Document:

EXHIBIT
10.53

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

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

EARTH
BIOFUELS, INC.

8% SENIOR CONVERTIBLE NOTE

New York,
New York                                                                                                                                                                $5,000,000

Issue
Date: July 11, 2006

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

The
Company has issued this Note pursuant to a Securities Purchase Agreement, dated
as of July 10, 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

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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.

“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

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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.

“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.

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“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.

“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.

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“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.

(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

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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.

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.

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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.

(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

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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
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

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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 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

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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 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

 10
 

 

 

“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 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

 11
 

 

 

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 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

 12
 

 

 

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 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

 13
 

 

 

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 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.

 14
 

 

 

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.

(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

 15
 

 

 

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.

[Signature Page to Follow]

 16
 

 

 

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:

  	
    /s/
  DENNIS G. MCLAUGHLIN, III

  	
   

  
	
   Name: Dennis G. McLaughlin, III

  
	
   Title:Chief Executive Officer

  

 

 17

 

 

ANNEX I

NOTICE OF
CONVERSION

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

 

	
  

  	
  Date of Conversion:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Principal Amount of

  Note to be Converted:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Amount of Interest

  to be Converted:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Number of Shares of

  Common Stock to be Issued:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Name of Holder:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Signature:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
							

 

Holder Requests Delivery to be made: (check one)

o                                   By Delivery of Physical Certificates to the Above
Address

o                                   Through Depository Trust Corporation

(Account                                                        )

 

 

ANNEX II

Schedule of

Decreases

of Principal Amount

	
  Principal

  	
   

  	
  Amount of

  	
   

  	
   

  	
   

  
	
  Balance

  	
   

  	
  Decrease

  	
   

  	
  Date

  	
   

  
	
  $5,000,000

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

rEXHIBIT 10.54

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: July 11, 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 July 10, 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 $2.50, 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 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

 11
 

 

 

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 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

 12
 

 

 

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]

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

	
  

  	
  EARTH BIOFUELS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/DENNIS G. MCLAUGHLIN, III

  	
   

  
	
   

  	
   

  	
  Name: Dennis G. McLaughlin, III

  
	
   

  	
   

  	
  Title: Chief Executive Officer

  

 

 

 

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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