Document:

Exhibit 4.4

 

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

 

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

 

 

 

EARTH
BIOFUELS, INC.

 

8% SENIOR CONVERTIBLE NOTE

 

 

	
  New York, New York

  	
  $2,500,000

  

Issue Date:  June 7, 2006

 

FOR VALUE
RECEIVED, EARTH BIOFUELS, INC., a
Delaware corporation (the “Company”), hereby promises to pay to
the order of RADCLIFFE SPC, LTD. FOR
AND ON BEHALF OF THE CLASS A CONVERTIBLE CROSSOVER SEGREGATED PORTFOLIO or its permitted successors or assigns
(the “Holder”) the sum of TWO MILLION
FIVE HUNDRED THOUSAND AND 00/100 DOLLARS ($2,500,000) in same day funds, on or
before the Maturity Date (as defined below). Upon the occurrence of the Conversion
Trigger Event (as defined below), the Holder may convert principal of and
interest accrued on this Note into shares (“Conversion
Shares”) of the Company’s common stock, par value $.001 per
share (the “Common Stock”), on the terms
set forth herein.

 

The Company has issued
this Note pursuant to a Securities Purchase Agreement, dated as of June 7, 2006
(the “Securities Purchase Agreement”).
The Notes issued by the Company pursuant to the Securities Purchase Agreement,
including this Note, are collectively referred to herein as the “Notes”.

 

 

The following terms shall
apply to this Note:

 

1.             DEFINITIONS.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

2

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

3

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

“New Offering” means a private
offering and sale by the Company of its equity securities with gross cash
proceeds to the Company of at least the principal amount of this Note.

 

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

 

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

 

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

 

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

 

4

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

2.             MATURITY DATE; EXTENSION
OF MATURITY.

 

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

 

5

 

(b)           Subsequent Maturity Date; Extension.  In the event that the Company does not pay
the entire amount of the Obligations on the Initial Maturity Date either (i) in
cash or (ii) to the extent permitted through an Exchange in accordance with Section 2(c) below, the Holder shall
have the option to extend the Maturity Date as to all or any part of the
Obligations from the Initial Maturity Date to the Subsequent Maturity Date (the
“Maturity Extension Option”). If the
Holder exercises the Maturity Extension Option, the Obligations shall become
due on the Subsequent Maturity Date instead of the Initial Maturity Date, and
Interest (and any other amounts) shall continue to accrue hereon through the
full and final payment (through cash or an Exchange) of all Obligations. In
order to exercise the Maturity Extension Option, the Holder must deliver
written notice thereof no later than the fifth (5th) Business Day prior
to the Initial Maturity Date specifying the amount of Obligations to which the Maturity
Extension Option applies. If the Holder does not exercise the Maturity
Extension Option, the Obligations shall be deemed due and payable on the
Initial Maturity Date. Any Obligations (including accrued and unpaid Interest) not
paid in full when due shall bear interest at the Default Interest Rate from the
due date through the date on which payment in full is made.

 

(c)           Exchange. The Company must deliver written notice of the
Exchange (including the proposed date and expected gross proceeds thereof) to
the Holder at least five (5) Business Days (the “Exchange
Notice Date”) prior to the closing date of the New Offering (the
“Exchange Date”).  In order to pay the Obligations
through an Exchange, the Company must have
received notice from the Holder at least one (1) Business Day prior to the Exchange Date that such
Holder has elected to have the Obligations paid through an Exchange (an “Exchange Election”). On the Exchange
Date, if
the Holder has made an Exchange Election, this Note shall be automatically exchanged for a
portion of the securities issued in a New Offering, such Exchange to be
effected on a dollar-for-dollar
basis so that each dollar of Obligations (including all Interest accrued
through the Exchange Date) shall be deemed payment for the securities issued in
the New Offering on the same terms and conditions granted to other purchasers
in the New Offering. Unless and until an Exchange occurs (or payment in full of
all Obligations is made in cash), the Holder shall have all of its rights and
remedies hereunder (including without limitation its right to convert this Note
if the Conversion Trigger Event has occurred) through the Exchange Date (or the
date on which payment in full is made).

 

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

 

 

 

6

 

3.             INTEREST

 

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

 

4.             CONVERSION.

 

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

 

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

 

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

 

7

 

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

 

(e)           Failure to Deliver Conversion
Shares.

 

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

 

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

 

8

 

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

 

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

 

5.             ADJUSTMENTS TO FIXED CONVERSION
PRICE.

 

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

 

(b)           Major Transactions.  If, at any time after the Issue Date, any
Major Transaction shall occur, then the Holder shall thereafter have the right
to receive upon Conversion, in lieu of the shares of Common Stock otherwise
issuable, such shares of publicly traded stock, securities and/or other
property as would have been issued or payable upon such Major Transaction with
respect to or in exchange for the number of shares of Common Stock which would
have been issuable upon Conversion had such Major Transaction not taken place
(without giving effect to any limitations on such Conversion contained in this Note
or the Securities Purchase Agreement). The Company shall not effect any Major
Transaction unless (i) the Holder has received written notice of such
transaction at least thirty (30) days prior thereto (which period shall be
increased to sixty one (61) days if, at such time, without giving effect to the
limitation on conversion contained in Section 4(f)
hereof, the Holder would beneficially own more than 4.9% of the Common Stock
then

 

9

 

outstanding, and the
Holder has notified the Company in writing of such circumstance) but in no
event later than fifteen (15) days prior to the record date for the
determination of stockholders entitled to vote with respect thereto; provided, however, that
the Company shall publicly disclose the material terms of any such Major
Transaction on or before the date on which it delivers notice of a Major
Transaction to the Holder, and (ii) the resulting successor or acquiring entity
(if not the Company) assumes by written instrument (in form and substance
reasonable satisfactory to the Holder) the obligations of the Company under
this Note (including, without limitation, the obligation to make payments of
Interest accrued but unpaid through the date of such consolidation, merger or
sale and accruing thereafter).  The above
provisions shall apply regardless of whether or not there would have been a
sufficient number of shares of Common Stock authorized and available for issuance
upon conversion of this Note as of the date of such transaction, and shall
similarly apply to successive Major Transactions.

 

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

 

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

 

10

 

Agreement) had the Holder
been the holder of such shares of Common Stock on the record date for the
determination of stockholders entitled to receive such Convertible Securities
or Options (or if no such record is taken, the date on which such Convertible
Securities or Options were issued).

 

(e)           Dilutive Issuances.

 

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

 

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

 

(A)          Issuance Of Options.  If the Company issues or sells any Options,
whether or not immediately exercisable, and the price per share for which Common
Stock is issuable upon the exercise of such Options (and the price of any
conversion of Convertible Securities, if applicable) is less than the Fixed
Conversion Price in effect on the date of issuance or sale of such Options,
then the maximum total number of shares of Common Stock issuable upon the
exercise of all such Options (assuming full conversion, exercise or exchange of
Convertible Securities, if applicable) shall, as of the date of the issuance or
sale of such Options, be deemed to be outstanding and to have been issued and
sold by the Company for such price per share. For purposes of the preceding
sentence, the “price per share for which Common Stock is issuable upon the
exercise of such Options” shall be determined by dividing (x) the total amount,
if any, received or receivable by the Company as consideration for the issuance
or sale of all such Options, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the exercise of all such Options,
plus, in the case of Convertible Securities issuable upon the exercise
of such Options, the minimum aggregate amount of additional consideration
payable upon the conversion, exercise or exchange thereof (determined in
accordance with the calculation method set forth in Section
5(e)(ii)(B) below) at the time such Convertible Securities first
become convertible, exercisable or exchangeable, by (y) the maximum total
number of shares of Common Stock issuable upon the exercise of all such Options
(assuming full conversion, exercise or exchange of Convertible Securities, if
applicable). No further adjustment to the Fixed Conversion Price shall be made
upon the actual issuance of such Common Stock upon the exercise of such Options
or upon the conversion, exercise or exchange of Convertible Securities issuable
upon exercise of such Options.

 

(B)           Issuance Of Convertible Securities.  If the Company issues or sells any
Convertible Securities, whether or not immediately convertible, exercisable or

 

11

 

exchangeable, and the
price per share for which Common Stock is issuable upon such conversion,
exercise or exchange is less than the Fixed Conversion Price in effect on the
date of issuance or sale of such Convertible Securities, then the maximum total
number of shares of Common Stock issuable upon the conversion, exercise or
exchange of all such Convertible Securities shall, as of the date of the
issuance or sale of such Convertible Securities, be deemed to be outstanding
and to have been issued and sold by the Company for such price per share. If
the Convertible Securities so issued or sold do not have a fluctuating
conversion or exercise price or exchange ratio, then for the purposes of the
immediately preceding sentence, the “price per share for which Common Stock is
issuable upon such conversion, exercise or exchange” shall be determined by
dividing (A) the total amount, if any, received or receivable by the Company as
consideration for the issuance or sale of all such Convertible Securities, plus
the minimum aggregate amount of additional consideration, if any, payable to the
Company upon the conversion, exercise or exchange thereof (determined in
accordance with the calculation method set forth in this Section
5(e)(ii)(B)) at the time such Convertible Securities first
become convertible, exercisable or exchangeable, by (B) the maximum total
number of shares of Common Stock issuable upon the exercise, conversion or
exchange of all such Convertible Securities. If the Convertible Securities so
issued or sold have a fluctuating conversion or exercise price or exchange
ratio (a “Variable Rate Convertible
Security”), then for purposes of the first sentence of this Section 5(e)(ii)(B), the “price per
share for which Common Stock is issuable upon such conversion, exercise or
exchange” shall be deemed to be the lowest price per share which would be
applicable (assuming all holding period and other conditions to any discounts
contained in such Variable Rate Convertible Security have been satisfied) if
the conversion price of such Variable Rate Convertible Security on the date of
issuance or sale thereof were equal to the actual conversion price on such date
(or such higher minimum conversion price if such Variable Rate Convertible
Security is subject to a minimum conversion price) (the “Assumed Variable Market Price”),
and, further, if the conversion price of such Variable Rate Convertible
Security at any time or times thereafter is less than or equal to the Assumed
Variable Market Price last used for making any adjustment under this Section 5(e) with respect to any
Variable Rate Convertible Security, the Fixed Conversion Price in effect at
such time shall be readjusted to equal the Fixed Conversion Price which would
have resulted if the Assumed Variable Market Price at the time of issuance of
the Variable Rate Convertible Security had been equal to the actual conversion
price of such Variable Rate Convertible Security existing at the time of the
adjustment required by this sentence; provided, however,
that if the conversion or exercise price or exchange ratio of a Convertible
Security may fluctuate solely as a result of provisions designed to protect
against dilution, such Convertible Security shall not be deemed to be a
Variable Rate Convertible Security.  No
further adjustment to the Fixed Conversion Price shall be made upon the actual
issuance of such Common Stock upon conversion, exercise or exchange of such
Convertible Securities.

 

(C)           Change In Option Price Or
Conversion Rate.  If there is a change
at any time in (x) the amount of additional consideration payable to the
Company upon the exercise of any Options; (y) the amount of additional
consideration, if any, payable to the Company upon the conversion, exercise or
exchange of any Convertible Securities; or (z) the rate at which any
Convertible Securities are convertible into or exercisable or exchangeable for
Common Stock (in each such case, other than under or by reason of provisions
designed

 

12

 

to protect against
dilution), the Fixed Conversion Price in effect at the time of such change
shall be readjusted to the Fixed Conversion Price which would have been in
effect at such time had such Options or Convertible Securities still
outstanding provided for such changed additional consideration or changed
conversion, exercise or exchange rate, as the case may be, at the time
initially issued or sold.

 

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

 

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

 

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

 

6.             EVENTS OF DEFAULT; ACCELERATION.

 

(a)           Acceleration.  In the event that an Event of Default (as
defined below) or a Change of Control occurs, the Holder shall have the right,
upon written notice to the Company (an “Acceleration Notice”),
to require that all or any portion of the unpaid principal amount of this Note,
plus all accrued and unpaid Interest (and any other amounts) thereon, plus an
amount equal to twenty percent (20%) of the principal amount of this Note, be
immediately paid in full in cash.  The

 

13

 

Acceleration Notice shall
specify the date on which all Obligations must be paid, (the “Acceleration Date”), which date may
be the Business Day on which the Acceleration Notice is delivered to the
Company, and the amount of principal and Interest (and other amounts) to be
accelerated. The Holder must deliver an Acceleration Notice no later than the
close of business on the thirtieth (30th) Business Day immediately
following the Business Day on which an Event of Default is no longer
continuing; provided, however,
that with respect to a Change of Control, the Holder must deliver an
Acceleration Notice no later than the close of business on the thirtieth (30th)Business
Day following the date on which the Change of Control is effected or when it is
publicly announced, whichever is later. 
The Company will make public disclosure of an Event of Default,
consistent with the requirements of Form 8-K. 
Additionally, the Company will make public disclosure of any prepayment
of this Note.

 

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

 

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

 

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

 

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

 

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

 

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

 

7.             PREPAYMENT.

 

The
Company shall be entitled to prepay principal of and interest (and any other
amounts) accrued on this Note, at any time without the prior written consent of
the Holder, either in cash or, if the Holder so elects in accordance with Section 2(c), through an Exchange; provided, however, that,
except as otherwise permitted by this Section 7, if the Holder exercises the Maturity Extension
Option, the Company may not prepay this Note prior to the Subsequent Maturity
Date without the prior consent of the Holder, which consent may be withheld for
any reason (or no reason) in the Holder’s sole discretion.  If the Holder does not elect to participate in the Exchange and (x) the
Company receives gross proceeds less than $40 million from any
New Offering on or after the 

 

14

 

Initial
Maturity Date or (y) the Company receives gross proceeds greater than $40
million from any New Offering at any time, the Company must prepay this Note in
full and in cash on the date the New Offering is consummated or within two (2)
Business Days thereafter.

 

8.             MISCELLANEOUS.

 

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

 

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

 

	
  if to the Company:

  
	
   

  
	
   

  	
  Earth Biofuels, Inc.

  
	
   

  	
  3001 Knox Street, Suite
  403,

  
	
   

  	
  Dallas, Texas 75205

  
	
   

  	
  Telephone:

  	
  214.389.9800

  
	
   

  	
  Facsimile:

  	
  214.389.9806

  
	
   

  	
  Attention:

  	
  Dennis McLaughlin

  
	
   

  
	
  with a copy (for
  informational purposes only) to:

  
	
   

  
	
   

  	
  Scheef & Stone, LLP

  
	
   

  	
  Telephone: 

  	
  214.706.4200

  
	
   

  	
  Facsimile:

  	
  214.706.4242

  
	
   

  	
  Attention:

  	
  Roger A. Crabb, Esq.

  

 

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

 

15

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

 

16

 

[Signature Page to Follow]

 

17

 

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

 

EARTH
BIOFUELS, INC.

 

 

	
  By:

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  
			

 

18

 

ANNEX I

 

 

NOTICE OF CONVERSION

 

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

 

 

	
   

  	
  Date
  of Conversion:

  	
   

  
	
   

  	
   

  
	
   

  	
  Principal
  Amount of

  
	
   

  	
  Note
  to be Converted:

  	
   

  
	
   

  	
   

  
	
   

  	
  Amount
  of Interest

  
	
   

  	
  to
  be Converted:

  	
   

  
	
   

  	
   

  
	
   

  	
  Number
  of Shares of

  
	
   

  	
  Common
  Stock to be Issued:

  	
   

  
	
   

  	
   

  
	
   

  	
  Name
  of Holder:

  	
   

  
	
   

  	
   

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Signature:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
								

 

Holder
Requests Delivery to be made:
(check one)

 

	
  o

  	
  By
  Delivery of Physical Certificates to the Above Address

  
	
   

  	
   

  
	
  o

  	
  Through
  Depository Trust Corporation

  
	
   

  	
  (Account

  	
   

  	
  )

  

 

 

ANNEX II

 

Schedule of

Decreases

of Principal
Amount

 

 

 

	
  Principal

  	
   

  	
  Amount
  of

  	
   

  	
   

  
	
  Balance

  	
   

  	
  Decrease

  	
   

  	
  Date

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  $2,500,000Exhibit 4.5

 

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

 

WARRANT

 

TO PURCHASE COMMON STOCK

 

OF

 

EARTH BIOFUELS, INC.

 

	
  Issue
  Date: June 7, 2006

  	
  Warrant No. 1

  

 

                                                THIS CERTIFIES
that CASTLERIGG MASTER INVESTMENTS LTD. or any subsequent holder hereof (the “Holder”), has the
right to purchase from EARTH BIOFUELS, INC.,
a Delaware corporation (the “Company”), up to 750,000 fully paid and
nonassessable shares of the Company’s common stock, par value $0.001 per share
(the “Common Stock”),
subject to adjustment as provided herein, at a price per share equal to the
Exercise Price (as defined below), at any time and from time to time beginning
on the date on which this Warrant is issued (the “Issue Date”) and ending at 5:00 p.m.,
eastern time, on the fifth (5th) anniversary of the Issue Date or,
if such day is not a Business Day, on the next succeeding Business Day (the “Expiration Date”).  This Warrant is issued pursuant to a
Securities Purchase Agreement, dated as of June 7, 2006 (the “Securities Purchase Agreement”).  Capitalized terms used herein and not
otherwise defined shall have the respective meanings set forth in the
Securities Purchase Agreement.

 

                                                1.                                       EXERCISE.

 

                                                (a)                                Right to
Exercise; Exercise Price.  The
Holder shall have the right to exercise this Warrant at any time and from time
to time during the period beginning on the Issue Date and ending on the
Expiration Date as to all or any part of the shares of Common Stock covered
hereby (the “Warrant
Shares”).  The “Exercise Price” for
each Warrant Share purchased by the Holder upon the exercise of this Warrant
shall be $2.93, subject to adjustment for the events specified in Section 6 below.

 

 

                                                (b)                               Exercise Notice.  In order to exercise this Warrant, the Holder
shall (i) send by facsimile transmission, at any time prior to 5:00 p.m.,
eastern time, on the Business Day on which the Holder wishes to effect such
exercise (the “Exercise
Date”), to the Company an executed copy of the notice of
exercise in the form attached hereto as Exhibit A (the “Exercise Notice”), (ii) deliver the
original Warrant or a copy thereof, and (iii) in the case of a Cash Exercise
(as defined below), the Exercise Price to the Company.  The Exercise Notice shall also state the name
or names in which the Warrant Shares issuable on such exercise shall be
issued.  In the case of a dispute as to
the calculation of the Exercise Price or the number of Warrant Shares issuable
hereunder (including, without limitation, the calculation of any adjustment
pursuant to Section 6 below),
the Company shall promptly issue to the Holder the number of Warrant Shares
that are not disputed and shall submit the disputed calculations to a certified
public accounting firm of national recognition (other than the Company’s
independent accountants) within two (2) Business Days following the date on which
the Exercise Notice is delivered to the Company. The Company shall use its best
efforts to cause such accountant to calculate the Exercise Price and/or the
number of Warrant Shares issuable hereunder and to notify the Company and the
Holder of the results in writing no later than two (2) Business Days following
the day on which such accountant received the disputed calculations (the “Dispute Procedure”).
Such accountant’s calculation shall be deemed conclusive absent manifest
error.  The fees of any such accountant
shall be borne by the party whose calculations were most at variance with those
of such accountant.

 

                                                (c)                              Holder of
Record.  The Holder shall, for all
purposes, be deemed to have become the holder of record of the Warrant Shares
specified in an Exercise Notice on the Exercise Date specified therein,
irrespective of the date of delivery of such Warrant Shares. Except as
specifically provided herein, nothing in this Warrant shall be construed as
conferring upon the Holder hereof any rights as a stockholder of the Company
prior to the Exercise Date.

 

                                                (d)                               Cancellation of
Warrant.  This Warrant shall be canceled
upon its exercise and, if this Warrant is exercised in part, the Company shall,
at the time that it delivers Warrant Shares to the Holder pursuant to such
exercise as provided herein, issue a new warrant, and deliver to the Holder a
certificate representing such new warrant, with terms identical in all respects
to this Warrant (except that such new warrant shall be exercisable into the number
of shares of Common Stock with respect to which this Warrant shall remain
unexercised); provided, however,
that the Holder shall be entitled to exercise all or any portion of such new
warrant at any time following the time at which this Warrant is exercised,
regardless of whether the Company has actually issued such new warrant or
delivered to the Holder a certificate therefor.

 

                                                (e)                                  Charter
Amendment.  In the
event there are insufficient shares of Common Stock authorized, unreserved and
available for issuance upon exercise of this Warrant, the Company shall use its
best efforts to effect an amendment of its certificate of incorporation so as
to increase the authorized shares of Common Stock to accommodate such exercise.

 

                                                (f)                                    Principal
Market Regulation.  The Company shall not be obligated to issue any shares
of Common Stock upon exercise of this Warrant if the issuance of such shares of
Common Stock would exceed that number of shares of Common Stock which the
Company may issue upon exercise of this Warrant without breaching the Company’s
obligations under the rules

 

2

 

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 shares of Common Stock 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 holders of the
Warrant representing at least a majority of the shares of Common Stock
underlying the Warrants then outstanding issued under the Securities Purchase
Agreement.  Until such approval or written opinion is obtained, no
Purchaser shall be issued, upon exercise of any Warrants, shares of Common
Stock in an amount greater than the product of the Exchange Cap multiplied by a
fraction, the numerator of which is the total number of shares of Common Stock
issued to such Purchaser pursuant to the Securities Purchase Agreement on the
Issuance Date and the denominator of which is the aggregate number of shares of
Common Stock issued to the Purchasers pursuant to the Securities Purchase Agreement
on the Issuance 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 Warrants, 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 Warrants shall exercise all
of such holder’s Warrants into a number of shares of Common Stock 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
shares of Common Stock actually issued to such holder shall be allocated to the
respective Exchange Cap Allocations of the remaining holders of Warrants on a
pro rata basis in proportion to the shares of Common Stock underlying the
Warrants then held by each such holder.  In the event that the Company is
prohibited from issuing any Warrant Shares for which an Exercise Notice has
been received as a result of the operation of this Section 1(f), the Company
shall pay cash in exchange for cancellation of such Warrant Shares, at a price
per Warrant Share equal to the difference between the closing sale price and
the Exercise Price as of the date of the attempted exercise.

 

                                                2.                                       DELIVERY
OF WARRANT SHARES UPON EXERCISE.

 

                                                Upon receipt of
an Exercise Notice pursuant to Section 1 above, the Company shall, (A) in the case of a
Cash Exercise (as defined below) no later than the close of business on the
later to occur of (i) the third (3rd) Business Day following the Exercise Date
set forth in such Exercise Notice and (ii) the date on which the Company has
received payment of the Exercise Price, (B) in the case of a Cashless Exercise
(as defined below), no later than the close of business on the third (3rd)
Business Day following the Exercise Date set forth in such Exercise Notice, and
(C) with respect to Warrant Shares that are the subject of a Dispute Procedure,
the close of business on the third (3rd) Business Day following the
determination made pursuant to Section 1(b) (each of the dates specified in (A), (B) or
(C) being referred to as a “Delivery Date”), issue and deliver or cause to be
delivered to the Holder the number of Warrant Shares as shall be determined as
provided herein. The Company shall effect delivery of Warrant Shares to the
Holder, as long as the Company’s designated transfer agent or co-transfer agent
in the United States for the Common Stock (the “Transfer Agent”) participates in the
Depository Trust Company (“DTC”)
Fast Automated Securities Transfer program (“FAST”), by crediting the account of the
Holder or its nominee at DTC (as specified in the applicable Exercise Notice)
with the number of Warrant

 

3

 

Shares required to be
delivered, no later than the close of business on such Delivery Date. In the
event that the Transfer Agent is not a participant in FAST, or if the Holder so
specifies in an Exercise Notice or otherwise in writing on or before the
Exercise Date, the Company shall effect delivery of Warrant Shares by
delivering to the Holder or its nominee physical certificates representing such
Warrant Shares, no later than the close of business on such Delivery Date.  If any exercise would create a fractional
Warrant Share, such fractional Warrant Share shall be disregarded and the
number of Warrant Shares issuable upon such exercise, in the aggregate, shall
be the nearest whole number of Warrant Shares. 
Warrant Shares delivered to the Holder shall not contain any restrictive
legend unless such legend is required pursuant to the terms of the Securities
Purchase Agreement.

 

                                                3.                                       FAILURE
TO DELIVER WARRANT SHARES.

 

(a)                                  In the event
that the Company fails for any reason (other than as a result of the Holder’s
failure, in the case of a Cash Exercise (as defined below), to pay the
aggregate Exercise Price for the Warrant Shares being purchased) to deliver to
the Holder the number of Warrant Shares specified in the applicable Exercise
Notice (without any restrictive legend to the extent permitted by the terms of
the Securities Purchase Agreement) on or before the second (2nd)
Business Day following the Delivery Date therefor (an “Exercise Default”),
the Holder shall have the right to receive from the Company an amount equal to
(i) (N/365) multiplied by (ii) the aggregate Exercise Price of the
Warrant Shares which are the subject of such Exercise Default multiplied by
(iii) the lower of sixteen percent (16%) and the maximum rate permitted by
applicable law or by the applicable rules or regulations of any Governmental
Agency (the “Default
Interest Rate”), where “N” equals the number of days elapsed
between the original Delivery Date of such Warrant Shares and the date on which
such Exercise Default has been cured.  In
the event that shares of Common Stock are purchased by or on behalf of the
Holder in order to make delivery on
a sale effected in anticipation of receiving Warrant Shares upon an exercise,
the Holder shall have the right to receive from the Company, in addition to the
foregoing amounts, (i) the aggregate amount paid by or on behalf of the Holder
for such shares of Common Stock minus (ii) the aggregate amount of net
proceeds, if any, received by the Holder from the sale of the Warrant Shares
issued by the Company pursuant to such exercise.  Amounts
payable under this Section
3(a)  shall be paid to
the Holder in immediately available funds on or before the fifth (5th) Business
Day following written notice from the Holder to the Company specifying the
amount owed to it by the Company pursuant to this Section 3(a).

 

(b)                                 In addition to
its rights under Section
3(a) above, upon an Exercise Default, the Exercise Price
applicable to the applicable exercise shall be automatically be adjusted to the
lower of (i) the Exercise Price in effect on the Exercise Date and (ii) the
lowest Exercise Price occurring from the first date of such Exercise Default
through the date on which all Warrant Shares to which the Holder is entitled
have been delivered in accordance with the terms of this Warrant.  The Holder shall have the right to pursue all
other remedies available to it at law or in equity (including, without
limitation, a decree of specific performance and/or injunctive relief).

 

 

4

 

                                                4.                                     EXERCISE
LIMITATION.

 

                                                In no event
shall the Holder be permitted to exercise this Warrant, or part thereof, if,
upon such exercise, the number of shares of Common Stock beneficially owned by
the Holder (other than shares which may be deemed beneficially owned except for
being subject to a limitation on exercise or exercise analogous to the
limitation contained in this Section 4), would exceed 4.99% of the number of
shares of Common Stock then issued and outstanding, it being the intent of the
Company and the Holder that the Holder not be deemed at any time to have the
power to vote or dispose of greater than 4.99% of the number of shares of
Common Stock issued and outstanding at any time. Nothing contained herein shall
be deemed to restrict the right of the Holder to exercise this Warrant at such
time as such exercise will not violate the provisions of this Section 4.  As used
herein, beneficial ownership shall be determined in accordance with Section
13(d) of (i) Securities Exchange Act of 1934, as amended, and the rules
thereunder.  To the extent that the
limitation contained in this Section 4
applies (and without limiting any rights the Company may otherwise have), the
Company may rely on the Holder’s determination of whether this Warrant
is exercisable pursuant to the terms hereof,
the Company shall have no obligation whatsoever to verify or confirm the
accuracy of such determination, and the submission of an Exercise Notice by the
Holder shall be deemed to be the Holder’s representation that this Warrant is
exercisable pursuant to the terms hereof.  The Company shall have no
liability to any person if the Holder’s determination of whether this Warrant
is exercisable pursuant to the terms hereof is incorrect.

 

5.                                       PAYMENT
OF THE EXERCISE PRICE; CASHLESS EXERCISE.

 

                                                The Holder may
pay the Exercise Price in either of the following forms or, at the election of
Holder, a combination thereof:

 

                                                (a)                                  through a cash
exercise (a “Cash
Exercise”) by delivering immediately available funds, or

 

                                                (b)                                 through a
cashless exercise (a “Cashless
Exercise”) if, following the one-year anniversary of the Issue
Date, an effective Registration Statement is not available for the resale of
all of the Warrant Shares issuable hereunder at the time an Exercise Notice is
delivered to the Company, or if the Company otherwise consents in writing.  The Holder shall effect a Cashless Exercise
by surrendering this Warrant to the Company and noting on the Exercise Notice
that the Holder wishes to effect a Cashless Exercise, upon which the Company
shall issue to the Holder a number of Warrant Shares determined as follows:

 

	
   

  	
  X = Y x (A-B)/A

  
	
   

  	
   

  
	
  where:

  	
  X = the number of Warrant
  Shares to be issued to the Holder;

  
	
   

  	
   

  
	
   

  	
  Y = the number of Warrant Shares with respect to which this Warrant
  is being exercised;

  

 

5

 

	
   

  	
  A = the Market Price as of
  the Exercise Date; and

  
	
   

  	
   

  
	
   

  	
  B = the Exercise Price.

  

 

It is intended and acknowledged that the Warrant Shares issued in a
Cashless Exercise transaction shall be deemed to have been acquired by the
Holder, and the holding period for the Warrant Shares required by Rule 144
shall be deemed to have been commenced, on the Issue Date.

 

                                                6.                                       ANTI-DILUTION
ADJUSTMENTS; DISTRIBUTIONS; OTHER EVENTS.

 

                                                The Exercise
Price and the number of Warrant Shares issuable hereunder shall be subject to
adjustment from time to time as provided in this Section 6.

 

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

 

(b)                                 Major
Transactions.  If, at any
time after the Issue Date, any Major Transaction shall occur, then the Holder
shall thereafter have the right to receive upon exercise, in lieu of the shares
of Common Stock otherwise issuable, such shares of publicly traded stock,
securities and/or other property as would have been issued or payable upon such
Major Transaction with respect to or in exchange for the number of shares of
Common Stock which would have been issuable upon exercise had such Major
Transaction not taken place (without giving effect to any limitations on such exercise
contained in this Warrant or the Securities Purchase Agreement). Notwithstanding
the foregoing, following a Major Transaction in which all or substantially all
of the outstanding Common Stock of the Company is exchanged for, converted
into, acquired for or constitutes the right to receive solely cash (a “Triggering
Event”), at the written request of the Holder delivered before the 30th day
after such Triggering Event, the Company (or the successor entity) shall
purchase this Warrant from the Holder by paying to the Holder, within five days
after such request, cash in an amount equal to the Black-Scholes Value (as
defined below) of the remaining unexercised portion of this Warrant.  “Black-Scholes Value” means the value of the
unexercised portion of this Warrant calculated using the Black-Scholes Option
Pricing Model determined as of the day immediately following the public
announcement of the applicable Triggering Event and reflecting (i) a risk-free
interest rate corresponding to the U.S. Treasury rate for a period equal to the
remaining term of this Warrant as of the date of such request and (ii) an
expected volatility equal to the lesser of (a) the 100 day volatility obtained
from the HVT function on Bloomberg or (b) a volatility of 60.  The Company shall not effect any Major
Transaction unless (i) the Holder has received written notice of such
transaction at least thirty (30) days prior thereto (which period shall be
increased to sixty one (61) days if, at such time, without giving effect to the
limitation on exercise contained in Section 4 hereof, the Holder would beneficially
own more than 4.9% of the Common Stock then outstanding, and the

 

6

 

Holder has notified the Company in writing of
such circumstance) but in no event later than fifteen (15) days prior to the
record date for the determination of stockholders entitled to vote with respect
thereto; provided, however, that the Company shall publicly
disclose the material terms of any such Major Transaction on or before the date
on which it delivers notice of a Major Transaction to the Holder, and (ii) the
resulting successor or acquiring entity (if not the Company) assumes by written
instrument (in form and substance reasonable satisfactory to the Holder) the
obligations of the Company under this Warrant. 
The above provisions shall apply regardless of whether or not there
would have been a sufficient number of shares of Common Stock authorized and
available for issuance upon exercise of this Warrant as of the date of such
transaction, and shall similarly apply to successive Major Transactions.

 

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

 

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

 

7

 

the Securities Purchase Agreement) had the
Holder been the holder of such shares of Common Stock on the record date for
the determination of stockholders entitled to receive such Convertible
Securities or Options (or if no such record is taken, the date on which such
Convertible Securities or Options were issued).

 

(e)                                  Dilutive
Issuances.

 

                                                (i)                                     Adjustment Upon
Dilutive Issuance.  If, at any
time after the Issue Date, the Company issues or sells, or in accordance with Section 6(e)(ii) is
deemed to have issued or sold, any shares of Common Stock for no consideration
or for a consideration per share less than the Exercise Price on the date of
such issuance or sale (or deemed issuance or sale) (a “Dilutive Issuance”),
then the Exercise Price shall be adjusted as follows:

 

(A)                              if such
Dilutive Issuance occurs on or prior to the eighteen (18) month anniversary of
the Issue Date, then effective immediately upon such Dilutive Issuance, the
Exercise Price shall be adjusted so as to equal the consideration received or
receivable by the Company (on a per share basis) for the additional shares of
Common Stock so issued, sold or deemed issued or sold in such Dilutive Issuance
(which, in the case of a deemed issuance or sale, shall be calculated in
accordance with Section
6(e)(ii) below). 
Notwithstanding the foregoing, no adjustment shall be made pursuant to
this Section 6(e)(i)(A)
if such adjustment would result in an increase in the Exercise Price.

 

(B)                                if such
Dilutive Issuance occurs after the eighteen (18) month anniversary of the Issue
Date, then effective immediately upon the Dilutive Issuance, the Exercise Price
shall be adjusted so as to equal an amount determined by multiplying such
Exercise Price by the following fraction:

 

N0 + N1

N0  + N2

 

where:

	
   

  	
  N0
  =

  	
  the
  number of shares of Common Stock outstanding immediately prior to such
  Dilutive Issuance (without taking into account any Convertible Securities or
  Options, including the Notes and Warrants);

  
	
   

  	
   

  	
   

  
	
   

  	
  N1
  =

  	
  the
  number of shares of Common Stock which the aggregate consideration, if any,
  received or receivable by the Company for the total number of such additional
  shares of Common Stock so issued, sold or deemed issued or sold in such
  Dilutive Issuance (which, in the case of a deemed issuance or sale, shall be
  calculated in accordance with Section 6(e)(ii) below) would purchase at the Exercise
  Price in effect immediately prior to such Dilutive Issuance; and

  
	
   

  	
   

  	
   

  
	
   

  	
  N2
  =

  	
  the
  number of such additional shares of Common Stock so issued, 

  

 

8

 

	
   

  	
   

  	
  sold
  or deemed issued or sold in such Dilutive Issuance.

  

 

Notwithstanding the
foregoing, no adjustment shall be made pursuant hereto if such adjustment would
result in an increase in the Exercise Price.

 

                                                (ii)                                  Effect On Exercise
Price Of Certain Events.  For
purposes of determining the adjusted Exercise Price under Section 6(e)(i), the
following will be applicable:

 

(A)                              Issuance Of
Options.  If the Company issues or sells
any Options, whether or not immediately exercisable, and the price per share
for which Common Stock is issuable upon the exercise of such Options (and the
price of any conversion of Convertible Securities, if applicable) is less than
the Exercise Price in effect on the date of issuance or sale of such Options,
then the maximum total number of shares of Common Stock issuable upon the
exercise of all such Options (assuming full conversion, exercise or exchange of
Convertible Securities, if applicable) shall, as of the date of the issuance or
sale of such Options, be deemed to be outstanding and to have been issued and
sold by the Company for such price per share. For purposes of the preceding
sentence, the “price per share for which Common Stock is issuable upon the
exercise of such Options” shall be determined by dividing (x) the total amount,
if any, received or receivable by the Company as consideration for the issuance
or sale of all such Options, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the exercise of all such
Options, plus, in the case of Convertible Securities issuable upon the
exercise of such Options, the minimum aggregate amount of additional
consideration payable upon the conversion, exercise or exchange thereof
(determined in accordance with the calculation method set forth in Section 6(e)(ii)(B)
below) at the time such Convertible Securities first become convertible,
exercisable or exchangeable, by (y) the maximum total number of shares of
Common Stock issuable upon the exercise of all such Options (assuming full
conversion, exercise or exchange of Convertible Securities, if applicable). No
further adjustment to the Exercise Price shall be made upon the actual issuance
of such Common Stock upon the exercise of such Options or upon the conversion,
exercise or exchange of Convertible Securities issuable upon exercise of such
Options.

 

(B)                                Issuance Of
Convertible Securities.  If
the Company issues or sells any Convertible Securities, whether or not
immediately convertible, exercisable or exchangeable, and the price per share
for which Common Stock is issuable upon such conversion, exercise or exchange
is less than the Exercise Price in effect on the date of issuance or sale of
such Convertible Securities, then the maximum total number of shares of Common
Stock issuable upon the conversion, exercise or exchange of all such
Convertible Securities shall, as of the date of the issuance or sale of such
Convertible Securities, be deemed to be outstanding and to have been issued and
sold by the Company for such price per share. If the Convertible Securities so
issued or sold do not have a fluctuating conversion or exercise price or
exchange ratio, then for the purposes of the immediately preceding sentence,
the “price per share for which Common Stock is issuable upon such conversion,
exercise or exchange” shall be determined by dividing (A) the total amount, if
any, received or receivable by the Company as consideration for the issuance or
sale of all such Convertible Securities, plus the minimum aggregate

 

9

 

amount of additional
consideration, if any, payable to the Company upon the conversion, exercise or exchange
thereof (determined in accordance with the calculation method set forth in this
Section 6(e)(ii)(B))
at the time such Convertible Securities first become convertible, exercisable
or exchangeable, by (B) the maximum total number of shares of Common Stock
issuable upon the exercise, conversion or exchange of all such Convertible
Securities. If the Convertible Securities so issued or sold have a fluctuating
conversion or exercise price or exchange ratio (a “Variable Rate Convertible Security”),
then for purposes of the first sentence of this Section 6(e)(ii)(B), the “price per
share for which Common Stock is issuable upon such conversion, exercise or
exchange” shall be deemed to be the lowest price per share which would be
applicable (assuming all holding period and other conditions to any discounts
contained in such Variable Rate Convertible Security have been satisfied) if
the conversion price of such Variable Rate Convertible Security on the date of
issuance or sale thereof were equal to the actual conversion price on such date
(or such higher minimum conversion price if such Variable Rate Convertible
Security is subject to a minimum conversion price) (the “Assumed Variable Market Price”),
and, further, if the conversion price of such Variable Rate Convertible
Security at any time or times thereafter is less than or equal to the Assumed
Variable Market Price last used for making any adjustment under this Section 6(e) with
respect to any Variable Rate Convertible Security, the Exercise Price in effect
at such time shall be readjusted to equal the Exercise Price which would have
resulted if the Assumed Variable Market Price at the time of issuance of the
Variable Rate Convertible Security had been equal to the actual conversion
price of such Variable Rate Convertible Security existing at the time of the
adjustment required by this sentence; provided,
however, that if the conversion or exercise price or exchange ratio
of a Convertible Security may fluctuate solely as a result of provisions
designed to protect against dilution, such Convertible Security shall not be
deemed to be a Variable Rate Convertible Security.  No further adjustment to the Exercise Price
shall be made upon the actual issuance of such Common Stock upon conversion,
exercise or exchange of such Convertible Securities.

 

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

 

(D)                               Calculation Of
Consideration Received.  If
any Common Stock, Options or Convertible Securities are issued or sold for
cash, the consideration received therefor will be the amount received by the
Company therefor. In case any Common Stock, Options or Convertible Securities
are issued or sold for a consideration part or all of which shall be other than
cash, including in the case of a strategic or similar arrangement in which the
other entity will provide services to the Company, purchase

 

10

 

services from the Company or
otherwise provide intangible consideration to the Company, the amount of the
consideration other than cash received by the Company (including the net
present value of the consideration expected by the Company for the provided or
purchased services) shall be the fair market value of such consideration. In
case any Common Stock, Options or Convertible Securities are issued in
connection with any merger or consolidation in which the Company is the
surviving corporation, the amount of consideration therefor will be deemed to
be the fair market value of such portion of the net assets and business of the
non-surviving corporation as is attributable to such Common Stock, Options or
Convertible Securities, as the case may be. The independent members of the
Company’s Board of Directors shall calculate reasonably and in good faith,
using standard commercial valuation methods appropriate for valuing such
assets, the fair market value of any consideration.

 

                                                (iii)                               Exceptions To
Adjustment Of Exercise Price.  Notwithstanding the foregoing, no adjustment to
the Exercise Price shall be made pursuant to this Section 6(e) upon the issuance of any
Excluded Securities.

 

(iv)                              Notice Of
Adjustments.  Upon the
occurrence of each adjustment or readjustment of the Exercise Price pursuant to
this Section 6(e)
resulting in a change in the Exercise Price by more than one percent (1%), or
any change in the number or type of stock, securities and/or other property
issuable upon exercise of this Warrant, the Company, at its expense, shall
promptly compute such adjustment, readjustment or change and prepare and
furnish to the Holder a certificate setting forth such adjustment, readjustment
or change and showing in detail the facts upon which such adjustment,
readjustment or change is based.  The
Company shall, upon the written request at any time of the Holder, furnish to
the Holder a like certificate setting forth (i) such adjustment, readjustment
or change, (ii) the Exercise Price at the time in effect and (iii) the number
of shares of Common Stock and the amount, if any, of other securities or
property which at the time would be received upon exercise of this Warrant.

 

(v)                                 Adjustments;
Additional Shares, Securities or Assets.  In the event that at any time, as a result of
an adjustment made pursuant to this Section 6, the Holder of this Warrant shall,
upon exercise of this Warrant, become entitled to receive securities or assets
(other than Common Stock) then, wherever appropriate, all references herein to
shares of Common Stock shall be deemed to refer to and include such shares
and/or other securities or assets; and thereafter the number of such shares
and/or other securities or assets shall be subject to adjustment from time to
time in a manner and upon terms as nearly equivalent as practicable to the
provisions of this Section
6.  Any adjustment made
herein that results in a decrease in the Exercise Price shall also effect a
proportional increase in the number of shares of Common Stock into which this
Warrant is exercisable.

 

                                                7.                                       MISCELLANEOUS.

 

(a)                                  Failure to
Exercise Rights not Waiver.  No failure or delay on the part of the Holder
in the exercise of any power, right or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such power,
right or privilege preclude any

 

11

 

other or further exercise thereof. All rights
and remedies of the Holder hereunder are cumulative and not exclusive of any
rights or remedies otherwise available. In the event that the Company breaches
any of its obligations hereunder to issue Warrant Shares or pay any amounts as
and when due, the Company shall bear all costs incurred by the Holder in
collecting such amount, including without limitation reasonable legal fees and
expenses.

 

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

 

	
  if to the Company:

  
	
   

  
	
   

  	
  Earth Biofuels, Inc.

  
	
   

  	
  3001 Knox Street, Suite
  403,

  
	
   

  	
  Dallas, Texas 75205

  
	
   

  	
  Telephone:

  	
  214.389.9800

  
	
   

  	
  Facsimile:

  	
  214.389.9806

  
	
   

  	
  Attention:

  	
  Dennis McLaughlin

  
	
   

  	
   

  
	
  with a copy (for
  informational purposes only) to:

  
	
   

  	
   

  
	
   

  	
  Scheef & Stone, LLP

  
	
   

  	
  Telephone:

  	
  214.706.4200

  
	
   

  	
  Facsimile:

  	
  214.706.4242

  
	
   

  	
  Attention:

  	
  Roger A. Crabb, Esq.

  
				

 

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

 

(c)                                Amendments.  No amendment, modification or other change
to, or waiver of any provision of, this Warrant may be made unless such
amendment, modification or change is set forth in writing and is signed by the
Company and the Holder.

 

(d)                               Transfer of Warrant.  The Holder may sell, transfer or otherwise
dispose of all or any part of this Warrant (including without limitation
pursuant to a pledge) to any person or entity as long as such sale, transfer or
disposition is the subject of an effective registration statement under the
Securities Act of 1933, as amended, and applicable state securities laws, or is
exempt from registration thereunder, and is otherwise made in accordance

 

12

 

with the applicable provisions of the
Securities Purchase Agreement.  From and
after the date of any such sale, transfer or disposition, the transferee hereof
shall be deemed to be the holder of the portion of this Warrant acquired by
such transferee, and the Company shall, as promptly as practicable, issue and
deliver to such transferee a new Warrant identical in all respects to this Warrant,
in the name of such transferee. The Company shall be entitled to treat the
original Holder as the holder of this entire Warrant unless and until it
receives written notice of the sale, transfer or disposition hereof.

 

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

 

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

 

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

 

(h)           Taxes.  The issue of stock certificates on exercises
of this Warrant shall be made without charge to the exercising Holder for any
tax in respect of the issue thereof.  The
Company shall not, however, be required to pay any tax which may be payable in
respect of any transfer involved in the issue and delivery of stock in any name
other than that of the Holder of any Warrant exercised, and the Company shall
not be required to issue or deliver any such stock certificate unless and until
the person or persons requesting the issue thereof shall have paid to the
Company the amount of such tax or shall have established to the reasonable satisfaction
of the Company that such tax has been paid.

 

 

 

 

 

 

 

[Signature Page to Follow]

 

13

 

IN WITNESS WHEREOF, the
Company has duly executed and delivered this Warrant as of the Issue Date.

 

 

 

	
   

  	
  EARTH
  BIOFUELS, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

EXHIBIT A to WARRANT

 

EXERCISE NOTICE

 

 

                                                The undersigned
Holder hereby irrevocably exercises the right to purchase                  of the shares of Common Stock (“Warrant
Shares”) of EARTH BIOFUELS, INC. evidenced by the attached Warrant (the “Warrant”).  Capitalized terms used herein and not
otherwise defined shall have the respective meanings set forth in the Warrant.

 

                                                1.                                     Form of
Exercise Price.  The Holder intends that
payment of the Exercise Price shall be made as:

 

                                                                                                            
a Cash Exercise with respect to                                    
Warrant Shares; and/or

 

                                                                                                            
a Cashless Exercise with respect to                                    
Warrant Shares, as permitted by Section 5(b) of the attached Warrant.

 

 

                                                2.                                   Payment of
Exercise Price.  In the event that the
Holder has elected a Cash Exercise with respect to some or all of the Warrant
Shares to be issued pursuant hereto, the Holder shall pay the sum of $                                 
to the Company in accordance with the terms of the Warrant.

 

 

	
  Date: 

  	
   

  	
   

  
	
   

  
	
   

  
	
  Name
  of Registered Holder

  
	
   

  	
   

  
	
  By: 

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

                                                By tendering
this Exercise Notice, the Holder represents to the Company that it is an “accredited investor” as that term is defined
in Rule 501 of Regulation D, and that it is acquiring the Warrants Shares
solely for its own account, and not with a present view to the public resale or
distribution of all or any part thereof, except pursuant to sales that are
registered under the Securities Act or are exempt from the registration
requirements of the Securities Act; provided, however, that, in
making such representation, the Holder does
not agree to hold the Warrants Shares for any minimum or specific term and
reserves the right to sell, transfer or otherwise dispose of the Warrants
Shares at any time in accordance with the provisions of the Warrant and with
Federal and state securities laws applicable to such sale, transfer or
disposition.

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