisions of Section
3(c)(iv) following conversion or redemption of any portion of this Note, the outstanding Principal
represented by this Note may be less than the Principal stated on the face of this Note.



               (b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Note,
and, in the case of loss, theft or destruction, of any indemnification undertaking by the Holder to
the Company in customary form and, in the case of mutilation, upon surrender and cancellation of
this Note, the Company shall execute and deliver to the Holder a new Note (in accordance with
Section 17(d)) representing the outstanding Principal.



               (c) Note Exchangeable for Different Denominations. This Note is exchangeable, upon
the surrender hereof by the Holder at the principal office of the Company, for a new Note or Notes
(in accordance with Section 17(d) and in principal amounts of at least $100,000) representing in
the aggregate the outstanding Principal of this Note, and each such new Note will represent such
portion of such outstanding Principal as is designated by the Holder at the time of such surrender.



               (d) Issuance of New Notes. Whenever the Company is required to issue a new Note
pursuant to the terms of this Note, such new Note (i) shall be of like tenor with this Note, (ii)
shall represent, as indicated on the face of such new Note, the Principal remaining outstanding (or
in the case of a new Note being issued pursuant to Section 17(a) or Section 17(c), the Principal
designated by the Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining outstanding under
this Note immediately prior to such issuance of new Notes), (iii) shall have an issuance date, as
indicated on the face of such new Note, which is the same as the Issuance Date of this Note, (iv)
shall have the same rights and conditions as this Note, and (v) shall represent accrued and unpaid
Interest on the Principal of this Note, from the Issuance Date.



          18. REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.
The remedies provided in this Note shall be cumulative and in addition to all other remedies
available under this Note and any of the other Transaction Documents at law or in equity (including
a decree of specific performance and/or other injunctive relief), and nothing herein shall limit
the Holder’s right to pursue actual and consequential damages for any failure by the Company to
comply with the terms of this Note. Amounts set forth or provided for herein with respect to
payments, conversion and the like (and the computation thereof) shall be the amounts to be received
by the Holder and shall not, except as expressly provided herein, be subject to any other
obligation of the Company (or the performance thereof). The Company acknowledges that a breach by
it of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at
law for any such breach may be inadequate. The Company therefore agrees that, in the event of any
such breach or threatened breach, the Holder shall be entitled, in addition to all other available
remedies, to an injunction restraining any breach, without the necessity of showing economic loss
and without any bond or other security being required.




          19. PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS.  If (a) this Note is placed in
the hands of an attorney for collection or enforcement or is collected or enforced through any
legal proceeding or the Holder otherwise takes action to collect amounts due under this Note or to
enforce the provisions of this Note or (b) there occurs any bankruptcy, reorganization,
receivership of the Company or other proceedings affecting Company creditors’ rights and involving
a claim under this Note, then the Company shall pay the costs incurred by the Holder for such
collection, enforcement or action or in connection with such bankruptcy,




14









 







reorganization, receivership or other proceeding, including, but not limited to, attorneys’
fees and disbursements.




          20. CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly drafted by the
Company and all the Purchasers and shall not be construed against any person as the drafter hereof.
The headings of this Note are for convenience of reference and shall not form part of, or affect
the interpretation of, this Note.




          21. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the Holder
in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such power, right or privilege preclude other or
further exercise thereof or of any other right, power or privilege.




          22. DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Closing Bid Price, the Closing Sale Price or the Weighted Average Price or the arithmetic
calculation of the Conversion Rate or any Redemption Price, the Company shall submit the disputed
determinations or arithmetic calculations via facsimile within one (1) Trading Day of receipt, or
deemed receipt, of the Conversion Notice or Redemption Notice or other event giving rise to such
dispute, as the case may be, to the Holder. If the Holder and the Company are unable to agree upon
such determination or calculation within one (1) Trading Day of such disputed determination or
arithmetic calculation being submitted to the Holder, then the Company shall, within one (1)
Trading Day submit via facsimile (a) the disputed determination of the Closing Bid Price, the
Closing Sale Price or the Weighted Average Price to an independent, reputable investment bank
selected by the Company and approved by the Holder or (b) the disputed arithmetic calculation of
the Conversion Rate or any Redemption Price to the Company’s independent, outside accountant. The
Company, at the Company’s expense, shall cause the investment bank or the accountant, as the case
may be, to perform the determinations or calculations and notify the Company and the Holder of the
results no later than five (5) Trading Days from the time it receives the disputed determinations
or calculations. Such investment bank’s or accountant’s determination or calculation, as the case
may be, shall be binding upon all parties absent demonstrable error.




          23. NOTICES; CURRENCY; PAYMENTS.




               (a) Notices. Whenever notice is required to be given under this Note, unless
otherwise provided herein, such notice shall be given in accordance with Section 9(f) of the
Securities Purchase Agreement. The Company shall provide the Holder with prompt written notice of
all actions taken pursuant to this Note, including in reasonable detail a description of such
action and the reason therefore. Without limiting the generality of the foregoing, the Company
will give written notice to the Holder (i) immediately upon any adjustment of the Conversion Price,
setting forth in reasonable detail, and certifying, the calculation of such adjustment and (ii) at
least twenty (20) days prior to the date on which the Company closes its books or takes a record
(A) with respect to any dividend or distribution upon the Common Shares, (B) with respect to any
pro rata subscription offer to holders of Common Shares or (C) for determining rights to vote with
respect to any Fundamental Transaction, dissolution or liquidation, provided in each case that such
information shall be made known to the public prior to or in conjunction with such notice being
provided to the Holder.



               (b) Currency. All principal, interest and other amounts owing under this Note or any
Transaction Document that, in accordance with their terms, are paid in cash shall be paid in US
dollars. All amounts denominated in other currencies shall be converted in the US dollar
equivalent amount in accordance with the Exchange Rate on the date of calculation. “Exchange Rate”
means, in relation to any amount of currency to be converted into US dollars pursuant to this Note,
the US dollar exchange rate as published in the Wall Street Journal on the relevant date of
calculation (it being understood and agreed that where an amount is calculated with reference to,
or over, a period of time, the date of calculation shall be the final date of such period of time).



               (c) Payments. Whenever any payment of cash is to be made by the Company to any Person
pursuant to this Note, such payment shall be made in lawful money of the United States of America
by a check drawn on the account of the Company and sent via overnight courier service to such
Person at such address as previously provided to the Company in writing (which address, in the case
of each of the Purchasers, shall initially be as set forth on the Schedule of Buyers attached to
the Securities Purchase Agreement); provided that the Holder may elect to receive a payment of cash
via wire transfer of immediately available funds by providing the Company with prior written notice
setting out such request and the Holder’s wire transfer instructions. Whenever any amount



15









 




expressed to be due by the terms of this Note is due on any day which is not a Trading Day,
the same shall instead be due on the next succeeding day which is a Trading Day and, in the case of
any Interest Date which is not the date on which this Note is paid in full, the extension of the
due date thereof shall not be taken into account for purposes of determining the amount of Interest
due on such date.




          24. CANCELLATION. After all Principal, accrued Interest and other amounts at any time
owed on this Note have been paid in full, this Note shall automatically be deemed canceled, shall
be surrendered to the Company for cancellation and shall not be reissued.




          25. WAIVER OF NOTICE. To the extent permitted by law, the Company hereby waives demand,
notice, protest and all other demands and notices in connection with the delivery, acceptance,
performance, default or enforcement of this Note and the Securities Purchase Agreement.




          26. GOVERNING LAW. This Note shall be construed and enforced in accordance with, and
all questions concerning the construction, validity, interpretation and performance of this Note
shall be governed by, the internal laws of the State of New York, without giving effect to any
choice of law or conflict of law provision or rule (whether of the State of New York or any other
jurisdictions) that would cause the application of the laws of any jurisdictions other than the
State of New York. Any action brought by either party against the other concerning the transactions
contemplated by this Agreement shall be brought only in the state courts of New York or in the
federal courts located in the State of New York and waive trial by jury. Both parties agree to
submit to the jurisdiction of such courts. The prevailing party shall be entitled to recover from
the other party its reasonable attorney’s fees and costs. In the event that any provision of this
Note is invalid or unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed
modified to conform with such statute or rule of law. Any such provision which may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of any other provision
of this Note. Nothing contained herein shall be deemed or operate to preclude the Holder from
bringing suit or taking other legal action against the Company in any other jurisdiction to collect
on the Company’s obligations to the Holder, to realize on any collateral or any other security for
such obligations, or to enforce a judgment or other court ruling in favor of the Holder.




          27. JUDGMENT CURRENCY.




               (a) If for the purpose of obtaining or enforcing judgment against the Company in any court in
any jurisdiction it becomes necessary to convert into any other currency (such other currency being
hereinafter in this Section 27 referred to as the “Judgment Currency”) an amount due in US dollars
under this Note, the conversion shall be made at the Exchange Rate prevailing on the business day
immediately preceding:



                    (i) the date actual payment of the amount due, in the case of any proceeding in the courts of
New York or in the courts of any other jurisdiction that will give effect to such conversion being
made on such date: or



                    (ii) the date on which the foreign court determines, in the case of any proceeding in the
courts of any other jurisdiction (the date as of which such conversion is made pursuant to this
Section 27(a)(ii) being hereinafter referred to as the “Judgment Conversion Date”).



               (b) If in the case of any proceeding in the court of any jurisdiction referred to in Section
27(a)(ii) above, there is a change in the Exchange Rate prevailing between the Judgment Conversion
Date and the date of actual payment of the amount due, the applicable party shall pay such adjusted
amount as may be necessary to ensure that the amount paid in the Judgment Currency, when converted
at the Exchange Rate prevailing on the date of payment, will produce the amount of US dollars which
could have been purchased with the amount of Judgment Currency stipulated in the judgment or
judicial order at the Exchange Rate prevailing on the Judgment Conversion Date.



16









 






               (c) Any amount due from the Company under this provision shall be due as a separate debt and
shall not be affected by judgment being obtained for any other amounts due under or in respect of
this Note.



          28. MAXIMUM PAYMENTS. Nothing contained herein shall be deemed to establish or
require the payment of a rate of interest or other charges in excess of the maximum permitted by
applicable law. In the event that the rate of interest required to be paid or other charges
hereunder exceed the maximum permitted by such law, any payments in excess of such maximum shall be
credited against amounts owed by the Company to the Holder and thus refunded to the Company.




          29. CERTAIN DEFINITIONS. For purposes of this Note, the following terms shall have the
following meanings:




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



               (b) “Bloomberg” means Bloomberg Financial Markets.



               (c) “Calendar Quarter” means each of: the period beginning on and including January 1 and
ending on and including March 31; the period beginning on and including April 1 and ending on and
including June 30; the period beginning on and including July 1 and ending on and including
September 30; and the period beginning on and including October 1 and ending on and including
December 31.



               (d) “Change of Control” means any Fundamental Transaction other than (i) any reorganization,
recapitalization or reclassification of the Common Shares in which holders of the Company’s voting
power immediately prior to such reorganization, recapitalization or reclassification continue after
such reorganization, recapitalization or reclassification to hold publicly traded securities and,
directly or indirectly, the voting power of the surviving entity or entities necessary to elect a
majority of the members of the board of directors (or their equivalent if other than a corporation)
of such entity or entities, or (ii) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company.



               (e) “Closing Bid Price” and “Closing Sale Price” means, for any security as of any date, the
last closing bid price and last closing trade price, respectively, for such security on the
Principal Market, as reported by Bloomberg, or, if the Principal Market begins to operate on an
extended hours basis and does not designate the closing bid price or the closing trade price, as
the case may be, then the last bid price or last trade price, respectively, of such security prior
to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the Principal Market is not the
principal securities exchange or trading market for such security, the last closing bid price or
last trade price, respectively, of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not
apply, the last closing bid price or last trade price, respectively, of such security in the
over-the-counter market on the electronic bulletin board for such security as reported by
Bloomberg, or, if no closing bid price or last trade price, respectively, is reported for such
security by Bloomberg, the average of the bid prices, or the ask prices, respectively, of any
market makers for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly the
National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing Sale Price cannot be
calculated for a security on a particular date on any of the foregoing bases, the Closing Bid Price
or the Closing Sale Price, as the case may be, of such security on such date shall be the fair
market value as mutually determined by the Company and the Holder. If the Company and the Holder
are unable to agree upon the fair market value of such security, then such dispute shall be
resolved pursuant to Section 22. All such determinations to be appropriately adjusted for any
share dividend, share split, share combination or other similar transaction during the applicable
calculation period.



               (f) “Closing Date” shall have the meaning set forth in the Securities Purchase Agreement,
which date is the date the Company initially issued Notes pursuant to the terms of the Securities
Purchase Agreement.



17









 





               (g) “Common Shares Deemed Outstanding” means, at any given time, the number of Common Shares
actually outstanding at such time, plus the number of Common Shares deemed to be outstanding
pursuant to Sections 7(a)(i) and 7(a)(ii) hereof regardless of whether the Options or Convertible
Securities are actually exercisable at such time, but excluding any Common Shares owned or held by
or for the account of the Company or issuable upon conversion or exercise, as applicable, of the
Notes and the Warrants.



               (h) “Contingent Obligation” means, as to any Person, any direct or indirect liability,
contingent or otherwise, of that Person with respect to any indebtedness, lease, dividend or other
obligation of another Person if the primary purpose or intent of the Person incurring such
liability, or the primary effect thereof, is to provide assurance to the obligee of such liability
that such liability will be paid or discharged, or that any agreements relating thereto will be
complied with, or that the holders of such liability will be protected (in whole or in part)
against loss with respect thereto.



               (i) “Convertible Securities” means any shares or securities (other than Options) directly or
indirectly convertible into or exercisable or exchangeable for Common Shares.



               (j) “Eligible Market” means the Principal Market, The New York Stock Exchange, Inc or the
Nasdaq National Market.



               (k) “Equity Conditions” means that each of the following conditions is satisfied: (i) on each
day during the period beginning three (3) months prior to the applicable date of determination and
ending on and including the applicable date of determination (the “Equity Conditions Measuring
Period”), either (x) the Registration Statement filed pursuant to the Registration Rights Agreement
shall be effective and available for the resale of all remaining Registrable Securities in
accordance with the terms of the Registration Rights Agreement and there shall not have been any
Grace Periods (as defined in the Registration Rights Agreement) or (y) all Common Shares issuable
upon conversion or redemption of the Notes and exercise of the Warrants shall be eligible for sale
without restriction and without the need for registration under any applicable federal or state
securities laws and such shares shall be freely tradable on AMEX or NASDAQ; (ii) on each day during
the Equity Conditions Measuring Period, the Common Shares are designated for quotation on the
Principal Market or NASDAQ and shall not have been suspended from trading on such exchange or
market (other than suspensions of not more than two (2) days and occurring prior to the applicable
date of determination due to business announcements by the Company) nor shall delisting or
suspension by such exchange or market been threatened or pending either (A) in writing by such
exchange or market or (B) by falling below the minimum listing maintenance requirements of such
exchange or market; (iii) during the one (1) year period ending on and including the date
immediately preceding the applicable date of determination, the Company shall have delivered
Conversion Shares upon conversion of the Notes and Common Shares upon exercise of the Warrants to
the holders on a timely basis as set forth in Section 3(c)(i) hereof (and analogous provisions
under the Other Notes) and Section 2(a) of the Warrants; (iv) any applicable Common Shares to be
issued in connection with the event requiring determination may be issued in full without violating
Section 3(d) hereof and the rules and regulations of the Principal Market and from and after the
Shareholder Meeting Deadline (as defined in the Securities Purchase Agreement), the Company shall
have obtained the Shareholder Approval (as defined in the Securities Purchase Agreement) if
required pursuant to the terms of the Securities Purchase Agreement; (v) during the Equity
Conditions Measuring Period, the Company shall not have failed to timely make any payments within
five (5) Trading Days of when such payment is due pursuant to any Transaction Document; (vi) during
the Equity Conditions Measuring Period, there shall not have occurred either (A) the public
announcement of a pending, proposed or intended Fundamental Transaction which has not been
abandoned, terminated or consummated or (B) an Event of Default or an event that with the passage
of time or giving of notice would constitute an Event of Default; (vii) the Company shall have no
knowledge of any fact that would cause (x) the Registration Statements required pursuant to the
Registration Rights Agreement not to be effective and available for the resale of all remaining
Registrable Securities in accordance with the terms of the Registration Rights Agreement or (y) any
Common Shares issuable upon conversion or redemption of the Notes and Common Shares issuable upon
exercise of the Warrants not to be eligible for sale without restriction pursuant to Rule 144(k)
and any applicable state securities laws; (viii) the Company otherwise shall have been in material
compliance with and shall not have materially breached any provision, covenant, representation or
warranty of any Transaction Document; and (ix) the Common Shares have not traded below $0.50 per
share in the immediately preceding twenty (20) consecutive Trading Days.



18









 





               (l) “Equity Conditions Failure” means that during any period commencing with (i) the delivery
of the Maturity Election Notice through the Maturity Date, (ii) the delivery of the Conversion
Notice Confirmation through the Share Delivery Date and (iii) the Optional Redemption Notice Date
through the Optional Redemption Date, the Equity Conditions have not been satisfied (or waived in
writing by the Holder).



               (m) “Excluded Securities” means any Common Shares issued or issuable: (i) in connection with
any Approved Share Plan; (ii) upon conversion of the Notes or the exercise of the Warrants; (iii)
pursuant to a bona fide firm commitment underwritten public offering with a nationally recognized
underwriter which generates gross proceeds to the Company of at least $30,000,000 (other than an
“at-the-market offering” as defined in Rule 415(a)(4) under the 1933 Act and “equity lines”); (iv)
in connection with any strategic acquisition or strategic transaction, whether through an
acquisition of shares or a merger of any business, assets or technologies, the primary purpose of
which is not to raise equity capital in an amount not to exceed, in the aggregate twenty percent
(20%) of the outstanding Common Shares in any twelve (12) month period; (v) upon conversion of any
Options or Convertible Securities which are outstanding on the day immediately preceding the
Subscription Date, provided that the terms of such Options or Convertible Securities are not
amended, modified or changed on or after the Subscription Date and (vi) issued in connection with
any share split, share dividend, recapitalization or similar transaction by the Company for which
adjustment is made pursuant to Section 7(b).



               (n) “Fundamental Transaction” means that the Company shall, directly or indirectly, in one or
more related transactions, (i) consolidate or merge with or into (whether or not the Company, is
the surviving corporation) another Person, or (ii) sell, assign, transfer, convey or otherwise
dispose of all or substantially all of the properties or assets of the Company to another Person,
or (iii) be subject to an offer from another Person or group of related Persons (as defined in
Sections 13(d) and 14(d) of the Exchange Act) other than the Holder to make a purchase, tender or
exchange offer that is accepted by the holders of more than the 50% of the outstanding Voting
Shares (not including any Voting Shares held by the Person or Persons making or party to, or
associated or affiliated with the Persons making or party to, such purchase, tender or exchange
offer), or (iv) consummate a share purchase agreement or other business combination (including,
without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with
another Person or group of related Persons (as defined in Sections 13(d) and 14(d) of the Exchange
Act) whereby such other Person or group acquires more than the 50% of the outstanding Voting Shares
(not including any Voting Shares held by the other Person or other Persons making or party to, or
associated or affiliated with the other Persons making or party to, such share purchase agreement
or other business combination), or (v) reorganize, recapitalize or reclassify the Common Shares.



               (o) “GAAP” means United States generally accepted accounting principles, consistently applied.



               (p) “Holder Pro Rata Amount” means a fraction (i) the numerator of which is the Principal
amount of this Note on the Closing Date and (ii) the denominator of which is the aggregate
principal amount of all Notes issued to the initial purchasers pursuant to the Securities Purchase
Agreement on the Closing Date.



               (q) “Indebtedness” of any Person means, without duplication (i) all indebtedness for borrowed
money, (ii) all obligations issued, undertaken or assumed as the deferred purchase price of
property or services, including (without limitation) “capital leases” in accordance with generally
accepted accounting principles (other than trade payables entered into in the ordinary course of
business), (iii) all reimbursement or payment obligations with respect to letters of credit, surety
bonds and other similar instruments, (iv) all obligations evidenced by notes, bonds, debentures or
similar instruments, including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (v) all indebtedness created or arising under any conditional
sale or other title retention agreement, or incurred as financing, in either case with respect to
any property or assets acquired with the proceeds of such indebtedness (even though the rights and
remedies of the seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (vi) all monetary obligations under any leasing or similar
arrangement which, in connection with generally accepted accounting principles, consistently
applied for the periods covered thereby, is classified as a capital lease, (vii) all indebtedness
referred to in clauses (i) through (vi) above secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by) any mortgage, lien,
pledge, charge, security interest or other encumbrance upon or in any property or assets (including
accounts and contract rights) owned by any Person, even though the



19









 




Person which owns such assets or property has not assumed or become liable for the payment of
such indebtedness, and (viii) all Contingent Obligations in respect of indebtedness or obligations
of others of the kinds referred to in clauses (i) through (vii) above.




               (r) “Make-Whole Amount” means the Interest to be paid or provided for by the Company upon any
conversion of this Notes prior to December 14, 2007 in an amount equal to two (2) full years of
Interest on this Note so converted less any Interest paid or provided for on the Principal amount
of this Note so converted prior to the Conversion Date. For purposes of this definition, Interest
shall be computed on the basis of 365 days elapsed over a 360-day year. By way of illustration,
“two (2) full years of Interest” on a Principal amount equal to $1,000 is $121.67 ($1,000 x
(730/360 x 6%)).



               (s) “Make-Whole Conversion Price” means that price which shall be the lower of (i) the
applicable Conversion Price and (ii) the price computed as 92.5% of the arithmetic average of the
Weighted Average Price of the Common Shares during the five (5) consecutive Trading Day period
ending on the Trading Day immediately preceding the Share Delivery Date (such period, the
“Make-Whole Conversion Measuring Period”); provided, however, that if such arithmetic average of
the Weighted Average Price during the Make-Whole Conversion Measuring Period shall yield a price
that is less than $1.00, then the Make-Whole Conversion Price shall be the lower of (1) the
applicable Conversion Price and (2) the price computed as 90% of the arithmetic average of the
Weighted Average Price of the Common Shares during the Make-Whole Conversion Measuring Period.



               (t) “Maturity Conversion Price” means that price which shall be the lower of (i) the
applicable Conversion Price and (ii) the price computed as 92.5% of the arithmetic average of the
Weighted Average Price of the Common Shares during the five (5) consecutive Trading Day period
ending on the Trading Day immediately preceding the Maturity Date (such period, the “Maturity
Conversion Measuring Period”); provided, however, that if such arithmetic average of the Weighted
Average Price during the Maturity Conversion Measuring Period shall yield a price that is less than
$1.00, then the Maturity Conversion Price shall be the lower of (1) the applicable Conversion Price
and (2) the price computed as 90% of the arithmetic average of the Weighted Average Price of the
Common Shares during the Maturity Conversion Measuring Period.



               (u) “Maturity Date” means December 15, 2010; provided further, however, that the Maturity Date
may be extended at the option of the Holder (i) in the event that, and for so long as, an Event of
Default shall have occurred and be continuing or any event shall have occurred and be continuing
which with the passage of time and the failure to cure would result in an Event of Default and (ii)
through the date that is ten (10) Business Days after the consummation of a Change of Control in
the event that a Change of Control is publicly announced or a Change of Control Notice (is
delivered prior to the Maturity Date.



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



               (w) “Parent Entity” of a Person means an entity that, directly or indirectly, controls the
applicable Person and whose common shares or equivalent equity security are quoted or listed on an
Eligible Market, or, if there is more than one such Person or Parent Entity, the Person or Parent
Entity with the largest public market capitalization as of the date of consummation of the
Fundamental Transaction.



               (x) “Person” means an individual, a limited liability company, a partnership, a joint venture,
a corporation, a trust, an unincorporated organization, any other entity and a government or any
department or agency thereof.



               (y) “Principal Market” means The Nasdaq Capital Market.



               (z) “Redemption Notices” means, collectively, the Event of Default Redemption Notices, Change
of Control Redemption Notices and the Optional Redemption Notices and, each of the foregoing,
individually, a Redemption Notice.



20









 





               (aa) “Redemption Premium” means (i) in the case of the Events of Default described in Section
4(a)(i) — (vi) and (ix) — (xi), 125% or (ii) in the case of the Events of Default described in
Section 4(a)(vii) — (viii), 100%.



               (bb) “Redemption Prices” means, collectively, the Event of Default Redemption Price, Change of
Control Redemption Price and the Optional Redemption Price and, each of the foregoing,
individually, a Redemption Price.



               (cc) “Registration Rights Agreement” means that certain registration rights agreement dated as
of the Subscription Date by and among the Company and the initial holders of the Notes relating to,
among other things, the registration of the resale of the Common Shares issuable upon conversion of
the Notes and exercise of the Warrants.



               (dd) “Required Holders” means the holders of Notes representing at least a majority of the
aggregate principal amount of the Notes then outstanding.



               (ee) “SEC” means the United States Securities and Exchange Commission.



               (ff) “Securities Purchase Agreement” means that certain securities purchase agreement dated as
of the Subscription Date by and among the Company and the initial holders of the Notes pursuant to
which the Company issued the Notes.



               (gg) “Subscription Date” means December 13, 2005.



               (hh) “Successor Entity” means the Person, which may be the Company, formed by, resulting from
or surviving any Fundamental Transaction or the Person with which such Fundamental Transaction
shall have been made, provided that if such Person is not a publicly traded entity whose common
shares or equivalent equity security are quoted or listed for trading on an Eligible Market,
Successor Entity shall mean such Person’s Parent Entity.



               (ii) “Tax” means any tax, levy, impost, duty or other charge or withholding of a similar
nature (including any related penalty or interest).



               (jj) “Tax Deduction” means a deduction or withholding for or on account of Tax from a payment
under the Notes.



               (kk) “Trading Day” means any day on which the Common Shares are traded on the Principal
Market, or, if the Principal Market is not the principal trading market for the Common Shares, then
on the principal securities exchange or securities market on which the Common Shares are then
traded; provided that “Trading Day” shall not include any day on which the Common Shares is
scheduled to trade on any such exchange or market for less than 4.5 hours or any day that the
Common Shares are suspended from trading during the final hour of trading on any such exchange or
market (or if such exchange or market does not designate in advance the closing time of trading on
such exchange or market, then during the hour ending at 4:00:00 p.m., New York Time).



               (ll) “Volume Limitation” means, for any date of determination, twenty percent (20.0%) of the
aggregate dollar trading volume (as reported on Bloomberg) of the Common Shares over the ten (10)
consecutive Trading Day period ending on the Trading Day immediately preceding Maturity Date or the
Share Delivery Date, as applicable.



               (mm) “Voting Shares” of a Person means capital shares of such Person of the class or classes
pursuant to which the holders thereof have the general voting power to elect, or the general power
to appoint, at least a majority of the board of directors, managers or trustees of such Person
(irrespective of whether or not at the time capital shares of any other class or classes shall have
or might have voting power by reason of the happening of any contingency).



21









 





               (nn) “Warrants” has the meaning ascribed to such term in the Securities Purchase Agreement,
and shall include all warrants issued in exchange therefor or replacement thereof.



               (oo) “Weighted Average Price” means, for any security as of any date, the dollar
volume-weighted average price for such security on the Principal Market during the period beginning
at 9:30:01 a.m., New York Time (or such other time as the Principal Market publicly announces is
the official open of trading), and ending at 4:00:00 p.m., New York Time (or such other time as the
Principal Market publicly announces is the official close of trading) as reported by Bloomberg
through its “Volume at Price” functions, or, if the foregoing does not apply, the dollar
volume-weighted average price of such security in the over-the-counter market on the electronic
bulletin board for such security during the period beginning at 9:30:01 a.m., New York Time (or
such other time as such market publicly announces is the official open of trading), and ending at
4:00:00 p.m., New York Time (or such other time as such market publicly announces is the official
close of trading) as reported by Bloomberg, if no dollar volume-weighted average price is reported
for such security by Bloomberg for such hours, the average of the highest closing bid price and the
lowest closing ask price of any of the market makers for such security as reported in the “pink
sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If the Weighted Average
Price cannot be calculated for a security on a particular date on any of the foregoing bases, the
Weighted Average Price of such security on such date shall be the fair market value as mutually
determined by the Company and the Holder. If the Company and the Holder are unable to agree upon
the fair market value of such security, then such dispute shall be resolved pursuant to Section 22.
All such determinations to be appropriately adjusted for any share dividend, share split, share
combination or other similar transaction during the applicable calculation period.



          30. DISCLOSURE. Upon receipt or delivery by the Company of any notice in accordance
with the terms of this Note, unless the Company has in good faith determined that the matters
relating to such notice do not constitute material, nonpublic information relating to the Company
or its Subsidiaries, the Company shall within one (1) Business Day after any such receipt or
delivery publicly disclose such material, nonpublic information on a Current Report on Form 8-K or
otherwise. In the event that the Company believes that a notice contains material, nonpublic
information, relating to the Company or its Subsidiaries, the Company shall indicate to the Holder
contemporaneously with delivery of such notice, and in the absence of any such indication, the
Holder shall be allowed to presume that all matters relating to such notice do not constitute
material, nonpublic information relating to the Company or its Subsidiaries.



[Signature Page Follows]




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     IN WITNESS WHEREOF, the Company has caused this Note to be duly executed as of the Issuance
Date set out above.



	 	 	 	 	 	 	 
	 	 	NGAS Resources, Inc.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Name:	 	 
	 

	 	 	 	Title:	 	 






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