Document:

Exhibit 4.3

 

[FORM OF SENIOR CONVERTIBLE NOTE]

 

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED
BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR
SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR (B) AN OPINION OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE
COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD
PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE
FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES. ANY
TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS NOTE,
INCLUDING SECTIONS 3(c)(iv) AND 19(a) HEREOF. THE PRINCIPAL AMOUNT REPRESENTED
BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF
MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION
3(c)(iv) OF THIS NOTE.

 

EARTH BIOFUELS, INC.

 

SENIOR CONVERTIBLE NOTE

 

	
  Issuance
  Date: July24, 2006

  	
   

  	
  Original
  Principal Amount: U.S.
  $                  

  

 

FOR VALUE RECEIVED, Earth Biofuels, Inc., a Delaware corporation
(the “Company”), hereby promises
to pay to the order of [BUYER] or registered assigns (“Holder”) the amount set out above as the
Original Principal Amount (as reduced pursuant to the terms hereof pursuant to
redemption, conversion or otherwise, the “Principal”)
when due, whether upon the Maturity Date (as defined below), on any Installment
Date with respect to the Installment Amount due on such Installment Date (each,
as defined herein), acceleration, redemption or otherwise (in each case in
accordance with the terms hereof) and to pay interest (“Interest”) on any outstanding Principal at
the applicable Interest Rate from the date set out above as the Issuance Date
(the “Issuance  Date”) until the same becomes due and
payable, whether upon an Interest Date (as defined below), any Installment Date
or the Maturity Date or acceleration, conversion, redemption or otherwise (in
each case in accordance with the terms hereof). This Senior Convertible Note
(including all Senior Convertible Notes issued in exchange, transfer or
replacement hereof, this “Note”)
is one of an issue of Senior Convertible Notes issued pursuant to the
Securities Purchase Agreement on the Closing Date (collectively, the “Notes” and such other Senior Convertible
Notes, the “Other  Notes”). Certain capitalized terms used
herein are defined in Section 29.

 

 

(1)           PAYMENTS OF PRINCIPAL. On each Installment Date, the Company
shall pay to the Holder an amount equal to the Installment Amount due on such
Installment Date in accordance with Section 8. On the Maturity Date, the
Company shall pay to the Holder an amount in cash representing all outstanding
Principal, accrued and unpaid Interest and accrued and unpaid Late Charges on
such Principal and Interest. The “Maturity
Date” shall be July 24, 2011, as
may be extended at the option of the Holder (i) in the event that, and for so
long as, an Event of Default (as defined in Section 4(a)) shall have occurred
and be continuing on the Maturity Date (as may be extended pursuant to this
Section 1) or any event shall have occurred and be continuing on the Maturity
Date (as may be extended pursuant to this Section 1) that with the passage of
time and the failure to cure would result in an Event of Default and (ii)
through the date that is ten (10) Business Days after the consummation of a
Change of Control in the event that a Change of Control is publicly announced
or a Change of Control Notice (as defined in Section 5(b)) is delivered prior
to the Maturity Date. Other than as specifically permitted by this Note, the
Company may not prepay any portion of the outstanding Principal, accrued and
unpaid interest or accrued and unpaid Late Charges on Principal and Interest,
if any.

 

(2)           INTEREST; INTEREST RATE. Interest on this Note shall commence
accruing on the Issuance Date and shall be computed on the basis of a 360-day
year comprised of twelve (12) thirty (30) day months and shall be payable in
arrears for each Calendar Quarter on the first day of the succeeding Calendar
Quarter during the period beginning on the Issuance Date and ending on, and
including, the Maturity Date (each, an “Interest
Date”) with the first Interest
Date being October 1, 2006. Interest shall be payable on each Interest Date, to
the record holder of this Note on the applicable Interest Date, and to the
extent that any Principal amount of this Note is converted prior to such
Interest Date, accrued and unpaid Interest with respect to such converted
Principal amount and accrued and unpaid Late Charges with respect to such
Principal and Interest shall be paid on the Conversion Date (as defined below)
to the record holder of this Note on the applicable Conversion Date, in cash.
From and after the occurrence and during the continuance of an Event of
Default, the Interest Rate shall be increased to fifteen percent (15.0%). In
the event that such Event of Default is subsequently cured, the adjustment
referred to in the preceding sentence shall cease to be effective as of the
date of such cure; provided that the Interest as calculated and unpaid at such
increased rate during the continuance of such Event of Default shall continue
to apply to the extent relating to the days after the occurrence of such Event
of Default through and including the date of cure of such Event of Default.

 

(3)           CONVERSION OF NOTES. This Note shall be convertible into
shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), on the terms and conditions
set forth in this Section 3.

 

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

 

2

 

payable
with respect to the issuance and delivery of Common Stock upon conversion of
any Conversion Amount.

 

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

 

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

 

(ii)           “Conversion
Price” means, as of any Conversion Date (as defined below) or other
date of determination, $2.90, subject to adjustment as provided herein.

 

(c)           Mechanics of Conversion.

 

(i)            Optional
Conversion. To convert any Conversion Amount into shares of Common Stock on
any date (a “Conversion Date”),
the Holder shall (A) transmit by facsimile (or otherwise deliver), for receipt
on or prior to 11:59 p.m., New York Time, on such date, a copy of an executed
notice of conversion in the form attached hereto as Exhibit I (the “Conversion Notice”) to the Company and (B)
if required by Section 3(c)(iv), surrender this Note to a nationally recognized
overnight delivery service for delivery to the Company (or an indemnification
undertaking with respect to this Note in the case of its loss, theft or
destruction). On or before the first (1st)
Business Day following the date of receipt of a Conversion Notice, the Company
shall transmit by facsimile a confirmation of receipt of such Conversion Notice
to the Holder and the Company’s transfer agent (the “Transfer Agent”). On or before the second Business Day
following the date of receipt of a Conversion Notice (the “Share Delivery  Date”), the Company shall (1) (X) if legends are not required
to be placed on certificates of Common Stock pursuant to the Securities
Purchase Agreement and provided that the Transfer Agent is participating in the
Depository Trust Company’s (“DTC”)
Fast Automated Securities Transfer Program, credit such aggregate number of
shares of Common Stock to which the Holder shall be entitled to the Holder’s or
its designee’s balance account with DTC through its Deposit Withdrawal Agent
Commission system or (Y) if the Transfer Agent is not participating in the DTC
Fast Automated Securities Transfer Program, issue and deliver to the address as
specified in the Conversion Notice, a certificate, registered in the name of
the Holder or its designee, for the number of shares of Common Stock to which
the Holder shall be entitled which certificates shall not bear any restrictive
legends unless required pursuant to Section 2(g) of the Securities Purchase
Agreement; (2) pay to the Holder in cash an amount equal to the accrued and
unpaid Interest on the Conversion Amount up to and including the Conversion
Date; and (3) for any conversions prior to the third (3rd)
anniversary of the Issuance Date, pay any applicable Make-Whole Amount in
accordance with Section 3(c)(ii). If this Note is physically surrendered for
conversion as required by Section 3(c)(iv) and the outstanding Principal of
this Note is greater than the Principal portion of the Conversion Amount being
converted, then the Company shall as soon as practicable and in no event later
than three (3) Business Days after receipt of this Note and at its own expense,
issue and deliver to the holder a new Note (in accordance with Section 19(d))
representing the outstanding Principal not converted. The Person or Persons
entitled to receive the shares of Common Stock issuable upon a conversion of
this Note shall be treated for 

 

3

 

all purposes as the record
holder or holders of such shares of Common Stock on the Conversion Date. In the
event of a partial conversion of this Note pursuant hereto, the principal
amount converted shall be deducted from the Installment Amounts relating to the
Installment Dates as set forth in the Conversion Notice.

 

(ii)           Make-Whole Amount. If prior to the third (3rd)
anniversary of the Issuance Date, the Holder converts all or any portion of
this Note pursuant to Section 3(c) or the Company requires conversion of all or
any portion of this Note pursuant to Section 9, then upon delivery of the
applicable shares of Common Stock upon such conversion, the Holder shall
receive the Make-Whole Amount; provided, however, that in the event that the
Average Market Price on a Conversion Date or Mandatory Conversion Date, as
applicable, occurring after the Effective Date (as defined in the Registration
Rights Agreement) exceeds 175% of the Conversion Price on the Conversion Date
or Mandatory Conversion Date, as applicable, then the Holder shall not be
entitled to receive the Make-Whole Amount; provided, further, that in the event
that the Closing Sale Price of the Common Stock for each Trading Day of any
forty (40) consecutive Trading Day period after the Effective Date exceeds 200%
of the Conversion Price on the Issuance Date (as adjusted for any stock split,
combination, reclassification or similar transaction), then the Holder shall no
longer have the right to receive a Make-Whole Amount. The Company shall pay the
Make-Whole Amount in shares of Common Stock or, at the Company’s option, in
cash. Following receipt of any Conversion Notice during the period when a
Holder is entitled to receive a Make-Whole Amount hereunder, the Company shall,
in its confirmation of receipt of such Conversion Notice as required by Section
3(c)(i) (the “Conversion Notice Confirmation”),
(A) specify whether the Make-Whole Amount shall not be paid in shares of Common
Stock but rather in cash and (B) if the Make-Whole Amount is to be paid in
shares of Common Stock, certify that there has been no Equity Conditions
Failure. Any Make-Whole Amount to be paid in shares of Common Stock shall be
paid in a number of fully paid and nonassessable shares of Common Stock equal
to the quotient of (1) the Make-Whole Amount and (2) the Make-Whole Conversion
Price. If the Make-Whole Amount shall be paid in Common Stock on the Share
Delivery Date, the Company shall (x) if legends are not required to be placed
on certificates of Common Stock pursuant to the Securities Purchase Agreement
and provided the Transfer Agent is participating in the DTC Fast Automated
Securities Transfer Program, credit such aggregate number of Common Shares to
which the Holder shall be entitled to the Holder or its designee’s balance
account with DTC through its Deposit Withdrawal Agent Commission system, or (y)
if the Transfer Agent is not participating in the DTC Fast Automated Securities
Transfer Program, issue and deliver to the address as specified in the
Conversion Notice or in the register maintained by the Company for such purpose
pursuant to the Securities Purchase Agreement, a certificate, registered in the
name of the Holder or its designee, for the number of Common Shares to which
the Holder shall be entitled which certificates shall not bear any restrictive
legends unless required pursuant to Section 2(g) of the Securities Purchase
Agreement. If the Make-Whole Amount shall be paid in cash, then the Company
shall make such payment on the Share Delivery Date by wire transfer of
immediately available funds to an account designated in writing by the Holder.
Notwithstanding the foregoing the Company shall not be entitled to pay the
Make-Whole Amount in shares of Common Stock and shall be required to pay such
Make-Whole Amount in cash on the applicable Share Delivery Date, if the Equity
Conditions are not then satisfied or if the Weighted Average Price of the
Common Stock on any Trading Day during the Make-Whole Conversion Measuring
Period is less than $1.00.

 

4

 

(iii)          Company’s Failure to Timely Convert. If within three (3) Trading Days after
the Company’s receipt of the facsimile copy of a Conversion Notice the Company
shall fail to issue and deliver a certificate to the Holder or credit the
Holder’s balance account with DTC for the number of shares of Common Stock to
which the Holder is entitled upon such holder’s conversion of any Conversion
Amount (a “Conversion Failure”),
and if on or after such Trading Day the Holder purchases (in an open market
transaction or otherwise) Common Stock to deliver in satisfaction of a sale by
the Holder of Common Stock issuable upon such conversion that the Holder
anticipated receiving from the Company (a “Buy-In”),
then the Company shall, within three (3) Business Days after the Holder’s
request and in the Holder’s discretion, either (i) pay cash to the Holder in an
amount equal to the Holder’s total purchase price (including brokerage
commissions and other out of pocket expenses, if any) for the shares of Common
Stock so purchased (the “Buy-In Price”),
at which point the Company’s obligation to deliver such certificate (and to
issue such Common Stock) shall terminate, or (ii) promptly honor its obligation
to deliver to the Holder a certificate or certificates representing such Common
Stock and pay cash to the Holder in an amount equal to the excess (if any) of
the Buy-In Price over the product of (A) such number of shares of Common Stock,
times (B) the Closing Bid Price on the Conversion Date.

 

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

 

(v)           Pro Rata Conversion; Disputes. In the event that the Company receives
a Conversion Notice from more than one holder of Notes for the same Conversion
Date and the Company can convert some, but not all, of such portions of the
Notes submitted for conversion, the Company, subject to Section 3(d), shall
convert from each holder of Notes electing to have Notes converted on such date
a pro rata amount of such holder’s portion of its Notes submitted for
conversion based on the principal amount of Notes submitted for conversion on
such date by such holder relative to the aggregate principal amount of all
Notes submitted for conversion on such date. In the event of a dispute as to
the number of shares of Common Stock issuable to the Holder in connection with
a conversion of this Note, the Company shall issue to the Holder the number of
shares of Common Stock not in dispute and resolve such dispute in accordance
with Section 24.

 

(d)           Limitations on Conversions.

 

(i)            Beneficial Ownership. The Company shall not effect any
conversion of this Note or otherwise issue shares of Common Stock pursuant to
Section 3(c)(ii) hereof or Sections 8 or 9 hereof, and the Holder of this Note
shall not have the right to convert any portion of this Note pursuant to
Section 3(a), to the extent that after giving effect to such conversion, the
Holder (together with the Holder’s affiliates) would beneficially own in excess
of 

 

5

 

4.99%
(the “Maximum Percentage”) of the
number of shares of Common Stock outstanding immediately after giving effect to
such conversion. For purposes of the foregoing sentence, the number of shares
of Common Stock beneficially owned by the Holder and its affiliates shall
include the number of shares of Common Stock issuable upon conversion of this
Note with respect to which the determination of such sentence is being made,
but shall exclude the number of shares of Common Stock which would be issuable
upon (A) conversion of the remaining, nonconverted portion of this Note
beneficially owned by the Holder or any of its affiliates and (B) exercise or
conversion of the unexercised or nonconverted portion of any other securities
of the Company (including, without limitation, any Other Notes or warrants)
subject to a limitation on conversion or exercise analogous to the limitation
contained herein beneficially owned by the Holder or any of its affiliates.
Except as set forth in the preceding sentence, for purposes of this Section
3(d)(i), beneficial ownership shall be calculated in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended (the “1934 Act”). For purposes of this Section
3(d)(i), in determining the number of outstanding shares of Common Stock, the
Holder may rely on the number of outstanding shares of Common Stock as
reflected in (x) the Company’s most recent Form 10-KSB, Form 10-QSB or Form 8-K,
as the case may be (y) a more recent public announcement by the Company or (z)
any other notice by the Company or the Transfer Agent setting forth the number
of shares of Common Stock outstanding. For any reason at any time, upon the
written request of the Holder, the Company shall within one (1) Business Day
confirm in writing to the Holder the number of shares of Common Stock then
outstanding. In any case, the number of outstanding shares of Common Stock
shall be determined after giving effect to the conversion or exercise of
securities of the Company, including this Note, by the Holder or its affiliates
since the date as of which such number of outstanding shares of Common Stock
was reported. [NOT TO BE INCLUDED IN
RADCLIFFE NOTE: By written notice to the Company, the Holder may
increase or decrease the Maximum Percentage to any other percentage not in
excess of 9.99% specified in such notice; provided that (i) any such increase
will not be effective until the sixty-first (61st) day after such notice is delivered to
the Company, and (ii) any such increase or decrease will apply only to the
Holder and not to any other holder of Notes.]

 

(ii)           Principal Market Regulation. The Company shall not be obligated to
issue any shares of Common Stock upon conversion of this Note, and the Holder
of this Note shall not have the right to receive upon conversion of this Note
any shares of Common Stock, if the issuance of such shares of Common Stock
would exceed the aggregate number of shares of Common Stock which the Company
may issue upon conversion or exercise, as applicable, of the Notes and Warrants
without breaching the Company’s obligations under the rules or regulations of
the applicable Eligible Market (the number of shares which may be issued
without violating such rules and regulations, the “Exchange Cap”), except that such limitation shall not apply in
the event that the Company (A) obtains the approval of its stockholders as
required by the applicable rules of such Eligible Market for issuances 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 Required Holders. Unless and
until such approval or written opinion is obtained, no purchaser of the Notes
pursuant to the Securities Purchase Agreement (the “Purchasers”) shall be issued in the aggregate, upon conversion
or exercise or otherwise, as applicable, of Notes or 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 principal amount of Notes issued to
such Purchasers 

 

6

 

pursuant
to the Securities Purchase Agreement on the Closing Date and the denominator of
which is the aggregate principal amount of all Notes issued to the Purchasers
pursuant to the Securities Purchase Agreement on the Closing Date (with respect
to each Purchaser, the “Exchange Cap
Allocation”). In the event that any Purchaser shall sell or
otherwise transfer any of such Purchaser’s Notes, the transferee shall be
allocated a pro rata portion of such Purchaser’s Exchange Cap Allocation, and
the restrictions of the prior sentence shall apply to such transferee with respect
to the portion of the Exchange Cap Allocation allocated to such transferee. In
the event that any holder of Notes shall convert all of such holder’s Notes
into a number of 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 Notes on a pro rata basis in
proportion to the aggregate principal amount of the Notes then held by each
such holder.

 

(4)           RIGHTS UPON EVENT OF DEFAULT.

 

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

 

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

 

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

 

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

 

(iv)          at any time following the tenth (10th)
consecutive Business Day following the Authorized Share Failure Deadline that
the Holder’s Authorized Share Allocation is less than the number of shares of
Common Stock that the Holder would be entitled 

 

7

 

to
receive upon a conversion of the full Conversion Amount of this Note (without
regard to any limitations on conversion set forth in Section 3(d) or
otherwise);

 

(v)           the Company’s failure to pay to the
Holder any amount of Principal, Interest, Late Charges or other amounts when
and as due under this Note (including, without limitation, the Company’s
failure to pay any redemption payments or amounts hereunder) or any other
Transaction Document (as defined in the Securities Purchase Agreement) or any
other agreement, document, certificate or other instrument delivered in
connection with the transactions contemplated hereby and thereby to which the
Holder is a party, except, in the case of a failure to pay Interest and Late
Charges when and as due, in which case only if such failure continues for a
period of at least ten (10) Business Days;

 

(vi)          the occurrence of any default under,
redemption of or acceleration prior to maturity of any Indebtedness of the
Company or any of its Subsidiaries (as defined in Section 3(a) of the
Securities Purchase Agreement) which, individually or in the aggregate, exceeds
$500,000, other than with respect to any Other Notes;

 

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

 

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

 

(ix)           a final judgment or judgments for the
payment of money aggregating in excess of $1,500,000 are rendered against the
Company or any of its Subsidiaries and which judgments are not, within sixty
(60) days after the entry thereof, bonded, discharged or stayed pending appeal,
or are not discharged within sixty (60) days after the expiration of such stay;
provided, however, that any judgment which is covered by insurance or an
indemnity from a credit worthy party shall not be included in calculating the
$1,500,000 amount set forth above
so long as the Company provides the Holder a written statement from such
insurer or indemnity provider (which written statement shall be reasonably
satisfactory to the Holder) to the effect that such judgment is covered by
insurance or an indemnity and the Company will receive the proceeds of such
insurance or indemnity within thirty (30) days of the issuance of such
judgment;

 

(x)            the Company breaches any representation,
warranty, covenant or other term or condition of any Transaction Document,
which breach has or is likely to have a cost or adverse impact on the Company
or the Holders (including by reduction in the value of the shares of Common
Stock deliverable in connection with the Transaction Documents) in excess of
$250,000, except, in the case of a breach of a covenant or other term or 

 

8

 

condition
of any Transaction Document which is curable, only if such breach continues for
a period of at least ten (10) consecutive Business Days;

 

(xi)           any breach or failure in any respect to
comply with either of Sections 8 or 15 of this Note; or

 

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

 

(b)           Redemption Right. Upon the occurrence of an Event of
Default with respect to this Note or any Other Note, the Company shall within
one (1) Business Day deliver written notice thereof via facsimile and overnight
courier (an “Event of Default Notice”)
to the Holder. At any time after the earlier of the Holder’s receipt of an
Event of Default Notice and the Holder becoming aware of an Event of Default,
the Holder may require the Company to redeem all or any portion of this Note by
delivering written notice thereof (the “Event
of Default Redemption Notice”) to the Company, which Event of
Default Redemption Notice shall indicate the portion of this Note the Holder is
electing to redeem. Each portion of this Note subject to redemption by the
Company pursuant to this Section 4(b) shall be redeemed by the Company at a
price equal to the greater of (i) the product of (A) the sum of the Conversion
Amount to be redeemed together with accrued and unpaid Interest with respect to
such Conversion Amount and accrued and unpaid Late Charges with respect to such
Conversion Amount and Interest and (B) the Redemption Premium and (ii) the
product of (A) the Conversion Rate with respect to such sum of the Conversion
Amount together with accrued and unpaid Interest with respect to such
Conversion Amount and accrued and unpaid Late Charges with respect to such
Conversion Amount and Interest in effect at such time as the Holder delivers an
Event of Default Redemption Notice and (B) the product of (1) the Equity Value
Redemption Premium and (2) the greater of (x) the Closing Sale Price of the
Common Stock on the date immediately preceding such Event of Default, (y) the
Closing Sale Price of the Common Stock on the date immediately after such Event
of Default and (z) the Closing Sale Price of the Common Stock on the date the
Holder delivers the Event of Default Redemption Notice (the “Event of Default  Redemption Price”). Redemptions required by this Section 4(b)
shall be made in accordance with the provisions of Section 13. To the extent
redemptions required by this Section 4(b) are deemed or determined by a court
of competent jurisdiction to be prepayments of the Note by the Company, such
redemptions shall be deemed to be voluntary prepayments. In the event of a
partial redemption of this Note pursuant hereto, the principal amount redeemed
shall be deducted from the Installment Amounts relating to the applicable
Installment Dates as set forth in the Event of Default Redemption Notice. The
parties hereto agree that in the event of the Company’s redemption of any
portion of the Note under this Section 4(b), the Holder’s damages would be
uncertain and difficult to estimate because of the parties’ inability to
predict future interest rates and the uncertainty of the availability of a
suitable substitute investment opportunity for the Holder. Accordingly, any
Redemption Premium due under this Section 4(b) is intended by the parties to
be, and shall be deemed, a reasonable estimate of the Holder’s actual loss of
its investment opportunity and not as a penalty.

 

9

 

(5)           RIGHTS UPON FUNDAMENTAL TRANSACTION AND
CHANGE OF CONTROL.

 

(a)           Assumption. The Company shall not enter into or be party to a
Fundamental Transaction unless (i)  the Successor Entity assumes in
writing all of the obligations of the Company under this Note and the other
Transaction Documents in accordance with the provisions of this Section 5(a)
pursuant to written agreements in form and substance reasonably satisfactory to
the Required Holders and approved by the Required Holders prior to such
Fundamental Transaction, including agreements to deliver to each holder of
Notes in exchange for such Notes a security of the Successor Entity evidenced
by a written instrument substantially similar in form and substance to the
Notes, including, without limitation, having a principal amount and interest
rate equal to the principal amounts and the interest rates of the Notes then
outstanding held by such holder, having similar conversion rights and having
similar ranking to the Notes, and reasonably satisfactory to the Required
Holders and (ii)  the Successor Entity (including its Parent Entity) is a
publicly traded corporation whose common stock is quoted on or listed for
trading on an Eligible Market (a “Public
Successor Entity”). Upon the occurrence of any Fundamental
Transaction, the Successor Entity shall succeed to, and be substituted for (so
that from and after the date of such Fundamental Transaction, the provisions of
this Note referring to the “Company” shall refer instead to the Successor
Entity), and may exercise every right and power of the Company and shall assume
all of the obligations of the Company under this Note with the same effect as
if such Successor Entity had been named as the Company herein. Upon
consummation of the Fundamental Transaction, the Successor Entity shall deliver
to the Holder confirmation that there shall be issued upon conversion of this
Note at any time after the consummation of the Fundamental Transaction, in lieu
of the shares of the Company’s Common Stock (or other securities, cash, assets
or other property) issuable upon the conversion of the Notes prior to such Fundamental
Transaction, such shares of the publicly traded common stock (or their
equivalent) of the Successor Entity (including its Parent Entity), as adjusted
in accordance with the provisions of this Note. The provisions of this Section
shall apply similarly and equally to successive Fundamental Transactions and
shall be applied without regard to any limitations on the conversion of this
Note.

 

(b)           Redemption Right. No sooner than twenty (20) Trading Days
nor later than ten (10) Trading Days prior to the consummation of a Change of
Control, but not prior to the public announcement of such Change of Control,
the Company shall deliver written notice thereof via facsimile and overnight
courier to the Holder (a “Change of Control
Notice”). At any time during the
period beginning after the Holder’s receipt of a Change of Control Notice and
ending on the later of (A) one (1) Business Day prior to consummation of such
Change of Control or (B) twenty (20) Trading Days after the date of receipt of
such Change of Control Notice, the Holder may require the Company to redeem all
or any portion of this Note by delivering written notice thereof (“Change of Control Redemption Notice”) to
the Company, which Change of Control Redemption Notice shall indicate the
Conversion Amount the Holder is electing to redeem. The portion of this Note
subject to redemption pursuant to this Section 5 shall be redeemed by the
Company in cash at a price equal to the greater of (i) the sum of (x) the
product of the Change of Control Redemption Premium and the Conversion Amount
being redeemed and (y) the amount of any accrued but unpaid Interest on such
Conversion Amount being redeemed and accrued and unpaid Late Charges, if any,
with respect to such Conversion Amount and Interest through the date of such
redemption payment and (ii) the product of (x) the 

 

10

 

Equity
Value Redemption Premium and (y) the sum of (1) the product of (A) the
Conversion Amount being redeemed multiplied by (B) the quotient determined by
dividing (I) the aggregate cash consideration and the aggregate cash value of
any non-cash consideration per Common Share to be paid to the holders of the
Common Shares upon consummation of the Change of Control (any such non-cash
consideration to be valued at the higher of the Closing Sale Price of such
securities as of the Trading Day immediately prior to the consummation of such
Change of Control, the Closing Sale Price on the Trading Day immediately
following the public announcement of such proposed Change of Control and the
Closing Sale Price on the Trading Day immediately prior to the public
announcement of such proposed Change of Control) by (II) the Conversion Price
plus (2) the amount of any accrued but unpaid Interest on such Conversion
Amount being redeemed and accrued and unpaid Late Charges, if any, with respect
to such Conversion Amount and Interest through the date of such redemption
payment, (the “Change of Control Redemption
Price”). Redemptions required by this Section 5 shall be made in
accordance with the provisions of Section 13 and shall have priority to
payments to stockholders in connection with a Change of Control. To the extent
redemptions required by this Section 5(b) are deemed or determined by a court
of competent jurisdiction to be prepayments of the Note by the Company, such
redemptions shall be deemed to be voluntary prepayments. Notwithstanding
anything to the contrary in this Section 5, but subject to Section 3(d), until
the Change of Control Redemption Price (together with any interest thereon) is
paid in full, the Conversion Amount submitted for redemption under this Section
5(c) (together with any interest thereon) may be converted, in whole or in
part, by the Holder into Common Stock pursuant to Section 3. In the event of a
partial redemption of this Note pursuant hereto, the principal amount redeemed
shall be deducted from the Installment Amounts relating to the applicable
Installment Dates as set forth in the Change of Control Redemption Notice. The
parties hereto agree that in the event of the Company’s redemption of any
portion of the Note under this Section 5(b), the Holder’s damages would be
uncertain and difficult to estimate because of the parties’ inability to
predict future interest rates and the uncertainty of the availability of a
suitable substitute investment opportunity for the Holder. Accordingly, any
Change of Control Redemption Premium due under this Section 5(b) is intended by
the parties to be, and shall be deemed, a reasonable estimate of the Holder’s
actual loss of its investment opportunity and not as a penalty.

 

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

 

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

 

(b)           Other Corporate Events. In addition to and not in substitution
for any other rights hereunder, prior to the consummation of any Fundamental
Transaction pursuant 

 

11

 

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

 

(7)           RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

 

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

 

(i)            Issuance of Options. If the Company in any manner grants or
sells any Options and the lowest price per share for which one share of Common
Stock is issuable upon the exercise of any such Option or upon conversion or
exchange or exercise of any Convertible Securities issuable upon exercise of
such Option is less than the Applicable Price, then such share of Common Stock
shall be deemed to be outstanding and to have been issued and sold by the
Company at the time of the granting or sale of such Option for such price per
share. For purposes of this Section 7(a)(i), the “lowest price per share for
which one share of Common Stock is issuable upon the exercise of any such
Option or upon conversion or exchange or exercise of any 

 

12

 

Convertible Securities
issuable upon exercise of such Option” shall be equal to the sum of the lowest
amounts of consideration (if any) received or receivable by the Company with
respect to any one share of Common Stock upon granting or sale of the Option,
upon exercise of the Option and upon conversion or exchange or exercise of any
Convertible Security issuable upon exercise of such Option. No further
adjustment of the Conversion Price shall be made upon the actual issuance of
such share of Common Stock or of such Convertible Securities upon the exercise
of such Options or upon the actual issuance of such Common Stock upon
conversion or exchange or exercise of such Convertible Securities.

 

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

 

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

 

(iv)          Calculation of Consideration Received. In case any Option is issued in
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is 

 

13

 

allocated to such Options
by the parties thereto, the Options will be deemed to have been issued for the
difference of (x) the aggregate fair market value of such Options and other
securities issued or sold in such integrated transaction, less (y) the fair
market value of the securities other than such Option, issued or sold in such
transaction and the other securities issued or sold in such integrated
transaction will be deemed to have been issued or sold for the balance of the
consideration received by the Company. If any Common Stock, Options or
Convertible Securities are issued or sold or deemed to have been issued or sold
for cash, the consideration received therefor will be deemed to be the gross
amount raised by the Company; provided, however, that such gross amount is not
greater than 110% of the net amount received by the Company therefor. If any
Common Stock, Options or Convertible Securities are issued or sold for a
consideration other than cash, the amount of the consideration other than cash
received by the Company will be the fair value of such consideration, except
where such consideration consists of securities, in which case the amount of
consideration received by the Company will be the Closing Sale Price of such
securities on the date of receipt. If any Common Stock, Options or Convertible
Securities are issued to the owners of the non-surviving entity in connection
with any merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion of
the net assets and business of the non-surviving entity as is attributable to such
Common Stock, Options or Convertible Securities, as the case may be. The fair
value of any consideration other than cash or securities will be determined
jointly by the Company and the Required Holders. If such parties are unable to
reach agreement within ten (10) days after the occurrence of an event requiring
valuation (the “Valuation Event”),
the fair value of such consideration will be determined within five (5)
Business Days after the tenth (10th) day following the Valuation Event by an
independent, reputable appraiser jointly selected by the Company and the
Required Holders. The determination of such appraiser shall be deemed binding
upon all parties absent manifest error and the fees and expenses of such
appraiser shall be borne by the Company.

 

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

 

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

 

14

 

(c)           Other Events. If any event occurs of the type
contemplated by the provisions of this Section 7 but not expressly provided for
by such provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity
features), then the Company’s Board of Directors will make an appropriate
adjustment in the Conversion Price so as to protect the rights of the Holder
under this Note; provided that no such adjustment will increase the Conversion
Price as otherwise determined pursuant to this Section 7.

 

(8)           COMPANY INSTALLMENT CONVERSION OR
REDEMPTION.

 

(a)           General. On each applicable Installment Date, the Company
shall pay to the Holder of this Note the Installment Amount due on such date by
converting such Installment Amount, provided that there is not then an Equity
Conditions Failure, in accordance with this Section 8 (a “Company Conversion”); provided, however,
that the Company may, at its option following notice to the Holder, pay the
Installment Amount by redeeming such Installment Amount (a “Company Redemption”) or by any combination
of a Company Conversion and a Company Redemption so long as all of the
outstanding applicable Installment Amount shall be converted and/or redeemed by
the Company on the applicable Installment Date, subject to the provisions of
this Section 8; provided further, however, that the Company shall not be entitled
to pay any portion of the Installment Amount in shares of Common Stock pursuant
to a Company Conversion and shall be required to pay such Installment Amount in
cash pursuant to a Company Redemption if the Weighted Average Price of the
Common Stock on any Trading Day during the Company Conversion Measuring Period
is less than $1.00. Notwithstanding the foregoing, the Company may not effect a
Company Conversion of any Installment Amount under this Section in excess of
the Holder Pro Rata Amount of the applicable Installment Volume Limitation. On
or prior to the date which is the eighth (8th) Trading Day prior to each Installment
Date (each, an “Installment Notice Due Date”),
the Company shall deliver written notice (each, a “Company Installment Notice” and the date all of the holders
receive such notice is referred to as to the “Company
Installment Notice Date”), to each holder of Notes which Company
Installment Notice shall (i) either (A) confirm that the applicable Installment
Amount of such holder’s Note shall be converted in whole pursuant to a Company
Conversion (such amount to be converted, the “Company
Conversion Amount”) or (B) (1) state that the Company elects to
redeem, or is required to redeem in accordance with the provisions of the
Notes, in whole or in part, the applicable Installment Amount pursuant to a
Company Redemption and (2) specify the portion (including Interest and Late
Charges, if any, on such amount and Interest) which the Company elects or is
required to redeem pursuant to a Company Redemption (such amount to be
redeemed, the “Company Redemption Amount”)
and the portion (including Interest and Late Charges, if any, on such amount
and Interest), if any, that the Company elects to convert pursuant to a Company
Conversion (such amount a “Company Conversion
Amount”) which amounts when added together, must equal the
applicable Installment Amount and (ii) if the Installment Amount is to be paid,
in whole or in part, pursuant to a Company Conversion, certify that there is
not then an Equity Conditions Failure as of the date of the Company Installment
Notice. Each Company Installment Notice shall be irrevocable. If the Company
does not timely deliver a Company Installment Notice in accordance with this
Section 8, then the Company shall be deemed to have delivered an irrevocable
Company Installment Notice confirming a Company Conversion and shall be deemed
to have certified that there is not then an Equity Conditions Failure in
connection with any such conversion. Except as 

 

15

 

expressly
provided in this Section 8(a), the Company shall convert and/or redeem the
applicable Installment Amount of this Note pursuant to this Section 8 and the
corresponding Installment Amounts of the Other Notes pursuant to the
corresponding provisions of the Other Notes in the same ratio of the
Installment Amount being converted and/or redeemed hereunder. The Company
Conversion Amount (whether set forth in the Company Installment Notice or by
operation of this Section 8) shall be converted in accordance with Section 8(b)
and the Company Redemption Amount shall be redeemed in accordance with Section
8(c).

 

(b)           Mechanics
of Company Conversion. Subject to Section 3(d), if the Company delivers a
Company Installment Notice and elects, or is deemed to have elected, in whole
or in part, a Company Conversion in accordance with Section 8(a), then the
applicable Company Conversion Amount, if any, which remains outstanding as of
the applicable Installment Date shall be converted as of the applicable
Installment Date by converting on such Installment Date such Company Conversion
Amount at the Company Conversion Price; provided that the Equity Conditions are
then satisfied (or waived in writing by the Holder) on such Installment Date and
that the Holder Pro Rata Amount of the Installment Volume Limitation is not
exceeded. If the Equity Conditions are not satisfied (or waived in writing by
the Holder) on such Installment Date or the Holder Pro Rata Amount of the
Installment Volume Limitation is exceeded, then at the option of the Holder
designated in writing to the Company, the Holder may require the Company to do
any one or more of the following: (i) the Company shall redeem all or any part
designated by the Holder of the unconverted Company Conversion Amount (such
designated amount is referred to as the “First
Redemption Amount”) and the Company shall pay to the Holder within
three (3) days of such Installment Date, by wire transfer of immediately
available funds, an amount in cash equal to 120% of such First Redemption
Amount, and/or (ii) the Company Conversion shall be null and void with respect
to all or any part designated by the Holder of the unconverted Company
Conversion Amount and the Holder shall be entitled to all the rights of a holder
of this Note with respect to such amount of the Company Conversion Amount;
provided, however, that the Conversion Price for such unconverted Company
Conversion Amount shall thereafter be adjusted to equal the lesser of (A) the
Company Conversion Price as in effect on the date on which the Holder voided
the Company Conversion and (B) the Company Conversion Price as in effect on the
date on which the Holder delivers a Conversion Notice relating thereto. If the
Company fails to redeem any First Redemption Amount by the third (3rd) day following the applicable Installment Date by
payment of such amount on the applicable Installment Date, then the Holder
shall have the rights set forth in Section 13(a) as if the Company failed to
pay the applicable Company Redemption Price and all other rights under this
Note (including, without limitation, such failure constituting an Event of
Default described in Section 4(a)(xi)). Notwithstanding anything to the
contrary in this Section 8(b), but subject to 3(d), until the Company delivers
Common Stock representing the Company Conversion Amount to the Holder, the
Company Conversion Amount may be converted by the Holder into Common Stock
pursuant to Section 3. In the event that the Holder elects to convert the
Company Conversion Amount prior to the applicable Installment Date as set forth
in the immediately preceding sentence, the Company Conversion Amount so
converted shall be deducted from the Installment Amounts relating to the
applicable Installment Dates as set forth in the applicable Conversion Notice.

 

(c)           Mechanics of Company Redemption. If the Company elects a Company
Redemption in accordance with Section 8(a), then the Company Redemption Amount,

 

16

 

if any,
which is to be paid to the Holder on the applicable Installment Date shall be
redeemed by the Company on such Installment Date, and the Company shall pay to
the Holder on such Installment Date, by wire transfer of immediately available
funds, in an amount in cash (the “Company
Installment Redemption Price”) equal to 100% of the Company
Redemption Amount. If the Company fails to redeem the Company Redemption Amount
on the applicable Installment Date by payment of the Company Installment
Redemption Price on such date, then at the option of the Holder designated in
writing to the Company (any such designation, “Conversion Notice” for purposes of this Note), the Holder may
require the Company to convert all or any part of the Company Redemption Amount
at the Company Conversion Price. Conversions required by this Section 8(c)
shall be made in accordance with the provisions of Section 3(c).
Notwithstanding anything to the contrary in this Section 8(c), but subject to
Section 3(d), until the Company Installment Redemption Price (together with any
interest thereon) is paid in full, the Company Redemption Amount (together with
any interest thereon) may be converted, in whole or in part, by the Holder into
Common Stock pursuant to Section 3. In the event the Holder elects to convert
all or any portion of the Company Redemption Amount prior to the applicable
Installment Date as set forth in the immediately preceding sentence, the
Company Redemption Amount so converted shall be deducted from the Installment
Amounts relating to the applicable Installment Dates as set forth in the
applicable Conversion Notice.

 

(d)           Deferred Installment Amount. Notwithstanding any provision of this
Section 8 to the contrary, the Holder may, at its option and in its sole
discretion, deliver a written notice to the Company at least two (2) days prior
to any Installment Notice Due Date electing to have the payment of all or any
portion of an Installment Amount payable on the next Installment Date deferred
to the Maturity Date. Any amount deferred to the Maturity Date pursuant to this
Section 8(d) shall continue to accrue Interest through the Maturity Date and
shall be paid on such date in cash.

 

(e)           Cancellation of Installment Amount. Notwithstanding any provision of this
Section 8 to the contrary, in the event that the Weighted Average Price of the
Common Stock equals or exceeds 145% of the applicable Conversion Price for each
of the five (5) consecutive Trading Days immediately preceding the Installment
Notice Due Date, then the Installment Amount payable on such Installment Date
shall be deferred to the Maturity Date. Any amount deferred to the Maturity
Date pursuant to this Section 8(e) shall continue to accrue Interest through
the Maturity Date and shall be paid on such date in cash.

 

(9)           COMPANY’S RIGHT OF MANDATORY CONVERSION.

 

(a)           Mandatory Conversion. Subject to Section 3(d), if at any time
from and after the Effective Date (as defined in the Registration Rights
Agreement) (the “Mandatory Conversion
Eligibility Date”), (i) the Closing Sale Price of the Common Stock
for any twenty (20) Trading Days (which need not be consecutive) out of any
thirty (30) consecutive Trading Day period following the applicable Mandatory
Conversion Eligibility Date (the “Mandatory
Conversion Measuring Period”) equals or exceeds either (A) 150% (the
“First Conversion Threshold”) or
(B) 175% (the “Second Conversion Threshold”)
of the Conversion Price on the Closing Date (subject to appropriate adjustments
for stock splits, stock dividends, stock combinations and other similar
transactions after the Subscription Date) and (ii) there is not then an Equity
Conditions Failure, the Company shall have the right to require the Holder to 

 

17

 

convert (1) if the First
Conversion Threshold has been met, up to the First Conversion Threshold
Conversion Amount or (2) if the Second Conversion Threshold has been met, all,
but not less than all, of the Conversion Amount then remaining under this Note,
in each case as designated in the
Mandatory Conversion Notice (as defined below) into fully paid, validly issued
and nonassessable shares of Common Stock in accordance with Section 3(c)
hereof at the Conversion Rate as of the Mandatory Conversion Date (as defined
below) (a “Mandatory Conversion”).
The Company may exercise its right to require conversion under this Section
9(a) by delivering within not more than three (3) Trading Days following the
end of such Mandatory Conversion Measuring Period a written notice thereof by
facsimile and overnight courier to all, but not less than all, of the holders
of Notes and the Transfer Agent (the “Mandatory
Conversion Notice” and the date all of the holders received such
notice by facsimile is referred to as the “Mandatory
Conversion Notice Date”). The Mandatory Conversion Notice shall be
irrevocable. The Mandatory Conversion Notice shall state (w) the Trading Day
selected for the Mandatory Conversion in accordance with Section 9(a), which
Trading Day shall be no later than five (5) Business Days following the Mandatory
Conversion Notice Date (the “Mandatory
Conversion Date”), (v) the aggregate Conversion Amount, including
any applicable First Conversion Threshold Conversion Amount, of the Notes
subject to mandatory conversion from the Holder and all of the holders of the
Notes pursuant to this Section 9 (and analogous provisions under the Other
Notes), (w) the number of shares of Common Stock to be issued to such Holder on
the Mandatory Conversion Date, (x) if the Mandatory Conversion is consummated
prior to the third (3rd)
anniversary of the Issuance Date, that the Series B Warrants (as defined in the
Securities Purchase Agreement) issued to the Holder shall become exercisable on
the Mandatory Conversion Date, (y) the Make-Whole Amount, if any, required to
be paid on the Mandatory Conversion and whether such Make-Whole Amount shall
not be paid in shares of Common Stock but rather in cash and (z) certify that
there is not then an Equity Conditions Failure; provided, however, that the
Company may not effect a Mandatory Conversion under this Section in excess of
the Holder Pro Rata Amount of the applicable Mandatory Conversion Volume
Limitation. Notwithstanding the foregoing, the Company may effect only one (1)
Mandatory Conversion with respect to the First Conversion Threshold during any
forty (40) consecutive Trading Days. Any shares of Common Stock delivered in
connection with a Mandatory Conversion hereunder shall be accompanied by (I)
any applicable Make-Whole Amount and (II) any accrued and unpaid Interest with
respect to such Conversion Amount subject to such Mandatory Conversion and
accrued and unpaid Late Charges with respect to such Conversion Amount and
Interest.

 

(b)           Pro Rata Conversion Requirement. If the Company elects to cause a
conversion of any Conversion Amount of this Note pursuant to Section 9(a), then
it must simultaneously take the same action in the same proportion with respect
to the Other Notes. If the Company elects a Mandatory Conversion of this Note
pursuant to Section 9(a) (or similar provisions under the Other Notes) with
respect to less than all of the Conversion Amounts of the Notes then
outstanding, then the Company shall require conversion of a Conversion Amount
from each of the holders of the Notes equal to the product of (I) the aggregate
Conversion Amount of Notes which the Company has elected to cause to be
converted pursuant to Section 9(a), multiplied by (II) the fraction, the
numerator of which is the sum of the aggregate Original Principal Amount of the
Notes purchased by such holder of outstanding Notes and the denominator of
which is the sum of the aggregate Original Principal Amount of the Notes
purchased by all holders holding outstanding Notes (such fraction with respect
to each holder is 

 

18

 

referred
to as its “Conversion  Allocation Percentage,” and such amount
with respect to each holder is referred to as its “Pro Rata Conversion Amount”); provided, however, that in the
event that any holder’s Pro Rata Conversion Amount exceeds the outstanding
Principal amount of such holder’s Note, then such excess Pro Rata Conversion
Amount shall be allocated amongst the remaining holders of Notes in accordance
with the foregoing formula. In the event that the initial holder of any Notes
shall sell or otherwise transfer any of such holder’s Notes, the transferee
shall be allocated a pro rata portion of such holder’s Conversion Allocation
Percentage and the Pro Rata Conversion Amount.

 

(10)         HOLDER’S RIGHT OF OPTIONAL REDEMPTION. On the third (3rd)
anniversary of the Issuance Date (the “Optional
Redemption Date”), the Holder shall have the right, in its sole
discretion, to require that the Company redeem (each a “Holder Optional Redemption”) up to all of
the Principal amount of the Note (excluding any Principal amount the payment of
which has been deferred pursuant to Section 8(d)) plus accrued and unpaid
Interest with respect to such Principal and accrued and unpaid Late Charges
with respect to such Principal and Interest then outstanding (the “Optional Redemption Amount”) by delivering
written notice thereof (a “Holder Optional
Redemption Notice” and, collectively with the Event of Default
Redemption Notice and the Change of Control Redemption Notice, the “Redemption Notices” and each a “Redemption Notice”) to the Company no later
than three (3) Business Days prior to the Optional Redemption Date. The Holder
Optional Redemption Notice shall indicate the amount of the applicable Optional
Redemption Amount the Holder is electing to have redeemed on such Optional
Redemption Date (the “Holder Optional
Redemption Amount”). The portion of this Note subject to redemption
pursuant to this Section 10 shall be redeemed by the Company in cash on the
applicable Optional Redemption Date at a price equal to the Holder Optional
Redemption Amount being redeemed (the “Holder
Optional Redemption Price” and, collectively with the Event of
Default Redemption Price, the Change of Control Redemption Price and the
Company Installment Redemption Price, the “Redemption
Prices” and, each a “Redemption
Price”).

 

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

 

(12)         RESERVATION OF AUTHORIZED SHARES.

 

(a)           Reservation. The Company shall initially reserve out
of its authorized and unissued Common Stock a number of shares of Common Stock
for each of the Notes equal to 130% of the Conversion Rate with respect to the
Conversion Amount of each such Note as of the Issuance Date. So long as any of the Notes are
outstanding, the Company shall take all action necessary to reserve and keep
available out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Notes, 130% of the number of shares
of Common Stock as shall from time to time be necessary to effect the
conversion of all of the Notes then outstanding; provided that at no time shall
the number of 

 

19

 

shares
of Common Stock so reserved be less than the number of shares required to be
reserved by the previous sentence (without regard to any limitations on
conversions) (the “Required Reserve Amount”).
The initial number of shares of Common Stock reserved for conversions of the
Notes and each increase in the number of shares so reserved shall be allocated
pro rata among the holders of the Notes based on the principal amount of the
Notes held by each holder at the Closing (as defined in the Securities Purchase
Agreement) or increase in the number of reserved shares, as the case may be
(the “Authorized Share Allocation”).
In the event that a holder shall sell or otherwise transfer any of such
holder’s Notes, each transferee shall be allocated a pro rata portion of such
holder’s Authorized Share Allocation. Any shares of Common Stock reserved and
allocated to any Person which ceases to hold any Notes shall be allocated to
the remaining holders of Notes, pro rata based on the principal amount of the
Notes then held by such holders.

 

(b)           Insufficient Authorized Shares. If at any time while any of the Notes
remain outstanding the Company does not have a sufficient number of authorized
and unreserved shares of Common Stock to satisfy its obligation to reserve for
issuance upon conversion of the Notes at least a number of shares of Common
Stock equal to the Required Reserve Amount (an “Authorized Share Failure”), then the Company shall immediately
take all action necessary to increase the Company’s authorized shares of Common
Stock to an amount sufficient to allow the Company to reserve the Required
Reserve Amount for the Notes then outstanding. Without limiting the generality
of the foregoing sentence, as soon as practicable after the date of the
occurrence of an Authorized Share Failure, but in no event later than ninety
(90) days after the occurrence of such Authorized Share Failure, the Company
shall hold a meeting of its stockholders for the approval of an increase in
(the “Authorized Share Failure Deadline”),
the number of authorized shares of Common Stock. In connection with such
meeting, the Company shall provide each stockholder with a proxy statement and
shall use its best efforts to solicit its stockholders’ approval of such
increase in authorized shares of Common Stock and to cause its board of
directors to recommend to the stockholders that they approve such proposal.

 

(13)         HOLDER’S REDEMPTIONS.

 

(a)           Mechanics. The Company shall deliver the applicable Event of
Default Redemption Price to the Holder within five (5) Business Days after the
Company’s receipt of the Holder’s Event of Default Redemption Notice. If the
Holder has submitted a Change of Control Redemption Notice in accordance with
Section 5(b), the Company shall deliver the applicable Change of Control
Redemption Price to the Holder concurrently with the consummation of such
Change of Control if such notice is received prior to the consummation of such
Change of Control and within five (5) Business Days after the Company’s receipt
of such notice otherwise. The Company shall deliver the applicable Company
Installment Redemption Price to the Holder on the applicable Installment Date
and the applicable Holder Optional Redemption Price on the applicable Optional
Redemption Date. In the event of a redemption of less than all of the
Conversion Amount of this Note, the Company shall promptly cause to be issued
and delivered to the Holder a new Note (in accordance with Section 19(d))
representing the outstanding Principal which has not been redeemed. In the
event that the Company does not pay the applicable Redemption Price to the
Holder within the time period required, at any time thereafter and until the
Company pays such unpaid Redemption Price in full, the Holder shall 

 

20

 

have the
option, in lieu of redemption, to require the Company to promptly return to the
Holder all or any portion of this Note representing the Conversion Amount that
was submitted for redemption and for which the applicable Redemption Price
(together with any Late Charges thereon) has not been paid. Upon the Company’s
receipt of such notice, (x) the applicable Redemption Notice shall be null and
void with respect to such Conversion Amount, (y) the Company shall immediately
return this Note, or issue a new Note (in accordance with Section 19(d)) to the
Holder representing the sum of such Conversion Amount to be redeemed together
with accrued and unpaid Interest with respect to such Conversion Amount and
accrued and unpaid Late Charges with respect to such Conversion Amount and
Interest and (z) the Conversion Price of this Note or such new Notes shall be
adjusted to the lesser of (A) the Conversion Price as in effect on the date on
which the applicable Redemption Notice is voided and (B) the lowest Closing Bid
Price of the Common Stock during the period beginning on and including the date
on which the applicable Redemption Notice is delivered to the Company and
ending on and including the date on which the applicable Redemption Notice is
voided. The Holder’s delivery of a notice voiding a Redemption Notice and
exercise of its rights following such notice shall not affect the Company’s
obligations to make any payments of Late Charges which have accrued prior to
the date of such notice with respect to the Conversion Amount subject to such
notice.

 

(b)           Redemption by Other Holders. Upon the Company’s receipt of notice
from any of the holders of the Other Notes for redemption or repayment as a
result of an event or occurrence substantially similar to the events or
occurrences described in Section 4(b), Section 5(b) or Section 10 (each, an “Other Redemption Notice”), the Company shall
immediately, but no later than one (1) Business Day of its receipt thereof,
forward to the Holder by facsimile a copy of such notice. If the Company
receives a Redemption Notice and one or more Other Redemption Notices, during
the seven (7) Business Day period beginning on and including the date which is
three (3) Business Days prior to the Company’s receipt of the Holder’s
Redemption Notice and ending on and including the date which is three (3)
Business Days after the Company’s receipt of the Holder’s Redemption Notice and
the Company is unable to redeem all principal, interest and other amounts
designated in such Redemption Notice and such Other Redemption Notices received
during such seven (7) Business Day period, then the Company shall redeem a pro
rata amount from each holder of the Notes (including the Holder) based on the
principal amount of the Notes submitted for redemption pursuant to such
Redemption Notice and such Other Redemption Notices received by the Company
during such seven Business Day period.

 

(14)         VOTING RIGHTS. The Holder shall have no voting rights
as the holder of this Note, except as required by law, including, but not
limited to, the General Corporation Law of the State of Delaware, and as
expressly provided in this Note.

 

(15)         COVENANTS.

 

(a)           Rank.      All payments due under this Note (a) shall rank pari passu with all Other Notes and (b)
shall be senior to all other Indebtedness of the Company and its Subsidiaries
other than Permitted Indebtedness of the type described in clause (iii) of the
definition thereof.

 

21

 

(b)           Incurrence of Indebtedness. So long as this Note is outstanding,
the Company shall not, and the Company shall not permit any of its Subsidiaries
to, directly or indirectly, incur or guarantee, assume or suffer to exist any
Indebtedness, other than (i) the Indebtedness evidenced by this Note and the
Other Notes and (ii) other Permitted Indebtedness.

 

(c)           Existence of Liens. So long as this Note is outstanding,
the Company shall not, and the Company shall not permit any of its Subsidiaries
to, directly or indirectly, allow or suffer to exist any mortgage, lien,
pledge, charge, security interest or other encumbrance upon or in any property
or assets (including accounts and contract rights) owned by the Company or any
of its Subsidiaries (collectively, “Liens”)
other than Permitted Liens.

 

(d)           Restricted Payments. The Company shall not, and the Company
shall not permit any of its Subsidiaries to, directly or indirectly, redeem,
defease, repurchase, repay or make any payments in respect of, by the payment
of cash or cash equivalents (in whole or in part, whether by way of open market
purchases, tender offers, private transactions or otherwise), all or any
portion of any Permitted Indebtedness, whether by way of payment in respect of
principal of (or premium, if any) or interest on, such Indebtedness if at the
time such payment is due or is otherwise made or, after giving effect to such
payment, (i) an event constituting an Event of Default has occurred and is
continuing or (ii) an event that with the passage of time and without being
cured would constitute an Event of Default has occurred and is continuing.

 

(e)           Restriction on Redemption and Cash
Dividends. Until
all of the Notes have been converted, redeemed or otherwise satisfied in
accordance with their terms, the Company shall not, directly or indirectly,
redeem, repurchase or declare or pay any cash dividend or distribution on its
capital stock without the prior express written consent of the Required
Holders.

 

(f)            Financial Covenants.

 

(i)            EBITDA Test. From and after December 31, 2007 and so
long as this Note is outstanding, the Company shall maintain EBITDA which
equals to or exceeds the applicable EBITDA Threshold (the “EBITDA Test”).

 

(ii)           Net Cash Balance Test. If the EBITDA Test is not met for any
Fiscal Quarter, the Company shall maintain a Net Cash Balance in excess of the
applicable Reserved Amount (the “Net Cash
Balance Test”) until such time as the Company satisfies such EBITDA
Test for any Fiscal Quarter thereafter; provided, however, that if at any time
the Company reports an LTM Consolidated EBITDA equal to or in excess of $60.0
million or EBITDA equal to or in excess of $25.0 million for any Fiscal
Quarter, the Company shall not be required to satisfy the EBITDA Test or the
Net Cash Balance Test at any time thereafter. If the Company fails (a “Failure Date”) to satisfy the Net Cash
Balance Test at any time when such test is required, the Company promptly shall
provide to the Holder a certification, executed on behalf of the Company by the
Chief Financial Officer of the Company, as to the amount of the Net Cash
Balance as of the Failure Date, and publicly disclose (on a Current Report on
Form 8-K or otherwise) such material non-public information (the date of such
certification and public announcement, the “Disclosure
Date”). On the Disclosure Date, the Company shall also obtain 

 

22

 

the
Letter of Credit (as defined in the Securities Purchase Agreement) pursuant to
and in accordance with Section 4(q) of the Securities Purchase Agreement from a
financial institution satisfactory to the Required Holders in the applicable
Letter of Credit Amount for the benefit, pro rata by principal amount
outstanding, of the holders of Notes in the event of any default by the Company
under any of the Transaction Documents.

 

(iii)          Operating Results Announcement. The Company shall announce its
operating results (the “Operating Results”)
from which compliance with the EBITDA Test and Net Cash Balance Test can be
determined for each Fiscal Quarter no later than the forty-fifth (45th) day after
the end of each Fiscal Quarter or, with respect to the last Fiscal Quarter, the
ninetieth (90th) day after such quarter (the “Announcement Date”) and, in the event the
Company shall have satisfied the EBITDA Test and/or the Net Cash Balance Test
at all times during such Fiscal Quarter, as applicable, such announcement shall
include a statement to the effect that the Company satisfied the EBITDA Test
and/or the Net Cash Balance Test, as applicable, at all times throughout such
Fiscal Quarter; provided, however, that in the event the Company is delayed in
announcing its Operating Results for any Fiscal Quarter, by the Announcement
Date the Company shall, in lieu of the foregoing, (A) make a statement to the
effect that it has complied with all of its covenants under the Notes,
including, without limitation, the EBITDA Test and/or the Net Cash Balance
Test, as applicable, and (B) provide to the Holders a certification, in
accordance with terms of the next sentence, certifying the same. On the
Announcement Date, the Company shall also provide to the Holders a
certification, executed on behalf of the Company by the Chief Financial Officer
of the Company, certifying that the Company satisfied the EBITDA Test and/or
the Net Cash Balance Test, as applicable, at all times throughout such Fiscal
Quarter.

 

(g)           Durant Facility. On or before July 31, 2006, the Company
shall have begun commercial production of biodiesel fuel at its facility
located in Durant, Oklahoma. Within one (1) Business Day of the initiation of
such production at the facility, the Company shall publicly disclose such event
in a Current Report on Form 8-K or otherwise.

 

(16)         PARTICIPATION. The Holder, as the holder of this Note,
shall be entitled to receive such dividends paid and distributions made to the
holders of Common Stock to the same extent as if the Holder had converted this
Note into Common Stock (without regard to any limitations on conversion herein
or elsewhere) and had held such shares of Common Stock on the record date for
such dividends and distributions. Payments under the preceding sentence shall
be made concurrently with the dividend or distribution to the holders of Common
Stock.

 

(17)         VOTE TO ISSUE, OR CHANGE THE TERMS OF,
NOTES. The
affirmative vote at a meeting duly called for such purpose or the written
consent without a meeting of the Required Holders shall be required for any
change or amendment to this Note or the Other Notes.

 

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

 

23

 

(19)         REISSUANCE OF THIS NOTE.

 

(a)           Transfer. If this Note is to be transferred, the Holder shall
surrender this Note to the Company, whereupon the Company will, subject to the
satisfaction of the transfer provisions of the Securities Purchase Agreement,
forthwith issue and deliver upon the order of the Holder a new Note (in
accordance with Section 19(d)), registered in the name of the registered
transferee or assignee, representing the outstanding Principal being transferred
by the Holder and, if less then the entire outstanding Principal is being
transferred, a new Note (in accordance with Section 19(d)) to the Holder
representing the outstanding Principal not being transferred. The Holder and
any assignee, by acceptance of this Note, acknowledge and agree that, by reason
of the provisions of Section 3(c)(iv) following conversion or redemption of any
portion of this Note, the outstanding Principal represented by this Note may be
less than the Principal stated on the face of this Note.

 

(b)           Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Note, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the Holder to the Company in customary form and,
in the case of mutilation, upon surrender and cancellation of this Note, the
Company shall execute and deliver to the Holder a new Note (in accordance with
Section 19(d)) representing the outstanding Principal.

 

(c)           Note Exchangeable for Different
Denominations.
This Note is exchangeable, upon the surrender hereof by the Holder at the
principal office of the Company, for a new Note or Notes (in accordance with
Section 19(d) and in principal amounts of at least $100,000) representing in
the aggregate the outstanding Principal of this Note, and each such new Note
will represent such portion of such outstanding Principal as is designated by
the Holder at the time of such surrender.

 

(d)           Issuance of New Notes. Whenever the Company is required to
issue a new Note pursuant to the terms of this Note, such new Note (i) shall be
of like tenor with this Note, (ii) shall represent, as indicated on the face of
such new Note, the Principal remaining outstanding (or in the case of a new
Note being issued pursuant to Section 19(a) or Section 19(c), the Principal
designated by the Holder which, when added to the principal represented by the
other new Notes issued in connection with such issuance, does not exceed the
Principal remaining outstanding under this Note immediately prior to such
issuance of new Notes), (iii) shall have an issuance date, as indicated on the
face of such new Note, which is the same as the Issuance Date of this Note,
(iv) shall have the same rights and conditions as this Note, and (v) shall
represent accrued and unpaid Interest and Late Charges on the Principal and
Interest of this Note, from the Issuance Date.

 

(20)         REMEDIES, CHARACTERIZATIONS, OTHER
OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The remedies provided in this Note shall be
cumulative and in addition to all other remedies available under this Note and
any of the other Transaction Documents at law or in equity (including a decree
of specific performance and/or other injunctive relief), and nothing herein
shall limit the Holder’s right to pursue actual and consequential damages for
any failure by the Company to comply with the terms of this Note. Amounts set
forth or provided for herein with respect to payments, conversion and the like
(and 

 

24

 

the
computation thereof) shall be the amounts to be received by the Holder and
shall not, except as expressly provided herein, be subject to any other
obligation of the Company (or the performance thereof). The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Holder and that the remedy at law for any such breach
may be inadequate. The Company therefore agrees that, in the event of any such
breach or threatened breach, the Holder shall be entitled, in addition to all
other available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security being
required.

 

(21)         PAYMENT OF COLLECTION, ENFORCEMENT AND
OTHER COSTS. If
(a) this Note is placed in the hands of an attorney for collection or
enforcement or is collected or enforced through any legal proceeding or the
Holder otherwise takes action to collect amounts due under this Note or to
enforce the provisions of this Note or (b) there occurs any bankruptcy,
reorganization, receivership of the Company or other proceedings affecting
Company creditors’ rights and involving a claim under this Note, then the
Company shall pay the costs incurred by the Holder for such collection,
enforcement or action or in connection with such bankruptcy, reorganization,
receivership or other proceeding, including, but not limited to, attorneys’
fees and disbursements.

 

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

 

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

 

(24)         DISPUTE RESOLUTION. In the case of a dispute as to the
determination of the Closing Bid Price, the Closing Sale Price or the Weighted
Average Price or the arithmetic calculation of the Conversion Rate or any
Redemption Price, the Company shall submit the disputed determinations or
arithmetic calculations via facsimile within two (2) Business Days of receipt,
or deemed receipt, of the Conversion Notice or Redemption Notice or other event
giving rise to such dispute, as the case may be, to the Holder. If the Holder
and the Company are unable to agree upon such determination or calculation
within two (2) Business Days of such disputed determination or arithmetic
calculation being submitted to the Holder, then the Company shall, within two
(2) Business Days submit via facsimile (a) the disputed determination of the
Closing Bid Price, the Closing Sale Price or the Weighted Average Price to an
independent, reputable investment bank selected by the Company and approved by
the Holder or (b) the disputed arithmetic calculation of the Conversion Rate or
any Redemption Price to the Company’s independent, outside accountant. The Company,
at the Company’s expense, shall cause the investment bank or the accountant, as
the case may be, to perform the determinations or calculations and notify the
Company and the Holder of the results no later than five (5) Business Days from
the time it receives the disputed determinations or calculations. Such
investment bank’s or accountant’s determination or calculation, as the case may
be, shall be binding upon all parties absent demonstrable error.

 

25

 

(25)         NOTICES; PAYMENTS.

 

(a)           Notices. Whenever notice is required to be given under this
Note, unless otherwise provided herein, such notice shall be given in
accordance with Section 10(f) of the Securities Purchase Agreement. The Company
shall provide the Holder with prompt written notice of all actions taken
pursuant to this Note, including in reasonable detail a description of such
action and the reason therefore. Without limiting the generality of the
foregoing, the Company will give written notice to the Holder (i) immediately
upon any adjustment of the Conversion Price, setting forth in reasonable
detail, and certifying, the calculation of such adjustment and (ii) at least
twenty (20) days prior to the date on which the Company closes its books or takes
a record (A) with respect to any dividend or distribution upon the Common
Stock, (B) with respect to any pro rata subscription offer to holders of Common
Stock or (C) for determining rights to vote with respect to any Fundamental
Transaction, dissolution or liquidation, provided in each case that such
information shall be made known to the public prior to or in conjunction with
such notice being provided to the Holder.

 

(b)           Payments. Whenever any payment of cash is to be made by the
Company to any Person pursuant to this Note, such payment shall be made in
lawful money of the United States of America by a check drawn on the account of
the Company and sent via overnight courier service to such Person at such
address as previously provided to the Company in writing (which address, in the
case of each of the Purchasers, shall initially be as set forth on the Schedule
of Buyers attached to the Securities Purchase Agreement); provided that the
Holder may elect to receive a payment of cash via wire transfer of immediately
available funds by providing the Company with prior written notice setting out
such request and the Holder’s wire transfer instructions. Whenever any amount
expressed to be due by the terms of this Note is due on any day which is not a
Business Day, the same shall instead be due on the next succeeding day which is
a Business Day and, in the case of any Interest Date which is not the date on
which this Note is paid in full, the extension of the due date thereof shall
not be taken into account for purposes of determining the amount of Interest
due on such date. Any amount of Principal or other amounts due under the
Transaction Documents, other than Interest, which is not paid when due shall
result in a late charge being incurred and payable by the Company in an amount
equal to interest on such amount at the rate of eighteen percent (18%) per
annum from the date such amount was due until the same is paid in full (“Late Charge”).

 

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

 

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

 

(28)         GOVERNING LAW. This Note shall be construed and enforced
in accordance with, and all questions concerning the construction, validity,
interpretation and performance of this Note shall be governed by, the internal
laws of the State of New York, without giving effect to any choice of law or
conflict of law provision or rule (whether of the 

 

26

 

State of
New York or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of New York. The Company hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in The City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper. Nothing contained herein
shall be deemed to limit in any way any right to serve process in any manner
permitted by law. In the event that any provision of this Note is invalid or unenforceable
under any applicable statute or rule of law, then such provision shall be
deemed inoperative to the extent that it may conflict therewith and shall be
deemed modified to conform with such statute or rule of law. Any such provision
which may prove invalid or unenforceable under any law shall not affect the
validity or enforceability of any other provision of this Note. Nothing
contained herein shall be deemed or operate to preclude the Holder from
bringing suit or taking other legal action against the Company in any other
jurisdiction to collect on the Company’s obligations to the Holder, to realize
on any collateral or any other security for such obligations, or to enforce a
judgment or other court ruling in favor of the Holder. THE COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY
HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY
DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY
TRANSACTION CONTEMPLATED HEREBY.

 

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

 

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

 

(b)           “Average
Market Price” means, for any given date, the arithmetic average of
the Weighted Average Price of the Common Stock during the ten (10) consecutive
Trading Day period ending on the third (3rd )
Trading Day immediately prior to such given date, as appropriately adjusted for
any stock split, stock dividend, stock combination or other similar transaction
that proportionately decreases or increases the Common Stock during such
period.

 

(c)           “Bloomberg”
means Bloomberg Financial Markets.

 

(d)           “Business
Day” means any day other than Saturday, Sunday or other day on which
commercial banks in The City of New York are authorized or required by law to
remain closed.

 

(e)           “Calendar
Quarter” means each of: the period beginning on and including
January 1 and ending on and including March 31; the period beginning on and
including April 1 and ending on and including June 30; the period beginning on
and including 

 

27

 

July 1
and ending on and including September 30; and the period beginning on and
including October 1 and ending on and including December 31.

 

(f)            “Change
of Control” means any Fundamental Transaction other than (i) any
reorganization, recapitalization or reclassification of the Common Stock or
business combination in which the Company is the publicly traded surviving
entity in which holders of the Company’s voting power immediately prior to such
reorganization, recapitalization or reclassification or business combination
continue after such reorganization, recapitalization or reclassification or
business combination to hold publicly traded securities and, directly or
indirectly, the voting power of the surviving entity or entities necessary to
elect a majority of the members of the board of directors (or their equivalent
if other than a corporation) of such entity or entities (except where Apollo
Resources International or its affiliates becomes the “beneficial owner” (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 70%
or greater of the aggregate Voting Stock of the Company), or (ii) pursuant to a
migratory merger effected solely for the purpose of changing the jurisdiction
of incorporation of the Company.

 

(g)           “Change
of Control Consideration” means, for any Change of Control, an
amount, if any, equal to the sum of the aggregate cash consideration and the
aggregate cash value of any marketable securities per share of Common Stock to
be paid to the holders of the Common Stock upon consummation of such Change of
Control, with any such non-cash consideration to be valued at the higher of the
Closing Sale Price of such securities as of the Trading Day immediately prior
to the consummation of the Change of Control, the Closing Sale Price on the
Trading Day immediately following the public announcement of such proposed
Change of Control and the Closing Sale Price of on the Trading Day immediately
prior to the public announcement of such proposed Change of Control.

 

(h)           “Change
of Control Redemption Premium” means (i) for Change of Control
Notice delivered or required to be delivered in connection with a Change of
Control prior to the third (3rd) anniversary of the Issuance Date, 125%
and (ii) for any Change of Control Notice delivered or required to be delivered
in connection with a Change of Control following the third (3rd)
anniversary of the Issuance Date, 115%; provided, however, that, in connection
with any Change of Control in which the Change of Control Consideration equals
or exceeds $8.00 per share, then the Change of Control Redemption Premium shall
equal 100%.

 

(i)            “Closing
Bid Price” and “Closing Sale Price”
means, for any security as of any date, the last closing bid price and last
closing trade price, respectively, for such security on the Principal Market,
as reported by Bloomberg, or, if the Principal Market begins to operate on an
extended hours basis and does not designate the closing bid price or the
closing trade price, as the case may be, then the last bid price or last trade
price, respectively, of such security prior to 4:00:00 p.m., New York Time, as
reported by Bloomberg, or, if the Principal Market is not the principal
securities exchange or trading market for such security, the last closing bid
price or last trade price, respectively, of such security on the principal
securities exchange or trading market where such security is listed or traded
as reported by Bloomberg, or if the foregoing do not apply, the last closing
bid price or last trade price, respectively, of such security in the
over-the-counter market on the electronic bulletin board for such security as
reported by Bloomberg, or, if no closing bid price or last trade price,
respectively, is reported for such security by Bloomberg, the average of the
bid prices, or the ask prices, respectively, of any 

 

28

 

market
makers for such security as reported in the “pink sheets” by Pink Sheets LLC
(formerly the National Quotation Bureau, Inc.). If the Closing Bid Price or the
Closing Sale Price cannot be calculated for a security on a particular date on
any of the foregoing bases, the Closing Bid Price or the Closing Sale Price, as
the case may be, of such security on such date shall be the fair market value
as mutually determined by the Company and the Holder. If the Company and the
Holder are unable to agree upon the fair market value of such security, then
such dispute shall be resolved pursuant to Section 24. All such determinations
to be appropriately adjusted for any stock dividend, stock split, stock
combination or other similar transaction during the applicable calculation
period.

 

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

 

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

 

(l)            “Company
Conversion Price” means, the lower of (i) the applicable Conversion
Price and (ii) that price which shall be computed as 90% of the arithmetic
average of the Weighted Average Price of the Common Stock on each of the five
(5) consecutive Trading Days immediately preceding the applicable Installment
Date (each such period, a “Company Conversion
Measuring Period”). All such determinations to be appropriately
adjusted for any stock split, stock dividend, stock combination or other
similar transaction during such Company Conversion Measuring Period.

 

(m)          “Consolidated
Net Income” means, for any applicable period, the net income (loss)
of the Company and its Subsidiaries for such period, determined on a
consolidated basis and in accordance with GAAP, but excluding from the
determination of Consolidated Net Income (without duplication) (a) any
extraordinary or non recurring gains or losses or gains or losses from
Dispositions, (b) restructuring charges, (c) any tax refunds, net operating
losses or other net tax benefits, (d) effects of discontinued operations and
(e) interest income (including interest paid-in-kind).

 

(n)           “Consolidated
Net Interest Expense” means, for any applicable period, gross
interest expense of the Company and its Subsidiaries for such period determined
on a consolidated basis and in accordance with GAAP, less (i) the sum of (A)
interest income for such period and (B) gains for such period on Hedging
Agreements (to the extent not included in interest income above and to the
extent not deducted in the calculation of gross interest expense), plus (ii)
the sum of (A) losses for such period on Hedging Agreements (to the extent not
included in gross interest expense) and (B) the upfront costs or fees for such
period associated with Hedging Agreements (to the extent not included in gross
interest expense), in each case, determined on a consolidated basis and in
accordance with GAAP.

 

29

 

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

 

(p)           “Convertible
Securities” means any stock or securities (other than Options)
directly or indirectly convertible into or exercisable or exchangeable for
Common Stock.

 

(q)           “EBITDA”
means, with respect to any Person and its Subsidiaries for any applicable
Fiscal Quarters, the Consolidated Net Income of such Person and its
Subsidiaries as set forth in the financial statements of the Company contained
in the Form 10-QSB or Form 10-KSB of the Company for the applicable Fiscal
Quarter, plus without
duplication, the sum of the following amounts of the Company and its
Subsidiaries for such period to the extent deducted in determining Consolidated
Net Income of such Persons for such period: 
(i) Consolidated Net Interest Expense, (ii) income tax expense, (iii)
depreciation expense and (iv) amortization expense.

 

(r)            “EBITDA
Threshold” means:

 

(i)            (A) $30.0 million of LTM Consolidated
EBITDA reported for the Fiscal Quarter ending December 31, 2007 or (B) $27.5
million of LTM Consolidated EBITDA reported for the Fiscal Quarter ending
December 31, 2007 with at least $10.0 million in EBITDA reported for the Fiscal
Quarter ending December 31, 2007;

 

(ii)           $35.0 million of LTM Consolidated EBITDA
reported for the Fiscal Quarter ending March 31, 2008 or $11.5 million in
EBITDA reported for the Fiscal Quarter ending March 31, 2008;

 

(iii)          $45.0 million of LTM Consolidated EBITDA
reported for the Fiscal Quarter ending June 30, 2008 or $17.5 million in EBITDA
reported for the Fiscal Quarter ending June 30, 2008;

 

(iv)          $50.0 million of LTM Consolidated EBITDA
reported for the Fiscal Quarter ending September 30, 2008 or $17.5 million in
EBITDA reported for the Fiscal Quarter ending September 30, 2008; and

 

(v)           $60.0 million of LTM Consolidated EBITDA
reported for the Fiscal Quarter ending December 31, 2008 or $25.0 million in
EBITDA reported for the Fiscal Quarter ending December 31, 2008.

 

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

 

30

 

(t)            “Equity
Conditions” means that each of the following conditions is
satisfied:  (i) on each day during the
period beginning three (3) months prior to the applicable date of determination
and ending on and including the applicable date of determination (the “Equity Conditions Measuring Period”),
either (x) the Registration Statement filed pursuant to the Registration Rights
Agreement shall be effective and available for the resale of all remaining
Registrable Securities in accordance with the terms of the Registration Rights
Agreement and there shall not have been for the one (1) month period ending on
and including the date immediately preceding the applicable date of
determination any Grace Periods (as defined in the Registration Rights
Agreement) or (y) all shares of Common Stock issuable upon conversion of the
Notes and exercise of the Warrants shall be eligible for sale without
restriction and without the need for registration under any applicable federal
or state securities laws; (ii) on each day during the Equity Conditions Measuring
Period, the Common Stock is designated for quotation on the Principal Market or
any other Eligible Market and shall not have been suspended from trading on
such exchange or market (other than suspensions of not more than two (2) days
and occurring prior to the applicable date of determination due to business
announcements by the Company) nor shall delisting or suspension by such
exchange or market been threatened or pending either (A) in writing by such
exchange or market or (B) by falling below the then effective minimum listing
maintenance requirements of such exchange or market; (iii) during the Equity
Conditions Measuring Period, the Company shall have delivered Conversion Shares
upon conversion of the Notes and Warrant Shares upon exercise of the Warrants
to the holders on a timely basis as set forth in Section 3(c)(ii) hereof (and
analogous provisions under the Other Notes) and Section 2(a) of the Warrants;
(iv) any applicable shares of Common Stock to be issued in connection with the
event requiring determination may be issued in full without violating Section
3(d) hereof and the rules or regulations of any applicable Eligible Market; (v)
for the two (2) Calendar Quarters immediately preceding the applicable date of
determination, the Company shall not have failed to timely make any payments
within five (5) Business Days of when such payment is due pursuant to any
Transaction Document; (vi) during the Equity Conditions Measuring Period, there
shall not have occurred either (A) the public announcement of a pending,
proposed or intended Fundamental Transaction which has not been abandoned,
terminated or consummated, or (B) an Event of Default or (C) an event that with
the passage of time or giving of notice would constitute an Event of Default;
(vii) the Company shall have no knowledge of any fact that would cause (x) the
Registration Statements required pursuant to the Registration Rights Agreement
not to be effective and available for the resale of all remaining Registrable
Securities in accordance with the terms of the Registration Rights Agreement or
(y) any shares of Common Stock issuable upon conversion of the Notes and shares
of Common Stock issuable upon exercise of the Warrants not to be eligible for
sale without restriction pursuant to Rule 144(k) and any applicable state
securities laws; and (viii) during the six (6) month period ending on and
including the date immediately preceding the applicable date of determination,
the Company otherwise shall have been in material compliance with and shall not
have materially breached any provision, covenant, representation or warranty of
any Transaction Document.

 

(u)           “Equity
Conditions Failure” means that (i) on any day during the period
commencing ten (10) Trading Days prior to the applicable Conversion Date
through the applicable Share Delivery Date, (ii) on any day during the period
commencing ten (10) Trading Days prior to the applicable Company Installment
Notice Date through the applicable Installment Date or (ii) on any day during
the period commencing ten (10) Trading Days prior to the 

 

31

 

applicable
Mandatory Conversion Notice Date through the applicable Mandatory Conversion
Date, the Equity Conditions have not been satisfied (or waived in writing by
the Holder).

 

(v)           “Equity
Value Redemption Premium” means (i) for any Change of Control Notice
or Event of Default Notice, as applicable, delivered or required to be
delivered in connection with a Change of Control or Event of Default, as
applicable, prior to the third (3rd) anniversary of the Issuance Date, 115%
and (ii) for any Change of Control Notice or Event of Default Notice, as
applicable, delivered or required to be delivered in connection with a Change
of Control or Event of Default, as applicable, following the third (3rd)
anniversary of the Issuance Date, 110%; provided, however, that, in connection
with any Change of Control in which the Change of Control Consideration equals
or exceeds $8.00 per share, then the Equity Value Redemption Premium shall
equal 100%.

 

(w)          “Excluded
Securities” means any Common Stock issued or issuable: (i) in
connection with any Approved Stock Plan; (ii) upon conversion, adjustment or
redemption of the Notes or the exercise of the Warrants; (iii) pursuant to a
bona fide firm commitment underwritten public offering with a nationally
recognized underwriter which generates gross proceeds to the Company in excess
of $50,000,000 (other than an “at-the-market offering” as defined in Rule
415(a)(4) under the 1933 Act and “equity lines”); (iv) in connection with any
acquisition by the Company, whether through an acquisition of stock or a merger
of any business, assets or technologies the primary purpose of which is not to
raise equity capital; (v) in connection with any other strategic transaction or
alliance the primary purpose of which is not to raise equity capital including
without limitation, the issuance of no more than 10,000,000 shares of Common
Stock to agricultural conglomerates and (vii) upon conversion or exercise of any
Options or Convertible Securities which are outstanding on the day immediately
preceding the Subscription Date, provided that the conversion or exercise price
of such Options or Convertible Securities is not amended, modified or changed
on or after the Subscription Date.

 

(x)            “First
Conversion Threshold Conversion Amount” means an amount equal to (x)
50% of the Conversion Amount of this Note on the Issuance Date minus (y)
the aggregate Conversion Amount of this Note converted or redeemed pursuant to
the terms of this Note.

 

(y)           “Fiscal
Quarter” means each of
the fiscal quarters adopted by the Company for financial reporting purposes
that correspond to the Company’s fiscal year that ends on December 31, or such
other fiscal quarter adopted by the Company for financial reporting purposes in
accordance with GAAP.

 

(z)            “Fundamental
Transaction” means that the Company shall, directly or indirectly,
in one or more related transactions, (i) consolidate or merge with or into
(whether or not the Company is the surviving corporation) another Person or
Persons, or (ii) sell, assign, transfer, convey or otherwise dispose of all or
substantially all of the properties or assets of the Company to another Person,
or (iii) allow another Person to make a purchase, tender or exchange offer that
is accepted by the holders of more than 50% of the outstanding shares of Voting
Stock (not including any shares of Voting Stock held by the Person or Persons
making or party to, or associated or affiliated with the Persons making or party
to, such purchase, tender or exchange offer), or (iv) consummate a stock
purchase agreement or other business combination 

 

32

 

(including,
without limitation, a reorganization, recapitalization, spin-off or scheme of
arrangement) with another Person whereby such other Person acquires more than
the 50% of the outstanding shares of Voting Stock (not including any shares of
Voting Stock held by the other Person or other Persons making or party to, or
associated or affiliated with the other Persons making or party to, such stock
purchase agreement or other business combination), or (v) reorganize,
recapitalize or reclassify its Common Stock, or (vi) any “person” or “group”
(as these terms are used for purposes of Sections 13(d) and 14(d) of the
Exchange Act) (other than Apollo Resources International) is or shall become
the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of 50% of the aggregate Voting Stock of the Company, or
(vii) Apollo Resources International ceases to be the “beneficial owner” (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of at
least 50% of the aggregate Voting Stock of the Company, or (viii) Apollo
Resources International or its affiliates becomes the “beneficial owner” (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 70%
or greater of the aggregate Voting Stock of the Company.

 

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

 

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

 

(cc)         “Indebtedness”
of any Person means, without duplication (i) all indebtedness for borrowed
money, (ii) all obligations issued, undertaken or assumed as the deferred
purchase price of property or services, including (without limitation) “capital
leases” in accordance with GAAP (other than trade payables entered into in the
ordinary course of business), (iii) all reimbursement or payment obligations
with respect to letters of credit, surety bonds and other similar instruments,
(iv) all obligations evidenced by notes, bonds, debentures or similar
instruments, including obligations so evidenced incurred in connection with the
acquisition of property, assets or businesses, (v) all indebtedness created or
arising under any conditional sale or other title retention agreement, or
incurred as financing, in either case with respect to any property or assets
acquired with the proceeds of such indebtedness (even though the rights and
remedies of the seller or bank under such agreement in the event of default are
limited to repossession or sale of such property), (vi) all monetary
obligations under any leasing or similar arrangement which, in connection with
GAAP, consistently applied for the periods covered thereby, is classified as a
capital lease, (vii) all indebtedness referred to in clauses (i) through (vi)
above secured by (or for which the holder of such Indebtedness has an existing
right, contingent or otherwise, to be secured by) any mortgage, lien, pledge,
charge, security interest or other encumbrance upon or in any property or
assets (including accounts and contract rights) owned by any Person, even
though the Person which owns such assets or property has not assumed or become
liable for the payment of such indebtedness, and (viii) all Contingent
Obligations in respect of indebtedness or obligations of others of the kinds
referred to in clauses (i) through (vii) above.

 

(dd)         “Installment
Amount” means with respect to any Installment Date, the lesser of
(A) the product of (i) $[         ], multiplied
by (ii) Holder Pro Rata Amount 

 

33

 

and (B)
the Principal amount under this Note as of such Installment Date, as any such
Installment Amount may be reduced pursuant to the terms of this Note, whether
upon conversion, redemption or otherwise, together with, in each case the sum
of any accrued and unpaid Interest with respect to such Principal amount and
accrued and unpaid Late Charges, if any, with respect to such Principal amount
and Interest. In the event the Holder shall sell or otherwise transfer any
portion of this Note, the transferee shall be allocated a pro rata portion of
the each unpaid Installment Amount hereunder.

 

(ee)         “Installment
Date” means each of the following dates: (i) March 31, 2007, (ii)
June 30, 2007, (iii) September 31, 2007, (iv) December 31, 2007, (v) March 31,
2008, (vi) June 30, 2008, (vii) September 31, 2008, (viii) December 31, 2008,
(ix) March 31, 2009, (x) June 30, 2009, (xi) September 31, 2009, (xii) December
31, 2009, (xiii) March 31, 2010, (xiv) June 30, 2010, (xv) September 31, 2010,
(xvi) December 31, 2010, (xvii) March 31, 2011 and (xviii) the earlier of the
Maturity Date and June 30, 2011.

 

(ff)           “Installment
Volume Limitation” means 15% of the aggregate dollar trading volume
(as reported on Bloomberg) of the Common Stock on the Principal Market over the
forty (40) consecutive Trading Day period ending on the Trading Day immediately
preceding the applicable Installment Notice Date.

 

(gg)         “Interest
Rate” means, initially eight
percent (8.0%) per annum, subject to adjustment at the beginning of each
Calendar Quarter beginning with the Calendar Quarter ended March 31, 2007 in
the event that the Interest Rate Conditions are satisfied as of the applicable
Calendar Quarter, then in which case the Interest Rate shall equal six percent
(6.0%) per annum thereafter.

 

(hh)         “Interest
Rate Conditions” means that (i) the Equity Conditions are presently
satisfied (or waived in writing by the Holder) and (ii) the Company has
reported LTM Consolidated EBITDA in excess of $40,000,000.

 

(ii)           “Letter
of Credit Amount” means, as of any date of determination, an amount
equal to 30% of the aggregate Principal Amount outstanding under the Notes.

 

(jj)           “LTM
Consolidated EBITDA” means, with respect to any Person, the
aggregate Consolidated Net Income of such Person and its Subsidiaries for the
current Fiscal Quarter and the immediately preceding three (3) Fiscal Quarters
but only if and as set forth in the financial statements of the Company
contained in the Form 10-QSB or Form 10-KSB of the Company; plus without
duplication, the sum of the following amounts of such Person and its
Subsidiaries for such period and to the extent deducted in determining
Consolidated Net Income of such Person for such period:  (i) Consolidated Net Interest Expense, (ii)
income tax expense, (iii) depreciation expense, and (iv) amortization
expense.

 

(kk)         “Make-Whole
Amount” means, as to any Conversion Amount being converted pursuant
to Section 3(c) or pursuant to Section 9, an amount equal to the difference
between (i) an amount of Interest that, but for the applicable conversion,
would have been paid to the Holder on such Conversion Amount from the Issuance
Date through the third 

 

34

 

(3rd)
anniversary of the Issuance Date and (ii) the amount of Interest already paid
to the Holder from the Issuance Date through the Conversion Date or Mandatory
Conversion Date, as applicable with respect to that Conversion Amount.

 

(ll)           “Make-Whole
Conversion Price” means that price which shall be the lower of (i)
the applicable Conversion Price and (ii) the price computed as 90% of the
arithmetic average of the Weighted Average Price of the Common Shares during
the five (5) consecutive Trading Day period ending on the Trading Day
immediately preceding the Conversion Date or Mandatory Conversion Notice Date,
as applicable (each, a “Make-Whole Conversion
Measuring Period”). All such determinations to be appropriately
adjusted for any stock split, stock dividend, stock combination or other
similar transaction during such Make-Whole Conversion Period.

 

(mm)       “Mandatory
Conversion Volume Limitation” means 25% of the aggregate dollar
trading volume (as reported on Bloomberg) of the Common Stock on the Principal
Market over the thirty (30) consecutive Trading Day period prior to the
applicable Mandatory Conversion Notice Date.

 

(nn)         “Net
Cash Balance” means, at any date, (i) an amount equal to the
aggregate amount of cash, cash equivalents (including cash collateralizing the
Letter of Credit and not including other restricted cash) and marketable
securities, consisting of corporate bonds, commercial paper and medium-term
notes, as shown or reflected in the notes to the Company’s consolidated balance
sheet as at such date minus
(ii) the unpaid principal balance of any Indebtedness for borrowed money
(excluding Indebtedness under the Notes and accounts payable).

 

(oo)         “Options”
means any rights, warrants or options to subscribe for or purchase shares of
Common Stock or Convertible Securities.

 

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

 

(qq)         “Permitted
Indebtedness” means (i) from the Issuance Date through December 31,
2007, total Indebtedness of the Company not to exceed $25.0 million in the
aggregate outstanding at any one time; (ii) on and after January 1, 2008, total
aggregate Indebtedness of the Company that does not as of the date on which any
such Indebtedness is incurred, or as of the end of any Fiscal Quarter, exceed
3.0x LTM Consolidated EBITDA; provided, however, that such Indebtedness
permitted pursuant to clauses (i) and (ii) hereof, shall be made expressly
subordinate in right of payment to the Indebtedness evidenced by this Note, as
reflected in a written agreement acceptable to the Required Holders and
approved by the Required Holders in writing, and which Indebtedness does not
provide at any time for (A) the payment, prepayment, repayment, repurchase or
defeasance, directly or indirectly, of any principal or premium, if any,
thereon until ninety-one (91) days after the Maturity Date or later and (B)
total interest and fees at a rate in excess of the initial Interest Rate per
annum; (iii) 

 

35

 

Indebtedness
of any Subsidiary that is non-recourse to the Company or any other Subsidiary;
(iv) Indebtedness incurred in connection with the build up of a Shell terminal
which Indebtedness shall not exceed twenty percent (20.0%) of the total cost of
such build up project and which Indebtedness may only be secured by such Shell
terminal being financed; (v) Indebtedness represented by that certain municipal
bond financing for the Company’s facility in Bell Chase, Louisiana which
Indebtedness shall be non-recourse to the Company and (vi) the Indebtedness
evidenced by this Note and the Other Notes.

 

(rr)           “Permitted
Liens” means (i) any Lien for taxes not yet due or delinquent or
being contested in good faith by appropriate proceedings for which adequate
reserves have been established in accordance with GAAP, (ii) any statutory Lien
arising in the ordinary course of business by operation of law with respect to
a liability that is not yet due or delinquent, (iii) any Lien created by
operation of law, such as materialmen’s liens, mechanics’ liens and other
similar liens, arising in the ordinary course of business with respect to a
liability that is not yet due or delinquent or that are being contested in good
faith by appropriate proceedings, (v) Liens (A) upon or in any equipment (as
defined in the Security Agreement) acquired or held by the Company or any of
its Subsidiaries to secure the purchase price of such equipment or indebtedness
incurred solely for the purpose of financing the acquisition or lease of such
equipment, or (B) existing on such equipment at the time of its acquisition,
provided that the Lien is confined solely to the property so acquired and
improvements thereon, and the proceeds of such equipment, (v) Liens on
Permitted Indebtedness of the type described in clauses (iii) and (iv) of the
definition thereof; (vi) Liens incurred in connection with the extension,
renewal or refinancing of the indebtedness secured by Liens of the type
described in clauses (i) and (v) above, provided that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the Indebtedness being extended, renewed or
refinanced does not increase, (vii) leases or subleases and licenses and
sublicenses granted to others in the ordinary course of the Company’s business,
not interfering in any material respect with the business of the Company and
its Subsidiaries taken as a whole, (viii) Liens in favor of customs and
revenue authorities arising as a matter of law to secure payments of custom
duties in connection with the importation of goods, and (ix) Liens arising from
judgments, decrees or attachments in circumstances not constituting an Event of
Default under Section 4(a)(ix).

 

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

 

(tt)           “Principal
Market” means the OTC Bulletin Board.

 

(uu)         “Redemption
Premium” means (i) in the case of the Events of Default described in
Section 4(a)(i) - (vi) and (ix) - (xii), 120% or (ii) in the case of the Events
of Default described in Section 4(a)(vii) - (viii), 100%.

 

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

 

36

 

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

 

(xx)          “Reserved
Amount” means, as of any date of determination, an amount equal to
35% of the aggregate Principal amount outstanding under all of the Notes.

 

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

 

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

 

(aaa)       “Subscription
Date” means July 24, 2006.

 

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

 

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

 

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

 

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

 

(fff)         “Weighted
Average Price” means, for any security as of any date, the dollar
volume-weighted average price for such security on the Principal Market during
the period beginning at 9:30:01 a.m., New York Time (or such other time as the
Principal Market publicly announces is the official open of trading), and
ending at 4:00:00 p.m., New York Time (or such other time as the Principal
Market publicly announces is the official close of trading) as reported by
Bloomberg through its “Volume at Price” functions, or, if the foregoing does
not apply, the dollar volume-weighted average price of such security in the
over-the-counter market 

 

37

 

on the
electronic bulletin board for such security during the period beginning at
9:30:01 a.m., New York Time (or such other time as such market publicly
announces is the official open of trading), and ending at 4:00:00 p.m., New
York Time (or such other time as such market publicly announces is the official
close of trading) as reported by Bloomberg, or, if no dollar volume-weighted
average price is reported for such security by Bloomberg for such hours, the
average of the highest closing bid price and the lowest closing ask price of
any of the market makers for such security as reported in the “pink sheets” by
Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If the Weighted
Average Price cannot be calculated for a security on a particular date on any
of the foregoing bases, the Weighted Average Price of such security on such
date shall be the fair market value as mutually determined by the Company and
the Required Holders. If the Company and the Required Holders are unable to
agree upon the fair market value of such security, then such dispute shall be
resolved pursuant to Section 24. All such determinations to be appropriately
adjusted for any stock dividend, stock split, stock combination or other
similar transaction during the applicable calculation period.

 

(30)         DISCLOSURE. Upon receipt or delivery by the Company of any
notice in accordance with the terms of this Note, unless the Company has in
good faith determined that the matters relating to such notice do not
constitute material, nonpublic information relating to the Company or its
Subsidiaries, the Company shall within two (2) Business Days after any such
receipt or delivery publicly disclose such material, nonpublic information on a
Current Report on Form 8-K or otherwise. In the event that the Company believes
that a notice contains material, nonpublic information relating to the Company
or its Subsidiaries, the Company so shall indicate to such Holder
contemporaneously with delivery of such notice, and in the absence of any such
indication, the Holder shall be allowed to presume that all matters relating to
such notice do not constitute material, nonpublic information relating to the
Company or its Subsidiaries. In the event of a breach of the foregoing covenant
by the Company, any of its Subsidiaries, or any of its or their respective
officers, directors, employees and agents, in addition to any other remedy
provided herein or in the Transaction Documents, a Holder shall have the right
to make a public disclosure, in the form of a press release, public
advertisement or otherwise, of such material, nonpublic information without the
prior approval by the Company, its Subsidiaries, or any of its or their
respective officers, directors, employees or agents. No Holder shall have any
liability to the Company, its Subsidiaries, or any of its or their respective
officers, directors, employees, stockholders or agents for any such disclosure.

 

[Signature Page Follows]

 

38

 

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

 

 

	
   

  	
  EARTH BIOFUELS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

EXHIBIT I

EARTH BIOFUELS, INC.

CONVERSION NOTICE

 

Reference
is made to the Senior Convertible Note (the “Note”)
issued to the undersigned by Earth Biofuels, Inc. (the “Company”). In accordance with and pursuant
to the Note, the undersigned hereby elects to convert the Conversion Amount (as
defined in the Note) of the Note indicated below into shares of Common Stock
par value $0.001 per share (the “Common Stock”)
of the Company, as of the date specified below.

 

	
   

  	
  Date
  of Conversion:

  	
   

  
	
   

  	
   

  
	
   

  	
  Aggregate
  Conversion Amount to be converted:

  	
   

  
	
   

  	
   

  
	
  Please
  confirm the following information:

  
	
   

  	
   

  
	
   

  	
  Conversion
  Price:

  	
   

  
	
   

  	
   

  
	
   

  	
  Number
  of shares of Common Stock to be issued:

  	
   

  
	
   

  	
   

  
	
  Please
  issue the Common Stock into which the Note is being converted in the
  following name and to the following address:

  
	
   

  	
   

  
	
   

  	
  Issue
  to:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Facsimile
  Number:

  	
   

  
	
   

  	
   

  
	
   

  	
  Authorization:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
  Dated:

  	
   

  
	
   

  	
   

  
	
   

  	
  Account
  Number:

  	
   

  
	
   

  	
    (if
  electronic book entry transfer)

  
	
   

  	
   

  
	
   

  	
  Transaction
  Code Number:

  	
   

  
	
   

  	
    (if
  electronic book entry transfer)

  
	
  Installment
  Amounts to be reduced and amount of reduction:

  	
   

  	
   

  
																		

 

 

ACKNOWLEDGMENT

 

The
Company hereby acknowledges this Conversion Notice and hereby directs Nevada
Agency and Trust Company to issue the above indicated number of shares of
Common Stock in accordance with the Transfer Agent Instructions dated
July    , 2006 from the Company and acknowledged and agreed
to by Nevada Agency and Trust Company.

 

 

	
   

  	
  EARTH BIOFUELS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:Exhibit 4.4

 

[FORM OF WARRANT]

 

NEITHER THE ISSUANCE AND SALE OF THE
SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT
BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE
TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS
SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE
FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES. ANY
TRANSFEREE OF THIS WARRANT SHOULD CAREFULLY REVIEW THE TERMS OF THIS WARRANT,
INCLUDING SECTION 7(d) HEREOF.

 

EARTH BIOFUELS, INC.

 

WARRANT TO PURCHASE COMMON STOCK

 

Warrant No.:           

Number of Shares of Common Stock:
                     

Date of Issuance: July 24, 2006 (“Issuance
Date”)

 

Earth Biofuels, Inc., a Delaware corporation (the “Company”), hereby certifies that, for good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, [BUYERS], the registered holder hereof or its permitted assigns
(the “Holder”), is entitled,
subject to the terms set forth below, to purchase from the Company, at the
Exercise Price (as defined below) then in effect, upon surrender of this
Warrant to Purchase Common Stock (including any Warrants to Purchase Common
Stock issued in exchange, transfer or replacement hereof, the “Warrant”), at any time or times on or after
the date hereof, but not after 11:59 p.m., New York time, on the Expiration
Date (as defined below),                              
(                        )(1)
fully paid nonassessable shares of Common Stock (as defined below) (the “Warrant
Shares”). Except as otherwise defined herein, capitalized terms in
this Warrant shall have the meanings set forth in Section 15. This Warrant is
one of the Warrants to purchase Common Stock (the “SPA Warrants”) issued pursuant to Section 1 of that certain
Securities Purchase Agreement, dated as of July 24, 2006 (the “Subscription Date”), by and among the
Company and the investors (the “Buyers”)
referred to therein (the “Securities Purchase
Agreement”).

 

(1)                                  Insert
number of shares equal to (x) 50% of the principal amount of Notes issued to
Holder pursuant to the Securities Purchase Agreement divided by (y) the
Conversion Price (as defined in the Notes).

 

 

1.                                       EXERCISE OF
WARRANT.

 

(a)                                  Mechanics of
Exercise. Subject to the terms and conditions hereof
(including, without limitation, the limitations set forth in Section 1(f)),
this Warrant may be exercised by the Holder on any day on or after the date
hereof, in whole or in part, by (i) delivery of a written notice, in the
form attached hereto as Exhibit A (the “Exercise Notice”), of the Holder’s election to exercise this
Warrant (accompanied by the attached Warrant Shares Exercise Log) to the
Company (with a copy to its legal counsel) and (ii) (A) payment to the
Company of an amount equal to the applicable Exercise Price multiplied by the
number of Warrant Shares as to which this Warrant is being exercised (the “Aggregate Exercise Price”) in cash or by
wire transfer of immediately available funds or (B) by notifying the Company
that this Warrant is being exercised pursuant to a Cashless Exercise (as defined
in Section 1(d)). The Holder shall not be required to deliver the original
Warrant in order to effect an exercise hereunder. Execution and delivery of the
Exercise Notice with respect to less than all of the Warrant Shares shall have
the same effect as cancellation of the original Warrant and issuance of a new
Warrant evidencing the right to purchase the remaining number of Warrant Shares.
On or before the first (1st) Business Day following the date on which the Company has received
each of the Exercise Notice and the Aggregate Exercise Price (or notice of a
Cashless Exercise) (the “Exercise Delivery
Documents”), the Company shall transmit by facsimile an
acknowledgment of confirmation of receipt of the Exercise Delivery Documents to
the Holder and the Company’s transfer agent (the “Transfer Agent”). For purposes hereof, any Exercise Delivery
Documents delivered on or after 5:00 p.m., New York City time shall be deemed
to have been delivered on the next Business Day. On or before the third (3rd) Business Day following the
date on which the Company has received all of the Exercise Delivery Documents
(the “Share Delivery Date”), the
Company shall (X) if legends are not required to be placed on certificates of
Common Stock pursuant to the Securities Purchase Agreement and provided that
the Transfer Agent is participating in The Depository Trust Company (“DTC”) Fast Automated Securities Transfer
Program, upon the request of the Holder, credit such aggregate number of
Warrant Shares to which the Holder is entitled pursuant to such exercise to the
Holder’s or its designee’s balance account with DTC through its Deposit
Withdrawal Agent Commission system, or (Y) if the Transfer Agent is not
participating in the DTC Fast Automated Securities Transfer Program, issue and
dispatch by overnight courier to the address as specified in the Exercise
Notice, a certificate, registered in the Company’s share register in the name
of the Holder or its designee, for the number of shares of Common Stock to
which the Holder is entitled pursuant to such exercise which certificates shall
not bear any restrictive legends unless required pursuant to Section 2(g) of
the Securities Purchase Agreement. Upon delivery of the Exercise Delivery
Documents, the Holder shall be deemed for all corporate purposes to have become
the holder of record of the Warrant Shares with respect to which this Warrant
has been exercised, irrespective of the date such Warrant Shares are credited
to the Holder’s DTC account or the date of delivery of the certificates evidencing
such Warrant Shares as the case may be. If this Warrant is submitted in
connection with any exercise pursuant to this Section 1(a) and the number of
Warrant Shares represented by this Warrant submitted for exercise is greater
than the number of Warrant Shares being acquired upon an exercise, then the
Company shall as soon as practicable and in no event later than three Business
Days after any exercise and at its own expense, issue subject to such prior
exercise a new Warrant (in accordance with Section 7(d)) representing the right
to purchase the number of Warrant Shares purchasable immediately prior to such
exercise under this Warrant, less the number of Warrant Shares with respect to
which this Warrant is

 

2

 

exercised. No fractional
shares of Common Stock are to be issued upon the exercise of this Warrant, but
rather the number of shares of Common Stock to be issued shall be rounded up to
the nearest whole number. The Company shall pay any and all taxes which may be
payable with respect to the issuance and delivery of Warrant Shares upon
exercise of this Warrant.

 

(b)                                 Exercise Price. For purposes
of this Warrant, “Exercise Price”
means $2.90, subject to adjustment as provided herein.

 

(c)                                  Company’s
Failure to Timely Deliver Securities. If within three (3)
Trading Days after the Company’s receipt of the facsimile copy of a Exercise
Notice the Company shall fail to issue and deliver a certificate to the Holder
and register such shares of Common Stock on the Company’s share register or
credit the Holder’s balance account with DTC for the number of shares of Common
Stock to which the Holder is entitled upon the Holder’s exercise hereunder, and
if on or after such Trading Day the Holder purchases (in an open market
transaction or otherwise) shares of Common Stock to deliver in satisfaction of
a sale by the Holder of shares of Common Stock issuable upon such exercise that
the Holder anticipated receiving from the Company (a “Buy-In”), then the Company shall, within three (3) Trading
Days after the Holder’s request and in the Holder’s discretion, either (i) pay
cash to the Holder in an amount equal to the Holder’s total purchase price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased (the “Buy-In Price”), at
which point the Company’s obligation to deliver such certificate (and to issue
such Warrant Shares) shall terminate, or (ii) promptly honor its obligation to
deliver to the Holder a certificate or certificates or if legends are not
required to be placed on certificates of Common Stock pursuant to the
Securities Purchase Agreement, provided that the Transfer Agent is
participating in DTC Fast Automated Securities Transfer Program, upon the
request of the Holder, credit such aggregate number of Warrant Shares to which
the Holder is entitled pursuant to such exercise to the Holder’s or its
designee’s balance account with DTC through its Deposit Withdrawal Agent
Commission system and pay cash to the Holder in an amount equal to the excess
(if any) of the Buy-In Price over the product of (A) such number of shares of
Common Stock, times (B) the Closing Bid Price on the date of exercise.

 

(d)                                 Cashless
Exercise. Notwithstanding anything contained herein to the
contrary, if a Registration Statement (as defined in the Registration Rights
Agreement) covering the Warrant Shares that are the subject of the Exercise
Notice (the “Unavailable Warrant Shares”)
is not available for the resale of such Unavailable Warrant Shares at any time
during which such Registration Statement is required in accordance with the
Registration Rights Agreement, the Holder may, in its sole discretion during
such time, exercise this Warrant in whole or in part and, in lieu of making the
cash payment otherwise contemplated to be made to the Company upon such
exercise in payment of the Aggregate Exercise Price, elect instead to receive
upon such exercise the “Net Number” of shares of Common Stock determined
according to the following formula (a “Cashless
Exercise”):

 

3

 

	
  Net
  Number = (A x B) - (A x C)

  
	
   

  	
  B

  

 

For purposes of the foregoing formula:

 

A= the total number of shares with respect to which this Warrant is
then being exercised.

 

B= the Closing Sale Price of the shares of Common Stock (as reported by
Bloomberg) on the date immediately preceding the date of the Exercise Notice.

 

C= the Exercise Price then in effect for the applicable Warrant Shares
at the time of such exercise.

 

(e)                                  Disputes. In the case
of a dispute as to the determination of the Exercise Price or the arithmetic
calculation of the Warrant Shares, the Company shall promptly issue to the
Holder the number of Warrant Shares that are not disputed and resolve such
dispute in accordance with Section 12.

 

(f)                                    Limitations on
Exercises. 

 

(1)                                  Beneficial
Ownership. The Company shall not effect the exercise of this
Warrant, and the Holder shall not have the right to exercise this Warrant, to
the extent that after giving effect to such exercise, such Person (together
with such Person’s affiliates) would beneficially own in excess of 4.99% of the
shares of Common Stock outstanding immediately after giving effect to such
exercise. For purposes of the foregoing sentence, the aggregate number of
shares of Common Stock beneficially owned by such Person and its affiliates
shall include the number of shares of Common Stock issuable upon exercise of
this Warrant with respect to which the determination of such sentence is being
made, but shall exclude shares of Common Stock which would be issuable upon (i)
exercise of the remaining, unexercised portion of this Warrant beneficially
owned by such Person and its affiliates and (ii) exercise or conversion of the
unexercised or unconverted portion of any other securities of the Company
beneficially owned by such Person and its affiliates (including, without
limitation, any convertible notes or convertible preferred stock or warrants)
subject to a limitation on conversion or exercise analogous to the limitation
contained herein. Except as set forth in the preceding sentence, for purposes
of this paragraph, beneficial ownership shall be calculated in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended. For purposes
of this Warrant, in determining the number of outstanding shares of Common
Stock, the Holder may rely on the number of outstanding shares of Common Stock
as reflected in (1) the Company’s most recent Form 10-KSB, Form 10-QSB, Current
Report on Form 8-K or other public filing with the Securities and Exchange
Commission, as the case may be, (2) a more recent public announcement by the
Company or (3) any other notice by the Company or the Transfer Agent setting
forth the number of shares of Common Stock outstanding. For any reason at any
time, upon the written request of the Holder, the Company shall within

 

4

 

one
Business Day confirm in writing to the Holder the number of shares of Common
Stock then outstanding. In any case, the number of outstanding shares of Common
Stock shall be determined after giving effect to the conversion or exercise of
securities of the Company, including the SPA Securities and the SPA Warrants,
by the Holder and its affiliates since the date as of which such number of outstanding
shares of Common Stock was reported. By written notice to the Company, the
Holder may from time to time increase or decrease the Maximum Percentage to any
other percentage not in excess of 9.99% specified in such notice; provided that
(i) any such increase will not be effective until the sixty-first (61st) day after such notice is
delivered to the Company, and (ii) any such increase or decrease will apply
only to the Holder and not to any other holder of SPA Warrants.

 

(2)                                  Market
Regulation. The Company shall not be obligated to issue any
shares of Common Stock upon exercise of this Warrant, and the Holder of this
Warrant shall not have the right to receive upon exercise of this Warrant any
shares of Common Stock, 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, redemption or conversion, as applicable, of the SPA Warrants and SPA
Securities or otherwise without breaching the Company’s obligations under the
rules or regulations of the applicable Eligible Market (the number of shares
which may be issued without violating such rules and regulations, the “Exchange Cap”), except that such limitation
shall not apply in the event that the Company (A) obtains the approval of its
stockholders as required by the applicable rules of the applicable Eligible
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
Required Holders. Unless and until such approval or written opinion is
obtained, no Buyer shall be issued in the aggregate, upon exercise or
conversion, as applicable, of any SPA Warrants or SPA Securities, 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 underlying the SPA Warrants issued to such Buyer pursuant to
the Securities Purchase Agreement on the Issuance Date and the denominator of
which is the aggregate number of shares of Common Stock underlying the SPA
Warrants issued to the Buyers pursuant to the Securities Purchase Agreement on
the Issuance Date (with respect to each Buyer, the “Exchange Cap Allocation”). In the event that any Buyer shall
sell or otherwise transfer any of such Buyer’s SPA Warrants, the transferee
shall be allocated a pro rata portion of such Buyer’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 SPA Warrants shall exercise all of
such holder’s SPA

 

5

 

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 SPA Warrants on a pro rata basis in
proportion to the shares of Common Stock underlying the SPA Warrants then held
by each such holder.

 

(g)                                 Insufficient
Authorized Shares. If at any time while any of the Warrants remain
outstanding the Company does not have a sufficient number of authorized and
unreserved shares of Common Stock to satisfy its obligation to reserve for
issuance upon exercise of the Warrants at least a number of shares of Common
Stock equal to 130% of the number of shares of Common Stock as shall from time
to time be necessary to effect the exercise of all of the Warrants then
outstanding  (the “Required Reserve Amount”) (an “Authorized Share Failure”), then the
Company shall immediately take all action necessary to increase the Company’s
authorized shares of Common Stock to an amount sufficient to allow the Company
to reserve the Required Reserve Amount for the Warrants then outstanding. Without
limiting the generality of the foregoing sentence, as soon as practicable after
the date of the occurrence of an Authorized Share Failure, but in no event
later than ninety (90) days after the occurrence of such Authorized Share Failure,
the Company shall hold a meeting of its stockholders for the approval of an
increase in the number of authorized shares of Common Stock. In connection with
such meeting, the Company shall provide each stockholder with a proxy statement
and shall use its best efforts to solicit its stockholders’ approval of such
increase in authorized shares of Common Stock and to cause its board of
directors to recommend to the stockholders that they approve such proposal.

 

2.                                       ADJUSTMENT OF
EXERCISE PRICE AND NUMBER OF WARRANT SHARES. The Exercise Price and the
number of Warrant Shares shall be adjusted from time to time as follows:

 

(a)                                  Adjustment upon
Issuance of shares of Common Stock. If and whenever on or
after the Subscription Date the Company issues or sells, or in accordance with
this Section 2 is deemed to have issued or sold, any shares of Common Stock
(including the issuance or sale of shares of Common Stock owned or held by or
for the account of the Company, but excluding shares of Common Stock deemed to
have been issued by the Company in connection with any Excluded Securities (as
defined in the SPA Securities) for a consideration per share (the “New Issuance Price”) less than a price
equal to the Exercise Price in effect immediately prior to such issue or sale
or deemed issuance or sale (the “Applicable
Price” and the foregoing a “Dilutive
Issuance”), then immediately after such Dilutive Issuance, the
Exercise Price then in effect shall be reduced to an amount equal to the New
Issuance Price. Upon each such adjustment of the Exercise Price hereunder, the
number of Warrant Shares shall be adjusted to the number of shares of Common
Stock determined by multiplying the Exercise Price in effect immediately prior
to such adjustment by the number of Warrant Shares acquirable upon exercise of
this Warrant immediately prior to such adjustment and dividing the product
thereof by the Exercise Price resulting from such adjustment. For purposes of
determining the adjusted Exercise Price under this Section 2(a), the following
shall be applicable:

 

6

 

(i)                                     Issuance of
Options. If the Company in any manner grants any Options and the lowest price
per share for which one share of Common Stock is issuable upon the exercise of
any such Option or upon conversion, exercise or exchange of any Convertible
Securities issuable upon exercise of any such Option is less than the
Applicable Price, then such share of Common Stock shall be deemed to be
outstanding and to have been issued and sold by the Company at the time of the
granting or sale of such Option for such price per share. For purposes of this
Section 2(a)(i), the “lowest price per share for which one share of Common
Stock is issuable upon exercise of any such Options or upon conversion,
exercise or exchange of any Convertible Securities issuable upon exercise of
such Option” shall be equal to the sum of the lowest amounts of consideration
(if any) received or receivable by the Company with respect to any one share of
Common Stock upon the granting or sale of the Option, upon exercise of the
Option and upon conversion, exercise or exchange of any Convertible Security
issuable upon exercise of such Option. No further adjustment of the Exercise
Price or number of Warrant Shares shall be made upon the actual issuance of
such shares of Common Stock or of such Convertible Securities upon the exercise
of such Options or upon the actual issuance of such shares of Common Stock upon
conversion, exercise or exchange of such Convertible Securities.

 

(ii)                                  Issuance of
Convertible Securities. If the Company in any manner issues or
sells any Convertible Securities and the lowest price per share for which one
share of Common Stock is issuable upon the conversion, exercise or exchange
thereof is less than the Applicable Price, then such share of Common Stock
shall be deemed to be outstanding and to have been issued and sold by the
Company at the time of the issuance or sale of such Convertible Securities for
such price per share. For the purposes of this Section 2(a)(ii), the “lowest
price per share for which one share of Common Stock is issuable upon the
conversion, exercise or exchange” shall be equal to the sum of the lowest
amounts of consideration (if any) received or receivable by the Company with respect
to one share of Common Stock upon the issuance or sale of the Convertible
Security and upon conversion, exercise or exchange of such Convertible Security.
No further adjustment of the Exercise Price or number of Warrant Shares shall
be made upon the actual issuance of such shares of Common Stock upon
conversion, exercise or exchange of such Convertible Securities, and if any
such issue or sale of such Convertible Securities is made upon exercise of any
Options for which adjustment of this Warrant has been or is to be made pursuant
to other provisions of this Section 2(a), no further adjustment of the Exercise
Price or number of Warrant Shares shall be made by reason of such issue or
sale.

 

(iii)                               Change in
Option Price or Rate of Conversion. If the purchase price
provided for in any Options, the additional consideration, if any,

 

7

 

payable
upon the issue, conversion, exercise or exchange of any Convertible Securities,
or the rate at which any Convertible Securities are convertible into or
exercisable or exchangeable for shares of Common Stock increases or decreases
at any time, the Exercise Price and the number of Warrant Shares in effect at
the time of such increase or decrease shall be adjusted to the Exercise Price
and the number of Warrant Shares which would have been in effect at such time
had such Options or Convertible Securities provided for such increased or
decreased purchase price, additional consideration or increased or decreased
conversion rate, as the case may be, at the time initially granted, issued or
sold. For purposes of this Section 2(a)(iii), if the terms of any Option or
Convertible Security that was outstanding as of the date of issuance of this
Warrant are increased or decreased in the manner described in the immediately
preceding sentence, then such Option or Convertible Security and the shares of
Common Stock deemed issuable upon exercise, conversion or exchange thereof
shall be deemed to have been issued as of the date of such increase or decrease.
No adjustment pursuant to this Section 2(a) shall be made if such adjustment
would result in an increase of the Exercise Price then in effect or a decrease
in the number of Warrant Shares.

 

(iv)                              Calculation of
Consideration Received. In case any Option is issued in connection
with the issue or sale of other securities of the Company, together comprising
one integrated transaction in which no specific consideration is allocated to
such Options by the parties thereto, the Options will be deemed to have been
issued the difference of (x) the aggregate fair market value of such Options
and other securities issued or sold in such integrated transaction, less (y)
the fair market value of the securities other than such Option, issued or sold
in such transaction and the other securities issued or sold in such integrated
transaction will be deemed to have been issued or sold for the balance of the
consideration received by the Company. If any Common Stock, Options or
Convertible Securities are issued or sold or deemed to have been issued or sold
for cash, the consideration received therefor will be deemed to be the gross
amount raised by the Company; provided, however, that such gross amount is not
greater than 110% of the net amount received by the Company therefor. If any
shares of Common Stock, Options or Convertible Securities are issued or sold
for a consideration other than cash, the amount of such consideration received
by the Company will be the fair value of such consideration, except where such
consideration consists of securities, in which case the amount of consideration
received by the Company will be the Closing Sale Price of such security on the
date of receipt. If any shares of Common Stock, Options or Convertible
Securities are issued to the owners of the non-surviving entity in connection
with any merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion of
the net assets and business of the non-surviving entity as is

 

8

 

attributable
to such shares of Common Stock, Options or Convertible Securities, as the case
may be. The fair value of any consideration other than cash or securities will
be determined jointly by the Company and the Required Holders. If such parties
are unable to reach agreement within ten (10) days after the occurrence of an
event requiring valuation (the “Valuation
Event”), the fair value of such consideration will be determined
within five (5) Business Days after the tenth day following the Valuation Event
by an independent, reputable appraiser jointly selected by the Company and the
Required Holders. The determination of such appraiser shall be final and
binding upon all parties absent manifest error and the fees and expenses of
such appraiser shall be borne by the Company.

 

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

 

(b)  Adjustment upon Subdivision or Combination
of Common Stock. If the Company at any time on or after the Subscription
Date subdivides (by any stock split, stock dividend, recapitalization or
otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares, the Exercise Price in effect immediately prior to
such subdivision will be proportionately reduced and the number of Warrant
Shares will be proportionately increased. If the Company at any time on or
after the Subscription Date combines (by combination, reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock into a
smaller number of shares, the Exercise Price in effect immediately prior to
such combination will be proportionately increased and the number of Warrant
Shares will be proportionately decreased. Any adjustment under this Section
2(b) shall become effective at the close of business on the date the
subdivision or combination becomes effective.

 

(c)  Other Events. If any event occurs of
the type contemplated by the provisions of this Section 2 but not expressly
provided for by such provisions (including, without limitation, the granting of
stock appreciation rights, phantom stock rights or other rights with equity
features), then the Company’s Board of Directors will make an appropriate
adjustment in the Exercise Price and the number of Warrant Shares so as to
protect the rights of the Holder; provided that no such adjustment pursuant to
this Section 2(c) will increase the Exercise Price or decrease the number of
Warrant Shares as otherwise determined pursuant to this Section 2.

 

3.                                       RIGHTS UPON
DISTRIBUTION OF ASSETS. If the Company shall declare or make any
dividend or other distribution of its assets (or rights to acquire its assets)
to

 

9

 

holders of shares of Common
Stock, by way of return of capital or otherwise (including, without limitation,
any distribution of cash, stock or other securities, property or options by way
of a dividend, spin off, reclassification, corporate rearrangement, scheme of
arrangement or other similar transaction) (a “Distribution”),
at any time after the issuance of this Warrant, then, in each such case:

 

(a)  any Exercise Price in effect immediately
prior to the close of business on the record date fixed for the determination
of holders of shares of Common Stock entitled to receive the Distribution shall
be reduced, effective as of the close of business on such record date, to a
price determined by multiplying such Exercise Price by a fraction of which (i)
the numerator shall be the Closing Bid Price of the shares of Common Stock on
the trading day immediately preceding such record date minus the value of the
Distribution (as determined in good faith by the Company’s Board of Directors)
applicable to one share of shares of Common Stock, and (ii) the denominator
shall be the Closing Bid Price of the shares of Common Stock on the trading day
immediately preceding such record date; and

 

(b)  the number of Warrant Shares shall be increased
to a number of shares equal to the number of shares of Common Stock obtainable
immediately prior to the close of business on the record date fixed for the
determination of holders of shares of Common Stock entitled to receive the
Distribution multiplied by the reciprocal of the fraction set forth in the
immediately preceding paragraph (a); provided that in the event that the
Distribution is of shares of Common Stock (or common stock) (“Other Shares of Common Stock”) of a company
whose common shares are traded on a national securities exchange or a national
automated quotation system, then the Holder may elect to receive a warrant to
purchase Other Shares of Common Stock in lieu of an increase in the number of
Warrant Shares, the terms of which shall be identical to those of this Warrant,
except that such warrant shall be exercisable into the number of shares of
Other Shares of Common Stock that would have been payable to the Holder
pursuant to the Distribution had the Holder exercised this Warrant immediately
prior to such record date and with an aggregate exercise price equal to the
product of the amount by which the exercise price of this Warrant was decreased
with respect to the Distribution pursuant to the terms of the immediately
preceding paragraph (a) and the number of Warrant Shares calculated in
accordance with the first part of this paragraph (b).

 

4.                                       PURCHASE
RIGHTS; FUNDAMENTAL TRANSACTIONS.

 

(a)  Purchase Rights. In addition to any
adjustments pursuant to Section 2 above, if at any time the Company grants,
issues or sells any Options, Convertible Securities or rights to purchase
stock, warrants, securities or other property pro rata to the record holders of
any class of shares of Common Stock (the “Purchase
Rights”), then the Holder will be entitled to acquire, upon the
terms applicable to such Purchase Rights, the aggregate Purchase Rights which
the Holder could have acquired if the Holder had held the number of shares of
Common Stock acquirable upon complete exercise of this Warrant (without regard
to any limitations on the exercise of this Warrant) immediately before the date
on which a record is taken for the grant, issuance or sale of such Purchase
Rights, or, if no such record is taken, the date as of which the record holders
of shares of Common Stock are to be determined for the grant, issue or sale of
such Purchase Rights.

 

10

 

(b)  Fundamental Transactions. The Company
shall not enter into or be party to a Fundamental Transaction unless (i)  the
Successor Entity assumes in writing all of the obligations of the Company under
this Warrant and the other Transaction Documents in accordance with the
provisions of this Section (4)(b) pursuant to written agreements in form and
substance reasonably satisfactory to the Required Holders and approved by the
Required Holders prior to such Fundamental Transaction, including agreements to
deliver to each holder of Warrants in exchange for such Warrants a security of
the Successor Entity evidenced by a written instrument substantially similar in
form and substance to this Warrant, including, without limitation, an adjusted
exercise price equal to the value for the shares of Common Stock reflected by
the terms of such Fundamental Transaction, and exercisable for a corresponding
number of shares of capital stock equivalent to the shares of Common Stock
acquirable and receivable upon exercise of this Warrant (without regard to any
limitations on the exercise of this Warrant) prior to such Fundamental
Transaction, and reasonably satisfactory to the Required Holders and
(ii) the Successor Entity (including its Parent Entity) is a publicly
traded corporation whose common stock is quoted on or listed for trading on an
Eligible Market. Upon the occurrence of any Fundamental Transaction, the
Successor Entity shall succeed to, and be substituted for (so that from and
after the date of such Fundamental Transaction, the provisions of this Warrant
referring to the “Company” shall refer instead to the Successor Entity), and may
exercise every right and power of the Company and shall assume all of the
obligations of the Company under this Warrant with the same effect as if such
Successor Entity had been named as the Company herein. Upon consummation of the
Fundamental Transaction, the Successor Entity shall deliver to the Holder
confirmation that there shall be issued upon exercise of this Warrant at any
time after the consummation of the Fundamental Transaction, in lieu of the
shares of the Common Stock (or other securities, cash, assets or other
property) issuable upon the exercise of the Warrant prior to such Fundamental
Transaction, such shares of the publicly traded common stock (or its
equivalent) of the Successor Entity (including its Parent Entity) which the
Holder would have been entitled to receive upon the happening of such
Fundamental Transaction had this Warrant been converted immediately prior to
such Fundamental Transaction, as adjusted in accordance with the provisions of
this Warrant. In addition to and not in substitution for any other rights
hereunder, prior to the consummation of any Fundamental Transaction pursuant to
which holders of shares of Common Stock are entitled to receive securities or
other assets with respect to or in exchange for shares of Common Stock (a “Corporate Event”), the Company shall make
appropriate provision to insure that the Holder will thereafter have the right
to receive upon an exercise of this Warrant at any time after the consummation
of the Fundamental Transaction but prior to the Expiration Date, in lieu of the
shares of the Common Stock (or other securities, cash, assets or other
property) issuable upon the exercise of the Warrant prior to such Fundamental
Transaction, such shares of stock, securities, cash, assets or any other property
whatsoever (including warrants or other purchase or subscription rights) which
the Holder would have been entitled to receive upon the happening of such
Fundamental Transaction had the Warrant been exercised immediately prior to
such Fundamental Transaction. The provisions of this Section shall apply
similarly and equally to successive Fundamental Transactions and Corporate
Events and shall be applied without regard to any limitations on the exercise
of this Warrant.

 

(c)  Notwithstanding the foregoing and the
provisions of Section 4(b) above, in the event of a Change of Control, if the
Holder has not exercised the Warrant in full prior to the consummation of the
Change of Control, then the Holder shall have the right to

 

11

 

require such Successor
Entity to purchase this Warrant from the Holder by paying to the Holder,
simultaneously with the consummation of the Change of Control and in lieu of
the warrant referred to in Section 4(b) cash in the amount equal to the value
of the remaining unexercised portion of this Warrant on the date of such
consummation, which value shall be determined by use of the Black-Scholes
Option Pricing Model 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 such date of request and (ii) an expected volatility equal to the 100 day
volatility obtained from the HVT function on Bloomberg; provided that if such
function yields a volatility (x) less than 50%, the expected volatility shall
be equal to 50% and (y) greater than 80%, the expected volatility shall be
equal to 80%.

 

5.                                       NONCIRCUMVENTION. The Company
hereby covenants and agrees that the Company will not, by amendment of its
Certificate of Incorporation, Bylaws or through any reorganization, transfer of
assets, consolidation, merger, scheme of arrangement, dissolution, issue or
sale of securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, and will at all
times in good faith carry out all the provisions of this Warrant and take all
action as may be required to protect the rights of the Holder. Without limiting
the generality of the foregoing, the Company (i) shall not increase the
par value of any shares of Common Stock receivable upon the exercise of this
Warrant above the Exercise Price then in effect, (ii) shall take all such
actions as may be necessary or appropriate in order that the Company may validly
and legally issue fully paid and nonassessable shares of Common Stock upon the
exercise of this Warrant, and (iii) shall, so long as any of the SPA Warrants
are outstanding, take all action necessary to reserve and keep available out of
its authorized and unissued shares of Common Stock, solely for the purpose of
effecting the exercise of the SPA Warrants, 130% of the number of shares of
Common Stock as shall from time to time be necessary to effect the exercise of
the SPA Warrants then outstanding (without regard to any limitations on
exercise).

 

6.                                       WARRANT HOLDER
NOT DEEMED A STOCKHOLDER. Except as otherwise specifically provided
herein, the Holder, solely in such Person’s capacity as a holder of this
Warrant, shall not be entitled to vote or receive dividends or be deemed the
holder of share capital of the Company for any purpose, nor shall anything
contained in this Warrant be construed to confer upon the Holder, solely in
such Person’s capacity as the Holder of this Warrant, any of the rights of a
shareholder of the Company or any right to vote, give or withhold consent to
any corporate action (whether any reorganization, issue of stock,
reclassification of stock, consolidation, merger, conveyance or otherwise),
receive notice of meetings, receive dividends or subscription rights, or
otherwise, prior to the issuance to the Holder of the Warrant Shares which such
Person is then entitled to receive upon the due exercise of this Warrant. In
addition, nothing contained in this Warrant shall be construed as imposing any
liabilities on the Holder to purchase any securities (upon exercise of this
Warrant or otherwise) or as a shareholder of the Company, whether such
liabilities are asserted by the Company or by creditors of the Company. Notwithstanding
this Section 6, the Company shall provide the Holder with copies of the same
notices and other information given to the shareholders of the Company
generally, contemporaneously with the giving thereof to the shareholders.

 

12

 

7.                                       REISSUANCE OF
WARRANTS.

 

(a)  Transfer of Warrant. If this Warrant
is to be transferred, the Holder shall surrender this Warrant to the Company,
whereupon the Company will subject to the satisfaction of the transfer
provisions of the Securities Purchase Agreement forthwith issue and deliver
upon the order of the Holder a new Warrant (in accordance with Section 7(d)),
registered in the name of the registered transferee or assignee, representing
the right to purchase the number of Warrant Shares being transferred by the
Holder and, if less then the total number of Warrant Shares then underlying
this Warrant is being transferred, a new Warrant (in accordance with Section
7(d)) to the Holder representing the right to purchase the number of Warrant
Shares not being transferred.

 

(b)  Lost, Stolen or Mutilated Warrant. Upon
receipt by the Company of evidence reasonably satisfactory to the Company of
the loss, theft, destruction or mutilation of this Warrant, and, in the case of
loss, theft or destruction, of any indemnification undertaking by the Holder to
the Company in customary form and, in the case of mutilation, upon surrender
and cancellation of this Warrant, the Company shall execute and deliver to the
Holder a new Warrant (in accordance with Section 7(d)) representing the right
to purchase the Warrant Shares then underlying this Warrant.

 

(c)  Exchangeable for Multiple Warrants. This
Warrant is exchangeable, upon the surrender hereof by the Holder at the
principal office of the Company, for a new Warrant or Warrants (in accordance
with Section 7(d)) representing in the aggregate the right to purchase the
number of Warrant Shares then underlying this Warrant, and each such new
Warrant will represent the right to purchase such portion of such Warrant Shares
as is designated by the Holder at the time of such surrender; provided,
however, that no Warrants for fractional shares of Common Stock shall be given.

 

(d)  Issuance of New Warrants. Whenever the
Company is required to issue a new Warrant pursuant to the terms of this
Warrant, such new Warrant (i) shall be of like tenor with this Warrant, (ii)
shall represent, as indicated on the face of such new Warrant, the right to
purchase the Warrant Shares then underlying this Warrant (or in the case of a
new Warrant being issued pursuant to Section 7(a) or Section 7(c), the Warrant
Shares designated by the Holder which, when added to the number of shares of
Common Stock underlying the other new Warrants issued in connection with such
issuance, does not exceed the number of Warrant Shares then underlying this
Warrant), (iii) shall have an issuance date, as indicated on the face of such
new Warrant which is the same as the Issuance Date, and (iv) shall have the
same rights and conditions as this Warrant.

 

8.                                       NOTICES. Whenever
notice is required to be given under this Warrant, unless otherwise provided
herein, such notice shall be given in accordance with Section 9(f) of the
Securities Purchase Agreement. The Company shall provide the Holder with prompt
written notice of all actions taken pursuant to this Warrant, including in
reasonable detail a description of such action and the reason therefore. Without
limiting the generality of the foregoing, the Company will give written notice
to the Holder (i) immediately upon any adjustment of the Exercise Price,
setting forth in reasonable detail, and certifying, the calculation of such
adjustment and (ii) at least fifteen days prior to the date on which the
Company closes its books

 

13

 

or takes a record (A) with
respect to any dividend or distribution upon the shares of Common Stock, (B)
with respect to any grants, issuances or sales of any Options, Convertible
Securities or rights to purchase stock, warrants, securities or other property
to holders of shares of Common Stock or (C) for determining rights to vote with
respect to any Fundamental Transaction, dissolution or liquidation, provided in
each case that such information shall be made known to the public prior to or
in conjunction with such notice being provided to the Holder.

 

9.                                       AMENDMENT AND
WAIVER. No term of this Warrant may be amended, modified or waived unless
pursuant to a writing signed by the Company and the Required Holders; provided
that no such action may increase the exercise price of any SPA Warrant or
decrease the number of shares or class of stock obtainable upon exercise of any
SPA Warrant without the written consent of the Holder. No such amendment shall
be effective to the extent that it applies to less than all of the holders of
the SPA Warrants then outstanding.

 

10.                                 GOVERNING LAW. This Warrant
shall be governed by and construed and enforced in accordance with, and all
questions concerning the construction, validity, interpretation and performance
of this Warrant shall be governed by, the internal laws of the State of New
York, without giving effect to any choice of law or conflict of law provision
or rule (whether of the State of New York or any other jurisdictions) that
would cause the application of the laws of any jurisdictions other than the
State of New York.

 

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

 

12.                                 DISPUTE
RESOLUTION. In the case of a dispute as to the determination
of the Exercise Price or the arithmetic calculation of the Warrant Shares, the
Company shall submit the disputed determinations or arithmetic calculations via
facsimile within two Business Days of receipt of the Exercise Notice giving
rise to such dispute, as the case may be, to the Holder. If the Holder and the Company
are unable to agree upon such determination or calculation of the Exercise
Price or the Warrant Shares within three Business Days of such disputed
determination or arithmetic calculation being submitted to the Holder, then the
Company shall, within two Business Days submit via facsimile (a) the disputed
determination of the Exercise Price to an independent, reputable investment
bank selected by the Company and approved by the Holder or (b) the disputed
arithmetic calculation of the Warrant Shares to the Company’s independent,
outside accountant. The Company shall cause at its expense the investment bank
or the accountant, as the case may be, to perform the determinations or
calculations and notify the Company and the Holder of the results no later than
ten Business Days from the time it receives the disputed determinations or
calculations. Such investment bank’s or accountant’s determination or
calculation, as the case may be, shall be binding upon all parties absent
demonstrable error.

 

13.                                 REMEDIES, OTHER
OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The remedies provided in
this Warrant shall be cumulative and in addition to all other remedies
available under this Warrant and the other Transaction Documents, at law or in
equity (including a decree of specific performance and/or other injunctive
relief), and nothing herein

 

14

 

shall limit the right of the
Holder right to pursue actual damages for any failure by the Company to comply
with the terms of this Warrant. The Company acknowledges that a breach by it of
its obligations hereunder will cause irreparable harm to the Holder and that
the remedy at law for any such breach may be inadequate. The Company therefore
agrees that, in the event of any such breach or threatened breach, the holder
of this Warrant shall be entitled, in addition to all other available remedies,
to an injunction restraining any breach, without the necessity of showing
economic loss and without any bond or other security being required.

 

14.                                 TRANSFER.                             This Warrant
may be offered for sale, sold, transferred or assigned without the consent of
the Company, except as may otherwise be required by Section 2(f) of the
Securities Purchase Agreement.

 

15.                                 CERTAIN
DEFINITIONS. For purposes of this Warrant, the following terms
shall have the following meanings:

 

(a)          “Bloomberg” means Bloomberg Financial
Markets.

 

(b)         “Business Day” means any day other than
Saturday, Sunday or other day on which commercial banks in The City of New York
are authorized or required by law to remain closed.

 

(c)          “Change of Control” means any Fundamental
Transaction other than (i) any reorganization, recapitalization or
reclassification of the Common Stock or business combination in which the
Company is the publicly traded surviving entity in which the holders of the
Company’s voting power immediately prior to such reorganization,
recapitalization or reclassification or business combination continue after
such reorganization, recapitalization or reclassification or business
combination to hold publicly traded securities and, directly or indirectly, the
voting power of the surviving entity or entities necessary to elect a majority
of the members of the board of directors (or their equivalent if other than a
corporation) of such entity or entities (except where Apollo Resources
International or its affiliates becomes the “beneficial owner” (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of 70% or greater
of the aggregate Voting Stock of the Company), or (ii) pursuant to a migratory
merger effected solely for the purpose of changing the jurisdiction of
incorporation of the Company.

 

(d)         “Closing Bid Price” and “Closing Sale Price” means, for any security
as of any date, the last closing bid price and last closing trade price,
respectively, for such security on the Principal Market, as reported by
Bloomberg, or, if the Principal Market begins to operate on an extended hours
basis and does not designate the closing bid price or the closing trade price, as
the case may be, then the last bid price or last trade price, respectively, of
such security prior to 4:00:00 p.m., New York time, as reported by Bloomberg,
or, if the Principal Market is not the principal securities exchange or trading
market for such security, the last closing bid price or last trade price,
respectively, of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg, or if
the foregoing do not apply, the last closing bid price or last trade price,
respectively, of such security in the over-the-counter market on the electronic
bulletin board for such security as reported by Bloomberg, or, if no closing
bid price or last trade price, respectively, is reported for such security by
Bloomberg, the average of the bid prices, or the ask prices, respectively, of
any

 

15

 

market makers for such
security as reported in the “pink sheets” by Pink Sheets LLC (formerly the
National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing Sale
Price cannot be calculated for a security on a particular date on any of the
foregoing bases, the Closing Bid Price or the Closing Sale Price, as the case
may be, of such security on such date shall be the fair market value as
mutually determined by the Company and the Holder. If the Company and the
Holder are unable to agree upon the fair market value of such security, then
such dispute shall be resolved pursuant to Section 12. All such determinations
to be appropriately adjusted for any stock dividend, stock split, stock
combination or other similar transaction during the applicable calculation
period.

 

(e)          “Common Stock” means (i) the Company’s
shares of Common Stock, par value $0.001 per share, and (ii) any share
capital into which such Common Stock shall have been changed or any share
capital resulting from a reclassification of such Common Stock.

 

(f)            “Convertible Securities” means any stock or
securities (other than Options) directly or indirectly convertible into or
exercisable or exchangeable for shares of Common Stock.

 

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

 

(h)         “Expiration Date” means the date sixty
months after the Issuance Date or, if such date falls on a day other than a
Business Day or on which trading does not take place on the Principal Market (a
“Holiday”), the next date that is
not a Holiday.

 

(i)             “Fundamental Transaction” means that the
Company shall, directly or indirectly, in one or more related transactions, (i)
consolidate or merge with or into (whether or not the Company is the surviving
corporation) another Person or Persons, or (ii) sell, assign, transfer, convey or
otherwise dispose of all or substantially all of the properties or assets of
the Company to another Person, or (iii) allow another Person to make a
purchase, tender or exchange offer that is accepted by the holders of more than
50% of the outstanding shares of Voting Stock (not including any shares of
Voting Stock held by the Person or Persons making or party to, or associated or
affiliated with the Persons making or party to, such purchase, tender or
exchange offer), or (iv) consummate a stock purchase agreement or other
business combination (including, without limitation, a reorganization,
recapitalization, spin-off or scheme of arrangement) with another Person
whereby such other Person acquires more than the 50% of the outstanding shares
of Voting Stock (not including any shares of Voting Stock held by the other
Person or other Persons making or party to, or associated or affiliated with
the other Persons making or party to, such stock purchase agreement or other
business combination), or (v) reorganize, recapitalize or reclassify its Common
Stock or (vi) any “person” or “group” (as these terms are used for purposes of
Sections 13(d) and 14(d) of the Exchange Act) (other than Apollo Resources
International) is or shall become the “beneficial owner” (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of 50% of the aggregate
Voting Stock of the Company, or (vii) Apollo Resources International ceases to
be the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of at least 50% of the aggregate Voting Stock of the
Company, or (viii) Apollo Resources International or its affiliates becomes the
“beneficial

 

16

 

owner” (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of 70% or greater of the
aggregate Voting Stock of the Company.

 

(j)             “Options” means any rights, warrants or
options to subscribe for or purchase shares of Common Stock or Convertible
Securities.

 

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

 

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

 

(m)       “Principal Market” means OTC Bulletin Board.

 

(n)         “Registration Rights Agreement” means that
certain registration rights agreement by and among the Company and the Buyers.

 

(o)         “Required Holders” means the holders of the
SPA Warrants representing at least a majority of shares of Common Stock
underlying the SPA Warrants then outstanding.

 

(p)         “SPA Securities” means the Notes issued
pursuant to the Securities Purchase Agreement.

 

(q)         “Successor Entity” means the Person (or, if
so elected by the Required Holders, the Parent Entity) formed by, resulting
from or surviving any Fundamental Transaction or the Person (or, if so elected
by the Required Holders, the Parent Entity) with which such Fundamental
Transaction shall have been entered into.

 

[Signature Page Follows]

 

17

 

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

 

 

	
   

  	
  EARTH
  BIOFUELS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

 

EXHIBIT A

 

EXERCISE NOTICE

 

TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE
THIS

WARRANT TO PURCHASE COMMON STOCK

 

EARTH BIOFUELS, INC.

 

The
undersigned holder hereby exercises the right to purchase                             
of the shares of Common Stock (“Warrant
Shares”) of Earth Biofuels, Inc., a Delaware corporation (the “Company”), evidenced by the attached
Warrant to Purchase Common Stock (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.

 

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 Aggregate
Exercise Price in the sum of $                                 
to the Company in accordance with the terms of the Warrant.

 

3.                                       Delivery of Warrant Shares. The Company shall
deliver to the holder                        
Warrant Shares in accordance with the terms of the Warrant.

 

4.                                       By its delivery of this Exercise Notice, the
undersigned represents and warrants to the Company that in giving effect to the
exercise evidenced hereby the Holder will not beneficially own in excess of the
number of shares of Common Stock (determined in accordance with Section 13(d)
of the Securities Exchange Act of 1934) permitted to be owned under Section
1(f)(1) of this Warrant to which this notice relates.

 

 

	
  Date:

  	
   

  	
  ,

  	
   

  	
   

  
	
   

  
	
   

  
	
   

  	
   

  
	
  Name of Registered Holder

  
	
   

  
	
   

  
	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  
							

 

 

ACKNOWLEDGMENT

 

The Company hereby acknowledges this Exercise Notice and, if
applicable, hereby directs Nevada Agency and Trust Company to issue the above indicated number of
shares of Common Stock in accordance with the Transfer Agent Instructions dated
July      , 2006 from the Company and acknowledged and
agreed to by Nevada Agency and Trust Company.

 

	
   

  	
  EARTH
  BIOFUELS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
					

 

 

Warrant Shares Exercise Log

 

 

	
  Date

  	
   

  	
  Number of Warrant

  Shares Available to be

  Exercised

  	
   

  	
  Number of Warrant Shares

  Exercised

  	
   

  	
  Number of

  Warrant Shares

  Remaining to

  be Exercised

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00107-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00107-of-00352.parquet"}]]