Document:

Exhibit 10.4

 

NEITHER
THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE
BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT
BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL
OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH
SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. 
THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN SECURED BY SUCH SECURITIES.

 

Original Issue Date: March       ,
2008

Original Conversion Price (subject to adjustment herein): $0.15

 

$                              

 

ORIGINAL
ISSUE DISCOUNT SENIOR SECURED CONVERTIBLE DEBENTURE

DUE MARCH       , 2009

 

THIS ORIGINAL ISSUE DISCOUNT SENIOR SECURED CONVERTIBLE DEBENTURE is one of a series of duly authorized and validly issued Original Issue Discount Senior Secured Convertible Debentures of Advanced Cell Technology, Inc., a Delaware corporation, (the “Company”), having its principal place of business at Alameda, California designated as its Original Issue Discount Senior Secured Convertible Debenture due March       , 2009 (this debenture, the “Debenture” and, collectively with the other debentures of such series, the “Debentures”).
 

FOR VALUE RECEIVED, the Company promises to
pay to
                                                
or its registered assigns (the “Holder”), or shall have paid pursuant to
the terms hereunder, the principal sum of
$                              
on March       ,
2009 (the “Maturity Date”) or such earlier date as this Debenture is required or permitted to be
repaid as provided hereunder.  This
Debenture is subject to the following additional provisions:

 

Section 1.               Definitions.  For the purposes hereof, in addition to the
terms defined elsewhere in this Debenture, (a) capitalized terms not
otherwise defined herein shall have the meanings set forth in the Purchase
Agreement and (b) the following terms shall have the following meanings:

 

1

 

“Alternate Consideration”
shall have the meaning set forth in Section 5(e).

 

“Bankruptcy Event”
means any of the following events: (a) the Company or any Significant
Subsidiary (as such term is defined in Rule 1-02(w) of Regulation
S-X) thereof commences a case or other proceeding under any bankruptcy,
reorganization, arrangement, adjustment of debt, relief of debtors,
dissolution, insolvency or liquidation or similar law of any jurisdiction
relating to the Company or any Significant Subsidiary thereof, (b) there
is commenced against the Company or any Significant Subsidiary thereof any such
case or proceeding that is not dismissed within 60 days after commencement, (c) the
Company or any Significant Subsidiary thereof is adjudicated insolvent or
bankrupt or any order of relief or other order approving any such case or
proceeding is entered, (d) the Company or any Significant Subsidiary
thereof suffers any appointment of any custodian or the like for it or any
substantial part of its property that is not discharged or stayed within 60
calendar days after such appointment, (e) the Company or any Significant
Subsidiary thereof makes a general assignment for the benefit of creditors, (f) the
Company or any Significant Subsidiary thereof calls a meeting of its creditors
with a view to arranging a composition, adjustment or restructuring of its
debts or (g) the Company or any Significant Subsidiary thereof, by any act
or failure to act, expressly indicates its consent to, approval of or
acquiescence in any of the foregoing or takes any corporate or other action for
the purpose of effecting any of the foregoing.

 

“Base Conversion Price”
shall have the meaning set forth in Section 5(b).

 

“Beneficial Ownership
Limitation” shall have the meaning set forth in Section 4(c)(ii).

 

“Business Day” means
any day except any Saturday, any Sunday, any day which shall be a federal legal
holiday in the United States or any day on which banking institutions in the
State of New York are authorized or required by law or other governmental
action to close.

 

“Buy-In” shall have
the meaning set forth in Section 4(d)(v).

 

“Change of Control
Transaction” means the occurrence after the date hereof of any of (a) an
acquisition after the date hereof by an individual or legal entity or “group”
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act)
of effective control (whether through legal or beneficial ownership of capital
stock of the Company, by contract or otherwise) of in excess of 33% of the
voting securities of the Company (other than by means of conversion or exercise
of the Debentures and the Securities issued together with the Debentures), (b) the
Company merges into or consolidates with any other Person, or any Person merges
into or consolidates with the Company and, after giving effect to such
transaction, the stockholders of the Company immediately prior to such
transaction own less than 66% of the aggregate voting power of the Company or
the successor entity of such transaction, or (c) the Company sells or
transfers all or substantially all of its assets to another Person and the
stockholders of the Company immediately prior to such transaction own less than
66% of the aggregate voting power 

 

2

 

of the acquiring entity immediately after the
transaction, (d) a replacement at one time or within a three year period
of more than one-half of the members of the Board of Directors which is not
approved by a majority of those individuals who are members of the Board of
Directors on the date hereof (or by those individuals who are serving as
members of the Board of Directors on any date whose nomination to the Board of
Directors was approved by a majority of the members of the Board of Directors
who are members on the date hereof), or (e) the execution by the Company
of an agreement to which the Company is a party or by which it is bound,
providing for any of the events set forth in clauses (a) through (d) above.

 

“Conversion” shall
have the meaning ascribed to such term in Section 4.

 

“Conversion Date”
shall have the meaning set forth in Section 4(a).

 

“Conversion Price”
shall have the meaning set forth in Section 4(b).

 

“Conversion Schedule”
means the Conversion Schedule in the form of Schedule 1 attached hereto.

 

“Conversion Shares”
means, collectively, the shares of Common Stock issuable upon conversion of
this Debenture in accordance with the terms hereof.

 

“Debenture Register”
means the records of the Company regarding registration and transfers of this
Debenture.

 

“Dilutive Issuance”
shall have the meaning set forth in Section 5(b).

 

“Dilutive Issuance Notice”
shall have the meaning set forth in Section 5(b).

 

“Equity Conditions”
means, during the period in question, (a) the Company shall have duly
honored all conversions and redemptions scheduled to occur or occurring by virtue
of one or more Notices of Conversion of the Holder, if any, (b) the
Company shall have paid all liquidated damages and other amounts owing to the
Holder in respect of this Debenture, (c)(i) the Legend may be removed from
the applicable Security pursuant to Section 4.1 of the Purchase Agreement
or (ii) all of the Conversion Shares issuable pursuant to the Transaction
Documents may be resold pursuant to Rule 144 without volume or
manner-of-sale restrictions and the current public information requirements
have been met by the Company as determined by the counsel to the Company
pursuant to a written opinion letter to such effect, addressed and acceptable
to the Transfer Agent and the Holder, (d) the Common Stock is trading on a
Trading Market and all of the shares issuable pursuant to the Transaction
Documents are listed or quoted for trading on such Trading Market (and the
Company believes, in good faith, that trading of the Common Stock on a Trading
Market will continue uninterrupted for the foreseeable future), (e) there
is a sufficient number of authorized but unissued and otherwise unreserved
shares of Common Stock for the issuance of all of the shares issuable pursuant
to the Transaction Documents, (f) there is no existing Event of Default or
no existing event 

 

3

 

which, with the passage of time or the giving
of notice, would constitute an Event of Default, (g) the issuance of the
shares in question (or, in the case of a Monthly Redemption, the share issuable
upon conversion in full of the Monthly Redemption Amount) to the Holder would
not violate the limitations set forth in Section 4(c) herein, (h) there
has been no public announcement of a pending or proposed Fundamental
Transaction or Change of Control Transaction that has not been consummated, (i) the
Holder is not in possession of any information provided by the Company that
constitutes, or may constitute, material non-public information and (j) in
a period of 20 consecutive Trading Days prior to the applicable date in
question, the average daily trading volume for the Common Stock on the
principal Trading Market exceeds 200,000 shares.

 

“Event of Default”
shall have the meaning set forth in Section 8(a).

 

“Exempt Issuance”
means the issuance of (a) options to employees, officers, directors or
consultants (provided, however, that issuances to consultants shall not exceed
500,000 shares in any 12 month period, subject to adjustment for reverse and
forward stock splits, stock interests, stock combinations and other similar
transactions that occur after the date of the Purchase Agreement; provided,
further, that the issuance price of such shares shall be equal to or greater
than the VWAP on the Trading Day immediately prior to the date of such
issuance) of the Company pursuant to any stock or option plan currently in
effect or hereafter duly adopted by a majority of the non-employee members of
the Board of Directors or a majority of the members of a committee of
non-employee directors established for such purpose, provided that the exercise
price of such options shall not be less than the VWAP on the Trading Day
immediately prior to the grant of such option), (b) securities upon the
exercise, conversion or redemption (amortization) of any securities issued pursuant
to the Purchase Agreement, convertible securities, options or warrants issued
and outstanding on the date of the Purchase Agreement (including the issuance
of Debentures to service providers of the Company in lieu of cash payments due
as of the date of the Purchase Agreement, including the payment of placement
agent fees hereunder and accrued but unpaid legal and consulting fees and
expenses), provided that such securities have not been amended since the date
of the Purchase Agreement to increase the number of such securities or to
decrease the exercise, exchange or conversion price of any such securities
except in accordance with their terms as in effect as of the date hereof or (c) securities
issued pursuant to acquisitions or strategic transactions, provided any such
issuance shall only be made in connection with a transaction involving a Person
which is, itself or through its subsidiaries, an operating company in a
business synergistic with the business of the Company and in which the Company
receives benefits in addition to the investment of funds, but shall not include
a transaction in which the Company is issuing securities primarily for the
purpose of raising capital or to an entity whose primary business is investing
in securities.  Notwithstanding anything
herein to the contrary, additional issuances of securities by the Company not
referenced above shall be deemed “Exempt Issuances” upon receipt by the Company
of the consent of each holder (including holdings by affiliates) of the
Debentures with an original Subscription Amount of at least $300,000 under the
Purchase Agreement on the Closing Date, and if no such holders hold any
Debentures or Warrants 

 

4

 

at such time, upon receipt by the Company of
the consent of 51% of the holders of Debentures then outstanding.

 

“Forced Conversion”
shall have the meaning set forth in Section 6(c).

 

“Forced Conversion Date”
shall have the meaning set forth in Section 6(c).

 

“Forced Conversion Notice”
shall have the meaning set forth in Section 6(c).

 

“Forced Conversion Notice
Date” shall have the meaning set forth in Section 6(c).

 

“Fundamental Transaction”
shall have the meaning set forth in Section 5(e).

 

“Mandatory Default Amount”  means the sum of (a) the greater of (i) the
outstanding principal amount of this Debenture, divided by the Conversion Price
on the date the Mandatory Default Amount is either (A) demanded (if demand
or notice is required to create an Event of Default) or otherwise due or (B) paid
in full, whichever has a lower Conversion Price, multiplied by the VWAP on the
date the Mandatory Default Amount is either (x) demanded or otherwise due
or (y) paid in full, whichever has a higher VWAP, or (ii) 120% of the
outstanding principal amount of this Debenture and (b) all other amounts,
costs, expenses and liquidated damages due in respect of this Debenture.

 

“Monthly Conversion
Period” shall have the meaning set forth in Section 6(b) hereof.

 

“Monthly Conversion Price”
shall have the meaning set forth in Section 6(b) hereof.

 

“Monthly Redemption”
means the redemption of this Debenture pursuant to Section 6(b) hereof.

 

“Monthly Redemption
Amount” means, as to a Monthly Redemption,
$          (1), plus accrued but unpaid interest, liquidated
damages and any other amounts then owing to the Holder in respect of this
Debenture.

 

“Monthly Redemption Date”
means the 1st of each month, commencing on October 1, 2008, and
terminating upon the full redemption of this Debenture.

 

“Monthly Redemption
Notice” shall have the meaning set forth in Section 6(b) hereof.

 

“New York Courts”
shall have the meaning set forth in Section 9(d).

 

(1)           1/6th of the
original principal amount.

 

5

 

“Notice of Conversion”
shall have the meaning set forth in Section 4(a).

 

“Original Issue Date”
means the date of the first issuance of the Debentures, regardless of any
transfers of any Debenture and regardless of the number of instruments which
may be issued to evidence such Debentures.

 

“Permitted Indebtedness”
means trade payables, indebtedness consisting of capitalized lease obligations
and purchase money indebtedness incurred in connection with acquisition of
capital assets and obligations under sale-leaseback arrangements with respect to
newly acquired or leased assets; provided, however, that in each case such
obligations are not secured by liens on any assets of the Company or its
Subsidiaries existing as of the date of the Purchase Agreement and may only be
secured by the assets so acquired or leased thereafter.

 

“Permitted Lien” mean
(a) Liens with respect to the payment of taxes or governmental charges in
all cases which are not yet due or which are subject to a good faith contest; (b) any
Liens incurred in connection with Permitted Indebtedness provided that such
liens are not secured by assets of the Company or its Subsidiaries other than
the assets so acquired or leased; (c) statutory Liens of landlords or
equipment lessors against any property of the Company or its Subsidiaries existing
as of the date of the Purchase Agreement in favor of suppliers, mechanics,
carriers, materialmen, warehousemen or workmen; and (d) Liens created
under the Security Agreement.

 

“Purchase Agreement”
means the Securities Purchase Agreement, dated as of March       , 2008 among the
Company and the original Holders, as amended, modified or supplemented from
time to time in accordance with its terms.

 

“Securities Act”
means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.

 

“Share Delivery Date”
shall have the meaning set forth in Section 4(d)(ii).

 

“Subsidiary” shall
have the meaning set forth in the Purchase Agreement.

 

“Threshold Period”
shall have the meaning set forth in Section 6(c).

 

“Trading Day” means a
day on which the New York Stock Exchange is open for business.

 

“Trading Market”
means the following markets or exchanges on which the Common Stock is listed or
quoted for trading on the date in question: the American Stock Exchange, the
Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select
Market, the New York Stock Exchange or the OTC Bulletin Board.

 

“Transaction Documents”
shall have the meaning set forth in the Purchase Agreement.

 

6

 

“VWAP” means, for any
date, the price determined by the first of the following clauses that applies: (a) if
the Common Stock is then listed or quoted on a Trading Market, the daily volume
weighted average price of the Common Stock for such date (or the nearest
preceding date) on the Trading Market on which the Common Stock is then listed
or quoted for trading as reported by Bloomberg L.P. (based on a Trading Day
from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City
time)); (b)  if the OTC Bulletin Board is not a Trading Market, the volume
weighted average price of the Common Stock for such date (or the nearest
preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not
then quoted for trading on the OTC Bulletin Board and if prices for the Common
Stock are then reported in the “Pink Sheets” published by Pink Sheets, LLC (or
a similar organization or agency succeeding to its functions of reporting
prices), the most recent bid price per share of the Common Stock so reported;
or (d) in all other cases, the fair market value of a share of Common
Stock as determined by an independent appraiser selected in good faith by the
Holder and reasonably acceptable to the Company.

 

Section 2.               Interest and Prepayment.  This Debenture was issued for an original
issue discount. No regularly scheduled interest payments shall be made on this
Debenture. Except as otherwise set forth in this Debenture, the Company may not
prepay any portion of the Principal Amount of this Debenture without the prior
written consent of the Holder.

 

Section 3.               Registration of Transfers and
Exchanges.

 

a)             Different Denominations. This Debenture is
exchangeable for an equal aggregate principal amount of Debentures of different
authorized denominations, as requested by the Holder surrendering the
same.  No service charge will be payable
for such registration of transfer or exchange.

 

b)            Investment Representations. This Debenture has
been issued subject to certain investment representations of the original
Holder set forth in the Purchase Agreement and may be transferred or exchanged
only in compliance with the Purchase Agreement and applicable federal and state
securities laws and regulations.

 

c)             Reliance on Debenture Register. Prior to due
presentment for transfer to the Company of this Debenture, the Company and any
agent of the Company may treat the Person in whose name this Debenture is duly
registered on the Debenture Register as the owner hereof for the purpose of
receiving payment as herein provided and for all other purposes, whether or not
this Debenture is overdue, and neither the Company nor any such agent shall be
affected by notice to the contrary.

 

Section 4.               Conversion.

 

a)             Voluntary Conversion. At any time after the
Original Issue Date until this Debenture is no longer outstanding, this
Debenture shall be convertible, in whole or in part, into shares of Common
Stock at the option of the Holder, at any time and from time 

 

7

 

to time (subject to the conversion
limitations set forth in Section 4(c) hereof).  The Holder shall effect conversions by
delivering to the Company a Notice of Conversion, the form of which is attached
hereto as Annex A (each, a “Notice of Conversion”), specifying
therein the principal amount of this Debenture to be converted and the date on
which such conversion shall be effected (such date, the “Conversion Date”).  If no Conversion Date is specified in a
Notice of Conversion, the Conversion Date shall be the date that such Notice of
Conversion is deemed delivered hereunder. 
To effect conversions hereunder, the Holder shall not be required to
physically surrender this Debenture to the Company unless the entire principal
amount of this Debenture has been so converted. Conversions hereunder shall
have the effect of lowering the outstanding principal amount of this Debenture
in an amount equal to the applicable conversion.  The Holder and the Company shall maintain
records showing the principal amount(s) converted and the date of such
conversion(s).  The Company may deliver
an objection to any Notice of Conversion within 1 Business Day of delivery of
such Notice of Conversion.  In the event
of any dispute or discrepancy, the records of the Holder shall be controlling and
determinative in the absence of manifest error. The Holder,
and any assignee by acceptance of this Debenture, acknowledge and agree that,
by reason of the provisions of this paragraph, following conversion of a
portion of this Debenture, the unpaid and unconverted principal amount of this
Debenture may be less than the amount stated on the face hereof.

 

b)            Conversion Price. 
The conversion price in effect on any Conversion Date shall be equal to $0.15, subject to adjustment herein (the “Conversion
Price”).

 

c)             Conversion Limitations.  The Company shall not effect any conversion
of this Debenture, and a Holder shall not have the right to convert any portion
of this Debenture, to the extent that after giving effect to the conversion set
forth on the applicable Notice of Conversion, the Holder (together with the
Holder’s Affiliates, and any other person or entity acting as a group together
with the Holder or any of the Holder’s Affiliates) would beneficially own in
excess of the Beneficial Ownership Limitation (as defined below).  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 Debenture with respect
to which such determination is being made, but shall exclude the number of
shares of Common Stock which are issuable upon (A) conversion of the
remaining, unconverted principal amount of this Debenture beneficially owned by
the Holder or any of its Affiliates and (B) exercise or conversion of the
unexercised or unconverted portion of any other securities of the Company
subject to a limitation on conversion or exercise analogous to the limitation
contained herein (including, without limitation, any other Debentures or the
Warrants) beneficially owned by the Holder or any of its Affiliates. 
Except as set forth in the preceding sentence, for purposes of this Section 4(c),
beneficial ownership shall be calculated in accordance with Section 13(d) of
the Exchange Act and the rules and regulations promulgated
thereunder.  To the extent that the
limitation contained in this Section 4(c) applies, the determination
of whether this Debenture is convertible (in relation to other securities owned
by the Holder together with any Affiliates) and of which principal amount of
this Debenture is convertible shall be in the 

 

8

 

sole discretion of the Holder, and the
submission of a Notice of Conversion shall be deemed to be the Holder’s
determination of whether this Debenture may be converted (in relation to other
securities owned by the Holder together with any Affiliates) and which
principal amount of this Debenture is convertible, in each case subject to the
Beneficial Ownership Limitation. To ensure compliance with this restriction,
the Holder will be deemed to represent to the Company each time it delivers a
Notice of Conversion that such Notice of Conversion has not violated the
restrictions set forth in this paragraph and the Company shall have no
obligation to verify or confirm the accuracy of such determination.  In addition, a determination as to any group
status as contemplated above shall be determined in accordance with Section 13(d) of
the Exchange Act and the rules and regulations promulgated thereunder.   For purposes of this Section 4(c), in
determining the number of outstanding shares of Common Stock, the Holder may
rely on the number of outstanding shares of Common Stock as stated in the most
recent of the following: (A) the Company’s most recent periodic or annual
report, as the case may be; (B) a more recent public announcement by the
Company; or (C) a more recent notice by the Company or the Company’s
transfer agent setting forth the number of shares of Common Stock
outstanding.  Upon the written or oral request of a Holder, the Company
shall within two Trading Days confirm orally and 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 Debenture, by the Holder or its Affiliates since the date as of which such
number of outstanding shares of Common Stock was reported. The “Beneficial
Ownership Limitation” shall be 4.99% of the number of shares of the Common
Stock outstanding immediately after giving effect to the issuance of shares of
Common Stock issuable upon conversion of this Debenture held by the
Holder.  The Holder, upon not less than
61 days’ prior notice to the Company, may increase or decrease the Beneficial
Ownership Limitation provisions of this Section 4(c), provided that the
Beneficial Ownership Limitation in no event exceeds 9.99% of the number of
shares of the Common Stock outstanding immediately after giving effect to the
issuance of shares of Common Stock upon conversion of this Debenture held by
the Holder and the Beneficial Ownership Limitation provisions of this Section 4(c) shall
continue to apply.  Any such increase or
decrease will not be effective until the 61st day after such notice
is delivered to the Company.  The
Beneficial Ownership Limitation provisions of this paragraph shall be construed
and implemented in a manner otherwise than in strict conformity with the terms of
this Section 4(c) to correct this paragraph (or any portion hereof)
which may be defective or inconsistent with the intended Beneficial Ownership
Limitation contained herein or to make changes or supplements necessary or
desirable to properly give effect to such limitation. The limitations contained
in this paragraph shall apply to a successor holder of this Debenture.

 

d)            Mechanics of Conversion.

 

i.              Conversion Shares Issuable Upon Conversion of
Principal Amount.  The number of
Conversion Shares issuable upon a conversion hereunder shall be determined by
the quotient obtained by dividing (x) the 

 

9

 

outstanding principal amount of this
Debenture to be converted by (y) the Conversion Price.

 

ii.             Delivery of Certificate Upon Conversion. Not
later than three Trading Days after each Conversion Date (the “Share
Delivery Date”), the Company shall deliver, or cause to be delivered, to
the Holder a certificate or certificates representing the Conversion Shares
which on or after the six month anniversary of the Original Issue Date shall be
free of restrictive legends and trading restrictions (other than those which
may then be required by the Purchase Agreement) representing the number of
Conversion Shares being acquired upon the conversion of this Debenture. On or
after the six month anniversary of the Original Issue Date, the Company shall,
if available and if allowed under applicable securities laws, use its best
efforts to deliver any certificate or certificates required to be delivered by
the Company under this Section 4(d) electronically through the
Depository Trust Company or another established clearing corporation performing
similar functions.

 

iii.            Failure to Deliver Certificates.  If in the case of any Notice of Conversion
such certificate or certificates are not delivered to or as directed by the
applicable Holder by the third Trading Day after the Conversion Date, the
Holder shall be entitled to elect by written notice to the Company at any time
on or before its receipt of such certificate or certificates, to rescind such
Conversion, in which event the Company shall promptly return to the Holder any
original Debenture delivered to the Company and the Holder shall promptly
return to the Company the Common Stock certificates representing the principal
amount of this Debenture unsuccessfully tendered for conversion to the Company.

 

iv.            Obligation Absolute; Partial Liquidated Damages.  The Company’s obligations to issue and
deliver the Conversion Shares upon conversion of this Debenture in accordance
with the terms hereof are absolute and unconditional, irrespective of any
action or inaction by the Holder to enforce the same, any waiver or consent
with respect to any provision hereof, the recovery of any judgment against any
Person or any action to enforce the same, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the
Holder or any other Person of any obligation to the Company or any violation or
alleged violation of law by the Holder or any other Person, and irrespective of
any other circumstance which might otherwise limit such obligation of the
Company to the Holder in connection with the issuance of such Conversion
Shares; provided, however, that such delivery shall not operate
as a waiver by the Company of any such action the Company may have against the
Holder.  In the event the Holder of this
Debenture shall elect to convert any or all of the outstanding principal amount
hereof, the Company may not refuse conversion based on any claim that the
Holder or anyone associated or affiliated with the Holder has been engaged in
any violation of law, agreement or for any other reason, unless an injunction
from a court, on notice to Holder, restraining and or enjoining conversion of
all or part of this Debenture shall have been sought

 

10

 

and obtained, and the Company posts a surety
bond for the benefit of the Holder in the amount of 150% of the outstanding
principal amount of this Debenture, which is subject to the injunction, which
bond shall remain in effect until the completion of arbitration/litigation of
the underlying dispute and the proceeds of which shall be payable to the Holder
to the extent it obtains judgment.  In the
absence of such injunction, the Company shall issue Conversion Shares or, if
applicable, cash, upon a properly noticed conversion.  If the Company fails for any reason to
deliver to the Holder such certificate or certificates pursuant to Section 4(d)(ii) by
the third Trading Day after the Conversion Date, the Company shall pay to the
Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of
principal amount being converted, $10 per Trading Day (increasing to $20 per
Trading Day on the fifth (5th) Trading Day after such liquidated
damages begin to accrue) for each Trading Day after such third (3rd)
Trading Day until such certificates are delivered.    Nothing herein shall limit a Holder’s right
to pursue actual damages or declare an Event of Default pursuant to Section 8
hereof for the Company’s failure to deliver Conversion Shares within the period
specified herein and the Holder shall have the right to pursue all remedies
available to it hereunder, at law or in equity including, without limitation, a
decree of specific performance and/or injunctive relief.  The exercise of any such rights shall not
prohibit the Holder from seeking to enforce damages pursuant to any other Section hereof
or under applicable law.

 

v.             Compensation for Buy-In on Failure to Timely Deliver
Certificates Upon Conversion. In addition to any other rights available to
the Holder, if the Company fails for any reason to deliver to the Holder such
certificate or certificates by the Share Delivery Date pursuant to Section 4(d)(ii),
and if after such Share Delivery Date the Holder is required by its brokerage
firm to purchase (in an open market transaction or otherwise), or the Holder’s
brokerage firm otherwise purchases, shares of Common Stock to deliver in
satisfaction of a sale by the Holder of the Conversion Shares which the Holder
was entitled to receive upon the conversion relating to such Share Delivery
Date (a “Buy-In”), then the Company shall (A) pay in cash to the
Holder (in addition to any other remedies available to or elected by the
Holder) the amount by which (x) the Holder’s total purchase price
(including any brokerage commissions) for the Common Stock so purchased exceeds
(y) the product of (1) the aggregate number of shares of Common Stock
that the Holder was entitled to receive from the conversion at issue multiplied
by (2) the actual sale price at which the sell order giving rise to such
purchase obligation was executed (including any brokerage commissions) and (B) at
the option of the Holder, either reissue (if surrendered) this Debenture in a
principal amount equal to the principal amount of the attempted conversion or
deliver to the Holder the number of shares of Common Stock that would have been
issued if the Company had timely complied with its delivery requirements under Section 4(d)(ii).  For example, if the Holder purchases Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect
to an attempted conversion of this Debenture with respect to which the actual
sale price

 

11

 

of the Conversion Shares (including any
brokerage commissions) giving rise to such purchase obligation was a total of
$10,000 under clause (A) of the immediately preceding sentence, the
Company shall be required to pay the Holder $1,000.  The Holder shall provide the Company written
notice indicating the amounts payable to the Holder in respect of the Buy-In
and, upon request of the Company, evidence of the amount of such loss.  Nothing herein shall limit a Holder’s right
to pursue any other remedies available to it hereunder, at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief with respect to the Company’s failure to timely deliver
certificates representing shares of Common Stock upon conversion of this
Debenture as required pursuant to the terms hereof.

 

vi.            Reservation of Shares Issuable Upon Conversion.
The Company covenants that it will at all times reserve and keep available out
of its authorized and unissued shares of Common Stock for the sole purpose of
issuance upon conversion of this Debenture, as herein provided, free from
preemptive rights or any other actual contingent purchase rights of Persons
other than the Holder (and the other holders of the Debentures), not less than
such aggregate number of shares of the Common Stock as shall (subject to the
terms and conditions set forth in the Purchase Agreement) be issuable (taking
into account the adjustments and restrictions of Section 5) upon the conversion
of the outstanding principal amount of this Debenture.  The Company covenants that all shares of
Common Stock that shall be so issuable shall, upon issue, be duly authorized,
validly issued, fully paid and nonassessable.

 

vii.           Fractional Shares. No fractional shares or scrip
representing fractional shares shall be issued upon the conversion of this
Debenture.  As to any fraction of a share
which Holder would otherwise be entitled to purchase upon such conversion, the
Company shall at its election, either pay a cash adjustment in respect of such
final fraction in an amount equal to such fraction multiplied by the Conversion
Price or round up to the next whole share.

 

viii.          Transfer Taxes. 
The issuance of certificates for shares of the Common Stock on
conversion of this Debenture shall be made without charge to the Holder hereof
for any documentary stamp or similar taxes that may be payable in respect of
the issue or delivery of such certificates, provided that, the Company shall
not be required to pay any tax that may be payable in respect of any transfer
involved in the issuance and delivery of any such certificate upon conversion
in a name other than that of the Holder of this Debenture so converted and the
Company shall not be required to issue or deliver such certificates unless or
until the person or persons requesting the issuance thereof shall have paid to
the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.

 

12

 

Section 5.               Certain Adjustments.

 

a)             Stock Dividends and Stock Splits.  If the Company, at any time while this
Debenture is outstanding: (i) pays a stock dividend or otherwise makes a
distribution or distributions payable in shares of Common Stock on shares of
Common Stock or any Common Stock Equivalents (which, for avoidance of doubt,
shall not include any shares of Common Stock issued by the Company upon
conversion of the Debentures), (ii) subdivides outstanding shares of
Common Stock into a larger number of shares, (iii) combines (including by
way of a reverse stock split) outstanding shares of Common Stock into a smaller
number of shares or (iv) issues, in the event of a reclassification of
shares of the Common Stock, any shares of capital stock of the Company, then
the Conversion Price shall be multiplied by a fraction of which the numerator
shall be the number of shares of Common Stock (excluding any treasury shares of
the Company) outstanding immediately before such event and of which the
denominator shall be the number of shares of Common Stock outstanding
immediately after such event.  Any
adjustment made pursuant to this Section shall become effective
immediately after the record date for the determination of stockholders
entitled to receive such dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision, combination
or re-classification.

 

b)            Subsequent Equity Sales.  If, at any time while this Debenture is
outstanding,  the Company or any
Subsidiary, as applicable, sells or grants any option to purchase or sells or
grants any right to reprice, or otherwise disposes of or issues (or announces
any sale, grant or any option to purchase or other disposition), any Common
Stock or Common Stock Equivalents entitling any Person to acquire shares of
Common Stock at an effective price per share that is lower than the then
Conversion Price (such lower price, the “Base Conversion Price” and such
issuances, collectively, a “Dilutive Issuance”) (if the holder of the
Common Stock or Common Stock Equivalents so issued shall at any time, whether
by operation of purchase price adjustments, reset provisions, floating
conversion, exercise or exchange prices or otherwise, or due to warrants,
options or rights per share which are issued in connection with such issuance,
be entitled to receive shares of Common Stock at an effective price per share
that is lower than the Conversion Price, such issuance shall be deemed to have
occurred for less than the Conversion Price on such date of the Dilutive
Issuance), then the Conversion Price shall be reduced to equal the Base
Conversion Price.  Such adjustment shall
be made whenever such Common Stock or Common Stock Equivalents are issued.  Notwithstanding the foregoing, no adjustment
will be made under this Section 5(b) in respect of an Exempt
Issuance. If the Company enters into a Variable Rate Transaction, despite the
prohibition set forth in the Purchase Agreement, the Company shall be deemed to
have issued Common Stock or Common Stock Equivalents at the lowest possible
conversion price at which such securities may be converted or exercised. The
Company shall notify the Holder in writing, no later than 1 Business Day
following the issuance of any Common Stock or Common Stock Equivalents subject
to this Section 5(b), indicating therein the applicable issuance price, or
applicable Conversion Price, exchange price, conversion price and other pricing
terms (such notice, the “Dilutive Issuance Notice”).  For purposes of clarification, whether or not
the Company provides a Dilutive Issuance Notice

 

13

 

pursuant to this Section 5(b), upon the
occurrence of any Dilutive Issuance, the Holder is entitled to receive a number
of Conversion Shares based upon the Base Conversion Price on or after the date
of such Dilutive Issuance, regardless of whether the Holder accurately refers
to the Base Conversion Price in the Notice of Conversion.

 

c)             Subsequent Rights Offerings.  If the Company, at any time while the
Debenture is outstanding, shall issue rights, options or warrants to all
holders of Common Stock (and not to Holders) entitling them to subscribe for or
purchase shares of Common Stock at a price per share that is lower than the
VWAP on the record date referenced below, then the Conversion Price shall be
multiplied by a fraction of which the denominator shall be the number of shares
of the Common Stock outstanding on the date of issuance of such rights or warrants
plus the number of additional shares of Common Stock offered for subscription
or purchase, and of which the numerator shall be the number of shares of the
Common Stock outstanding on the date of issuance of such rights or warrants
plus the number of shares which the aggregate offering price of the total
number of shares so offered (assuming delivery to the Company in full of all
consideration payable upon exercise of such rights, options or warrants) would
purchase at such VWAP.  Such adjustment
shall be made whenever such rights or warrants are issued, and shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such rights, options or warrants.

 

d)            Pro Rata Distributions. If the Company, at any
time while this Debenture is outstanding, distributes to all holders of Common
Stock (and not to the Holders) evidences of its indebtedness or assets
(including cash and cash dividends) or rights or warrants to subscribe for or
purchase any security (other than the Common Stock, which shall be subject to Section 5(b)),
then in each such case the Conversion Price shall be adjusted by multiplying
such Conversion Price in effect immediately prior to the record date fixed for
determination of stockholders entitled to receive such distribution by a
fraction of which the denominator shall be the VWAP determined as of the record
date mentioned above, and of which the numerator shall be such VWAP on such
record date less the then fair market value at such record date of the portion
of such assets or evidence of indebtedness so distributed applicable to 1
outstanding share of the Common Stock as determined by the Board of Directors
of the Company in good faith.  In either
case the adjustments shall be described in a statement delivered to the Holder
describing the portion of assets or evidences of indebtedness so distributed or
such subscription rights applicable to 1 share of Common Stock.  Such adjustment shall be made whenever any
such distribution is made and shall become effective immediately after the
record date mentioned above.

 

e)             Fundamental Transaction. If, at any time while
this Debenture is outstanding, (i) the Company effects any merger or
consolidation of the Company with or into another Person, (ii) the Company
effects any sale of all or substantially all of its assets in one transaction
or a series of related transactions, (iii) any tender offer or exchange
offer (whether by the Company or another Person) is completed pursuant to which
holders of Common Stock are permitted to tender or exchange their shares for 

 

14

 

other securities, cash or property, or (iv) the
Company effects any reclassification of the Common Stock or any compulsory
share exchange pursuant to which the Common Stock is effectively converted into
or exchanged for other securities, cash or property (in any such case, a “Fundamental
Transaction”), then, upon any subsequent conversion of this Debenture, the
Holder shall have the right to receive, for each Conversion Share that would
have been issuable upon such conversion immediately prior to the occurrence of
such Fundamental Transaction, the same kind and amount of securities, cash or
property as it would have been entitled to receive upon the occurrence of such
Fundamental Transaction if it had been, immediately prior to such Fundamental
Transaction, the holder of 1 share of Common Stock (the “Alternate
Consideration”).  For purposes of any
such conversion, the determination of the Conversion Price shall be
appropriately adjusted to apply to such Alternate Consideration based on the
amount of Alternate Consideration issuable in respect of 1 share of Common
Stock in such Fundamental Transaction, and the Company shall apportion the
Conversion Price among the Alternate Consideration in a reasonable manner
reflecting the relative value of any different components of the Alternate
Consideration.  If holders of Common
Stock are given any choice as to the securities, cash or property to be
received in a Fundamental Transaction, then the Holder shall be given the same
choice as to the Alternate Consideration it receives upon any conversion of
this Debenture following such Fundamental Transaction.  To the extent necessary to effectuate the
foregoing provisions, any successor to the Company or surviving entity in such
Fundamental Transaction shall issue to the Holder a new debenture consistent
with the foregoing provisions and evidencing the Holder’s right to convert such
debenture into Alternate Consideration. The terms of any agreement pursuant to
which a Fundamental Transaction is effected shall include terms requiring any
such successor or surviving entity to comply with the provisions of this Section 5(e) and
insuring that this Debenture (or any such replacement security) will be
similarly adjusted upon any subsequent transaction analogous to a Fundamental
Transaction.

 

f)                                        Calculations.  All calculations under this Section 5
shall be made to the nearest cent or the nearest 1/100th of a share, as the
case may be.  For purposes of this Section 5,
the number of shares of Common Stock deemed to be issued and outstanding as of
a given date shall be the sum of the number of shares of Common Stock
(excluding any treasury shares of the Company) issued and outstanding.

 

g)                                     Notice to the
Holder.

 

i.                                          Adjustment to
Conversion Price.  Whenever
the Conversion Price is adjusted pursuant to any provision of this Section 5,
the Company shall promptly deliver to each Holder a notice setting forth the
Conversion Price after such adjustment and setting forth a brief statement of
the facts requiring such adjustment.

 

ii.                                       Notice to Allow
Conversion by Holder.  If (A) the
Company shall declare a dividend (or any other distribution in whatever form)
on the Common Stock, (B) the Company shall declare a special nonrecurring
cash dividend on or a

 

15

 

redemption of the Common Stock, (C) the
Company shall authorize the granting to all holders of the Common Stock of
rights or warrants to subscribe for or purchase any shares of capital stock of
any class or of any rights, (D) the approval of any stockholders of the
Company shall be required in connection with any reclassification of the Common
Stock, any consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, of any compulsory
share exchange whereby the Common Stock is converted into other securities,
cash or property or (E) the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding up of the affairs of the
Company, then, in each case, the Company shall cause to be filed at each office
or agency maintained for the purpose of conversion of this Debenture, and shall
cause to be delivered to the Holder at its last address as it shall appear upon
the Debenture Register, at least twenty (20) calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x) the
date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be
taken, the date as of which the holders of the Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer or share exchange is expected to become
effective or close, and the date as of which it is expected that holders of the
Common Stock of record shall be entitled to exchange their shares of the Common
Stock for securities, cash or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer or share exchange,
provided that the failure to deliver such notice or any defect therein or in
the delivery thereof shall not affect the validity of the corporate action
required to be specified in such notice. 
The Holder is entitled to convert this Debenture during the 20-day
period commencing on the date of such notice through the effective date of the
event triggering such notice.

 

Section 6.                                            Monthly
Redemption and Forced Conversion.

 

a)                                      Monthly
Redemption.  On each
Monthly Redemption Date, the Company shall redeem the Monthly Redemption Amount
(the “Monthly Redemption”). The Monthly Redemption Amount payable on
each Monthly Redemption Date shall be paid in cash; provided, however,
as to any Monthly Redemption and upon 10 Trading Days’ prior written
irrevocable notice (the “Monthly Redemption Notice”), in lieu of a cash
redemption payment the Company may elect to pay all or part of a Monthly
Redemption Amount in Conversion Shares based on a conversion price equal to the
lesser of (i) the then Conversion Price and (ii) 80% of the
average of the VWAPs for the 10 consecutive Trading Days ending on the Trading
Day that is immediately prior to the applicable Monthly Redemption Date
(subject to adjustment for any stock dividend, stock split, stock combination
or other similar event affecting the Common Stock during such 10 Trading Day
period) (the price calculated during the 10 Trading Day period immediately
prior to the Monthly Redemption Date, the “Monthly Conversion Price” and
such 10 Trading Day period, the “Monthly Conversion Period”); 

 

16

 

provided, further,
that the Company may not pay the Monthly Redemption Amount in Conversion Shares
unless (y) from the date the Holder receives the duly delivered Monthly
Redemption Notice through and until the date such Monthly Redemption is paid in
full, the Equity Conditions have been satisfied, unless waived in writing by
the Holder, and (z) as to such Monthly Redemption, prior to such Monthly
Conversion Period (but not more than 5 Trading Days prior to the commencement
of the Monthly Conversion Period), the Company shall have delivered to the
Holder’s account with The Depository Trust Company a number of shares of Common
Stock to be applied against such Monthly Redemption Amount equal to the
quotient of (x) the applicable Monthly Redemption Amount divided by (y) the
lesser of (A) the Conversion Price and (B) 80% of the average of the
10 VWAPs during the period ending on the 3rd Trading Day immediately
prior to the date of the Monthly Redemption Notice (the “Pre-Redemption Conversion Shares”).  The Holder may convert, pursuant to Section 4(a),
any principal amount of this Debenture subject to a Monthly Redemption at any
time prior to the date that the Monthly Redemption Amount, plus accrued but
unpaid interest, liquidated damages and any other amounts then owing to the
Holder are due and paid in full.  Unless
otherwise indicated by the Holder in the applicable Notice of Conversion, any
principal amount of this Debenture converted during the applicable Monthly
Conversion Period until the date the Monthly Redemption Amount is paid in full
shall be first applied to the principal amount subject to the Monthly Redemption
Amount payable in cash and then to the Monthly Redemption Amount payable in
Conversion Shares.  Any principal amount
of this Debenture converted during the applicable Monthly Conversion Period in
excess of the Monthly Redemption Amount shall be applied against the last
principal amount of this Debenture scheduled to be redeemed hereunder, in
reverse time order from the Maturity Date; provided, however, if
any such conversion is applied against such Monthly Redemption Amount, the

Pre-Redemption Conversion Shares, if any were issued in connection with such
Monthly Redemption or were not already applied to such conversions, shall be
first applied against such conversion. 
The Company covenants and agrees that it will honor all Notices of
Conversion tendered up until such amounts are paid in full.  The Company’s determination to pay a Monthly
Redemption in cash, shares of Common Stock or a combination thereof shall be
applied ratably to all of the holders of the then outstanding Debentures based
on their (or their predecessor’s) initial purchases of Debentures pursuant to
the Purchase Agreement.  At any time the
Company delivers a notice to the Holder of its election to pay the Monthly
Redemption Amount in shares of Common Stock, the Company shall file a
prospectus supplement pursuant to Rule 424 disclosing such election.  Notwithstanding anything herein to the
contrary, on 3 occasions at the election of the Holder by written notice to the
Company prior to Monthly Redemption Date that is to be paid in shares, the
Holder may defer the pending Monthly Redemption to a subsequent date as
determined by the Holder.  Upon the
deferment of a Monthly Redemption, the Holder shall give at least 5 Trading
Days’ prior notice that such Monthly Redemption is due, including the deemed
Monthly Redemption Date as to such Monthly Redemption, and the Monthly
Conversion Price as to such Monthly Redemption shall be calculated off such
Monthly Redemption Date.

 

17

 

b)                                     Redemption Procedure.  The payment of cash or issuance of Common
Stock, as applicable, pursuant to a Monthly Redemption shall be payable on the
Monthly Redemption Date.  If any portion
of the payment pursuant to an Monthly Redemption shall not be paid by the
Company by the applicable due date, interest shall accrue thereon at an
interest rate equal to the lesser of 18% per annum or the maximum rate
permitted by applicable law until such amount is paid in full.  Notwithstanding anything herein contained to
the contrary, if any portion of the Monthly Redemption Amount remains unpaid
after such date, the Holder may elect, by written notice to the Company given
at any time thereafter, to invalidate such Monthly Redemption, ab  initio.  Notwithstanding anything to the contrary in
this Section 6, the Company’s determination to redeem in cash or its
elections under Section 6(b) shall be applied ratably among the
Holders of Debentures. The Holder may elect to convert the outstanding
principal amount of the Debenture pursuant to Section 4 prior to actual
payment in cash for any redemption under this Section 6 by the delivery of
a Notice of Conversion to the Company.

 

c)                                      Forced
Conversion. 
Notwithstanding anything herein to the contrary, if after the six month
anniversary of the Original Issue Date, (i) each of the Closing Prices for
any 20 consecutive Trading Days (such period commencing only after the six
month anniversary of the Original Issue Date, such period the “Threshold
Period”)) exceeds the then Conversion Price by $0.30
(subject to adjustment for reverse and forward stock splits, stock dividends,
stock combinations and other similar transactions of the Common Stock that
occur after the Original Issue Date) or (ii) the Company consummates a
bona fide firm commitment public underwritten offering of the Common Stock by a
nationally recognized investment bank of its Common Stock for an offering price
that is equal to or exceeds the then Conversion Price by $0.30
(subject to adjustment for reverse and forward stock splits, stock dividends,
stock combinations and other similar transactions of the Common Stock that
occur after the Original Issue Date), the Company may, within 1 Trading Day
after the end of any such Threshold Period, deliver a written notice to the
Holder (a “Forced Conversion Notice” and the date such notice is
delivered to the Holder, the “Forced Conversion Notice Date”) to cause
the Holder to convert all or part of the then outstanding principal amount of
Debentures plus, if so specified in the Forced Conversion Notice, accrued but
unpaid liquidated damages and other amounts owing to the Holder under this
Debenture, it being agreed that the “Conversion Date” for purposes of Section 4
shall be deemed to occur on the third Trading Day following the Forced
Conversion Notice Date (such third Trading Day, the “Forced Conversion Date”).  The Company may not deliver a Forced
Conversion Notice, and any Forced Conversion Notice delivered by the Company
shall not be effective, unless all of the Equity Conditions are met (unless
waived in writing by the Holder) on each Trading Day occurring during the
applicable Threshold Period through and including the later of the Forced
Conversion Date and the Trading Day after the date such Conversion Shares
pursuant to such conversion are delivered to the Holder.  Any Forced Conversion shall be applied
ratably to all Holders based on their initial purchases of Debentures pursuant
to the Purchase Agreement, provided that any voluntary conversions by a Holder
shall be applied against the Holder’s pro rata allocation, thereby decreasing
the aggregate amount forcibly converted hereunder if only a portion of this
Debenture is forcibly converted.  

 

18

 

For purposes of clarification, a Forced
Conversion shall be subject to all of the provisions of Section 4,
including, without limitation, the provision requiring payment of liquidated
damages and limitations on conversions.

 

Section 7.                                            Negative
Covenants. As long as any portion of this Debenture remains
outstanding, unless the holders of at least 67% in principal amount of the then
outstanding Debentures shall have otherwise given prior written consent, the
Company shall not, and shall not permit any of its subsidiaries (whether or not
a Subsidiary on the Original Issue Date) to, directly or indirectly:

 

a)                                      other than
Permitted Indebtedness, enter into, create, incur, assume, guarantee or suffer
to exist any indebtedness for borrowed money of any kind, including, but not
limited to, a guarantee, on or with respect to any of its property or assets
now owned or hereafter acquired or any interest therein or any income or
profits therefrom;

 

b)                                     other than
Permitted Liens, enter into, create, incur, assume or suffer to exist any Liens
of any kind, on or with respect to any of its property or assets now owned or
hereafter acquired or any interest therein or any income or profits therefrom;

 

c)                                      amend its
charter documents, including, without limitation, its certificate of
incorporation and bylaws, in any manner that materially and adversely affects
any rights of the Holder;

 

d)                                     repay,
repurchase or offer to repay, repurchase or otherwise acquire more than a de
minimis number of shares of its Common Stock or Common Stock Equivalents
(other than Exempt Issuances under clause (b) thereof) other than as to (i) the
Conversion Shares or Warrant Shares as permitted or required under the
Transaction Documents and (ii) repurchases of Common Stock or Common Stock
Equivalents of departing officers and directors of the Company, provided that
such repurchases shall not exceed an aggregate of $100,000 for all officers and
directors during the term of this Debenture;

 

e)                                      repay,
repurchase or offer to repay, repurchase or otherwise acquire any Indebtedness,
other than the Debentures if on a pro-rata basis, other than regularly
scheduled principal payments as such terms are in effect as of the Original
Issue Date, provided that such payments shall not be permitted if, at such
time, or after giving effect to such payment, any Event of Default exist or
occur;

 

f)                                        pay cash
dividends or distributions on any equity securities of the Company;

 

g)                                     enter into any
transaction with any Affiliate of the Company which would be required to be
disclosed in any public filing with the Commission, unless such transaction is
made on an arm’s-length basis and expressly approved by a majority of the
disinterested directors of the Company (even if less than a quorum otherwise
required for board approval); or

 

19

 

h)                                     enter into any
agreement with respect to any of the foregoing.

 

Notwithstanding anything to the contrary set
forth in this Debenture, under no circumstances shall any actions taken by the
Company that are necessary to comply with the Prior Transaction Documents (as
defined in the Purchase Agreement) be deemed to breach or trigger any default
with respect to any provision in this Debenture.

 

Section 8.                                            Events of
Default.

 

a)                                      “Event of
Default” means, wherever used herein, any of the following events (whatever
the reason for such event and whether such event shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court, or any order, rule or regulation of any
administrative or governmental body):

 

i.                                          any default in
the payment of (A) the principal amount of any Debenture or (B) other
fees owing on any Debenture, or liquidated damages in respect of, any
Debenture, as and when the same shall become due and payable (whether on a
Conversion Date or the Maturity Date or by acceleration or otherwise) which
default, solely in the case of defaults under clause (B) above, is not
cured, within 3 Trading Days;

 

ii.                                       the Company
shall fail to observe or perform any other covenant or agreement contained in the
Debentures (other than a breach by the Company of its obligations to deliver
shares of Common Stock to the Holder upon conversion, which breach is addressed
in clause (ix) below) which failure is not cured, if possible to cure,
within the earlier to occur of (A) 5 Trading Days after notice of such
failure sent by the Holder or by any other Holder to the Company and (B) 10
Trading Days after the Company has become or should have become aware of such
failure;

 

iii.                                    a default or
event of default (subject to any grace or cure period provided in the
applicable agreement, document or instrument) shall occur under (A) any of
the Transaction Documents or (B) any other material agreement, lease,
document or instrument to which the Company or any Subsidiary is obligated (and
not covered by clause (vi) below);

 

iv.                                   any
representation or warranty made in this Debenture, any other Transaction
Documents, any written statement pursuant hereto or thereto or any other
report, financial statement or certificate made or delivered to the Holder or
any other Holder shall be untrue or incorrect in any material respect as of the
date when made or deemed made;

 

20

 

v.                                      the Company or
any Significant Subsidiary (as such term is defined in Rule 1-02(w) of
Regulation S-X)  shall be subject to a
Bankruptcy Event;

 

vi.                                   the Company or
any Subsidiary shall default on any of its obligations under any mortgage,
credit agreement or other facility, indenture agreement, factoring agreement or
other instrument under which there may be issued, or by which there may be
secured or evidenced, any indebtedness for borrowed money or money due under
any long term leasing or factoring arrangement that (a) involves an
obligation greater than $150,000, whether such indebtedness now exists or shall
hereafter be created, and (b) results in such indebtedness becoming or
being declared due and payable prior to the date on which it would otherwise
become due and payable;

 

vii.                                the Common
Stock shall not be eligible for listing or quotation for trading on a Trading
Market and shall not be eligible to resume listing or quotation for trading
thereon within five Trading Days;

 

viii.                             the Company
shall be a party to any Change of Control Transaction or Fundamental Transaction
or shall agree to sell or dispose of all or in excess of 33% of its assets in
one transaction or a series of related transactions (whether or not such sale
would constitute a Change of Control Transaction);

 

ix.                                     the Company
shall fail for any reason to deliver certificates to a Holder prior to the
fifth Trading Day after a Conversion Date pursuant to Section 4(d) or
any Forced Conversion Date pursuant to Section 6 or the Company shall
provide at any time notice to the Holder, including by way of public
announcement, of the Company’s intention to not honor requests for conversions
of any Debentures in accordance with the terms hereof;

 

x.                                        the Company
does not meet the current public information requirements under Rule 144
in respect of the shares of Common Stock issuable pursuant to the Transaction
Documents; or

 

xi.                                     any monetary
judgment, writ or similar final process shall be entered or filed against the
Company, any subsidiary or any of their respective property or other assets for
more than [$100,000], and such judgment, writ or similar final process shall
remain unvacated, unbonded or unstayed for a period of 45 calendar days.

 

b)                                     Remedies Upon
Event of Default. If any Event of Default occurs, the outstanding
principal amount of this Debenture, plus accrued but unpaid liquidated damages
and other amounts owing in respect thereof through the date of acceleration,
shall become, at the Holder’s election, immediately due and payable in cash at
the Mandatory Default Amount.  Commencing
5 days after the occurrence of any Event of 

 

21

 

Default that results in the eventual
acceleration of this Debenture, the interest rate on this Debenture shall
accrue at an interest rate equal to the lesser of 18% per annum or the maximum
rate permitted under applicable law. 
Upon the payment in full of the Mandatory Default Amount, the Holder
shall promptly surrender this Debenture to or as directed by the Company.  In connection with such acceleration
described herein, the Holder need not provide, and the Company hereby waives,
any presentment, demand, protest or other notice of any kind, and the Holder
may immediately and without expiration of any grace period enforce any and all
of its rights and remedies hereunder and all other remedies available to it
under applicable law.  Such acceleration
may be rescinded and annulled by Holder at any time prior to payment hereunder
and the Holder shall have all rights as a holder of the Debenture until such
time, if any, as the Holder receives full payment pursuant to this Section 8(b).  No such rescission or annulment shall affect
any subsequent Event of Default or impair any right consequent thereon.

 

Section 9.                                            Miscellaneous.

 

a)                                      Notices.  Any and all notices or other communications
or deliveries to be provided by the Holder hereunder, including, without
limitation, any Notice of Conversion, shall be in writing and delivered
personally, by facsimile, or sent by a nationally recognized overnight courier
service, addressed to the Company, at the address set forth above, or such
other facsimile number or address as the Company may specify for such purpose
by notice to the Holder delivered in accordance with this Section 9(a).  Any and all notices or other communications
or deliveries to be provided by the Company hereunder shall be in writing and
delivered personally, by facsimile, or sent by a nationally recognized
overnight courier service addressed to each Holder at the facsimile number or
address of the Holder appearing on the books of the Company, or if no such
facsimile number or address appears, at the principal place of business of the
Holder.  Any notice or other
communication or deliveries hereunder shall be deemed given and effective on
the earliest of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified on
the signature page prior to 5:30 p.m. (New York City time), (ii) the
date immediately following the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified on
the signature page between 5:30 p.m. (New York City time) and 11:59 p.m.
(New York City time) on any date, (iii) the second Business Day following
the date of mailing, if sent by nationally recognized overnight courier service
or (iv) upon actual receipt by the party to whom such notice is required
to be given.

 

b)                                     Absolute
Obligation. Except as expressly provided herein, no provision
of this Debenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of and liquidated damages, as
applicable, on this Debenture at the time, place, and rate, and in the coin or
currency, herein prescribed.  This
Debenture is a direct debt obligation of the Company.  This Debenture ranks pari  passu
with all other Debentures now or hereafter issued under the terms set forth
herein.

 

22

 

c)                                      Lost or
Mutilated Debenture.  If this
Debenture shall be mutilated, lost, stolen or destroyed, the Company shall
execute and deliver, in exchange and substitution for and upon cancellation of
a mutilated Debenture, or in lieu of or in substitution for a lost, stolen or
destroyed Debenture, a new Debenture for the principal amount of this Debenture
so mutilated, lost, stolen or destroyed, but only upon receipt of evidence of
such loss, theft or destruction of such Debenture, and of the ownership hereof,
reasonably satisfactory to the Company.

 

d)                                     Governing Law.  All questions concerning the construction,
validity, enforcement and interpretation of this Debenture shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflict of laws thereof.  Each party agrees that all legal proceedings
concerning the interpretation, enforcement and defense of the transactions
contemplated by any of the Transaction Documents (whether brought against a
party hereto or its respective Affiliates, directors, officers, shareholders,
employees or agents) shall be commenced in the state and federal courts sitting
in the City of New York, Borough of Manhattan (the “New York Courts”).  Each party hereto hereby irrevocably submits
to the exclusive jurisdiction of the New York Courts for the adjudication of
any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein (including with respect to the
enforcement of any of the Transaction Documents), 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 such New York Courts, or such
New York Courts are improper or inconvenient venue for such proceeding.  Each party hereby irrevocably waives personal
service of process and consents to process being served in any such suit,
action or proceeding by mailing a copy thereof via registered or certified mail
or overnight delivery (with evidence of delivery) to such party at the address
in effect for notices to it under this Debenture and agrees that such service
shall constitute good and sufficient service of process and notice
thereof.  Nothing contained herein shall
be deemed to limit in any way any right to serve process in any other manner
permitted by applicable law. Each party hereto hereby irrevocably waives, to
the fullest extent permitted by applicable law, any and all right to trial by
jury in any legal proceeding arising out of or relating to this Debenture or
the transactions contemplated hereby. If either party shall commence an action
or proceeding to enforce any provisions of this Debenture, then the prevailing
party in such action or proceeding shall be reimbursed by the other party for
its attorneys fees and other costs and expenses incurred in the investigation,
preparation and prosecution of such action or proceeding.

 

e)                                      Amendments and
Waivers.  This Debenture, or any
provisions hereof, may be modified or amended or the provisions hereof waived
with the prior written consent of the Company and the Holder.  Any waiver by the Company or the Holder of a
breach of any provision of this Debenture shall not operate as or be construed
to be a waiver of any other breach of such provision or of any breach of any
other provision of this Debenture.  The
failure of the Company or the Holder to insist upon strict adherence to any
term of this Debenture on one or more occasions shall not be considered a
waiver 

 

23

 

or deprive that party of the right thereafter
to insist upon strict adherence to that term or any other term of this
Debenture.

 

f)                                        Severability.  If any provision of this Debenture is
invalid, illegal or unenforceable, the balance of this Debenture shall remain
in effect, and if any provision is inapplicable to any Person or circumstance,
it shall nevertheless remain applicable to all other Persons and
circumstances.  If it shall be found that
any interest or other amount deemed interest due hereunder violates the
applicable law governing usury, the applicable rate of interest due hereunder
shall automatically be lowered to equal the maximum rate of interest permitted
under applicable law. The Company covenants (to the extent that it may lawfully
do so) that it shall not at any time insist upon, plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay, extension or
usury law or other law which would prohibit or forgive the Company from paying
all or any portion of the principal of this Debenture as contemplated herein,
wherever enacted, now or at any time hereafter in force, or which may affect
the covenants or the performance of this indenture, and the Company (to the
extent it may lawfully do so) hereby expressly waives all benefits or advantage
of any such law, and covenants that it will not, by resort to any such law,
hinder, delay or impede the execution of any power herein granted to the
Holder, but will suffer and permit the execution of every such as though no
such law has been enacted.

 

g)                                     Next Business
Day.  Whenever any payment or other
obligation hereunder shall be due on a day other than a Business Day, such
payment shall be made on the next succeeding Business Day.

 

h)                                     Headings.  The headings contained herein are for
convenience only, do not constitute a part of this Debenture and shall not be
deemed to limit or affect any of the provisions hereof.

 

i)                                         Assumption.  Any
successor to the Company or any surviving entity in a Fundamental Transaction
shall (i) assume, prior to such Fundamental Transaction, all of the
obligations of the Company under this Debenture and the other Transaction
Documents pursuant to written agreements in form and substance satisfactory to
the Holder (such approval not to be unreasonably withheld or delayed) and (ii) issue
to the Holder a new debenture of such successor entity evidenced by a written
instrument substantially similar in form and substance to this Debenture,
including, without limitation, having a principal amount equal to the principal
amount of this Debenture and having similar ranking to this Debenture, which
shall be satisfactory to the Holder (any such approval not to be unreasonably
withheld or delayed).  The provisions of this Section 9(i) shall
apply similarly and equally to successive Fundamental Transactions and shall be
applied without regard to any limitations of this Debenture.

 

j)                                         Secured
Obligation.  The
obligations of the Company under this Debenture are secured by all assets of
the Company and each Subsidiary pursuant to the 

 

24

 

Security Agreement, dated as of March       ,
2008 between the Company, the Subsidiaries of the Company and the Secured
Parties (as defined therein).

 

*********************

 

(Signature Pages Follow)

 

25

 

IN WITNESS WHEREOF, the Company has caused
this Debenture to be duly executed by a duly authorized officer as of the date
first above indicated.

 

 

	
   

  	
  ADVANCED CELL TECHNOLOGY, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
  Facsimile No. for
  delivery of Notices:                                     

  

 

26

 

ANNEX A

 

NOTICE OF
CONVERSION

 

The undersigned hereby elects to convert
principal under the Original Issue Discount Senior Secured Convertible
Debenture due March     , 2009 of Advanced Cell
Technology, Inc., a Delaware corporation (the “Company”), into shares of common stock (the “Common
Stock”), of the Company according to the conditions hereof, as of the date
written below.  If shares of Common Stock
are to be issued in the name of a person other than the undersigned, the
undersigned will pay all transfer taxes payable with respect thereto and is
delivering herewith such certificates and opinions as reasonably requested by
the Company in accordance therewith.  No
fee will be charged to the holder for any conversion, except for such transfer
taxes, if any.

 

By the delivery of this Notice of Conversion
the undersigned represents and warrants to the Company that its ownership of
the Common Stock does not exceed the amounts specified under Section 4 of
this Debenture, as determined in accordance with Section 13(d) of the
Exchange Act.

 

The undersigned agrees to comply with the
prospectus delivery requirements under the applicable securities laws in
connection with any transfer of the aforesaid shares of Common Stock.

 

Conversion calculations:

 

	
   

  	
  Date to Effect Conversion:

  
	
   

  	
   

  
	
   

  	
  Principal Amount of Debenture to be Converted:

  
	
   

  	
   

  
	
   

  	
  Number of shares of Common Stock to be issued:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Signature:

  
	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
   

  
	
   

  	
  Address for Delivery of Common Stock Certificates:

  
	
   

  	
   

  
	
   

  	
  Or

  
	
   

  	
   

  
	
   

  	
  DWAC Instructions:

  
	
   

  	
   

  
	
   

  	
  Broker No:

  	
                                  

  
	
   

  	
  Account No:

  	
                                 

  
				

 

27

 

Schedule 1

 

CONVERSION
SCHEDULE

 

The Original Issue Discount
Senior Secured Convertible Debentures due on March       ,
2009 in the aggregate principal amount of
$                        
are issued by Advanced Cell Technology, Inc.,
a Delaware corporation.  This Conversion
Schedule reflects conversions made under Section 4 of the above referenced
Debenture.

 

Dated:

 

	
  Date of Conversion

  (or for first entry,

  Original Issue Date)

  	
   

  	
  Amount of

  Conversion

  	
   

  	
  Aggregate

  Principal

  Amount

  Remaining

  Subsequent to

  Conversion

  (or original

  Principal

  Amount)

  	
   

  	
  Company Attest

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

28Exhibit 10.5

 

SUBSIDIARY GUARANTEE

 

SUBSIDIARY
GUARANTEE, dated as of March 31, 2008 (this “Guarantee”), made by
each of the signatories hereto (together with any other entity that may become
a party hereto as provided herein, the “Guarantors”), in favor of the
purchasers signatory (together with their permitted assigns, the “Purchasers”)
to that certain Securities Purchase Agreement, dated as of the date hereof,
between Advanced Cell Technology, Inc., a Delaware corporation (the “Company”)
and the Purchasers.

 

W I T N E S S E T H:

 

WHEREAS, pursuant to that certain Securities Purchase
Agreement, dated as of the date hereof, by and between the Company and the
Purchasers (the “Purchase Agreement”), the Company has agreed to sell
and issue to the Purchasers, and the Purchasers have agreed to purchase from
the Company the Debentures, subject to the terms and conditions set forth
therein; and

 

WHEREAS, each Guarantor will directly benefit from
the extension of credit to the Company represented by the issuance of the
Debentures; and

 

NOW, THEREFORE, in consideration of the premises and
to induce the Purchasers to enter into the Purchase Agreement and to carry out
the transactions contemplated thereby, each Guarantor hereby agrees with the
Purchasers as follows:

 

1.             Definitions. Unless otherwise defined herein, terms defined in the Purchase Agreement and used herein shall have the meanings given to them in the Purchase Agreement. The words “hereof,” “herein,” “hereto” and “hereunder” and words of similar import when used in this Guarantee shall refer to this Guarantee as a whole and not to any particular provision of this Guarantee, and Section and Schedule references are to this Guarantee unless otherwise specified. The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms.  The following terms shall have the following meanings:
 

“Guarantee” means this Subsidiary Guarantee,
as the same may be amended, supplemented or otherwise modified from time to
time.

 

“Obligations”
means, in addition to all other costs and expenses of collection
incurred by Purchasers in enforcing any of such Obligations and/or this
Guarantee, all of the liabilities and obligations (primary, secondary, direct,
contingent, sole, joint or several) due or to become due, or that are now or
may be hereafter contracted or acquired, or owing to, of the Company or any
Guarantor to the Purchasers, including, without limitation, all obligations
under this Guarantee, the Debentures and any other instruments, agreements or
other documents executed and/or delivered in connection herewith or therewith,
in each case, whether now or hereafter existing, voluntary or involuntary,
direct or indirect, 

 

1

 

absolute or contingent, liquidated or
unliquidated, whether or not jointly owed with others, and whether or not from
time to time decreased or extinguished and later increased, created or
incurred, and all or any portion of such obligations or liabilities that are
paid, to the extent all or any part of such payment is avoided or recovered
directly or indirectly from any of the Purchasers as a preference, fraudulent
transfer or otherwise as such obligations may be amended, supplemented,
converted, extended or modified from time to time.  Without limiting the generality of the
foregoing, the term “Obligations” shall include, without limitation: (i) principal
of, and interest on the Debentures and the loans extended pursuant thereto; (ii) any
and all other fees, indemnities, costs, obligations and liabilities of the
Company or any Guarantor from time to time under or in connection with this
Guarantee, the Debentures and any other instruments, agreements or other
documents executed and/or delivered in connection herewith or therewith; and (iii) all
amounts (including but not limited to post-petition interest) in respect of the
foregoing that would be payable but for the fact that the obligations to pay
such amounts are unenforceable or not allowable due to the existence of a
bankruptcy, reorganization or similar proceeding involving the Company or any
Guarantor.

 

2.             Guarantee.
 

(a)           Guarantee.

 

(i)            The Guarantors hereby, jointly and severally,
unconditionally and irrevocably, guarantee to the Purchasers and their respective
successors, indorsees, transferees and assigns, the prompt and complete payment
and performance when due (whether at the stated maturity, by acceleration or
otherwise) of the Obligations.

 

(ii)           Anything herein or in any other Transaction Document to
the contrary notwithstanding, the maximum liability of each Guarantor hereunder
and under the other Transaction Documents shall in no event exceed the amount
which can be guaranteed by such Guarantor under applicable federal and state
laws, including laws relating to the insolvency of debtors, fraudulent
conveyance or transfer or laws affecting the rights of creditors generally
(after giving effect to the right of contribution established in Section 2(b)).

 

(iii)          Each Guarantor agrees that the Obligations may at any time
and from time to time exceed the amount of the liability of such Guarantor
hereunder without impairing the guarantee contained in this Section 2 or
affecting the rights and remedies of the Purchasers hereunder.

 

(iv)          The guarantee contained in this Section 2 shall
remain in full force and effect until all the Obligations and the obligations
of each 

 

2

 

Guarantor under the guarantee contained in this Section 2 shall
have been satisfied by indefeasible payment in full.

 

(v)           No payment made by the Company, any of the
Guarantors, any other guarantor or any other Person or received or collected by
the Purchasers from the Company, any of the Guarantors, any other guarantor or
any other Person by virtue of any action or proceeding or any set-off or
appropriation or application at any time or from time to time in reduction of
or in payment of the Obligations shall be deemed to modify, reduce, release or
otherwise affect the liability of any Guarantor hereunder which shall,
notwithstanding any such payment (other than any payment made by such Guarantor
in respect of the Obligations or any payment received or collected from such
Guarantor in respect of the Obligations), remain liable for the Obligations up
to the maximum liability of such Guarantor hereunder until the Obligations are
indefeasibly paid in full.

 

(vi)          Notwithstanding anything to the contrary in this
Guarantee, with respect to any defaulted non-monetary Obligations the specific
performance of which by the Guarantors is not reasonably possible (e.g. the
issuance of the Company’s Common Stock), the Guarantors shall only be liable
for making the Purchasers whole on a monetary basis for the Company’s failure
to perform such Obligations in accordance with the Transaction Documents.

 

(b)           Right of
Contribution. Subject to Section 2(c), each Guarantor
hereby agrees that to the extent that a Guarantor shall have paid more than its
proportionate share of any payment made hereunder, such Guarantor shall be
entitled to seek and receive contribution from and against any other Guarantor
hereunder which has not paid its proportionate share of such payment. Each
Guarantor’s right of contribution shall be subject to the terms and conditions
of Section 2(c). The provisions of this Section 2(b) shall in no
respect limit the obligations and liabilities of any Guarantor to the
Purchasers and each Guarantor shall remain liable to the Purchasers for the
full amount guaranteed by such Guarantor hereunder.

 

(c)           No Subrogation.  Notwithstanding any payment made by any
Guarantor hereunder or any set-off or application of funds of any Guarantor by
the Purchasers, no Guarantor shall be entitled to be subrogated to any of the
rights of the Purchasers against the Company or any other Guarantor or any
collateral security or guarantee or right of offset held by the Purchasers for
the payment of the Obligations, nor shall any Guarantor seek or be entitled to
seek any contribution or reimbursement from the Company or any other Guarantor
in respect of payments made by such Guarantor hereunder, until all amounts
owing to the Purchasers by the Company on account of the Obligations are
indefeasibly paid in full. If any amount shall be paid to any Guarantor on
account of such 

 

3

 

subrogation rights at any time when all of the Obligations shall not
have been paid in full, such amount shall be held by such Guarantor in trust
for the Purchasers, segregated from other funds of such Guarantor, and shall,
forthwith upon receipt by such Guarantor, be turned over to the Purchasers in
the exact form received by such Guarantor (duly indorsed by such Guarantor to
the Purchasers, if required), to be applied against the Obligations, whether
matured or unmatured, in such order as the Purchasers may determine.

 

(d)           Amendments,
Etc. With Respect to the Obligations. Each Guarantor shall remain obligated
hereunder notwithstanding that, without any reservation of rights against any
Guarantor and without notice to or further assent by any Guarantor, any demand
for payment of any of the Obligations made by the Purchasers may be rescinded
by the Purchasers and any of the Obligations continued, and the Obligations, or
the liability of any other Person upon or for any part thereof, or any
collateral security or guarantee therefor or right of offset with respect
thereto, may, from time to time, in whole or in part, be renewed, extended,
amended, modified, accelerated, compromised, waived, surrendered or released by
the Purchasers, and the Purchase Agreement and the other Transaction Documents
and any other documents executed and delivered in connection therewith may be
amended, modified, supplemented or terminated, in whole or in part, as the
Purchasers may deem advisable from time to time, and any collateral security,
guarantee or right of offset at any time held by the Purchasers for the payment
of the Obligations may be sold, exchanged, waived, surrendered or released. The
Purchasers shall have no obligation to protect, secure, perfect or insure any
Lien at any time held by them as security for the Obligations or for the
guarantee contained in this Section 2 or any property subject thereto.

 

(e)           Guarantee
Absolute and Unconditional. Each Guarantor waives any and all notice of the
creation, renewal, extension or accrual of any of the Obligations and notice of
or proof of reliance by the Purchasers upon the guarantee contained in this Section 2
or acceptance of the guarantee contained in this Section 2; the
Obligations, and any of them, shall conclusively be deemed to have been
created, contracted or incurred, or renewed, extended, amended or waived, in
reliance upon the guarantee contained in this Section 2; and all dealings
between the Company and any of the Guarantors, on the one hand, and the
Purchasers, on the other hand, likewise shall be conclusively presumed to have
been had or consummated in reliance upon the guarantee contained in this Section 2.
Each Guarantor waives to the extent permitted by law diligence, 

presentment, protest, demand for payment and notice of default or nonpayment to
or upon the Company or any of the Guarantors with respect to the Obligations.
Each Guarantor understands and agrees that the guarantee contained in this Section 2
shall be construed as a continuing, absolute and unconditional guarantee of
payment and performance without regard to (a) the validity or
enforceability of the Purchase Agreement or any other Transaction Document, any
of the Obligations or any other collateral security therefor or guarantee or
right of offset with respect thereto at any time or from time to time held by
the Purchasers,

 

4

 

(b) any defense, set-off or counterclaim (other than a defense of
payment or performance or fraud  or
misconduct by Purchasers) which may at any time be available to or be asserted
by the Company or any other Person against the Purchasers, or (c) any
other circumstance whatsoever (with or without notice to or knowledge of the
Company or such Guarantor) which constitutes, or might be construed to
constitute, an equitable or legal discharge of the Company for the Obligations,
or of such Guarantor under the guarantee contained in this Section 2, in
bankruptcy or in any other instance. When making any demand hereunder or
otherwise pursuing its rights and remedies hereunder against any Guarantor, the
Purchasers may, but shall be under no obligation to, make a similar demand on
or otherwise pursue such rights and remedies as they may have against the
Company, any other Guarantor or any other Person or against any collateral
security or guarantee for the Obligations or any right of offset with respect
thereto, and any failure by the Purchasers to make any such demand, to pursue
such other rights or remedies or to collect any payments from the Company, any
other Guarantor or any other Person or to realize upon any such collateral
security or guarantee or to exercise any such right of offset, or any release
of the Company, any other Guarantor or any other Person or any such collateral
security, guarantee or right of offset, shall not relieve any Guarantor of any
obligation or liability hereunder, and shall not impair or affect the rights
and remedies, whether express, implied or available as a matter of law, of the
Purchasers against any Guarantor. For the purposes hereof, “demand” shall
include the commencement and continuance of any legal proceedings.

 

(f)            Reinstatement.
The guarantee contained in this Section 2 shall continue to be effective,
or be reinstated, as the case may be, if at any time payment, or any part
thereof, of any of the Obligations is rescinded or must otherwise be restored
or returned by the Purchasers upon the insolvency, bankruptcy, dissolution,
liquidation or reorganization of the Company or any Guarantor, or upon or as a
result of the appointment of a receiver, intervenor or conservator of, or
trustee or similar officer for, the Company or any Guarantor or any substantial
part of its property, or otherwise, all as though such payments had not been
made.

 

(g)           Payments.
Each Guarantor hereby guarantees that payments hereunder will be paid to the
Purchasers without set-off or counterclaim in U.S. dollars at the address set
forth or referred to in the Signature Pages to the Purchase Agreement.

 

3.             Representations and Warranties. Each Guarantor hereby makes the following representations and warranties to Purchasers as of the date hereof:
 

(a)           Organization
and Qualification. The Guarantor is a corporation, duly incorporated,
validly existing and in good standing under the laws of the applicable
jurisdiction set forth on Schedule 1, with the requisite corporate power and
authority to own and use its properties and assets and to carry on its business

 

5

 

as currently conducted. The Guarantor has no subsidiaries other than
those identified as such on the Disclosure Schedules to the Purchase Agreement.
The Guarantor is duly qualified to do business and is in good standing as a
foreign corporation in each jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary, except
where the failure to be so qualified or in good standing, as the case may be,
could not, individually or in the aggregate, (x) adversely affect the
legality, validity or enforceability of any of this Guaranty in any material
respect, (y) have a material adverse effect on the results of operations,
assets, prospects, or financial condition of the Guarantor or (z) adversely
impair in any material respect the Guarantor’s ability to perform fully on a
timely basis its obligations under this Guaranty (a “Material Adverse Effect”).

 

(b)           Authorization;
Enforcement.  The
Guarantor has the requisite corporate power and authority to enter into and to
consummate the transactions contemplated by this Guaranty, and otherwise to
carry out its obligations hereunder. The execution and delivery of this
Guaranty by the Guarantor and the consummation by it of the transactions
contemplated hereby have been duly authorized by all requisite corporate action
on the part of the Guarantor. This Guaranty has been duly executed and
delivered by the Guarantor and constitutes the valid and binding obligation of
the Guarantor enforceable against the Guarantor in accordance with its terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating
to, or affecting generally the enforcement of, creditors’ rights and remedies
or by other equitable principles of general application.

 

(c)           No Conflicts. The execution,
delivery and performance of this Guaranty by the Guarantor and the consummation
by the Guarantor of the transactions contemplated thereby do not and will not (i) conflict
with or violate any provision of its Certificate of Incorporation or By-laws or
(ii) conflict with, constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which the Guarantor is a party, or (iii) result
in a violation of any law, rule, regulation, order, judgment, injunction,
decree or other restriction of any court or governmental authority to which the
Guarantor is subject (including Federal and State securities laws and
regulations), or by which any material property or asset of the Guarantor is
bound or affected, except in the case of each of clauses (ii) and (iii),
such conflicts, defaults, terminations, amendments, accelerations,
cancellations and violations as could not, individually or in the aggregate,
have or result in a Material Adverse Effect. The business of the Guarantor is
not being conducted in violation of any law, ordinance or regulation of any
governmental authority, except for violations which, individually or in the
aggregate, do not have a Material Adverse Effect.

 

6

 

(d)                                 Consents and
Approvals. The Guarantor is not required to obtain any
consent, waiver, authorization or order of, or make any filing or registration
with, any court or other federal, state, local, foreign or other governmental
authority or other person in connection with the execution, delivery and
performance by the Guarantor of this Guaranty.

 

(e)                                  Purchase
Agreement. The representations and warranties of the Company
set forth in the Purchase Agreement as they relate to such Guarantor, each of
which is hereby incorporated herein by reference, are true and correct as of
each time such representations are deemed to be made pursuant to such Purchase
Agreement, and the Purchasers shall be entitled to rely on each of them as if
they were fully set forth herein, provided that each reference in each such
representation and warranty to the Company’s knowledge shall, for the purposes
of this Section 3, be deemed to be a reference to such Guarantor’s
knowledge.

 

(f)                                    Foreign Law.  Each Guarantor has consulted with appropriate
foreign legal counsel with respect to any of the above representations for
which non-U.S. law is applicable. Such foreign counsel have advised each
applicable Guarantor that such counsel knows of no reason why any of the above
representations would not be true and accurate. Such foreign counsel were
provided with copies of this Subsidiary Guarantee and the Transaction Documents
prior to rendering their advice.

 

4.                                       Covenants.
 

(a)       Each Guarantor
covenants and agrees with the Purchasers that, from and after the date of this
Guarantee until the Obligations shall have been indefeasibly paid in full, such
Guarantor shall take, and/or shall refrain from taking, as the case may be,
each commercially reasonable action that is necessary to be taken or not taken,
as the case may be, so that no Event of Default (as defined in the Debentures)
is caused by the failure to take such action or to refrain from taking such
action by such Guarantor.

 

(b)       So long as any
of the Obligations are outstanding, unless Purchasers holding at least 67% of
the aggregate principal amount of the then outstanding Debentures shall
otherwise consent in writing, each Guarantor will not directly or indirectly on
or after the date of this Guarantee:

 

i.                                          enter into, create, incur, assume or suffer to exist any indebtedness for borrowed money of any kind, including but not limited to, a guarantee, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom;
 
ii.                                       enter into, create, incur, assume or suffer to exist any liens of any kind, on or with respect to any of its property or assets now owned 
 
7

 
or hereafter acquired or any interest therein or any income or profits therefrom;
 
iii.                                    amend its certificate of incorporation, bylaws or other charter documents so as to adversely affect any rights of any Purchaser;
 
iv.                                   repay, repurchase or offer to repay, repurchase or otherwise acquire more than a de minimis number of shares of its securities or debt obligations;
 
v.                                      pay cash dividends on any equity securities of the Company;
 
vi.                                   enter into any transaction with any Affiliate of the Guarantor which would be required to be disclosed in any public filing of the Company with the Commission, unless such transaction is made on an arm’s-length basis and expressly approved by a majority of the disinterested directors of the Company (even if less than a quorum otherwise required for board approval); or
 
vii.                                enter into any agreement with respect to any of the foregoing.
 
Provided, however, that the Guarantor shall not be prohibited from undertaking any of the actions described above that the Company is permitted to undertake pursuant to the terms of the Purchase Agreements, Debentures and any and all other agreements or other documents entered into in connection with the financings contemplated by the Purchase Agreements.
 
5.             Miscellaneous.
 

(a)           Amendments in
Writing. None of the terms or provisions of this Guarantee may be waived,
amended, supplemented or otherwise modified except in writing by Purchasers
holding 67% of the principal amount of Debentures then outstanding.

 

(b)           Notices. All notices,
requests and demands to or upon the Purchasers or any Guarantor hereunder shall
be effected in the manner provided for in the Purchase Agreement, provided that
any such notice, request or demand to or upon any Guarantor shall be addressed
to such Guarantor at its notice address set forth on Schedule 5(b).

 

(c)           No Waiver By
Course Of Conduct; Cumulative Remedies. The Purchasers shall not by
any act (except by a written instrument pursuant to Section 5(a)), delay,
indulgence, omission or otherwise be deemed to have waived 

 

8

 

any right or remedy hereunder or to have acquiesced in any default under
the Transaction Documents or Event of Default. No failure to exercise, nor any
delay in exercising, on the part of the Purchasers, any right, power or
privilege hereunder shall operate as a waiver thereof. No single or partial exercise
of any right, power or privilege hereunder shall preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. A
waiver by the Purchasers of any right or remedy hereunder on any one occasion
shall not be construed as a bar to any right or remedy which the Purchasers
would otherwise have on any future occasion. The rights and remedies herein
provided are cumulative, may be exercised singly or concurrently and are not
exclusive of any other rights or remedies provided by law.

 

(d)           Enforcement
Expenses; Indemnification.

 

(i)            Each Guarantor agrees to pay, or reimburse the
Purchasers for, all its costs and expenses incurred in collecting against such
Guarantor under the guarantee contained in Section 2 or otherwise
enforcing or preserving any rights under this Guarantee and the other
Transaction Documents to which such Guarantor is a party, including, without
limitation, the reasonable fees and disbursements of counsel to the Purchasers.

 

(ii)           Each Guarantor agrees to pay, and to save the
Purchasers harmless from, any and all liabilities with respect to, or resulting
from any delay in paying, any and all stamp, excise, sales or other taxes which
may be payable or determined to be payable in connection with any of the
transactions contemplated by this Guarantee.

 

(iii)          Each Guarantor agrees to pay, and to save the
Purchasers harmless from, any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
of any kind or nature whatsoever with respect to the execution, delivery,
enforcement, performance and administration of this Guarantee to the extent the
Company would be required to do so pursuant to the Purchase Agreement.

 

(iv)          The agreements in this Section shall survive
repayment of the Obligations and all other amounts payable under the Purchase
Agreement and the other Transaction Documents.

 

(e)           Successor and
Assigns. This Guarantee shall be binding upon the successors and assigns of each
Guarantor and shall inure to the benefit of the Purchasers and their respective
successors and assigns; provided that no Guarantor may assign, transfer or
delegate any of its rights or obligations under this Guarantee without the
prior written consent of the Purchasers.

 

9

 

(f)            Set-Off. Each Guarantor
hereby irrevocably authorizes the Purchasers at any time and from time to time
while an Event of Default under any of the Transaction Documents shall have
occurred and be continuing, without notice to such Guarantor or any other
Guarantor, any such notice being expressly waived by each Guarantor, to set-off
and appropriate and apply any and all deposits, credits, indebtedness or
claims, in any currency, in each case whether direct or indirect, absolute or
contingent, matured or unmatured, at any time held or owing by the Purchasers
to or for the credit or the account of such Guarantor, or any part thereof in
such amounts as the Purchasers may elect, against and on account of the obligations
and liabilities of such Guarantor to the Purchasers hereunder and claims of
every nature and description of the Purchasers against such Guarantor, in any
currency, whether arising hereunder, under the Purchase Agreement, any other
Transaction Document or otherwise, as the Purchasers may elect, whether or not
the Purchasers have made any demand for payment and although such obligations,
liabilities and claims may be contingent or unmatured. The Purchasers shall
notify such Guarantor promptly of any such set-off and the application made by
the Purchasers of the proceeds thereof, provided that the failure to give such
notice shall not affect the validity of such set-off and application. The
rights of the Purchasers under this Section are in addition to other
rights and remedies (including, without limitation, other rights of set-off)
which the Purchasers may have.

 

(g)           Counterparts. This Guarantee
may be executed by one or more of the parties to this Guarantee on any number
of separate counterparts (including by telecopy), and all of said counterparts
taken together shall be deemed to constitute one and the same instrument.

 

(h)           Severability. Any provision
of this Guarantee which is prohibited or unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof, and any such prohibition or unenforceability in any jurisdiction shall
not invalidate or render unenforceable such provision in any other
jurisdiction.

 

(i)            Section Headings. The Section headings
used in this Guarantee are for convenience of reference only and are not to
affect the construction hereof or be taken into consideration in the
interpretation hereof.

 

(j)            Integration. This Guarantee
and the other Transaction Documents represent the agreement of the Guarantors
and the Purchasers with respect to the subject matter hereof and thereof, and
there are no promises, undertakings, representations or warranties by the
Purchasers relative to subject matter hereof and thereof not expressly set
forth or referred to herein or in the other Transaction Documents.

 

10

 

(k)           Governing Laws. All questions
concerning the construction, validity, enforcement and interpretation of this
Guarantee shall be governed by and construed and enforced in accordance with
the internal laws of the State of New York, without regard to the principles of
conflicts of law thereof.  Each of the
Company and the Guarantors agree that all proceedings concerning the
interpretations, enforcement and defense of the transactions contemplated by
this Guarantee (whether brought against a party hereto or its respective
affiliates, directors, officers, shareholders, partners, members, employees or
agents) shall be commenced exclusively in the state and federal courts sitting
in the City of New York, Borough of Manhattan. Each of the Company and the
Guarantors 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 proceeding, any claim that it is not
personally subject to the jurisdiction of any such court, that such proceeding
is improper. Each party hereto hereby irrevocably waives personal service of
process and consents to process being served in any such proceeding by mailing
a copy thereof via registered or certified mail or overnight delivery (with
evidence of delivery) to such party at the address in effect for notices to it
under this Guarantee and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing contained herein
shall be deemed to limit in any way any right to serve process in any manner
permitted by law.  Each party hereto
hereby irrevocably waives, to the fullest extent permitted by applicable law,
any and all right to trial by jury in any legal proceeding arising out of or
relating to this Guarantee or the transactions contemplated hereby.

 

(l)            Acknowledgements.  Each Guarantor hereby acknowledges that:

 

(i)            it has been advised by counsel in the negotiation,
execution and delivery of this Guarantee and the other Transaction Documents to
which it is a party;

 

(ii)           the Purchasers have no fiduciary relationship with or
duty to any Guarantor arising out of or in connection with this Guarantee or
any of the other Transaction Documents, and the relationship between the
Guarantors, on the one hand, and the Purchasers, on the other hand, in
connection herewith or therewith is solely that of debtor and creditor; and

 

(iii)          no joint venture is created hereby or by the other
Transaction Documents or otherwise exists by virtue of the transactions
contemplated hereby among the Guarantors and the Purchasers.

 

(m)          Additional
Guarantors.  The Company
shall cause each of its subsidiaries formed or acquired on or subsequent to the
date hereof to become a 

 

11

 

Guarantor for all purposes of this Guarantee by executing and delivering
an Assumption Agreement in the form of Annex 1 hereto.

 

(n)           Release of
Guarantors. Each Guarantor will be released from all liability
hereunder concurrently with the indefeasible repayment in full of all amounts
owed under the Purchase Agreement, the Debentures and the other Transaction
Documents.

 

(o)           Seniority. The Obligations
of each of the Guarantors hereunder rank senior in priority to any other
Indebtedness (as defined in the Purchase Agreement) of such Guarantor.

 

(p)           WAIVER OF JURY
TRIAL. EACH
GUARANTOR AND, BY ACCEPTANCE OF THE BENEFITS HEREOF, THE PURCHASERS, HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS GUARANTEE AND FOR ANY COUNTERCLAIM THEREIN.

 

*********************

 

(Signature Pages Follow)

 

12

 

IN
WITNESS WHEREOF, each of the undersigned has caused this Guarantee to be duly
executed and delivered as of the date first above written.

 

	 
	MYTOGEN, INC.

	 
	 

	 
	By:
	/s/ William M. Caldwell, IV
	 
	 

	 
	 
	  Name: William M. Caldwell, IV

	 
	 
	  Title: President

 

13

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