Document:

exv4w1

Exhibit 4.1

[FORM OF SENIOR SECURED CONVERTIBLE NOTE]

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

Converted Organics Inc.

Senior Secured Convertible Note

			
	 	 	 
	Issuance Date: April [___], 2011
	 	Original Principal Amount: U.S. $[_________]

          FOR VALUE RECEIVED, Converted Organics Inc., a Delaware corporation (the “Company”), hereby
promises to pay to the order of [________________] or its registered assigns (“Holder”) the amount
set out above as the Original Principal Amount (as reduced pursuant to the terms hereof pursuant to
redemption, conversion or otherwise, the “Principal”) when due, whether upon the Maturity Date, on
any Installment Date with respect to the Installment Amount due on such Installment Date (each as
defined below), acceleration, redemption or otherwise (in each case in accordance with the terms
hereof) and to pay interest (“Interest”) on any outstanding Principal at the applicable Interest
Rate (as defined below) from the date set out above as the Issuance Date (the “Issuance Date”)
until the same becomes due and payable, whether upon any Installment Date, the Maturity Date or
acceleration, conversion, redemption or otherwise (in each case in accordance with the terms
hereof). This Senior Secured Convertible Note (including all Senior Secured Convertible Notes
issued in exchange, transfer or replacement hereof, this “Note”) is one of an issue of Senior
Secured Convertible Notes issued pursuant to the Securities Purchase Agreement (as defined below)
(collectively, the “Notes” and such other Convertible Notes, the “Other Notes”). Certain
capitalized terms used herein are defined in Section 27.

 

 

          1. PAYMENTS OF PRINCIPAL. On each Installment Date (which includes the Maturity Date),
the Company shall pay to the Holder an amount equal to the Installment Amount due on such
Installment Date in accordance with Section 8. Other than as specifically permitted by this Note,
the Company may not prepay any portion of the outstanding Principal, accrued and unpaid Interest or
accrued and unpaid Late Charges on Principal and Interest, if any.

          2. INTEREST; INTEREST RATE. No Interest shall accrue on this Note prior to the
occurrence of an Event of Default, in which case Interest on this Note shall commence accruing on
the occurrence of such Event of Default, shall accrue daily at the Interest Rate on the outstanding
Principal amount from time to time, shall be computed on the basis of a 360-day year comprised of
twelve (12) thirty (30) day months, shall compound each Quarter and shall be payable in accordance
with the terms of this Note. From and after the occurrence and during the continuance of any Event
of Default, the Interest Rate shall automatically be increased to eighteen percent (18%). In the
event that such Event of Default is subsequently cured, the adjustment referred to in the preceding
sentence shall cease to be effective as of the date of such cure, provided that the Interest as
calculated and unpaid at such increased rate during the continuance of such Event of Default shall
continue to apply to the extent relating to the days after the occurrence of such Event of Default
through and including the date of such cure of such Event of Default.

          3. CONVERSION OF NOTES. This Note shall be convertible into validly issued, fully paid
and non-assessable shares of Common Stock (as defined below), on the terms and conditions set forth
in this Section 3.

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

          (b) Conversion Rates.

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

          (1) “Conversion Amount” means the portion of the Principal to be
converted, redeemed or otherwise with respect to which this determination is
being made, plus all accrued and unpaid Interest with respect to such
portion of the Principal amount and accrued and unpaid Late Charges with
respect to such portion of such Principal and such Interest.

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          (2) “Conversion Price” means, as of any Conversion Date or other date
of determination, $0.40, subject to adjustment as provided herein.

          (c) Mechanics of Conversion.

               (i) Conversion Prior to Maturity Date. To convert any Conversion Amount
into shares of Common Stock on any date (a “Conversion Date”), the Holder shall deliver
(whether via facsimile or otherwise), for receipt on or prior to 5:59 p.m., New York
time, on such date, a copy of an executed notice of conversion in the form attached
hereto as Exhibit I (the “Conversion Notice”) to the Company. If required by
Section 3(c)(iii), within three (3) Trading Days following a conversion of this Note as
aforesaid, the Holder shall surrender this Note to a nationally recognized overnight
delivery service for delivery to the Company (or an indemnification undertaking with
respect to this Note in the case of its loss, theft or destruction as contemplated by
Section 17(b)). On or before the first (1st) Trading Day following the date
of receipt of a Conversion Notice, the Company shall transmit by facsimile an
acknowledgment of confirmation, in the form attached hereto as Exhibit II, of
receipt of such Conversion Notice to the Holder and the Company’s transfer agent (the
“Transfer Agent”). On or before the second (2nd) Trading Day following the
date of receipt of a Conversion Notice, the Company shall (1) provided that either a
registration statement for the resale by the Holder of the applicable shares of Common
Stock issuable upon such conversion of this Note is effective or such shares of Common
Stock are otherwise eligible for resale pursuant to Rule 144 (as defined in the
Securities Purchase Agreement) and that the Transfer Agent is participating in The
Depository Trust Company’s (“DTC”) Fast Automated Securities Transfer Program, credit
such aggregate number of shares of Common Stock to which the Holder shall be entitled to
the Holder’s or its designee’s balance account with DTC through its Deposit/Withdrawal
at Custodian system or (2) if the Transfer Agent is not participating in the DTC Fast
Automated Securities Transfer Program, issue and deliver (via reputable overnight
courier) to the address as specified in the Conversion Notice, a certificate, registered
in the name of the Holder or its designee, for the number of shares of Common Stock to
which the Holder shall be entitled, and to the extent such shares of Common Stock have
not been registered for resale by the Holder on an effective registration statement or
are not eligible for resale pursuant to Rule 144, the certificate shall include such
restrictive legends as required by Section 5 of the Securities Purchase Agreement. If
this Note is physically surrendered for conversion pursuant to Section 3(c)(iii) and the
outstanding Principal of this Note is greater than the Principal portion of the
Conversion Amount being converted, then the Company shall as soon as practicable and in
no event later than three (3) Business Days after receipt of this Note and at its own
expense, issue and deliver to the Holder (or its designee) a new Note (in accordance
with Section 17(d)) representing the outstanding Principal not converted. The Person or
Persons entitled to receive the shares of Common Stock issuable upon a conversion of
this Note shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on the Conversion Date. In the event of a partial conversion of
this Note pursuant hereto, the Principal amount converted shall be deducted from the

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Installment Amount(s) relating to the Installment Date(s) as set forth in the
applicable Conversion Notice.

               (ii) Company’s Failure to Timely Convert. If the Company shall fail, for
any reason or for no reason, to issue to the Holder within three (3) Trading Days after
the Company’s receipt of a Conversion Notice (whether via facsimile or otherwise), a
certificate for the number of shares of Common Stock to which the Holder is entitled and
register such shares of Common Stock on the Company’s share register or to credit the
Holder’s or its designee’s balance account with DTC for such number of shares of Common
Stock to which the Holder is entitled upon the Holder’s conversion of any Conversion
Amount (as the case may be) (a “Conversion Failure”), then, in addition to all other
remedies available to the Holder, (1) the Company shall pay in cash to the Holder on
each day after such third (3rd) Trading Day that the issuance of such shares
of Common Stock is not timely effected an amount equal to 2% of the product of (A) the
sum of the number of shares of Common Stock not issued to the Holder on a timely basis
and to which the Holder is entitled multiplied by (B) the Closing Sale Price of the
Common Stock on the Trading Day immediately preceding the last possible date which the
Company could have issued such shares of Common Stock to the Holder without violating
Section 3(c)(i) and (2) the Holder, upon written notice to the Company, may void its
Conversion Notice with respect to, and retain or have returned (as the case may be) any
portion of this Note that has not been converted pursuant to such Conversion Notice,
provided that the voiding of a Conversion Notice shall not affect the Company’s
obligations to make any payments which have accrued prior to the date of such notice
pursuant to this Section 3(c)(ii) or otherwise. In addition to the foregoing, if within
three (3) Trading Days after the Company’s receipt of a Conversion Notice (whether via
facsimile or otherwise), the Company shall fail to issue and deliver a certificate to
the Holder and register such shares of Common Stock on the Company’s share register or
credit the Holder’s or its designee’s balance account with DTC for the number of shares
of Common Stock to which the Holder is entitled upon the Holder’s conversion hereunder
(as the case may be), and if on or after such third (3rd) Trading Day the
Holder (or any other Person in respect, or on behalf, of the Holder) purchases (in an
open market transaction or otherwise) shares of Common Stock to deliver in satisfaction
of a sale by the Holder of all or any portion of the number of shares of Common Stock,
or a sale of a number of shares of Common Stock equal to all or any portion of the
number of shares of Common Stock, issuable upon such conversion that the Holder so
anticipated receiving from the Company, then, in addition to all other remedies
available to the Holder, the Company shall, within three (3) Business Days after the
Holder’s request and in the Holder’s discretion, either (i) pay cash to the Holder in an
amount equal to the Holder’s total purchase price (including brokerage commissions and
other out-of-pocket expenses, if any) for the shares of Common Stock so purchased
(including, without limitation, by any other Person in respect, or on behalf, of the
Holder) (the “Buy-In Price”), at which point the Company’s obligation to so issue and
deliver such certificate or credit the Holder’s balance account with DTC for the number
of shares of Common Stock to which the Holder is entitled upon the Holder’s conversion
hereunder (as the case may be) (and to issue such shares of Common Stock) shall
terminate, or (ii) promptly honor its

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obligation to so issue and deliver to the Holder a certificate or certificates
representing such shares of Common Stock or credit the Holder’s balance account with DTC
for the number of shares of Common Stock to which the Holder is entitled upon the
Holder’s conversion hereunder (as the case may be) and pay cash to the Holder in an
amount equal to the excess (if any) of the Buy-In Price over the product of (A) such
number of shares of Common Stock multiplied by (B) the lowest Closing Sale Price of the
Common Stock on any Trading Day during the period commencing on the date of the
applicable Conversion Notice and ending on the date of such issuance and payment under
this clause (ii).

               (iii) Registration; Book-Entry. The Company shall maintain a register (the
“Register”) for the recordation of the names and addresses of the holders of each Note
and the principal amount of the Notes held by such holders (the “Registered Notes”). The
entries in the Register shall be conclusive and binding for all purposes absent manifest
error. The Company and the holders of the Notes shall treat each Person whose name is
recorded in the Register as the owner of a Note for all purposes (including, without
limitation, the right to receive payments of Principal and Interest hereunder)
notwithstanding notice to the contrary. A Registered Note may be assigned, transferred
or sold in whole or in part only by registration of such assignment or sale on the
Register. Upon its receipt of a request to assign, transfer or sell all or part of any
Registered Note by the holder thereof, the Company shall record the information
contained therein in the Register and issue one or more new Registered Notes in the same
aggregate principal amount as the principal amount of the surrendered Registered Note to
the designated assignee or transferee pursuant to Section 17, provided that if the
Company does not so record an assignment, transfer or sale (as the case may be) of all
or part of any Registered Note within one (1) Business Day of such a request, then the
Register shall be automatically updated to reflect such assignment, transfer or sale (as
the case may be). Notwithstanding anything to the contrary set forth in this Section 3,
following conversion of any portion of this Note in accordance with the terms hereof,
the Holder shall not be required to physically surrender this Note to the Company unless
(A) the full Conversion Amount represented by this Note is being converted (in which
event this Note shall be delivered to the Company as contemplated by Section 3(c)(i)) or
(B) the Holder has provided the Company with prior written notice (which notice may be
included in a Conversion Notice) requesting reissuance of this Note upon physical
surrender of this Note. The Holder and the Company shall maintain records showing the
Principal, Interest and Late Charges converted and/or paid (as the case may be) and the
dates of such conversions and/or payments (as the case may be) or shall use such other
method, reasonably satisfactory to the Holder and the Company, so as not to require
physical surrender of this Note upon conversion.

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

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on the principal amount of Notes submitted for conversion on such date by such
holder relative to the aggregate principal amount of all Notes submitted for conversion
on such date. In the event of a dispute as to the number of shares of Common Stock
issuable to the Holder in connection with a conversion of this Note, the Company shall
issue to the Holder the number of shares of Common Stock not in dispute and resolve such
dispute in accordance with Section 22.

          (d) Limitations on Conversions.

               (i) Beneficial Ownership. Notwithstanding anything to the contrary
contained in this Note, this Note shall not be convertible by the Holder hereof, and the
Company shall not effect any conversion of this Note or otherwise issue any shares of
Common Stock pursuant to Section 8 hereof, to the extent (but only to the extent) that
the Holder or any of its affiliates would beneficially own in excess of 4.9% (the
“Maximum Percentage”) of the Common Stock. To the extent the above limitation applies,
the determination of whether this Note shall be convertible (vis-à-vis other
convertible, exercisable or exchangeable securities owned by the Holder or any of its
affiliates) and of which such securities shall be convertible, exercisable or
exchangeable (as among all such securities owned by the Holder and its affiliates)
shall, subject to such Maximum Percentage limitation, be determined on the basis of the
first submission to the Company for conversion, exercise or exchange (as the case may
be). No prior inability to convert this Note, or to issue shares of Common Stock,
pursuant to this paragraph shall have any effect on the applicability of the provisions
of this paragraph with respect to any subsequent determination of convertibility. For
purposes of this paragraph, beneficial ownership and all determinations and calculations
(including, without limitation, with respect to calculations of percentage ownership)
shall be determined in accordance with Section 13(d) of the 1934 Act (as defined in the
Securities Purchase Agreement) and the rules and regulations promulgated thereunder. The
provisions of this paragraph shall be implemented in a manner otherwise than in strict
conformity with the terms of this paragraph to correct this paragraph (or any portion
hereof) which may be defective or inconsistent with the intended Maximum Percentage
beneficial ownership limitation herein contained or to make changes or supplements
necessary or desirable to properly give effect to such Maximum Percentage limitation.
The limitations contained in this paragraph shall apply to a successor Holder of this
Note. The holders of Common Stock shall be third party beneficiaries of this paragraph
and the Company may not waive this paragraph without the consent of holders of a
majority of its Common Stock. For any reason at any time, upon the written or oral
request of the Holder, the Company shall within one (1) Business Day confirm orally and
in writing to the Holder the number of shares of Common Stock then outstanding,
including by virtue of any prior conversion or exercise of convertible or exercisable
securities into Common Stock, including, without limitation, pursuant to this Note or
securities issued pursuant to the Securities Purchase Agreement.

               (ii) Principal Market Regulation. The Company shall not issue any shares of
Common Stock upon conversion of this Note if the issuance of such shares of Common Stock
would exceed the aggregate number of shares of Common Stock

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which the Company may issue upon conversion or exercise (as the case may be) of the
Notes (including, without limitation, pursuant to Section 8 hereof and thereof) without
breaching the Company’s obligations under the rules or regulations of the Principal
Market (the number of shares which may be issued without violating such rules and
regulations, the “Exchange Cap”), except that such limitation shall not apply in the
event that the Company (A) obtains the approval of its stockholders as required by the
applicable rules of the Principal Market for issuances of shares of Common Stock in
excess of such amount or (B) obtains a written opinion from outside counsel to the
Company that such approval is not required, which opinion shall be reasonably
satisfactory to the Holder. Until such approval or such written opinion is obtained, no
Buyer (as defined in the Securities Purchase Agreement) shall be issued in the
aggregate, upon conversion of any of the Notes (including, without limitation, pursuant
to Section 8 hereof and thereof), shares of Common Stock in an amount greater than the
product of (i) the Exchange Cap multiplied by (ii) the quotient of (1) the original
principal amount of Notes issued to such Buyer pursuant to the Securities Purchase
Agreement on the Closing Date (as defined in the Securities Purchase Agreement) divided
by (2) the aggregate original principal amount of all Notes issued to all the Buyers (as
defined in the Securities Purchase Agreement) pursuant to the Securities Purchase
Agreement on the Closing Date (with respect to each Buyer, the “Exchange Cap
Allocation”). Upon conversion in full of a Buyer’s Notes, the difference (if any)
between such Buyer’s Exchange Cap Allocation and the number of shares of Common Stock
actually issued to such Buyer upon such Buyer’s conversion in full of such Notes shall
be allocated to the respective Exchange Cap Allocations of the remaining holders of
Notes on a pro rata basis in proportion to the shares of Common Stock underlying the
Notes then held by each such Buyer.

          4. RIGHTS UPON EVENT OF DEFAULT.

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

               (i) the failure of the applicable Registration Statement (as defined in the
Registration Rights Agreement (as defined below)) to be filed with the SEC on or prior
to the date that is five (5) days after the applicable Filing Deadline (as defined in
the Registration Rights Agreement) or the failure of the applicable Registration
Statement to be declared effective by the SEC on or prior to the date that is ten (10)
days after the applicable Effectiveness Deadline (as defined in the Registration Rights
Agreement);

               (ii) while the applicable Registration Statement is required to be maintained
effective pursuant to the terms of the Registration Rights Agreement, the effectiveness
of the applicable Registration Statement lapses for any reason (including, without
limitation, the issuance of a stop order) or such Registration Statement (or the
prospectus contained therein) is unavailable to any holder of Registrable Securities (as
defined in the Registration Rights Agreement) for sale of all of such holder’s
Registrable Securities in accordance with the terms of the

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Registration Rights Agreement, and (I) such lapse or unavailability continues for a
period of five (5) consecutive days or for more than an aggregate of ten (10) days in
any 365-day period (excluding days during an Allowable Grace Period (as defined in the
Registration Rights Agreement)) and (II) any such holder may not then sell all of such
holder’s Registrable Securities without restriction pursuant to Rule 144 (as defined in
the Securities Purchase Agreement) (including, without limitation, without volume
limitations);

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

               (iv) the Company’s (A) failure to cure a Conversion Failure or a Delivery Failure
(as defined in the Warrants) by delivery of the required number of shares of Common
Stock within five (5) Trading Days after the applicable Conversion Date or exercise date
(as the case may be) or (B) notice, written or oral, to any holder of the Notes or
Warrants, including, without limitation, by way of public announcement or through any of
its agents, at any time, of its intention not to comply, as required, with a request for
conversion of any Notes into shares of Common Stock that is requested in accordance with
the provisions of the Notes, other than pursuant to Section 3(d), or a request for
exercise of any Warrants for Warrant Shares (as defined in the Securities Purchase
Agreement) in accordance with the provisions of the Warrants;

               (v) at any time following the tenth (10th) consecutive day that the
Holder’s Authorized Share Allocation is less than the number of shares of Common Stock
that the Holder would be entitled to receive upon a conversion of the full Conversion
Amount of this Note (without regard to any limitations on conversion set forth in
Section 3(d) or otherwise);

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

               (vii)
the Company fails to remove any restrictive legend on any certificate or any shares of Common Stock issued to the Holder upon conversion or exercise (as the case may
be) of any Securities acquired by the Holder under the Securities Purchase Agreement
(including this Note) as and when required by such Securities or the Securities Purchase
Agreement, unless otherwise then prohibited by applicable federal securities laws, and
any such failure remains uncured for at least

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five (5) days;

               (viii) the occurrence of any default under, redemption of or acceleration prior to
maturity of any Indebtedness (as defined in the Securities Purchase Agreement) of the
Company or any of its Subsidiaries, other than with respect to any Other Notes;

               (ix) bankruptcy, insolvency, reorganization or liquidation proceedings or other
proceedings for the relief of debtors shall be instituted by or against the Company or
any Subsidiary and, if instituted against the Company or any Subsidiary by a third
party, shall not be dismissed within forty-five (45) days of their initiation;

               (x) the commencement by the Company or any Significant Subsidiary of a voluntary
case or proceeding under any applicable federal, state or foreign bankruptcy,
insolvency, reorganization or other similar law or of any other case or proceeding to be
adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree,
order, judgment or other similar document in respect of the Company or any Significant
Subsidiary in an involuntary case or proceeding under any applicable federal, state or
foreign bankruptcy, insolvency, reorganization or other similar law or to the
commencement of any bankruptcy or insolvency case or proceeding against it, or the
filing by it of a petition or answer or consent seeking reorganization or relief under
any applicable federal, state or foreign law, or the consent by it to the filing of such
petition or to the appointment of or taking possession by a custodian, receiver,
liquidator, assignee, trustee, sequestrator or other similar official of the Company or
any Significant Subsidiary or of any substantial part of its property, or the making by
it of an assignment for the benefit of creditors, or the execution of a composition of
debts, or the occurrence of any other similar federal, state or foreign proceeding, the
taking of corporate action by the Company or any Significant Subsidiary in furtherance
of any such action or the commencement by any Person of a UCC foreclosure sale of a
material portion of the Company’s or any Significant Subsidiary’s assets or any other
similar action under federal, state or foreign law;

               (xi) the entry by a court of (i) a decree, order, judgment or other similar
document adjudging the Company or any Significant Subsidiary as bankrupt or insolvent,
or approving as properly filed a petition seeking liquidation, reorganization,
arrangement, adjustment or composition of or in respect of the Company or any
Significant Subsidiary under any applicable federal, state or foreign law or (ii) a
decree, order, judgment or other similar document appointing a custodian, receiver,
liquidator, assignee, trustee, sequestrator or other similar official of the Company or
any Significant Subsidiary or of any substantial part of its property, or ordering the
winding up or liquidation of its affairs, and the continuance of any such decree, order,
judgment or other similar document or any such other decree, order, judgment or other
similar document unstayed and in effect for a period of thirty (30) consecutive days;

               (xii) a final judgment or judgments for the payment of money aggregating in excess
of $100,000 are rendered against the Company and/or any of its

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

               (xiii) the Company and/or any Subsidiary, individually or in the aggregate, either
(i) fails to pay, when due, or within any applicable grace period, any payment with
respect to any Indebtedness in excess of $100,000 due to any third party (other than,
with respect to unsecured Indebtedness only, payments contested by the Company and/or
such Subsidiary (as the case may be) in good faith by proper proceedings and with
respect to which adequate reserves have been set aside for the payment thereof in
accordance with GAAP) or is otherwise in breach or violation of any agreement for monies
owed or owing in an amount in excess of $100,000, which breach or violation permits the
other party thereto to declare a default or otherwise accelerate amounts due thereunder,
or (ii) suffer to exist any other circumstance or event that would, with or without the
passage of time or the giving of notice, result in a default or event of default under
any agreement binding the Company or any Subsidiary, which default or event of default
would or is likely to have a material adverse effect on the business, assets, operations
(including results thereof), liabilities, properties, condition (including financial
condition) or prospects of the Company or any of its Subsidiaries, individually or in
the aggregate;

               (xiv) other than as specifically set forth in another clause of this Section
4(a), the Company or any Subsidiary breaches any representation, warranty,
covenant or other term or condition of any Transaction Document (including, without
limitation, the Security Documents and the Guaranties), except, in the case of a breach
of a covenant or other term or condition that is curable, only if such breach remains
uncured for a period of five (5) days;

               (xv) any breach or failure in any respect by the Company or any Subsidiary to
comply with any provision of either of Sections 8 or 13 of this Note, except, in the
case of a failure to comply with any provision of Section 13 that is curable, only if
such failure remains uncured for a period of five (5) days;

               (xvi) a false or inaccurate certification (including a false or inaccurate deemed
certification) by the Company that the Equity Conditions are satisfied, that there has
been no Equity Conditions Failure or as to whether any Event of Default has occurred;

               (xvii) any Material Adverse Effect (as defined in the Securities Purchase
Agreement) occurs;

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               (xviii) any provision of any Transaction Document (including, without limitation,
the Security Documents and the Guaranties) shall at any time for any reason (other than
pursuant to the express terms thereof) cease to be valid and binding on or enforceable
against the parties thereto, or the validity or enforceability thereof shall be
contested by any party thereto, or a proceeding shall be commenced by the Company or any
Subsidiary or any governmental authority having jurisdiction over any of them, seeking
to establish the invalidity or unenforceability thereof, or the Company or any
Subsidiary shall deny in writing that it has any liability or obligation purported to be
created under any Transaction Document (including, without limitation, the Security
Documents and the Guaranties);

               (xix) the Security Documents shall for any reason fail or cease to create a
separate valid and perfected and, except to the extent permitted by the terms hereof or
thereof, first priority Lien on the Collateral (as defined in the Security Agreement) in
favor of each of the Secured Parties (as defined in the Security Agreement);

               (xx) any material damage to, or loss, theft or destruction of, any Collateral,
whether or not insured, or any strike, lockout, labor dispute, embargo, condemnation,
act of God or public enemy, or other casualty which causes, for more than fifteen (15)
consecutive days, the cessation or substantial curtailment of revenue producing
activities at any facility of the Company or any Subsidiary, if any such event or
circumstance could have a Material Adverse Effect; or

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

          (b) Notice of an Event of Default; Redemption Right. Upon the occurrence of an
Event of Default with respect to this Note or any Other Note, the Company shall within one
(1) Business Day deliver written notice thereof via facsimile and overnight courier (with
next day delivery specified) (an “Event of Default Notice”) to the Holder. At any time after
the earlier of the Holder’s receipt of an Event of Default Notice and the Holder becoming
aware of an Event of Default, the Holder may require the Company to redeem (regardless of
whether such Event of Default has been cured) all or any portion of this Note by delivering
written notice thereof (the “Event of Default Redemption Notice”) to the Company, which
Event of Default Redemption Notice shall indicate the portion of this Note the Holder is
electing to redeem. Each portion of this Note subject to redemption by the Company pursuant
to this Section 4(b) shall be redeemed by the Company at a price equal to the greater of (i)
the product of (A) the Conversion Amount to be redeemed multiplied by (B) the Redemption
Premium and (ii) the product of (X) the Conversion Rate with respect to the Conversion
Amount in effect at such time as the Holder delivers an Event of Default Redemption Notice
multiplied by (Y) the product of (1) the Equity Value Redemption Premium multiplied by (2)
the greatest Closing Sale Price of the Common Stock on any Trading Day during the period
commencing on the date immediately preceding such Event of Default and ending on the date
the Company makes the entire payment required to be made under this Section 4(b) (the “Event
of Default Redemption Price”). Redemptions required by this Section 4(b) shall be made in
accordance with the provisions of Section 11. To the extent redemptions required by

11

 

this Section 4(b) are deemed or determined by a court of competent jurisdiction to be
prepayments of this Note by the Company, such redemptions shall be deemed to be voluntary
prepayments. Notwithstanding anything to the contrary in this Section 4, but subject to
Section 3(d), until the Event of Default Redemption Price (together with any Late Charges
thereon) is paid in full, the Conversion Amount submitted for redemption under this Section
4(b) (together with any Late Charges thereon) may be converted, in whole or in part, by the
Holder into Common Stock pursuant to the terms of this Note. In the event of a partial
redemption of this Note pursuant hereto, the Principal amount redeemed shall be deducted
from the Installment Amount(s) relating to the applicable Installment Date(s) as set forth
in the Event of Default Redemption Notice. In the event of the Company’s redemption of any
portion of this Note under this Section 4(b), the Holder’s damages would be uncertain and
difficult to estimate because of the parties’ inability to predict future interest rates and
the uncertainty of the availability of a suitable substitute investment opportunity for the
Holder. Accordingly, any redemption premium due under this Section 4(b) is intended by the
parties to be, and shall be deemed, a reasonable estimate of the Holder’s actual loss of its
investment opportunity and not as a penalty.

          5. RIGHTS UPON FUNDAMENTAL TRANSACTION.

          (a) Assumption. The Company shall not enter into or be party to a Fundamental
Transaction unless (i) the Successor Entity assumes in writing all of the obligations of the
Company under this Note and the other Transaction Documents in accordance with the
provisions of this Section 5(a) pursuant to written agreements in form and substance
satisfactory to the Holder and approved by the Holder prior to such Fundamental Transaction,
including agreements to deliver to each holder of Notes in exchange for such Notes a
security of the Successor Entity evidenced by a written instrument substantially similar in
form and substance to the Notes, including, without limitation, having a principal amount
and interest rate equal to the principal amounts then outstanding and the interest rates of
the Notes held by such holder, having similar conversion rights as the Notes and having
similar ranking to the Notes, and satisfactory to the Holder and (ii) the Successor Entity
is a publicly traded corporation whose common stock is quoted on or listed for trading on an
Eligible Market. Upon the occurrence of any Fundamental Transaction, the Successor Entity
shall succeed to, and be substituted for (so that from and after the date of such
Fundamental Transaction, the provisions of this Note and the other Transaction Documents
referring to the “Company” shall refer instead to the Successor Entity), and may exercise
every right and power of the Company and shall assume all of the obligations of the Company
under this Note and the other Transaction Documents with the same effect as if such
Successor Entity had been named as the Company herein. Upon consummation of a Fundamental
Transaction, the Successor Entity shall deliver to the Holder confirmation that there shall
be issued upon conversion or redemption of this Note at any time after the consummation of
such Fundamental Transaction, in lieu of the shares of the Company’s Common Stock (or other
securities, cash, assets or other property (except such items still issuable under Sections
6 and 14, which shall continue to be receivable thereafter) issuable upon the conversion or
redemption of the Notes prior to such Fundamental Transaction, such shares of the publicly
traded common stock (or their equivalent) of the Successor Entity

12

 

(including its Parent Entity) which the Holder would have been entitled to receive upon
the happening of such Fundamental Transaction had this Note been converted immediately prior
to such Fundamental Transaction (without regard to any limitations on the conversion of this
Note), as adjusted in accordance with the provisions of this Note. The provisions of this
Section 5 shall apply similarly and equally to successive Fundamental Transactions and shall
be applied without regard to any limitations on the conversion of this Note.

          (b) Notice of a Fundamental Transaction; Redemption Right. No sooner than
twenty (20) Trading Days nor later than ten (10) Trading Days prior to the consummation of a
Fundamental Transaction, but not prior to the public announcement of such Fundamental
Transaction, the Company shall deliver written notice thereof via facsimile and overnight
courier to the Holder (a “Fundamental Transaction Notice”). At any time during the period
beginning after the Holder’s receipt of a Fundamental Transaction Notice or the Holder
becoming aware of a Fundamental Transaction if a Fundamental Transaction Notice is not
delivered to the Holder in accordance with the immediately preceding sentence (as
applicable) and ending on the later of twenty (20) Trading Days after (A) consummation of
such Fundamental Transaction or (B) the date of receipt of such Fundamental Transaction
Notice, the Holder may require the Company to redeem all or any portion of this Note by
delivering written notice thereof (“Fundamental Transaction Redemption Notice”) to the
Company, which Fundamental Transaction Redemption Notice shall indicate the Conversion
Amount the Holder is electing to redeem. The portion of this Note subject to redemption
pursuant to this Section 5 shall be redeemed by the Company in cash at a price equal to the
greater of (i) the product of (w) the Fundamental Transaction Redemption Premium multiplied
by (x) the Conversion Amount being redeemed and (ii) the product of (y) the Equity Value
Redemption Premium multiplied by (z) the product of (1) the Conversion Amount being redeemed
multiplied by (2) the quotient of (A) the aggregate cash consideration and the aggregate
cash value of any non-cash consideration per share of Common Stock to be paid to the holders
of the shares of Common Stock upon consummation of such Fundamental Transaction (any such
non-cash consideration constituting publicly-traded securities shall be valued at the
highest of the Closing Sale Price of such securities as of the Trading Day immediately prior
to the consummation of such Fundamental Transaction, the Closing Sale Price of such
securities on the Trading Day immediately following the public announcement of such proposed
Fundamental Transaction and the Closing Sale Price of such securities on the Trading Day
immediately prior to the public announcement of such proposed Fundamental Transaction)
divided by (B) the Conversion Price then in effect (the “Fundamental Transaction Redemption
Price”). Redemptions required by this Section 5 shall be made in accordance with the
provisions of Section 11 and shall have priority to payments to stockholders in connection
with such Fundamental Transaction. To the extent redemptions required by this Section 5(b)
are deemed or determined by a court of competent jurisdiction to be prepayments of this Note
by the Company, such redemptions shall be deemed to be voluntary prepayments.
Notwithstanding anything to the contrary in this Section 5, but subject to Section 3(d),
until the Fundamental Transaction Redemption Price (together with any Late Charges thereon)
is paid in full, the Conversion Amount submitted for redemption under this Section 5(b)
(together with any Late Charges thereon) may be converted, in whole or in part, by the
Holder into

13

 

Common Stock pursuant to Section 3. In the event of a partial redemption of this Note
pursuant hereto, the Principal amount redeemed shall be deducted from the Installment
Amount(s) relating to the applicable Installment Date(s) as set forth in the Fundamental
Transaction Redemption Notice. In the event of the Company’s redemption of any portion of
this Note under this Section 5(b), the Holder’s damages would be uncertain and difficult to
estimate because of the parties’ inability to predict future interest rates and the
uncertainty of the availability of a suitable substitute investment opportunity for the
Holder. Accordingly, any redemption premium due under this Section 5(b) is intended by the
parties to be, and shall be deemed, a reasonable estimate of the Holder’s actual loss of its
investment opportunity and not as a penalty.

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

          (a) Purchase Rights. In addition to any adjustments pursuant to Section 7
below, if at any time the Company grants, issues or sells any Options, Convertible
Securities or rights to purchase stock, warrants, securities or other property pro rata to
the record holders of any class of Common Stock (the “Purchase Rights”), then the Holder
will be entitled to acquire, upon the terms applicable to such Purchase Rights, the
aggregate Purchase Rights which the Holder could have acquired if the Holder had held the
number of shares of Common Stock acquirable upon complete conversion of this Note (without
taking into account any limitations or restrictions on the convertibility of this Note)
immediately before the date on which a record is taken for the grant, issuance or sale of
such Purchase Rights, or, if no such record is taken, the date as of which the record
holders of Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights (provided, however, to the extent that the Holder’s right to participate in any such
Purchase Right would result in the Holder exceeding the Maximum Percentage, then the Holder
shall not be entitled to participate in such Purchase Right to such extent (or beneficial
ownership of such shares of Common Stock as a result of such Purchase Right to such extent)
and such Purchase Right to such extent shall be held in abeyance for the Holder until such
time, if ever, as its right thereto would not result in the Holder exceeding the Maximum
Percentage).

          (b) Other Corporate Events. In addition to and not in substitution for any
other rights hereunder, prior to the consummation of any Fundamental Transaction pursuant to
which holders of shares of Common Stock are entitled to receive securities or other assets
with respect to or in exchange for shares of Common Stock (a “Corporate Event”), the Company
shall make appropriate provision to insure that the Holder will thereafter have the right to
receive upon a conversion of this Note (i) in addition to the shares of Common Stock
receivable upon such conversion, such securities or other assets to which the Holder would
have been entitled with respect to such shares of Common Stock had such shares of Common
Stock been held by the Holder upon the consummation of such Corporate Event (without taking
into account any limitations or restrictions on the convertibility of this Note) or (ii) in
lieu of the shares of Common Stock otherwise receivable upon such conversion, such
securities or other assets received by the holders of shares of Common Stock in connection
with the consummation of such Corporate Event in such amounts as the Holder would have been
entitled to receive had this Note

14

 

initially been issued with conversion rights for the form of such consideration (as
opposed to shares of Common Stock) at a conversion rate for such consideration commensurate
with the Conversion Rate. Provision made pursuant to the preceding sentence shall be in a
form and substance satisfactory to the Holder. The provisions of this Section 6 shall apply
similarly and equally to successive Corporate Events and shall be applied without regard to
any limitations on the conversion or redemption of this Note.

          7. RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

          (a) Adjustment of Conversion Price upon Issuance of Common Stock. If and
whenever on or after the Subscription Date the Company issues or sells, or in accordance
with this Section 7(a) is deemed to have issued or sold, any shares of Common Stock
(including the issuance or sale of shares of Common Stock owned or held by or for the
account of the Company, but excluding any Excluded Securities (as defined in the Securities
Purchase Agreement) issued or sold or deemed to have been issued or sold) for a
consideration per share (the “New Issuance Price”) less than a price equal to the Conversion
Price in effect immediately prior to such issue or sale or deemed issuance or sale (such
Conversion Price then in effect is referred to herein as the “Applicable Price”) (the
foregoing a “Dilutive Issuance”), then, immediately after such Dilutive Issuance, the
Conversion Price then in effect shall be reduced to an amount equal to the New Issuance
Price. For all purposes of the foregoing (including, without limitation, determining the
adjusted Conversion Price and consideration per share under this Section 7(a)), the
following shall be applicable:

               (i) Issuance of Options. If the Company in any manner grants or sells any
Options and the lowest price per share for which one share of Common Stock is issuable
upon the exercise of any such Option or upon conversion, exercise or exchange of any
Convertible Securities issuable upon exercise of any such Option is less than the
Applicable Price, then such share of Common Stock shall be deemed to be outstanding and
to have been issued and sold by the Company at the time of the granting or sale of such
Option for such price per share. For purposes of this Section 7(a)(i), the “lowest price
per share for which one share of Common Stock is issuable upon the exercise of any such
Options or upon conversion, exercise or exchange of any Convertible Securities issuable
upon exercise of any such Option” shall be equal to (1) the lower of (x) the sum of the
lowest amounts of consideration (if any) received or receivable by the Company with
respect to any one share of Common Stock upon the granting or sale of such Option, upon
exercise of such Option and upon conversion, exercise or exchange of any Convertible
Security issuable upon exercise of such Option and (y) the lowest exercise price set
forth in such Option for which one share of Common Stock is issuable upon the exercise
of any such Options or upon conversion, exercise or exchange of any Convertible
Securities issuable upon exercise of any such Option minus (2) the sum of all amounts
paid or payable to the holder of such Option (or any other Person) upon the granting or
sale of such Option, upon exercise of such Option and upon conversion, exercise or
exchange of any Convertible Security issuable upon exercise of such Option plus the
value of any other consideration received or receivable by, or benefit conferred on, the
holder of such Option (or any other Person). Except as contemplated below, no further

15

 

adjustment of the Conversion Price shall be made upon the actual issuance of such
share of Common Stock or of such Convertible Securities upon the exercise of such
Options or upon the actual issuance of such share of Common Stock upon conversion,
exercise or exchange of such Convertible Securities.

               (ii) Issuance of Convertible Securities. If the Company in any manner
issues or sells any Convertible Securities and the lowest price per share for which one
share of Common Stock is issuable upon the conversion, exercise or exchange thereof is
less than the Applicable Price, then such share of Common Stock shall be deemed to be
outstanding and to have been issued and sold by the Company at the time of the issuance
or sale of such Convertible Securities for such price per share. For the purposes of
this Section 7(a)(ii), the “lowest price per share for which one share of Common Stock
is issuable upon the conversion, exercise or exchange thereof” shall be equal to (1) the
lower of (x) the sum of the lowest amounts of consideration (if any) received or
receivable by the Company with respect to one share of Common Stock upon the issuance or
sale of the Convertible Security and upon conversion, exercise or exchange of such
Convertible Security and (y) the lowest conversion price set forth in such Convertible
Security for which one share of Common Stock is issuable upon conversion, exercise or
exchange thereof minus (2) the sum of all amounts paid or payable to the holder of such
Convertible Security (or any other Person) upon the issuance or sale of such Convertible
Security plus the value of any other consideration received or receivable by, or benefit
conferred on, the holder of such Convertible Security (or any other Person). Except as
contemplated below, no further adjustment of the Conversion Price shall be made upon the
actual issuance of such share of Common Stock upon conversion, exercise or exchange of
such Convertible Securities, and if any such issue or sale of such Convertible
Securities is made upon exercise of any Options for which adjustment of the Conversion
Price has been or is to be made pursuant to other provisions of this Section 7(a),
except as contemplated below, no further adjustment of the Conversion Price shall be
made by reason of such issue or sale.

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

16

 

such adjustment would result in an increase of the Conversion Price then in effect.

               (iv) Calculation of Consideration Received. If any Option or Convertible
Security is issued or deemed issued in connection with the issuance or sale or deemed
issuance or sale of any other securities of the Company, together comprising one
integrated transaction, (x) such Option or Convertible Security (as applicable) will be
deemed to have been issued for consideration equal to the Black Scholes Consideration
Value thereof and (y) the other securities issued or sold or deemed to have been issued
or sold in such integrated transaction shall be deemed to have been issued for
consideration equal to the difference of (I) the aggregate consideration received by the
Company minus (II) the Black Scholes Consideration Value of each such Option or
Convertible Security (as applicable). If any shares of Common Stock, Options or
Convertible Securities are issued or sold or deemed to have been issued or sold for
cash, the consideration received therefor will be deemed to be the net amount received
by the Company therefor. If any shares of Common Stock, Options or Convertible
Securities are issued or sold for a consideration other than cash, the amount of such
consideration received by the Company will be the fair value of such consideration,
except where such consideration consists of publicly traded securities, in which case
the amount of consideration received by the Company for such securities will be the
average VWAP of such security for the five (5) Trading Day period immediately preceding
the date of receipt. If any shares of Common Stock, Options or Convertible Securities
are issued to the owners of the non-surviving entity in connection with any merger in
which the Company is the surviving entity, the amount of consideration therefor will be
deemed to be the fair value of such portion of the net assets and business of the
non-surviving entity as is attributable to such shares of Common Stock, Options or
Convertible Securities (as the case may be). The fair value of any consideration other
than cash or publicly traded securities will be determined jointly by the Company and
the Holder. If such parties are unable to reach agreement within ten (10) days after the
occurrence of an event requiring valuation (the “Valuation Event”), the fair value of
such consideration will be determined within five (5) Trading Days after the tenth
(10th) day following such Valuation Event by an independent, reputable
appraiser jointly selected by the Company and the Holder. The determination of such
appraiser shall be final and binding upon all parties absent manifest error and the fees
and expenses of such appraiser shall be borne by the Company.

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

          (b) Adjustment of Conversion Price upon Subdivision or Combination of Common
Stock. Without limiting any provision of Section 5 or Section 7(a), if the

17

 

Company at any time on or after the Subscription Date subdivides (by any stock split,
stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares
of Common Stock into a greater number of shares, the Conversion Price in effect immediately
prior to such subdivision will be proportionately reduced. Without limiting any provision of
Section 5 or Section 7(a), if the Company at any time on or after the Subscription Date
combines (by combination, reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in
effect immediately prior to such combination will be proportionately increased. Any
adjustment pursuant to this Section 7(b) shall become effective immediately after the
effective date of such subdivision or combination. If any event requiring an adjustment
under this Section 7(b) occurs during the period that a Conversion Price is calculated
hereunder, then the calculation of such Conversion Price shall be adjusted appropriately to
reflect such event.

          (c) Other Events. In the event that the Company (or any Subsidiary) shall take
any action to which the provisions hereof are not strictly applicable, or, if applicable,
would not operate to protect the Holder from dilution or if any event occurs of the type
contemplated by the provisions of this Section 7 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features), then the Company’s board of
directors shall in good faith determine and implement an appropriate adjustment in the
Conversion Price so as to protect the rights of the Holder, provided that no such adjustment
pursuant to this Section 7(c) will increase the Conversion Price as otherwise determined
pursuant to this Section 7, provided further that if the Holder does not accept such
adjustments as appropriately protecting its interests hereunder against such dilution, then
the Company’s board of directors and the Holder shall agree, in good faith, upon an
independent investment bank of nationally recognized standing to make such appropriate
adjustments, whose determination shall be final and binding and whose fees and expenses
shall be borne by the Company.

          8. COMPANY INSTALLMENT CONVERSION OR REDEMPTION.

          (a) General. On each applicable Installment Date, the Company shall pay to the
Holder of this Note the applicable Installment Amount due on such date by converting such
Installment Amount in accordance with this Section 8 (a “Company Conversion”); provided,
however, the Company may, at its option as described below, pay all or any part of such
Installment Amount by redeeming such Installment Amount in cash (a “Company Redemption”) or
by any combination of a Company Conversion and a Company Redemption so long as the entire
amount of such Installment Amount due shall be converted and/or redeemed by the Company on
the applicable Installment Date, subject to the provisions of this Section 8, provided
further that the Company shall not be entitled to effect a Company Conversion with respect
to any portion of such Installment Amount and shall be required to elect and to pay the
entire amount of such Installment Amount in cash pursuant to a Company Redemption if on the
applicable Installment Notice Due Date or on the applicable Installment Date (as the case
may be) there is an Equity Conditions Failure. On or prior to the date which is the
twenty-third (23rd) Trading Day prior to each Installment Date (each, an
“Installment Notice Due Date”), the

18

 

Company shall deliver written notice (each, a “Company Installment Notice” and the date
all of the holders receive such notice is referred to as to the “Company Installment Notice
Date”), to each holder of Notes and such Company Installment Notice shall (i) either (A)
confirm that the applicable Installment Amount of such holder’s Note shall be converted in
whole pursuant to a Company Conversion or (B) (1) state that the Company elects to redeem,
or is required to elect and redeem in accordance with the provisions of the Notes, in whole
or in part, the applicable Installment Amount pursuant to a Company Redemption and (2)
specify the portion of the applicable Installment Amount which the Company elects, or is
required to elect and redeem, pursuant to a Company Redemption (such amount to be redeemed
in cash, the “Company Redemption Amount”) and the portion of the applicable Installment
Amount, if any, with respect to which the Company will, and is permitted to, effect a
Company Conversion (such amount of the applicable Installment Amount so specified to be so
converted pursuant to this Section 8 is referred to herein as the “Company Conversion
Amount”), which amounts when added together, must equal the entire applicable Installment
Amount and (ii) if the applicable Installment Amount is to be paid, in whole or in part,
pursuant to a Company Conversion, certify that there is not an Equity Conditions Failure as
of the date of the applicable Company Installment Notice. Each Company Installment Notice
shall be irrevocable and may not be revoked by the Company. If the Company does not timely
deliver a Company Installment Notice in accordance with this Section 8 with respect to a
particular Installment Date, then the Company shall be deemed to have delivered an
irrevocable Company Installment Notice confirming a Company Conversion of the entire
Installment Amount payable on such Installment Date and shall be deemed to have certified
that there is not an Equity Conditions Failure on the applicable Installment Notice Due Date
and the applicable Installment Date. No later than two (2) Trading Days after delivery or
deemed delivery (as applicable) of the applicable Company Installment Notice setting forth a
Company Conversion Amount, the Company shall deliver to the Holder’s account with DTC such
number of shares of Common Stock (the “Pre-Installment Conversion Shares”) equal to the
quotient of (x) such Company Conversion Amount divided by (y) the Pre-Installment Conversion
Price, and as to which the Holder shall be the owner thereof as of such time of delivery or
deemed delivery (as the case may be) of such Company Installment Notice. Except as expressly
provided in this Section 8(a), the Company shall convert and/or redeem the applicable
Installment Amount of this Note pursuant to this Section 8 and the corresponding Installment
Amounts of the Other Notes pursuant to the corresponding provisions of the Other Notes in
the same ratio of the applicable Installment Amount being converted and/or redeemed
hereunder. The applicable Company Conversion Amount (whether set forth in the applicable
Company Installment Notice or by operation of this Section 8) shall be converted in
accordance with Section 8(b) and the applicable Company Redemption Amount shall be redeemed
in accordance with Section 8(c).

          (b) Mechanics of Company Conversion. Subject to Section 3(d), if the Company
delivers a Company Installment Notice and elects, or is deemed to have delivered a Company
Installment Notice and deemed to have elected, in whole or in part, a Company Conversion in
accordance with Section 8(a), then the remainder of this Section 8(b) shall apply. The
applicable Company Conversion Amount, if any, which remains outstanding as of the applicable
Installment Date shall be converted as of the

19

 

applicable Installment Date by converting on such Installment Date such Company
Conversion Amount at the Company Conversion Price, and the Company shall, on the applicable
Installment Date, deliver to the Holder’s account with DTC such shares of Common Stock
issued upon such conversion (subject to the reduction contemplated by the immediately
following sentence and, if applicable, the last sentence of this Section 8(b)), provided
that there is no Equity Conditions Failure as of such Installment Date and a Company
Conversion is not otherwise prohibited under any other provision of
this Note. The number of shares of Common Stock to be delivered upon such Company Conversion shall be reduced by the
number of any Pre-Installment Conversion Shares delivered in connection with such
Installment Date. If an Event of Default occurs during any applicable Company Conversion
Measuring Period, then either (i) the Holder shall return any Pre-Installment Conversion
Shares delivered in connection with the applicable Installment Date or (ii) the Conversion
Amount used to calculate the Event of Default Redemption Price shall be reduced by the
product of (x) the Company Conversion Amount applicable to such Installment Date multiplied
by (y) the Conversion Share Ratio (as defined below). If there is an Equity Conditions
Failure as of such Installment Date or a Company Conversion is not otherwise permitted under
any other provision of this Note, then, at the option of the Holder designated in writing to
the Company, the Holder may require the Company to do any one or more of the following: (i)
the Company shall redeem all or any part designated by the Holder of the unconverted Company
Conversion Amount (such designated amount is referred to as the “Designated Redemption
Amount”) and the Company shall pay to the Holder within three (3) days of such Installment
Date, by wire transfer of immediately available funds, an amount in cash equal to 135% of
such Designated Redemption Amount, and/or (ii) the Company Conversion shall be null and void
with respect to all or any part designated by the Holder of the unconverted Company
Conversion Amount and the Holder shall be entitled to all the rights of a holder of this
Note with respect to such designated part of the Company Conversion Amount; provided,
however, the Conversion Price for such designated part of such unconverted Company
Conversion Amount shall thereafter be adjusted to equal the lesser of (A) the Company
Conversion Price as in effect on the date on which the Holder voided the Company Conversion
and (B) the Company Conversion Price that would be in effect on the date on which the Holder
delivers a Conversion Notice relating thereto as if such date was an Installment Date. In
addition, if there is an Equity Conditions Failure as of such Installment Date or a Company
Conversion is not otherwise permitted under any other provision of this Note, then, at the
Holder’s option, either (I) the Holder shall return any Pre-Installment Conversion Shares
delivered in connection with the applicable Installment Date or (II) the applicable
Designated Redemption Amount shall be reduced by the product of (X) the Company Conversion
Amount applicable to such Installment Date multiplied by (Y) the Conversion Share Ratio. If
the Company fails to redeem any Designated Redemption Amount by the third (3rd)
day following the applicable Installment Date by payment of such amount on the applicable
Installment Date, then the Holder shall have the rights set forth in Section 11(a) as if the
Company failed to pay the applicable Company Installment Redemption Price (as defined below)
and all other rights under this Note (including, without limitation, such failure
constituting an Event of Default described in Section 4(a)(xv)). Notwithstanding anything to
the contrary in this Section 8(b), but subject to Section 3(d), until the Company delivers
Common Stock

20

 

representing the Company Conversion Amount to the Holder, the Company Conversion Amount
may be converted by the Holder into Common Stock pursuant to Section 3. In the event that
the Holder elects to convert the Company Conversion Amount prior to the applicable
Installment Date as set forth in the immediately preceding sentence, the Company Conversion
Amount so converted shall be deducted from the Installment Amount(s) relating to the
applicable Installment Date(s) as set forth in the applicable Conversion Notice. If, with
respect to an Installment Date, the number of Pre-Installment Conversion Shares delivered to
the Holder exceeds the number of Post-Installment Conversion Shares with respect to such
Installment Date, then the number of shares of Common Stock equal to such excess shall
constitute a credit against the number of shares of Common Stock to be issued to such Holder
pursuant to Sections 3 and 8(a) hereof and shall reduce the number of shares of Common Stock
required to be actually issued by the Company to the Holder under such sections on a
share-for-share basis until such time as the number of shares that would have been issued by
the Company to such Holder (not taking account of such credit) equals the amount of such
excess.

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

          9. NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company will
not, by amendment of its Articles of Incorporation (as defined in the Securities Purchase
Agreement), Bylaws (as defined in the Securities Purchase Agreement) or through any reorganization,
transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of
securities, or any other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms of this Note, and will at all times in good faith carry out all of

21

 

the provisions of this Note and take all action as may be required to protect the rights of
the Holder of this Note. Without limiting the generality of the foregoing, the Company (i) shall
not increase the par value of any shares of Common Stock receivable upon conversion of this Note
above the Conversion Price then in effect, (ii) shall take all such actions as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid and non-assessable
shares of Common Stock upon the conversion of this Note, and (iii) shall, so long as any of the
Notes are outstanding, take all action necessary to reserve and keep available out of its
authorized and unissued shares of Common Stock, solely for the purpose of effecting the conversion
of the Notes, the maximum number of shares of Common Stock as shall from time to time be necessary
to effect the conversion of the Notes then outstanding (without regard to any limitations on
conversion).

     10. RESERVATION OF AUTHORIZED SHARES.

     (a) Reservation. From and after the date on which Shareholder Approval (as
defined in the Securities Purchase Agreement) is obtained, the Company shall initially
reserve out of its authorized and unissued Common Stock a number of shares of Common Stock
for each of the Notes equal to 100% of the entire Conversion Rate with respect to the entire
Conversion Amount of each such Note as of the Issuance Date. From and after the date on
which Shareholder Approval is obtained and so long as any of the Notes are outstanding, the
Company shall take all action necessary to reserve and keep available out of its authorized
and unissued Common Stock, solely for the purpose of effecting the conversion of the Notes,
100% of the number of shares of Common Stock as shall from time to time be necessary to
effect the conversion of all of the Notes then outstanding, provided that at no time shall
the number of shares of Common Stock so reserved be less than the number of shares required
to be reserved by the previous sentence (without regard to any limitations on conversions)
(the “Required Reserve Amount”). The initial number of shares of Common Stock reserved for
conversions of the Notes and each increase in the number of shares so reserved shall be
allocated pro rata among the holders of the Notes based on the original principal amount of
the Notes held by each holder on the Closing Date or increase in the number of reserved
shares (as the case may be) (the “Authorized Share Allocation”). In the event that a holder
shall sell or otherwise transfer any of such holder’s Notes, each transferee shall be
allocated a pro rata portion of such holder’s Authorized Share Allocation. Any shares of
Common Stock reserved and allocated to any Person which ceases to hold any Notes shall be
allocated to the remaining holders of Notes, pro rata based on the principal amount of the
Notes then held by such holders.

     (b) Insufficient Authorized Shares. If, notwithstanding Section 10(a), and not
in limitation thereof, at any time while any of the Notes remain outstanding the Company
does not have a sufficient number of authorized and unreserved shares of Common Stock to
satisfy its obligation to reserve for issuance upon conversion of the Notes at least a
number of shares of Common Stock equal to the Required Reserve Amount (an “Authorized Share
Failure”), then the Company shall immediately take all action necessary to increase the
Company’s authorized shares of Common Stock to an amount sufficient to allow the Company to
reserve the Required Reserve Amount for the Notes then outstanding. Without limiting the
generality of the foregoing sentence, as soon as

22

 

practicable after the date of the occurrence of an Authorized Share Failure, but in no
event later than sixty (60) days after the occurrence of such Authorized Share Failure, the
Company shall hold a meeting of its stockholders for the approval of an increase in the
number of authorized shares of Common Stock. In connection with such meeting, the Company
shall provide each stockholder with a proxy statement and shall use its best efforts to
solicit its stockholders’ approval of such increase in authorized shares of Common Stock and
to cause its board of directors to recommend to the stockholders that they approve such
proposal.

     11. HOLDER’S REDEMPTIONS.

     (a) Mechanics. The Company shall deliver the applicable Event of Default
Redemption Price to the Holder in cash within one (1) Business Day after the Company’s
receipt of the Holder’s Event of Default Redemption Notice. If the Holder has submitted a
Fundamental Transaction Redemption Notice in accordance with Section 5(b), the Company shall
deliver the applicable Fundamental Transaction Redemption Price to the Holder in cash
concurrently with the consummation of such Fundamental Transaction if such notice is
received prior to the consummation of such Fundamental Transaction and within one (1)
Business Day after the Company’s receipt of such notice otherwise. The Company shall deliver
the applicable Company Installment Redemption Price to the Holder in cash on the applicable
Installment Date. In the event of a redemption of less than all of the Conversion Amount of
this Note, if requested by Holder the Company shall promptly cause to be issued and
delivered to the Holder a new Note (in accordance with Section 17(d)) representing the
outstanding Principal which has not been redeemed. In the event that the Company does not
pay the applicable Redemption Price to the Holder within the time period required, at any
time thereafter and until the Company pays such unpaid Redemption Price in full, the Holder
shall have the option, in lieu of redemption, to require the Company to promptly return to
the Holder all or any portion of this Note representing the Conversion Amount that was
submitted for redemption and for which the applicable Redemption Price (together with any
Late Charges thereon) has not been paid. Upon the Company’s receipt of such notice, (x) the
applicable Redemption Notice shall be null and void with respect to such Conversion Amount,
(y) the Company shall immediately return this Note, or issue a new Note (in accordance with
Section 17(d)), to the Holder, and in each case the principal amount of this Note or such
new Note (as the case may be) shall be increased by an amount equal to the difference
between (1) the applicable Event of Default Redemption Price or Fundamental Transaction
Redemption Price (as the case may be) minus (2) the Principal portion of the Conversion
Amount submitted for redemption and (z) the Conversion Price of this Note or such new Notes
(as the case may be) shall be automatically adjusted with respect to each conversion
effected thereafter by the Holder to the lowest of (A) the Conversion Price as in effect on
the date on which the applicable Redemption Notice is voided, (B) 80% of the lowest Closing
Bid Price of the Common Stock during the period beginning on and including the date on which
the applicable Redemption Notice is delivered to the Company and ending on and including the
date on which the applicable Redemption Notice is voided and (C) 80% of the VWAP of the
Common Stock for the five (5) Trading Day period immediately preceding the Conversion Date
of the applicable conversion. The Holder’s delivery of a notice voiding a Redemption Notice
and exercise

23

 

of its rights following such notice shall not affect the Company’s obligations to make
any payments of Late Charges which have accrued prior to the date of such notice with
respect to the Conversion Amount subject to such notice.

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

     12. VOTING RIGHTS. The Holder shall have no voting rights as the holder of this Note,
except as required by law (including, without limitation, the Delaware General Corporation Law) and
as expressly provided in this Note.

     13. COVENANTS. Until all of the Notes have been converted, redeemed or otherwise
satisfied in accordance with their terms:

     (a) Rank. All payments due under this Note shall rank pari passu with all Other
Notes and be senior to all other Indebtedness of the Company and its Subsidiaries.

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

     (c) Existence of Liens. The Company shall not, and the Company shall cause each
of its Subsidiaries to not, directly or indirectly, allow or suffer to exist any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any property or
assets (including accounts and contract rights) owned by the Company or any of its
Subsidiaries, taken as a whole (collectively, “Liens”) other than Permitted Liens.

     (d) Restricted Payments. The Company shall not, and the Company shall cause
each of its Subsidiaries to not, directly or indirectly, redeem, defease, repurchase, repay
or make any payments in respect of, by the payment of cash or cash equivalents (in whole or
in part, whether by way of open market purchases, tender offers, private

24

 

transactions or otherwise), all or any portion of any Indebtedness (other than the
Notes (as defined in the Prior Purchase Agreement (as defined in the Securities Purchase
Agreement)), whether by way of payment in respect of principal of (or premium, if any) or
interest on, such Indebtedness if at the time such payment is due or is otherwise made or,
after giving effect to such payment, (i) an event constituting an Event of Default has
occurred and is continuing or (ii) an event that with the passage of time and without being
cured would constitute an Event of Default has occurred and is continuing.

     (e) Restriction on Redemption and Cash Dividends. The Company shall not, and
the Company shall cause each of its Subsidiaries to not, directly or indirectly, redeem,
repurchase or declare or pay any cash dividend or distribution on any of its capital stock.

     (f) Restriction on Transfer of Assets. The Company shall not, and the Company
shall cause each of its Subsidiaries to not, directly or indirectly, sell, lease, license,
assign, transfer, convey or otherwise dispose of any assets or rights of the Company or any
Subsidiary owned or hereafter acquired whether in a single transaction or a series of
related transactions, other than (i) sales, leases, licenses, assignments, transfers,
conveyances and other dispositions of such assets or rights by the Company and its
Subsidiaries that, in the aggregate, do not have a fair market value in excess of $100,000
in any twelve (12) month period and (ii) sales of inventory in the ordinary course of
business. The Company shall cause Converted Organics of Woodbridge, LLC not to acquire any
assets or other property.

     (g) Maturity of Indebtedness. The Company shall not, and the Company shall
cause each of its Subsidiaries to not, directly or indirectly, permit any Indebtedness
(other than the Notes (as defined in the Prior Purchase Agreement)) of the Company or any of
its Subsidiaries to mature or accelerate prior to the Maturity Date.

     (h) Change in Nature of Business. The Company shall not, and the Company shall
cause each of its Subsidiaries to not, directly or indirectly, engage in any material line
of business substantially different from those lines of business conducted by or publicly
contemplated to be conducted by the Company and each of its Subsidiaries on the Issuance
Date or any business substantially related or incidental thereto. The Company shall not,
and the Company shall cause each of its Subsidiaries to not, directly or indirectly, modify
its or their corporate structure or purpose if such modification shall have a Material
Adverse Effect or shall materially adversely affect any rights of, or benefits to, the
Holder under any of the Transaction Documents.

     (i) New Subsidiaries. Simultaneously with the acquisition or formation of each
New Subsidiary, the Company shall immediately cause such New Subsidiary to execute, and
deliver to each holder of Notes, all Security Documents (as defined in the Securities
Purchase Agreement) and Guaranties (as defined in the Securities Purchase Agreement) as
requested by the Holder.

     14. PARTICIPATION. In addition to any adjustments pursuant to Section 7, the Holder,
as the holder of this Note, shall be entitled to receive such dividends paid and

25

 

distributions made to the holders of Common Stock to the same extent as if the Holder had
converted this Note into Common Stock (without regard to any limitations on conversion herein or
elsewhere) and had held such shares of Common Stock on the record date for such dividends and
distributions. Payments under the preceding sentence shall be made concurrently with the dividend
or distribution to the holders of Common Stock (provided, however, to the extent that the Holder’s
right to participate in any such dividend or distribution would result in the Holder exceeding the
Maximum Percentage, then the Holder shall not be entitled to participate in such dividend or
distribution to such extent (or the beneficial ownership of any such shares of Common Stock as a
result of such dividend or distribution to such extent) and such dividend or distribution to such
extent shall be held in abeyance for the benefit of the Holder until such time, if ever, as its
right thereto would not result in the Holder exceeding the Maximum Percentage).

     15. AMENDING THE TERMS OF THIS NOTE. The prior written consent of the Holder shall be
required for any change or amendment to this Note. No consideration shall be offered or paid to the
Holder to amend or consent to a waiver or modification of any provision of this Note unless the
same consideration is also offered to all of the holders of the Other Notes. The Holder shall be
entitled, at its option, to the benefit of any amendment to any of the Other Notes.

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

     17. REISSUANCE OF THIS NOTE.

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

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

     (c) Note Exchangeable for Different Denominations. This Note is

26

 

exchangeable, upon the surrender hereof by the Holder at the principal office of the
Company, for a new Note or Notes (in accordance with Section 17(d) and in principal amounts
of at least $1,000) representing in the aggregate the outstanding Principal of this Note,
and each such new Note will represent such portion of such outstanding Principal as is
designated by the Holder at the time of such surrender.

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

     18. REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.
The remedies provided in this Note shall be cumulative and in addition to all other remedies
available under this Note and any of the other Transaction Documents at law or in equity (including
a decree of specific performance and/or other injunctive relief), and nothing herein shall limit
the Holder’s right to pursue actual and consequential damages for any failure by the Company to
comply with the terms of this Note. The Company covenants to the Holder that there shall be no
characterization concerning this instrument other than as expressly provided herein. Amounts set
forth or provided for herein with respect to payments, conversion and the like (and the computation
thereof) shall be the amounts to be received by the Holder and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the performance thereof).
The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable
harm to the Holder and that the remedy at law for any such breach may be inadequate. The Company
therefore agrees that, in the event of any such breach or threatened breach, the Holder shall be
entitled, in addition to all other available remedies, to an injunction restraining any such breach
or any such threatened breach, without the necessity of showing economic loss and without any bond
or other security being required. The Company shall provide all information and documentation to
the Holder that is requested by the Holder to enable the Holder to confirm the Company’s compliance
with the terms and conditions of this Note (including, without limitation, compliance with Section
7).

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

27

 

reorganization, receivership or other proceeding, including, without limitation, attorneys’
fees and disbursements. The Company expressly acknowledges and agrees that no amounts due under
this Note shall be affected, or limited, by the fact that the Purchase Price paid for this Note was
less than the original Principal amount hereof.

     20. CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly drafted by the
Company and the Holder and shall not be construed against any Person as the drafter hereof. The
headings of this Note are for convenience of reference and shall not form part of, or affect the
interpretation of, this Note. Terms used in this Note but defined in the other Transaction
Documents shall have the meanings ascribed to such terms on the Closing Date in such other
Transaction Documents unless otherwise consented to in writing by the Holder.

     21. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the Holder in
the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such power, right or privilege preclude other or
further exercise thereof or of any other right, power or privilege. No waiver shall be effective
unless it is in writing and signed by an authorized representative of the waiving party.

     22. DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Conversion Price, the Closing Bid Price, the Closing Sale Price or fair market value (as the case
may be) or the arithmetic calculation of the Conversion Rate or the applicable Redemption Price (as
the case may be), the Company or the Holder (as the case may be) shall submit the disputed
determinations or arithmetic calculations (as the case may be) via facsimile (i) within two (2)
Business Days after receipt of the applicable notice giving rise to such dispute to the Company or
the Holder (as the case may be) or (ii) if no notice gave rise to such dispute, at any time after
the Holder learned of the circumstances giving rise to such dispute (including, without limitation,
as to whether any issuance or sale or deemed issuance or sale was an issuance or sale or deemed
issuance or sale of Excluded Securities). If the Holder and the Company are unable to agree upon
such determination or calculation within two (2) Business Days of such disputed determination or
arithmetic calculation (as the case may be) being submitted to the Company or the Holder (as the
case may be), then the Company shall, within two (2) Business Days, submit via facsimile (a) the
disputed determination of the Conversion Price, the Closing Bid Price, the Closing Sale Price or
fair market value (as the case may be) to an independent, reputable investment bank selected by the
Holder or (b) the disputed arithmetic calculation of the Conversion Rate or any Redemption Price
(as the case may be) to the Company’s independent, outside accountant. The Company shall cause at
its expense the investment bank or the accountant (as the case may be) to perform the
determinations or calculations (as the case may be) and notify the Company and the Holder of the
results no later than ten (10) Business Days from the time it receives such disputed determinations
or calculations (as the case may be). Such investment bank’s or accountant’s determination or
calculation (as the case may be) shall be binding upon all parties absent demonstrable error.

     23. NOTICES; PAYMENTS.

     (a) Notices. Whenever notice is required to be given under this Note, unless
otherwise provided herein, such notice shall be given in accordance with Section 9(f) of the
Securities Purchase Agreement. The Company shall provide the Holder with prompt

28

 

written notice of all actions taken pursuant to this Note, including in reasonable
detail a description of such action and the reason therefore. Without limiting the
generality of the foregoing, the Company will give written notice to the Holder (i)
immediately upon any adjustment of the Conversion Price, setting forth in reasonable detail,
and certifying, the calculation of such adjustment and (ii) at least fifteen (15) days prior
to the date on which the Company closes its books or takes a record (A) with respect to any
dividend or distribution upon the Common Stock, (B) with respect to any grant, issuances, or
sales of any Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property to all holders of shares of Common Stock or (C) for determining
rights to vote with respect to any Fundamental Transaction, dissolution or liquidation,
provided in each case that such information shall be made known to the public prior to or in
conjunction with such notice being provided to the Holder.

     (b) Currency. All dollar amounts referred to in this Note are in United States
Dollars (“U.S. Dollars”), and all amounts owing under this Note shall be paid in U.S.
Dollars. All amounts denominated in other currencies (if any) shall be converted into the
U.S. Dollar equivalent amount in accordance with the Exchange Rate on the date of
calculation. “Exchange Rate” means, in relation to any amount of currency to be converted
into U.S. Dollars pursuant to this Note, the U.S. Dollar exchange rate as published in the
Wall Street Journal on the relevant date of calculation (it being understood and agreed that
where an amount is calculated with reference to, or over, a period of time, the date of
calculation shall be the final date of such period of time).

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

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

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

29

 

the Securities Purchase Agreement.

     26. GOVERNING LAW. This Note shall be construed and enforced in accordance with, and
all questions concerning the construction, validity, interpretation and performance of this Note
shall be governed by, the internal laws of the State of New York, without giving effect to any
choice of law or conflict of law provision or rule (whether of the State of New York or any other
jurisdictions) that would cause the application of the laws of any jurisdictions other than the
State of New York. The Company hereby irrevocably submits to the exclusive jurisdiction of the
state and federal courts sitting in The City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of
any such court, that such suit, action or proceeding is brought in an inconvenient forum or that
the venue of such suit, action or proceeding is improper. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law. In the event that
any provision of this Note is invalid or unenforceable under any applicable statute or rule of law,
then such provision shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule of law. Any such provision which may
prove invalid or unenforceable under any law shall not affect the validity or enforceability of any
other provision of this Note. Nothing contained herein shall be deemed or operate to preclude the
Holder from bringing suit or taking other legal action against the Company in any other
jurisdiction to collect on the Company’s obligations to the Holder, to realize on any collateral or
any other security for such obligations, or to enforce a judgment or other court ruling in favor of
the Holder. THE COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR
ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.

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

     (a) “Black Scholes Consideration Value” means the value of the applicable Option or
Convertible Security (as the case may be) as of the date of issuance thereof calculated
using the Black Scholes Option Pricing Model obtained from the “OV” function on Bloomberg
utilizing (i) an underlying price per share equal to the Closing Sale Price of the Common
Stock on the Trading Day immediately preceding the public announcement of the execution of
definitive documents with respect to the issuance of such Option or Convertible Security (as
the case may be), (ii) a risk-free interest rate corresponding to the U.S. Treasury rate for
a period equal to the remaining term of such Option or Convertible Security (as the case may
be) as of the date of issuance of such Option or Convertible Security (as the case may be)
and (iii) an expected volatility equal to the greater of 100% and the 100 day volatility
obtained from the HVT function on Bloomberg (determined utilizing a 365 day annualization
factor) as of the Trading Day immediately following the date of issuance of such Option or
Convertible Security (as the case may be).

30

 

     (b) “Bloomberg” means Bloomberg, L.P.

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

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

     (e) “Common Stock” means (i) the Company’s shares of common stock, $0.0001 par value
per share, and (ii) any capital stock into which such common stock shall have been changed
or any share capital resulting from a reclassification of such common stock.

     (f) “Company Conversion Price” means, with respect to a particular date of
determination, the price which is equal to the product of (1) 85% multiplied by (2) the
quotient of (A) the sum of each of the three (3) lowest Closing Sale Prices of the Common
Stock during the twenty (20) consecutive Trading Day period immediately preceding the
applicable Installment Date (each such period, a “Company Conversion Measuring Period”)
divided by (B) three (3). All such determinations to be appropriately adjusted for any stock
split, stock dividend, stock combination or other similar transaction during any such
Company Conversion Measuring Period.

     (g) “Conversion Share Ratio” means as to any applicable Installment Date, the quotient
of (i) the number of Pre-Installment Conversion Shares delivered in connection with such
Installment Date divided by (ii) the number of Post-Installment

31

 

Conversion Shares applicable to such Installment Date.

     (h) “Convertible Securities” means any stock or other security (other than Options)
that is at any time and under any circumstances, directly or indirectly, convertible into,
exercisable or exchangeable for, or which otherwise entitles the holder thereof to acquire,
any shares of Common Stock.

     (i) “Current Subsidiary” means any Person in which the Company on the Subscription
Date, directly or indirectly, (i) owns any of the outstanding capital stock or holds any
equity or similar interest of such Person or (ii) controls or operates all or any part of
the business, operations or administration of such Person, and all of the foregoing,
collectively, “Current Subsidiaries.”

     (j) “Eligible Market” means The New York Stock Exchange, the NYSE Amex, the Nasdaq
Global Select Market, the Nasdaq Global Market or the Principal Market.

     (k) “Equity Conditions” means: (i) with respect to the applicable date of determination
either (x) one or more Registration Statements filed pursuant to the Registration Rights
Agreement are effective and each prospectus contained therein is available for the resale by
the Holder of all of the Conversion Shares (as defined in the Securities Purchase Agreement)
(which, solely for clarification purposes, includes all shares of Common Stock issuable upon
conversion of this Note, including, without limitation, under Sections 3 and 8) or (y) all
Conversion Shares shall be eligible for sale without restriction under Rule 144 (including,
without limitation, volume restrictions) and without the need for registration under any
applicable federal or state securities laws (in each case, disregarding any limitation on
conversion of the Notes); (ii) on each day during the period beginning one month prior to
the applicable date of determination and ending on and including the applicable date of
determination (the “Equity Conditions Measuring Period”), the Common Stock (including all of
the Registrable Securities) is listed or designated for quotation (as applicable) on an
Eligible Market and shall not have been suspended from trading on an Eligible Market (other
than suspensions of not more than two (2) days and occurring prior to the applicable date of
determination due to business announcements by the Company); (iii) on each day during the
Equity Conditions Measuring Period, the Company shall have delivered all shares of Common
Stock issuable upon conversion of this Note on a timely basis as set forth in Section 3
hereof and all other shares of capital stock required to be delivered by the Company on a
timely basis as set forth in the other Transaction Documents; (iv) any shares of Common
Stock to be issued in connection with the event requiring determination may be issued in
full without violating Section 3(d)(i) hereof (Holder acknowledges that the Company shall be
entitled to assume that this condition has been met for all purposes hereunder absent
written notice from Holder); (v) any shares of Common Stock to be issued in connection with
the event requiring determination may be issued in full without violating the rules or
regulations of the Eligible Market on which the Common Stock is then listed or designated
for quotation (as applicable); (vi) on each day during the Equity Conditions Measuring
Period, no public announcement of a pending, proposed or intended Fundamental Transaction
shall have occurred which has not been abandoned, terminated

32

 

or consummated; (vii) the Company shall have no knowledge of any fact that would
reasonably be expected to cause (1) any Registration Statement filed pursuant to the
Registration Rights Agreement to not be effective or the prospectus contained therein to not
be available for the resale of all of the Conversion Shares in accordance with the terms of
the Registration Rights Agreement or (2) any Conversion Shares to not be eligible for sale
without restriction pursuant to Rule 144 (including, without limitation, volume
restrictions) or any applicable state securities laws (in each case, disregarding any
limitation on conversion of the Notes); (viii) the Holder shall not be in (and no other
Buyer shall be in) possession of any material, non-public information provided to any of
them by the Company, any of its Subsidiaries or any of their respective affiliates,
employees, officers, representatives, agents or the like; (ix) on each day during the Equity
Conditions Measuring Period, the Company otherwise shall have been in material compliance
with each, and shall not have breached any, provision, covenant, representation or warranty
of any Transaction Document; and (x) without limiting clause (ix) above, on each day during
the Equity Conditions Measuring Period, there shall not have occurred an Event of Default or
an event that with the passage of time or giving of notice would constitute an Event of
Default.

     (l) “Equity Conditions Failure” means, with respect to a particular date of
determination, that on any day during the period commencing twenty (20) Trading Days
immediately prior to such date of determination, the Equity Conditions have not been
satisfied (or waived in writing by the Holder).

     (m) “Equity Value Redemption Premium” means 135%.

     (n) “Fundamental Transaction” means that (i) (1) the Company or any of its Subsidiaries
shall, directly or indirectly, in one or more related transactions, consolidate or merge
with or into (whether or not the Company or any of its Subsidiaries is the surviving
corporation) any other Person, or (2) the Company or any of its Significant Subsidiaries
shall, directly or indirectly, in one or more related transactions, sell, lease, license,
assign, transfer, convey or otherwise dispose of all or substantially all of its respective
properties or assets to any other Person, or (3) the Company or any of its Subsidiaries
shall, directly or indirectly, in one or more related transactions, allow any other Person
to make a purchase, tender or exchange offer that is accepted by the holders of more than
50% of the outstanding shares of Voting Stock of the Company (not including any shares of
Voting Stock of the Company held by the Person or Persons making or party to, or associated
or affiliated with the Persons making or party to, such purchase, tender or exchange offer),
or (4) the Company or any of its Subsidiaries shall, directly or indirectly, in one or more
related transactions, consummate a stock or share purchase agreement or other business
combination (including, without limitation, a reorganization, recapitalization, spin-off or
scheme of arrangement) with any other Person whereby such other Person acquires more than
50% of the outstanding shares of Voting Stock of the Company (not including any shares of
Voting Stock of the Company held by the other Person or other Persons making or party to, or
associated or affiliated with the other Persons making or party to, such stock or share
purchase agreement or other business combination), or (5) the Company or any of its
Subsidiaries shall, directly or indirectly, in one or more related transactions, reorganize,
recapitalize or reclassify the

33

 

Common Stock (which shall not include a reverse stock split), or (ii) any “person” or
“group” (as these terms are used for purposes of Sections 13(d) and 14(d) of the 1934 Act
and the rules and regulations promulgated thereunder) is or shall become the “beneficial
owner” (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of 50% of the
aggregate ordinary voting power represented by issued and outstanding Voting Stock of the
Company, excluding Iroquois (as defined in the Securities Purchase Agreement).

     (o) “Fundamental Transaction Redemption Premium” means 135%.

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

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

     (r) “Installment Amount” means (i) with respect to any Installment Date other than the
Maturity Date, the lesser of (A) the product of (I) $770,000, multiplied by (II) the Holder
Pro Rata Amount and (B) the Principal amount then outstanding under this Note as of such
Installment Date, and (ii) with respect to the Installment Date that is the Maturity Date,
the Principal amount then outstanding under this Note as of such Installment Date, in each
case, as any such Installment Amount may be reduced pursuant to the terms of this Note,
whether upon conversion, redemption or otherwise, together with, in each case of clauses (i)
and (ii), the sum of any accrued and unpaid Interest as of such Installment Date under this
Note and accrued and unpaid Late Charges, if any, under this Note as of such Installment
Date. In the event the Holder shall sell or otherwise transfer any portion of this Note, the
transferee shall be allocated a pro rata portion of each unpaid Installment Amount
hereunder.

     (s) “Installment Date” means each of the following dates: (i) July 31, 2011, (ii)
August 31, 2011, (iii) September 30, 2011, (iv) October 31, 2011 and (v) the Maturity Date.

     (t) “Interest Rate” means zero percent (0%) per annum, as may be adjusted from time to
time in accordance with Section 2.

     (u) “Maturity Date” shall mean November 30, 2011; provided, however, the Maturity Date
may be extended at the option of the Holder (i) in the event that, and for so long as, an
Event of Default shall have occurred and be continuing or any event shall have occurred and
be continuing that with the passage of time and the failure to cure would result in an Event
of Default or (ii) through the date that is twenty (20) Business Days after the consummation
of a Fundamental Transaction in the event that a Fundamental Transaction is publicly
announced or a Fundamental Transaction Notice is delivered prior to the Maturity Date,
provided further that if a Holder elects to convert some or all of this Note pursuant to
Section 3 hereof, and the Conversion Amount would be limited pursuant to Section 3(d)
hereunder, the Maturity Date shall automatically be

34

 

extended until such time as such provision shall not limit the conversion of this Note.

     (v) “New Subsidiary” means, as of any date of determination, any Person in which the
Company after the Subscription Date, directly or indirectly, (i) owns or acquires any of the
outstanding capital stock or holds any equity or similar interest of such Person or (ii)
controls or operates all or any part of the business, operations or administration of such
Person, and all of the foregoing, collectively, “New Subsidiaries.”

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

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

     (y) “Permitted Indebtedness” means (i) total Indebtedness of the Company and its
Subsidiaries (other than as expressly specified in, and permitted by, clauses (ii), (iii)
and (iv) below) not to exceed $250,000 in the aggregate outstanding at any time; provided,
however, such Indebtedness shall be made expressly subordinate in right of payment to the
Indebtedness evidenced by the Notes, as reflected in a written agreement acceptable to the
Holder and approved by the Holder in writing, and which Indebtedness does not provide at any
time for (A) the payment, prepayment, repayment, repurchase or defeasance, directly or
indirectly, of any principal or premium, if any, thereon until ninety-one (91) days after
the Maturity Date or later and (B) total interest and fees at a rate in excess of the
Interest Rate; (ii) equipment leases and purchase money obligations of the Company and its
Subsidiaries not to exceed $1,600,000 in the aggregate outstanding at any time; (iii)
Indebtedness evidenced by this Note and the Other Notes; and (iv) Indebtedness evidenced by
the Notes (as defined in the Prior Purchase Agreement).

     (z) “Permitted Liens” means (i) any Lien for taxes not yet due or delinquent or being
contested in good faith by appropriate proceedings for which adequate reserves have been
established in accordance with GAAP, (ii) any statutory Lien arising in the ordinary course
of business by operation of law with respect to a liability that is not yet due or
delinquent; (iii) any Lien created by operation of law, such as materialmen’s liens,
mechanics’ liens and other similar liens, arising in the ordinary course of business with
respect to a liability that is not yet due or delinquent or that are being contested in good
faith by appropriate proceedings; (iv) Liens securing the Indebtedness expressly permitted
by clause (ii) of Permitted Indebtedness; (v) Liens securing the Company’s obligations under
the Transaction Documents and (vi) Liens securing each Subsidiary’s obligations under the
Transaction Documents (including, without limitation, under the Guaranties).

     (aa) “Person” means an individual, a limited liability company, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization, any other entity or

35

 

a government or any department or agency thereof.

     (bb) “Pre-Installment Conversion Price” means, with respect to a particular date of
determination, the price which is equal to the product of (1) 85% multiplied by (2) the
quotient of (A) the sum of each of the three (3) lowest Closing Sale Prices of the Common
Stock during the twenty (20) consecutive Trading Day period immediately preceding the
delivery or deemed delivery of the applicable Company Installment Notice divided by (B)
three (3). All such determinations to be appropriately adjusted for any stock split, stock
dividend, stock combination or other similar transaction during any such measuring period.

     (cc) “Principal Market” means the Nasdaq Capital Market.

     (dd) “Post-Installment Conversion Shares” means that number of shares of Common Stock
that would be required to be delivered pursuant to Section 8 on an applicable Installment
Date without taking into account the delivery of any Pre-Installment Conversion Shares.

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

     (ff) “Redemption Notices” means, collectively, Event of Default Redemption Notices and
Fundamental Transaction Redemption Notices, and each of the foregoing, individually, a
“Redemption Notice.”

     (gg) “Redemption Premium” means (i) in the case of the Events of Default described in
Section 4(a) (other than Sections 4(a)(ix) through 4(a)(xi)), 135% or (ii) in the case of
the Events of Default described in Sections 4(a)(ix) through 4(a)(xi), 100%.

     (hh) “Redemption Prices” means, collectively, Event of Default Redemption Prices, the
Fundamental Transaction Redemption Prices and the Company Installment Redemption Prices, and
each of the foregoing, individually, a “Redemption Price.”

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

     (jj) “SEC” means the United States Securities and Exchange Commission or the successor
thereto.

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

36

 

amended from time to time.

     (ll) “Security Agreement” means that certain security agreement, dated as of the
Closing Date, by and among the Company, its Subsidiaries and the initial holders of the
Notes, as may be amended from time to time.

     (mm) “Significant Subsidiaries” means, as of any date of determination, collectively,
all Subsidiaries (other than Converted Organics of Woodbridge, LLC) that would constitute a
“significant subsidiary” under Rule 1-02 of Regulation S-X promulgated by the SEC, and each
of the foregoing, individually, a “Significant Subsidiary.”

     (nn) “Subscription Date” means April 1, 2011.

     (oo) “Subsidiaries” means, as of any date of determination, collectively, all Current
Subsidiaries and all New Subsidiaries, and each of the foregoing, individually, a
“Subsidiary.”

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

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

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

     (ss) “VWAP” means, for any security as of any date, the dollar volume-weighted average
price for such security on the Principal Market (or, if the Principal Market is not the
principal trading market for such security, then on the principal securities exchange or
securities market on which such security is then traded) during the period beginning at
9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York time, as reported by
Bloomberg through its “Volume at Price” function or, if the foregoing does not apply, the
dollar volume-weighted average price of such security in

37

 

the over-the-counter market on the electronic bulletin board for such security during
the period beginning at 9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York
time, as reported by Bloomberg, or, if no dollar volume-weighted average price is reported
for such security by Bloomberg for such hours, the average of the highest closing bid price
and the lowest closing ask price of any of the market makers for such security as reported
in the “pink sheets” by Pink OTC Markets Inc.(formerly Pink Sheets LLC). If the VWAP cannot
be calculated for such security on such date on any of the foregoing bases, the VWAP of such
security on such date shall be the fair market value as mutually determined by the Company
and the Holder. If the Company and the Holder are unable to agree upon the fair market value
of such security, then such dispute shall be resolved in accordance with the procedures in
Section 22. All such determinations shall be appropriately adjusted for any stock dividend,
stock split, stock combination or other similar transaction during such period.

     (tt) “Warrants” has the meaning ascribed to such term in the Securities Purchase
Agreement, as may be amended from time to time, and shall include all warrants issued in
exchange therefor or replacement thereof.

     28. DISCLOSURE. Upon receipt or delivery by the Company of any notice in accordance
with the terms of this Note, unless the Company has in good faith determined that the matters
relating to such notice do not constitute material, non-public information relating to the Company
or any of its Subsidiaries, the Company shall within one (1) Business Day after any such receipt or
delivery publicly disclose such material, non-public information on a Current Report on Form 8-K or
otherwise. In the event that the Company believes that a notice contains material, non-public
information relating to the Company or any of its Subsidiaries, the Company so shall indicate to
such Holder contemporaneously with delivery of such notice, and in the absence of any such
indication, the Holder shall be allowed to presume that all matters relating to such notice do not
constitute material, non-public information relating to the Company or its Subsidiaries. Nothing
contained in this Section 28 shall limit any obligations of the Company, or any rights of the
Holder, under Section 4(j) of the Securities Purchase Agreement.

     29. MAXIMUM PAYMENTS. Without limiting Section 9(d) of the Securities Purchase
Agreement, nothing contained in this Note shall, or shall be deemed to, establish or require the
payment of a rate of interest or other charges in excess of the maximum permitted by applicable
law. In the event that the rate of interest required to be paid or other charges under this Note
exceeds the maximum permitted by such law, any payments in excess of such maximum shall be credited
against amounts owed by the Company to the Holder and thus refunded to the Company.

     30. SECURITY. This Note and the Other Notes are secured to the extent and in the
manner set forth in the Transaction Documents (including, without limitation, the Security
Agreement, the other Security Documents and the Guaranties).

[signature page follows]

38

 

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

	 	 	 	 	 	 	 

	 	 	Converted Organics Inc.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Name:	 	 
	 

	 	 	 	Title:	 	 

 

EXHIBIT I

CONVERTED ORGANICS INC.

CONVERSION NOTICE

     Reference is made to the Senior Secured Convertible Note (the “Note”) issued to the
undersigned by Converted Organics Inc. (the “Company”). In accordance with and pursuant to the
Note, the undersigned hereby elects to convert the Conversion Amount (as defined in the Note) of
the Note indicated below into shares of common stock, $0.0001 par value per share (the “Common
Stock”), of the Company, as of the date specified below.

	 	 	 

	Date of Conversion:
	 	 
	 

	 	 

	 	 	 

	Aggregate Conversion Amount to be converted:
	 	 
	 

	 	 
	 
	 	 
	Conversion Price:
	 	 
	 

	 	 
	 
	 	 
	Number of shares of Common Stock to be issued:
	 	 
	 

	 	 
	 
	 	 

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

	 	 	 

	Issue to:
	 	 
	 

	 	 
	 
	 	 
	 

	 	 
	 
	 	 
	 

	 	 

	 	 	 
	Facsimile Number:
	 	 
	 

	 	 
	 
	 	 
	Holder:
	 	 
	 

	 	 
	 
	 	 
	By:      
	 	 
	 

	 	 

	 	 	 
	Title:
	 	 
	 

	 	 

	 	 	 

	Dated:
	 	 
	 

	 	 

	 	 	 

	   Account Number:
	 	 
	 

	 	 
	   (if electronic book entry transfer)
	 	 
	 
	 	 
	   Transaction Code Number:
	 	 
	 

	 	 
	   (if electronic book entry transfer)
	 	 
	 
	 	 
	Installment Amount(s) to be reduced (and
	 	 
	 

	 	 
	corresponding Installment Date(s)) and amount of
reduction:
	 	 

 

 

EXHIBIT
II

ACKNOWLEDGMENT

     The Company hereby acknowledges this Conversion Notice and hereby directs _________________ to
issue the above indicated number of shares of Common Stock in accordance with the Transfer Agent
Instructions dated _____________, 20__ from the Company and acknowledged and agreed to by
_______________________.

	 	 	 	 	 
	 	Converted Organics Inc.

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:exv4w2

Exhibit 4.2

[FORM OF SERIES A WARRANT]

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

CONVERTED ORGANICS INC.

Warrant To Purchase Common Stock

Series A Warrant No.:                                        

Date of Issuance: April [___], 2011 (“Issuance Date”)

     Converted Organics Inc., a Delaware corporation (the “Company”), hereby certifies that, for
good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged,
[________________], the registered holder hereof or its permitted assigns (the “Holder”), is
entitled, subject to the terms set forth below, to purchase from the Company, at the Exercise Price
(as defined below) then in effect, upon exercise of this Warrant to Purchase Common Stock
(including any Warrants to Purchase Common Stock issued in exchange, transfer or replacement
hereof, the “Warrant”), at any time or times on or after the six (6) month and one (1) day
anniversary of the Issuance Date (the “Initial Exercise Date”), but not after 11:59 p.m., New York
time, on the Expiration Date (as defined below), [___________] (subject to adjustment as provided
herein) fully paid and non-assessable shares of Common Stock (as defined below) (the “Warrant
Shares”). Except as otherwise defined herein, capitalized terms in this Warrant shall have the
meanings set forth in Section 16. This Warrant is one of the Warrants to Purchase Common Stock (the
“SPA Warrants”) issued pursuant to Section 1 of that certain Securities Purchase Agreement, dated
as of April 1, 2011, by and among the Company and the investors referred to therein (the
“Securities Purchase Agreement”).

1. EXERCISE OF WARRANT.

     (a) Mechanics of Exercise. Subject to the terms and conditions hereof (including, without limitation, the limitations
set forth in Section 1(f)), this Warrant may be exercised by the Holder on any day on or after the
Initial Exercise Date, in whole or in part, by delivery (whether via facsimile or otherwise) of a
written notice, in the form attached hereto as Exhibit A (the

 

 

“Exercise Notice”), of the Holder’s election to exercise this Warrant. Within one (1) Trading
Day following an exercise of this Warrant as aforesaid, the Holder shall deliver payment to the
Company of an amount equal to the Exercise Price in effect on the date of such exercise multiplied
by the number of Warrant Shares as to which this Warrant was so exercised (the “Aggregate Exercise
Price”) in cash or via wire transfer of immediately available funds if the Holder did not notify
the Company in such Exercise Notice that such exercise was made pursuant to a Cashless Exercise (as
defined in Section 1(d)). The Holder shall not be required to deliver the original of this Warrant
in order to effect an exercise hereunder. Execution and delivery of an Exercise Notice with respect
to less than all of the Warrant Shares shall have the same effect as cancellation of the original
of this Warrant and issuance of a new Warrant evidencing the right to purchase the remaining number
of Warrant Shares. Execution and delivery of an Exercise Notice for all of the then-remaining
Warrant Shares shall have the same effect as cancellation of the original of this Warrant after
delivery of the Warrant Shares in accordance with the terms hereof. On or before the first
(1st) Trading Day following the date on which the Company has received an Exercise
Notice, the Company shall transmit by facsimile an acknowledgment of confirmation of receipt of
such Exercise Notice, in the form attached hereto as Exhibit B, to the Holder and the
Company’s transfer agent (the “Transfer Agent”). On or before the third (3rd) Trading
Day following the date on which the Company has received such Exercise Notice and received the
Aggregate Exercise Price if the Holder did not notify the Company in such Exercise Notice that such
exercise was made pursuant to a Cashless Exercise, the Company shall (X) provided that either a
registration statement for the resale by the Holder of the applicable Warrant Shares is effective
or the applicable Warrant Shares are otherwise eligible for resale pursuant to Rule 144 (as defined
in the Securities Purchase Agreement) and the Transfer Agent is participating in The Depository
Trust Company (“DTC”) Fast Automated Securities Transfer Program, upon the request of the Holder,
credit such aggregate number of shares of Common Stock to which the Holder is entitled pursuant to
such exercise to the Holder’s or its designee’s balance account with DTC through its Deposit/
Withdrawal at Custodian system, or (Y) if the Transfer Agent is not participating in the DTC Fast
Automated Securities Transfer Program, issue and deliver to the Holder or, at the Holder’s
instruction pursuant to the Exercise Notice, the Holder’s agent or designee, in each case, sent by
reputable overnight courier to the address as specified in the applicable Exercise Notice, a
certificate, registered in the Company’s share register in the name of the Holder or its designee
(as indicated in the applicable Exercise Notice), for the number of shares of Common Stock to which
the Holder is entitled pursuant to such exercise, and to the extent the applicable Warrant Shares
have not been registered for resale by the Holder on an effective registration statement or are not
eligible for resale pursuant to Rule 144, the certificate shall include such restrictive legends as
required by Section 5 of the Securities Purchase Agreement. Upon delivery of an Exercise Notice,
the Holder shall be deemed for all corporate purposes to have become the holder of record of the
Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date such
Warrant Shares are credited to the Holder’s DTC account or the date of delivery of the certificates
evidencing such Warrant Shares (as the case may be). If this Warrant is submitted in connection
with any exercise pursuant to this Section 1(a) and the number of Warrant Shares represented by
this Warrant submitted for exercise is greater than the number of Warrant Shares being acquired
upon an exercise, then, at the request of the Holder, the Company shall as soon as practicable and
in no event later than three (3) Business Days after any exercise and at its own expense, issue and
deliver to the Holder (or its designee) a new Warrant (in

2

 

accordance with Section 7(d)) representing the right to purchase the number of Warrant Shares
purchasable immediately prior to such exercise under this Warrant, less the number of Warrant
Shares with respect to which this Warrant is exercised. No fractional shares of Common Stock are to
be issued upon the exercise of this Warrant, but rather the number of shares of Common Stock to be
issued shall be rounded up to the nearest whole number. The Company shall pay any and all taxes and
fees which may be payable with respect to the issuance and delivery of Warrant Shares upon exercise
of this Warrant.

     (b) Exercise Price. For purposes of this Warrant, “Exercise Price” means $0.40, subject to adjustment as
provided herein.

     (c) Company’s Failure to Timely Deliver Securities. If the Company shall fail, for any reason or for no reason, to issue to the Holder within
three (3) Trading Days after receipt of the applicable Exercise Notice and received the Aggregate
Exercise Price if the Holder did not notify the Company in such Exercise Notice that such exercise
was made pursuant to a Cashless Exercise, a certificate for the number of shares of Common Stock to
which the Holder is entitled and register such shares of Common Stock on the Company’s share
register or to credit the Holder’s balance account with DTC for such number of shares of Common
Stock to which the Holder is entitled upon the Holder’s exercise of this Warrant (as the case may
be) (a “Delivery Failure”), then, in addition to all other remedies available to the Holder, the
Company shall pay in cash to the Holder on each day after such third (3rd) Trading Day
that the issuance of such shares of Common Stock is not timely effected an amount equal to 2% of
the product of (A) the aggregate number of shares of Common Stock not issued to the Holder on a
timely basis and to which the Holder is entitled and (B) the Closing Sale Price of the Common Stock
on the Trading Day immediately preceding the last possible date on which the Company could have
issued such shares of Common Stock to the Holder without violating Section 1(a). In addition to the
foregoing, if within three (3) Trading Days after the Company’s receipt of the applicable Exercise
Notice, the Company shall fail to issue and deliver a certificate to the Holder and register such
shares of Common Stock on the Company’s share register or credit the Holder’s balance account with
DTC for the number of shares of Common Stock to which the Holder is entitled upon the Holder’s
exercise hereunder (as the case may be), and if on or after such third (3rd) Trading Day
the Holder (or any other Person in respect, or on behalf, of the Holder) purchases (in an open
market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the
Holder of all or any portion of the number of shares of Common Stock, or a sale of a number of
shares of Common Stock equal to all or any portion of the number of shares of Common Stock,
issuable upon such exercise that the Holder so anticipated receiving from the Company, then, in
addition to all other remedies available to the Holder, the Company shall, within three (3)
Business Days after the Holder’s request and in the Holder’s discretion, either (i) pay cash to the
Holder in an amount equal to the Holder’s total purchase price (including brokerage commissions and
other out-of-pocket expenses, if any) for the shares of Common Stock so purchased (including,
without limitation, by any other Person in respect, or on behalf, of the Holder) (the “Buy-In
Price”), at which point the Company’s obligation to so issue and deliver such certificate or credit
the Holder’s balance account with DTC for the number of shares of Common Stock to which the Holder
is entitled upon the Holder’s exercise hereunder (as the case may be) (and to issue such shares of
Common Stock) shall terminate, or (ii) promptly honor its obligation to so issue and deliver to the
Holder a certificate or certificates representing such shares of Common Stock or credit the
Holder’s balance account with DTC for

3

 

the number of shares of Common Stock to which the Holder is entitled upon the Holder’s
exercise hereunder (as the case may be) and pay cash to the Holder in an amount equal to the excess
(if any) of the Buy-In Price over the product of (A) such number of shares of Common Stock
multiplied by (B) the lowest Closing Sale Price of the Common Stock on any Trading Day during the
period commencing on the date of the applicable Exercise Notice and ending on the date of such
issuance and payment under this clause (ii).

     (d) Cashless Exercise. Notwithstanding anything contained herein to the contrary (other than Section 1(f) below),
if at the time of exercise hereof a Registration Statement (as defined in the Registration Rights
Agreement (as defined in the Securities Purchase Agreement)) is not effective (or the prospectus
contained therein is not available for use) for the resale by the Holder of all of the Warrant
Shares, then the Holder may, in its sole discretion, exercise this Warrant in whole or in part and,
in lieu of making the cash payment otherwise contemplated to be made to the Company upon such
exercise in payment of the Aggregate Exercise Price, elect instead to receive upon such exercise
the “Net Number” of shares of Common Stock determined according to the following formula (a
“Cashless Exercise”):

	 	 	 	 	 

	Net Number =

	 	(A x B) – (A x C)
	 	 
	 
	 	 	 	 
	 

	 	B	 	 
	 
	 	 	 	 
	For purposes of the foregoing formula:

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

B= as applicable: (i) the Closing Sale Price of the Common Stock on the Trading Day
immediately preceding the date of the applicable Exercise Notice if such Exercise
Notice is (1) both executed and delivered pursuant to Section 1(a) hereof on a day
that is not a Trading Day or (2) both executed and delivered pursuant to Section
1(a) hereof on a Trading Day prior to the opening of “regular trading hours” (as
defined in Rule 600(b)(64) of Regulation NMS promulgated under the federal
securities laws) on such Trading Day, (ii) the Bid Price of the Common Stock as of
the time of the Holder’s execution of the applicable Exercise Notice if such
Exercise Notice is executed during “regular trading hours” on a Trading Day and is
delivered within two (2) hours thereafter pursuant to Section 1(a) hereof or (iii)
the Closing Sale Price of the Common Stock on the date of the applicable Exercise
Notice if the date of such Exercise Notice is a Trading Day and such Exercise Notice
is both executed and delivered pursuant to Section 1(a) hereof after the close of
“regular trading hours” on such Trading Day.

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

     (e) Disputes. In the case of a dispute as to the determination of the Exercise Price or the arithmetic
calculation of the number of Warrant Shares to be issued pursuant to the terms hereof, the Company
shall promptly issue to the Holder the number of Warrant Shares that are not disputed and resolve
such dispute in accordance with Section 13.

4

 

     (f) Limitations on Exercises. Notwithstanding anything to the contrary contained in
this Warrant, this Warrant shall not be exercisable by the Holder hereof to the extent (but only to
the extent) that the Holder or any of its affiliates would beneficially own in excess of 4.9% (the
“Maximum Percentage”) of the Common Stock. To the extent the above limitation applies, the
determination of whether this Warrant shall be exercisable (vis-à-vis other convertible,
exercisable or exchangeable securities owned by the Holder or any of its affiliates) and of which
such securities shall be exercisable (as among all such securities owned by the Holder) shall,
subject to such Maximum Percentage limitation, be determined on the basis of the first submission
to the Company for conversion, exercise or exchange (as the case may be). No prior inability to
exercise this Warrant pursuant to this paragraph shall have any effect on the applicability of the
provisions of this paragraph with respect to any subsequent determination of exercisability. For
the purposes of this paragraph, beneficial ownership and all determinations and calculations
(including, without limitation, with respect to calculations of percentage ownership) shall be
determined in accordance with Section 13(d) of the 1934 Act (as defined in the Securities Purchase
Agreement) and the rules and regulations promulgated thereunder. The provisions of this paragraph
shall be implemented in a manner otherwise than in strict conformity with the terms of this
paragraph to correct this paragraph (or any portion hereof) which may be defective or inconsistent
with the intended Maximum Percentage beneficial ownership limitation herein contained or to make
changes or supplements necessary or desirable to properly give effect to such Maximum Percentage
limitation. The limitations contained in this paragraph shall apply to a successor Holder of this
Warrant. The holders of Common Stock shall be third party beneficiaries of this paragraph and the
Company may not waive this paragraph without the consent of holders of a majority of its Common
Stock. For any reason at any time, upon the written or oral request of the Holder, the Company
shall within one (1) Business Day confirm orally and in writing to the Holder the number of shares
of Common Stock then outstanding, including by virtue of any prior conversion or exercise of
convertible or exercisable securities into Common Stock, including, without limitation, pursuant to
this Warrant or securities issued pursuant to the Securities Purchase Agreement.

     (g) Insufficient Authorized Shares. From and after the date on which Shareholder Approval (as defined in the Securities Purchase
Agreement) is obtained, the Company shall at all times keep reserved for issuance under this
Warrant a number of shares of Common Stock as shall be necessary to satisfy the Company’s
obligation to issue shares of Common Stock hereunder (without regard to any limitation otherwise
contained herein with respect to the number of shares of Common Stock that may be acquirable upon
exercise of this Warrant). If, notwithstanding the foregoing, and not in limitation thereof, from
and after the date on which Shareholder Approval is obtained at any time while any of the SPA
Warrants remain outstanding the Company does not have a sufficient number of authorized and
unreserved shares of Common Stock to satisfy its obligation to reserve for issuance upon exercise
of the SPA Warrants at least a number of shares of Common Stock equal to the number of shares of
Common Stock as shall from time to time be necessary to effect the exercise of all of the SPA
Warrants then outstanding (the “Required Reserve Amount”) (an “Authorized Share Failure”), then the
Company shall immediately take all action necessary to increase the Company’s authorized shares of
Common Stock to an amount sufficient to allow the Company to reserve the Required Reserve Amount
for all the SPA Warrants then outstanding. Without limiting the generality of the foregoing
sentence, as soon as practicable after the date of the occurrence of an Authorized Share Failure,
but in no event later than sixty (60) days after the occurrence of such Authorized Share Failure,
the

5

 

Company shall hold a meeting of its stockholders for the approval of an increase in the number
of authorized shares of Common Stock. In connection with such meeting, the Company shall provide
each stockholder with a proxy statement and shall use its best efforts to solicit its stockholders’
approval of such increase in authorized shares of Common Stock and to cause its board of directors
to recommend to the stockholders that they approve such proposal.

2. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. The Exercise Price and number
of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to
time as set forth in this Section 2.

     (a) Stock Dividends and Splits. Without limiting any provision of Section 2(b) or Section 4, if the Company, at any time on
or after the date of the Securities Purchase Agreement, (i) pays a stock dividend on one or more
classes of its then outstanding shares of Common Stock or otherwise makes a distribution on any
class of capital stock that is payable in shares of Common Stock, (ii) subdivides (by any stock
split, stock dividend, recapitalization or otherwise) one or more classes of its then outstanding
shares of Common Stock into a larger number of shares or (iii) combines (by combination, reverse
stock split or otherwise) one or more classes of its then outstanding shares of Common Stock into a
smaller number of shares, then in each such case the Exercise Price shall be multiplied by a
fraction of which the numerator shall be the number of shares of Common Stock 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 clause (i) of this
paragraph shall become effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution, and any adjustment pursuant to
clause (ii) or (iii) of this paragraph shall become effective immediately after the effective date
of such subdivision or combination. If any event requiring an adjustment under this paragraph
occurs during the period that an Exercise Price is calculated hereunder, then the calculation of
such Exercise Price shall be adjusted appropriately to reflect such event.

     (b) Adjustment Upon Issuance of Shares of Common Stock. If and whenever on or after the date of the Securities Purchase Agreement, the Company
issues or sells, or in accordance with this Section 2 is deemed to have issued or sold, any shares
of Common Stock (including the issuance or sale of shares of Common Stock owned or held by or for
the account of the Company, but excluding any Excluded Securities (as defined in the Securities
Purchase Agreement) issued or sold or deemed to have been issued or sold) for a consideration per
share (the “New Issuance Price”) less than a price equal to the Exercise Price in effect
immediately prior to such issue or sale or deemed issuance or sale (such Exercise Price then in
effect is referred to as the “Applicable Price”) (the foregoing a “Dilutive Issuance”), then
immediately after such Dilutive Issuance, the Exercise Price then in effect shall be reduced to an
amount equal to the New Issuance Price. For all purposes of the foregoing (including, without
limitation, determining the adjusted Exercise Price and consideration per share under this Section
2(b)), the following shall be applicable:

     (i) Issuance of Options. If the Company in any manner grants or sells any
Options and the lowest price per share for which one share of Common Stock is issuable upon
the exercise of any such Option or upon conversion, exercise or exchange of any Convertible
Securities issuable upon exercise of any such Option is less than the

6

 

Applicable Price, then such share of Common Stock shall be deemed to be outstanding and
to have been issued and sold by the Company at the time of the granting or sale of such
Option for such price per share. For purposes of this Section 2(b)(i), the “lowest price per
share for which one share of Common Stock is issuable upon the exercise of any such Options
or upon conversion, exercise or exchange of any Convertible Securities issuable upon
exercise of any such Option” shall be equal to (1) the lower of (x) the sum of the lowest
amounts of consideration (if any) received or receivable by the Company with respect to any
one share of Common Stock upon the granting or sale of such Option, upon exercise of such
Option and upon conversion, exercise or exchange of any Convertible Security issuable upon
exercise of such Option and (y) the lowest exercise price set forth in such Option for which
one share of Common Stock is issuable upon the exercise of any such Options or upon
conversion, exercise or exchange of any Convertible Securities issuable upon exercise of any
such Option minus (2) the sum of all amounts paid or payable to the holder of such Option
(or any other Person) upon the granting or sale of such Option, upon exercise of such Option
and upon conversion, exercise or exchange of any Convertible Security issuable upon exercise
of such Option plus the value of any other consideration received or receivable by, or
benefit conferred on, the holder of such Option (or any other Person). Except as
contemplated below, no further adjustment of the Exercise Price shall be made upon the
actual issuance of such shares of Common Stock or of such Convertible Securities upon the
exercise of such Options or upon the actual issuance of such shares of Common Stock upon
conversion, exercise or exchange of such Convertible Securities.

     (ii) Issuance of Convertible Securities. If the Company in any manner issues or
sells any Convertible Securities and the lowest price per share for which one share of Common
Stock is issuable upon the conversion, exercise or exchange thereof is less than the
Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to
have been issued and sold by the Company at the time of the issuance or sale of such
Convertible Securities for such price per share. For the purposes of this Section 2(b)(ii),
the “lowest price per share for which one share of Common Stock is issuable upon the
conversion, exercise or exchange thereof” shall be equal to (1) the lower of (x) the sum of
the lowest amounts of consideration (if any) received or receivable by the Company with
respect to one share of Common Stock upon the issuance or sale of the Convertible Security
and upon conversion, exercise or exchange of such Convertible Security and (y) the lowest
conversion price set forth in such Convertible Security for which one share of Common Stock
is issuable upon conversion, exercise or exchange thereof minus (2) the sum of all amounts
paid or payable to the holder of such Convertible Security (or any other Person) upon the
issuance or sale of such Convertible Security plus the value of any other consideration
received or receivable by, or benefit conferred on, the holder of such Convertible Security
(or any other Person). Except as contemplated below, no further adjustment of the Exercise
Price shall be made upon the actual issuance of such shares of Common Stock upon conversion,
exercise or exchange of such Convertible Securities, and if any such issue or sale of such
Convertible Securities is made upon exercise of any Options for which adjustment of this
Warrant has been or is to be made pursuant to other provisions of this Section 2(b), except
as contemplated below, no further adjustment of the Exercise Price shall be made by reason of
such issue or sale.

7

 

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

     (iv) Calculation of Consideration Received. If any Option or Convertible
Security is issued in connection with the issuance or sale or deemed issuance or sale of any
other securities of the Company, together comprising one integrated transaction, (x) such
Option or Convertible Security (as applicable) will be deemed to have been issued for
consideration equal to the Black Scholes Consideration Value thereof and (y) the other
securities issued or sold or deemed to have been issued or sold in such integrated
transaction shall be deemed to have been issued for consideration equal to the difference of
(I) the aggregate consideration received by the Company minus (II) the Black Scholes
Consideration Value of each such Option or Convertible Security (as
applicable). If any shares of Common Stock, Options or Convertible Securities are issued or sold or deemed to
have been issued or sold for cash, the consideration received therefor will be deemed to be
the net amount of consideration received by the Company therefor. If any shares of Common
Stock, Options or Convertible Securities are issued or sold for a consideration other than
cash, the amount of such consideration received by the Company will be the fair value of such
consideration, except where such consideration consists of publicly traded securities, in
which case the amount of consideration received by the Company for such securities will be
the arithmetic average of the VWAPs of such security for each of the five (5) Trading Days
immediately preceding the date of receipt. If any shares of Common Stock, Options or
Convertible Securities are issued to the owners of the non-surviving entity in connection
with any merger in which the Company is the surviving entity, the amount of consideration
therefor will be deemed to be the fair value of such portion of the net assets and business
of the non-surviving entity as is attributable to such shares of Common Stock, Options or
Convertible Securities, as the case may be. The fair value of any consideration other than
cash or publicly traded securities will be determined jointly by the Company and the Holder.
If such parties are unable to reach agreement within ten (10) days after the occurrence of an
event requiring valuation (the “Valuation Event”), the fair value of such consideration will
be determined within five (5) Trading Days after the tenth (10th) day following
such Valuation Event by an independent, reputable appraiser jointly selected by the Company
and the Holder. The determination of

8

 

such appraiser shall be final and binding upon all parties absent manifest error and the
fees and expenses of such appraiser shall be borne by the Company.

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

     (vi) Floor Price. No adjustment pursuant to this Section 2(b) shall cause the
Exercise Price to be less than $0.34 (as adjusted for any stock dividend, stock split, stock
combination, reclassification or similar transaction occurring after the date of the
Securities Purchase Agreement) (the “Floor Price”). Notwithstanding the foregoing, nothing
contained in this Section 2(b)(vi) shall apply after Shareholder Approval (as defined in the
Securities Purchase Agreement) is obtained.

     (c) Number of Warrant Shares. Simultaneously with any adjustment to the Exercise Price pursuant to paragraph (a) of this
Section 2, the number of Warrant Shares that may be purchased upon exercise of this Warrant shall
be increased or decreased proportionately, so that after such adjustment the aggregate Exercise
Price payable hereunder for the adjusted number of Warrant Shares shall be the same as the
aggregate Exercise Price in effect immediately prior to such adjustment (without regard to any
limitations on exercise contained herein). No adjustments to the number of Warrant Shares shall be
made due to any adjustments to the Exercise Price pursuant to paragraph (b) of this Section 2.

     (d) Special Anti-Dilution Adjustment. On each Installment Date (as defined in the
Notes (as defined in the Securities Purchase Agreement)) on which the Company effects a Company
Conversion (as defined in the Notes) pursuant to Section 8 of the Notes, the Exercise Price shall
automatically be adjusted (up or down, as the case may be) simultaneously with such Company
Conversion to a price that is equal to the quotient of (A) the sum of each of the Company
Conversion Prices (as defined in the Notes) (adjusted for any stock dividend, stock split, stock
combination or other similar transaction occurring after the date of the Securities Purchase
Agreement) used for each Company Conversion that has occurred pursuant to Section 8 of the Notes
through and including such Installment Date divided by (B) the number of Company Conversions that
have occurred pursuant to Section 8 of the Notes through and including such Installment Date,
provided that in no event shall the Exercise Price be increased above $0.40 (adjusted for any stock
dividend, stock split, stock combination or other similar transaction occurring after the date of
the Securities Purchase Agreement), provided further that no adjustment pursuant to this Section
2(d) shall cause the Exercise Price to be less than the Floor Price until the date on which
Shareholder Approval is obtained. Notwithstanding the foregoing, (i) if the Exercise Price was
adjusted downward pursuant to Section 2(b) one or more times, then no upward adjustment of the
Exercise Price pursuant to this Section 2(d) shall cause the Exercise Price to exceed the lowest
Exercise Price that was in effect as a result of such downward adjustment pursuant to Section 2(b)
and (ii) no adjustment shall occur under this

9

 

Section 2(d) at any time while the Company has current or accumulated earnings and profits
within the meaning of Section 316(a) of the Internal Revenue Code of 1986, as amended.

     (e) Other Events. In the event that the Company (or any Subsidiary (as defined in the Securities Purchase
Agreement)) shall take any action to which the provisions hereof are not strictly applicable, or,
if applicable, would not operate to protect the Holder from dilution or if any event occurs of the
type contemplated by the provisions of this Section 2 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation rights, phantom stock
rights or other rights with equity features), then the Company’s board of directors shall in good
faith determine and implement an appropriate adjustment in the Exercise Price and the number of
Warrant Shares (if applicable) so as to protect the rights of the Holder, provided that no such
adjustment pursuant to this Section 2(e) will increase the Exercise Price or decrease the number of
Warrant Shares as otherwise determined pursuant to this Section 2, provided further that if the
Holder does not accept such adjustments as appropriately protecting its interests hereunder against
such dilution, then the Company’s board of directors and the Holder shall agree, in good faith,
upon an independent investment bank of nationally recognized standing to make such appropriate
adjustments, whose determination shall be final and binding and whose fees and expenses shall be
borne by the Company.

     (f) Calculations. All calculations under this Section 2 shall be made by rounding to the nearest cent or the
nearest 1/100th of a share, as applicable. The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by or for the account of the
Company, and the disposition of any such shares shall be considered an issue or sale of Common
Stock.

3. RIGHTS UPON DISTRIBUTION OF ASSETS. In addition to any adjustments pursuant to Section 2
above, if the Company shall declare or make any dividend or other distribution of its assets (or
rights to acquire its assets) to holders of shares of Common Stock, by way of return of capital or
otherwise (including, without limitation, any distribution of cash, stock or other securities,
property or options by way of a dividend, spin off, reclassification, corporate rearrangement,
scheme of arrangement or other similar transaction) (a “Distribution”), at any time after the
issuance of this Warrant, then, in each such case, the Holder shall be entitled to participate in
such Distribution to the same extent that the Holder would have participated therein if the Holder
had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant
(without regard to any limitations on exercise hereof, including without limitation, the Maximum
Percentage) immediately before the date on which a record is taken for such Distribution, or, if no
such record is taken, the date as of which the record holders of shares of Common Stock are to be
determined for the participation in such Distribution (provided, however, to the extent that the
Holder’s right to participate in any such Distributions would result in the Holder exceeding the
Maximum Percentage, then the Holder shall not be entitled to participate in such Distribution to
such extent (or the beneficial ownership of any such shares of Common Stock as a result of such
Distribution to such extent) and such Distribution to such extent shall be held in abeyance for the
benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder
exceeding the Maximum Percentage).

4. PURCHASE RIGHTS; FUNDAMENTAL TRANSACTIONS.

10

 

     (a) Purchase Rights. In addition to any adjustments pursuant to Section 2 above, if at any time the Company
grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of shares of Common Stock
(the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to
such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the
Holder had held the number of shares of Common Stock acquirable upon complete exercise of this
Warrant (without regard to any limitations on exercise hereof, including without limitation, the
Maximum Percentage) immediately before the date on which a record is taken for the grant, issuance
or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record
holders of shares of Common Stock are to be determined for the grant, issue or sale of such
Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any
such Purchase Right would result in the Holder exceeding the Maximum Percentage, then the Holder
shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership
of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase
Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its
right thereto would not result in the Holder exceeding the Maximum Percentage).

     (b) Fundamental Transactions. The Company shall not enter into or be party to a Fundamental Transaction unless (i) the
Successor Entity assumes in writing all of the obligations of the Company under this Warrant and
the other Transaction Documents (as defined in the Securities Purchase Agreement) in accordance
with the provisions of this Section 4(b) pursuant to written agreements in form and substance
satisfactory to the Holder and approved by the Holder prior to such Fundamental Transaction,
including agreements to deliver to the Holder in exchange for this Warrant a security of the
Successor Entity evidenced by a written instrument substantially similar in form and substance to
this Warrant, including, without limitation, which is exercisable for a corresponding number of
shares of capital stock equivalent to the shares of Common Stock acquirable and receivable upon
exercise of this Warrant (without regard to any limitations on the exercise of this Warrant) prior
to such Fundamental Transaction, and with an exercise price which applies the exercise price
hereunder to such shares of capital stock (but taking into account the relative value of the shares
of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital
stock, such adjustments to the number of shares of capital stock and such exercise price being for
the purpose of protecting the economic value of this Warrant immediately prior to the consummation
of such Fundamental Transaction) and (ii) the Successor Entity is a publicly traded corporation
whose common stock is quoted on or listed for trading on an Eligible Market. Upon the consummation
of each Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so
that from and after the date of the applicable Fundamental Transaction, the provisions of this
Warrant and the other Transaction Documents referring to the “Company” shall refer instead to the
Successor Entity), and may exercise every right and power of the Company and shall assume all of
the obligations of the Company under this Warrant and the other Transaction Documents with the same
effect as if such Successor Entity had been named as the Company herein. Upon consummation of each
Fundamental Transaction, the Successor Entity shall deliver to the Holder confirmation that there
shall be issued upon exercise of this Warrant at any time after the consummation of the applicable
Fundamental Transaction, in lieu of the shares of Common Stock (or other securities, cash, assets
or other property (except such items still issuable under Sections 3 and 4(a) above, which shall
continue to be receivable thereafter)) issuable upon the

11

 

exercise of this Warrant prior to the applicable Fundamental Transaction, such shares of
publicly traded common stock (or its equivalent) of the Successor Entity which the Holder would
have been entitled to receive upon the happening of the applicable Fundamental Transaction had this
Warrant been exercised immediately prior to the applicable Fundamental Transaction (without regard
to any limitations on the exercise of this Warrant), as adjusted in accordance with the provisions
of this Warrant. In addition to and not in substitution for any other rights hereunder, prior to
the consummation of each Fundamental Transaction pursuant to which holders of shares of Common
Stock are entitled to receive securities or other assets with respect to or in exchange for shares
of Common Stock (a “Corporate Event”), the Company shall make appropriate provision to insure that
the Holder will thereafter have the right to receive upon an exercise of this Warrant at any time
after the consummation of the applicable Fundamental Transaction but prior to the Expiration Date,
in lieu of the shares of the Common Stock (or other securities, cash, assets or other property
(except such items still issuable under Sections 3 and 4(a) above, which shall continue to be
receivable thereafter)) issuable upon the exercise of the Warrant prior to such Fundamental
Transaction, such shares of stock, securities, cash, assets or any other property whatsoever
(including warrants or other purchase or subscription rights) which the Holder would have been
entitled to receive upon the happening of the applicable Fundamental Transaction had this Warrant
been exercised immediately prior to the applicable Fundamental Transaction (without regard to any
limitations on the exercise of this Warrant). Provision made pursuant to the preceding sentence
shall be in a form and substance reasonably satisfactory to the Holder.

     (c) Black Scholes Value. Notwithstanding the foregoing and the provisions of Section 4(b) above, at the request of
the Holder delivered at any time commencing on the earliest to occur of (x) the public disclosure
of any Fundamental Transaction, (y) the consummation of any Fundamental Transaction and (z) the
Holder first becoming aware of any Fundamental Transaction (including, without limitation, a
Fundamental Transaction that is publicly disclosed, consummated or of which the Holder first
becomes aware (as the case may be) prior to the Initial Exercise Date) through the date that is
ninety (90) days after the public disclosure of the consummation of such Fundamental Transaction by
the Company pursuant to a Current Report on Form 8-K filed with the SEC, the Company or the
Successor Entity (as the case may be) shall purchase this Warrant from the Holder on the date of
such request by paying to the Holder cash in an amount equal to the Black Scholes Value.

     (d) Application. The provisions of this Section 4 shall apply similarly and equally to
successive Fundamental Transactions and Corporate Events and shall be applied as if this Warrant
(and any such subsequent warrants) were fully exercisable and without regard to any limitations on
the exercise of this Warrant (provided that the Holder shall continue to be entitled to the benefit
of the Maximum Percentage, applied however with respect to shares of capital stock registered under
the 1934 Act and thereafter receivable upon exercise of this Warrant (or any such other warrant)).

5. NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company will not, by
amendment of its Articles of Incorporation (as defined in the Securities Purchase Agreement),
Bylaws (as defined in the Securities Purchase Agreement) or through any reorganization, transfer of
assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities, or
any other voluntary action, avoid or seek to avoid the observance or performance of any of the
terms of this Warrant, and will at all times in good faith carry out all

12

 

the provisions of this Warrant and take all action as may be required to protect the rights of the
Holder. Without limiting the generality of the foregoing, the Company (i) shall not increase the
par value of any shares of Common Stock receivable upon the exercise of this Warrant above the
Exercise Price then in effect, (ii) shall take all such actions as may be necessary or appropriate
in order that the Company may validly and legally issue fully paid and non-assessable shares of
Common Stock upon the exercise of this Warrant, and (iii) shall, so long as any of the SPA Warrants
are outstanding, take all action necessary to reserve and keep available out of its authorized and
unissued shares of Common Stock, solely for the purpose of effecting the exercise of the SPA
Warrants, the maximum number of shares of Common Stock as shall from time to time be necessary to
effect the exercise of the SPA Warrants then outstanding (without regard to any limitations on
exercise).

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

7. REISSUANCE OF WARRANTS.

     (a) Transfer of Warrant. If this Warrant is to be transferred, the Holder shall surrender this Warrant to the
Company, whereupon the Company will forthwith issue and deliver upon the order of the Holder a new
Warrant (in accordance with Section 7(d)), registered as the Holder may request, representing the
right to purchase the number of Warrant Shares being transferred by the Holder and, if less than
the total number of Warrant Shares then underlying this Warrant is being transferred, a new Warrant
(in accordance with Section 7(d)) to the Holder representing the right to purchase the number of
Warrant Shares not being transferred.

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

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

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

8. NOTICES. Whenever notice is required to be given under this Warrant, unless otherwise
provided herein, such notice shall be given in accordance with Section 9(f) of the Securities
Purchase Agreement. The Company shall provide the Holder with prompt written notice of all actions
taken pursuant to this Warrant, including in reasonable detail a description of such action and the
reason therefor. Without limiting the generality of the foregoing, the Company will give written
notice to the Holder (i) immediately upon each adjustment of the Exercise Price and the number of
Warrant Shares, setting forth in reasonable detail, and certifying, the calculation of such
adjustment(s) and (ii) at least fifteen (15) days prior to the date on which the Company closes its
books or takes a record (A) with respect to any dividend or distribution upon the shares of Common
Stock, (B) with respect to any grants, issuances or sales of any Options, Convertible Securities or
rights to purchase stock, warrants, securities or other property to all holders of shares of Common
Stock or (C) for determining rights to vote with respect to any Fundamental Transaction,
dissolution or liquidation, provided in each case that such information shall be made known to the
public prior to or in conjunction with such notice being provided to the Holder and (iii) at least
ten (10) Trading Days prior to the consummation of any Fundamental Transaction. To the extent that
any notice provided hereunder constitutes, or contains, material, non-public information regarding
the Company or any of its Subsidiaries, the Company shall simultaneously file such notice with the
SEC (as defined in the Securities Purchase Agreement) pursuant to a Current Report on Form 8-K. It
is expressly understood and agreed that the time of execution specified by the Holder in each
Exercise Notice shall be definitive and may not be disputed or challenged by the Company, absent
manifest error.

9. AMENDMENT AND WAIVER. Except as otherwise provided herein, the provisions of this
Warrant (other than Section 1(f)) may be amended and the Company may take any action herein
prohibited, or omit to perform any act herein required to be performed by it, only if the Company
has obtained the written consent of the Holder. The Holder shall be entitled, at its option, to the
benefit of any amendment of (i) any other similar warrant issued under the

14

 

Securities Purchase Agreement or (ii) any other similar warrant. No waiver shall be effective
unless it is in writing and signed by an authorized representative of the waiving party.

10. SEVERABILITY. If any provision of this Warrant is prohibited by law or otherwise
determined to be invalid or unenforceable by a court of competent jurisdiction, the provision that
would otherwise be prohibited, invalid or unenforceable shall be deemed amended to apply to the
broadest extent that it would be valid and enforceable, and the invalidity or unenforceability of
such provision shall not affect the validity of the remaining provisions of this Warrant so long as
this Warrant as so modified continues to express, without material change, the original intentions
of the parties as to the subject matter hereof and the prohibited nature, invalidity or
unenforceability of the provision(s) in question does not substantially impair the respective
expectations or reciprocal obligations of the parties or the practical realization of the benefits
that would otherwise be conferred upon the parties. The parties will endeavor in good faith
negotiations to replace the prohibited, invalid or unenforceable provision(s) with a valid
provision(s), the effect of which comes as close as possible to that of the prohibited, invalid or
unenforceable provision(s).

11. GOVERNING LAW. This Warrant shall be governed by and construed and enforced in
accordance with, and all questions concerning the construction, validity, interpretation and
performance of this Warrant shall be governed by, the internal laws of the State of New York,
without giving effect to any choice of law or conflict of law provision or rule (whether of the
State of New York or any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York. The Company hereby irrevocably submits to the
exclusive jurisdiction of the state and federal courts sitting in The City of New York, Borough of
Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not
to assert in any suit, action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient
forum or that the venue of such suit, action or proceeding is improper. Nothing contained herein
shall be deemed to limit in any way any right to serve process in any manner permitted by law.
Nothing contained herein shall be deemed or operate to preclude the Holder from bringing suit or
taking other legal action against the Company in any other jurisdiction to collect on the Company’s
obligations to the Holder or to enforce a judgment or other court ruling in favor of the Holder.
THE COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO, AND AGREES NOT TO REQUEST, A JURY
TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS
WARRANT OR ANY TRANSACTION CONTEMPLATED HEREBY.

12. CONSTRUCTION; HEADINGS. This Warrant shall be deemed to be jointly drafted by the
Company and the Holder and shall not be construed against any Person as the drafter hereof. The
headings of this Warrant are for convenience of reference and shall not form part of, or affect the
interpretation of, this Warrant. Terms used in this Warrant but defined in the other Transaction
Documents shall have the meanings ascribed to such terms on the Closing Date (as defined in the
Securities Purchase Agreement) in such other Transaction Documents unless otherwise consented to in
writing by the Holder.

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13. DISPUTE RESOLUTION. In the case of a dispute as to the determination of the Exercise
Price, the Closing Sale Price, the Bid Price or fair market value or the arithmetic calculation of
the Warrant Shares (as the case may be), the Company or the Holder (as the case may be) shall
submit the disputed determinations or arithmetic calculations (as the case may be) via facsimile
(i) within two (2) Business Days after receipt of the applicable notice giving rise to such dispute
to the Company or the Holder (as the case may be) or (ii) if no notice gave rise to such dispute,
at any time after the Holder learned of the circumstances giving rise to such dispute (including,
without limitation, as to whether any issuance or sale or deemed issuance or sale was an issuance
or sale or deemed issuance or sale of Excluded Securities). If the Holder and the Company are
unable to agree upon such determination or calculation (as the case may be) of the Exercise Price,
the Closing Sale Price, the Bid Price or fair market value or the number of Warrant Shares (as the
case may be) within three (3) Business Days of such disputed determination or arithmetic
calculation being submitted to the Company or the Holder (as the case may be), then the Company
shall, within two (2) Business Days submit via facsimile (a) the disputed determination of the
Exercise Price, the Closing Sale Price, the Bid Price or fair market value (as the case may be) to
an independent, reputable investment bank selected by the Holder or (b) the disputed arithmetic
calculation of the Warrant Shares to the Company’s independent, outside accountant. The Company
shall cause at its expense the investment bank or the accountant (as the case may be) to perform
the determinations or calculations (as the case may be) and notify the Company and the Holder of
the results no later than ten (10) Business Days from the time it receives such disputed
determinations or calculations (as the case may be). Such investment bank’s or accountant’s
determination or calculation (as the case may be) shall be binding upon all parties absent
demonstrable error.

14. REMEDIES, CHARACTERIZATION, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The
remedies provided in this Warrant shall be cumulative and in addition to all other remedies
available under this Warrant and the other Transaction Documents, at law or in equity (including a
decree of specific performance and/or other injunctive relief), and nothing herein shall limit the
right of the Holder to pursue actual damages for any failure by the Company to comply with the
terms of this Warrant. The Company covenants to the Holder that there shall be no characterization
concerning this instrument other than as expressly provided herein. Amounts set forth or provided
for herein with respect to payments, exercises and the like (and the computation thereof) shall be
the amounts to be received by the Holder and shall not, except as expressly provided herein, be
subject to any other obligation of the Company (or the performance thereof). The Company
acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the
Holder and that the remedy at law for any such breach may be inadequate. The Company therefore
agrees that, in the event of any such breach or threatened breach, the holder of this Warrant shall
be entitled, in addition to all other available remedies, to an injunction restraining any breach,
without the necessity of showing economic loss and without any bond or other security being
required. The Company shall provide all information and documentation to the Holder that is
requested by the Holder to enable the Holder to confirm the Company’s compliance with the terms and
conditions of this Warrant (including, without limitation, compliance with Section 2 hereof). The
issuance of shares and certificates for shares as contemplated hereby upon the exercise of this
Warrant shall be made without charge to the Holder or such shares for any issuance tax or other
costs in respect thereof, provided that the Company shall not be required to pay any tax which may
be payable in respect

16

 

of any transfer involved in the issuance and delivery of any certificate in a name other than the
Holder or its agent on its behalf.

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

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

     (a) “Bid Price” means, for any security as of the particular time of determination, the bid
price for such security on the Principal Market as reported by Bloomberg as of such time of
determination, or, if the Principal Market is not the principal securities exchange or trading
market for such security, the bid price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg as of such time of
determination, or if the foregoing does not apply, the bid price of such security in the
over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg
as of such time of determination, or, if no bid price is reported for such security by Bloomberg as
of such time of determination, the average of the bid prices of any market makers for such security
as reported in the “pink sheets” by Pink OTC Markets Inc.(formerly Pink Sheets LLC) as of such time
of determination. If the Bid Price cannot be calculated for a security as of the particular time of
determination on any of the foregoing bases, the Bid Price of such security as of such time of
determination shall be the fair market value as mutually determined by the Company and the Holder.
If the Company and the Holder are unable to agree upon the fair market value of such security, then
such dispute shall be resolved in accordance with the procedures in Section 13. All such
determinations shall be appropriately adjusted for any stock dividend, stock split, stock
combination or other similar transaction during such period.

     (b) “Black Scholes Consideration Value” means the value of the applicable Option or
Convertible Security (as the case may be) as of the date of issuance thereof calculated using the
Black Scholes Option Pricing Model obtained from the “OV” function on Bloomberg utilizing (i) an
underlying price per share equal to the Closing Sale Price of the Common Stock on the Trading Day
immediately preceding the public announcement of the execution of definitive documents with respect
to the issuance of such Option or Convertible Security (as the case may be), (ii) a risk-free
interest rate corresponding to the U.S. Treasury rate for a period equal to the remaining term of
such Option or Convertible Security (as the case may be) as of the date of issuance of such Option
or Convertible Security (as the case may be) and (iii) an expected volatility equal to the greater
of 100% and the 100 day volatility obtained from the HVT function on Bloomberg (determined
utilizing a 365 day annualization factor) as of the Trading Day immediately following the date of
issuance of such Option or Convertible Security (as the case may be).

     (c) “Black Scholes Value” means the value of the unexercised portion of this Warrant remaining
on the date of the Holder’s request pursuant to Section 4(c), which value is calculated using the
Black Scholes Option Pricing Model obtained from the “OV” function on Bloomberg utilizing (i) an
underlying price per share equal to the greater of (1) the highest Closing Sale Price of the Common
Stock during the period beginning on the Trading Day

17

 

immediately preceding the earliest to occur of (x) the public disclosure of the applicable
Fundamental Transaction, (y) the consummation of the applicable Fundamental Transaction and (z) the
date on which the Holder first became aware of the applicable Fundamental Transaction and ending on
the Trading Day of the Holder’s request pursuant to Section 4(c) and (2) the sum of the price per
share being offered in cash in the applicable Fundamental Transaction (if any) plus the value of
the non-cash consideration being offered in the applicable Fundamental Transaction (if any), (ii) a
strike price equal to the Exercise Price in effect on the date of the Holder’s request pursuant to
Section 4(c), (iii) a risk-free interest rate corresponding to the U.S. Treasury rate for a period
equal to the greater of (1) the remaining term of this Warrant as of the date of the Holder’s
request pursuant to Section 4(c) and (2) the remaining term of this Warrant as of the date of
consummation of the applicable Fundamental Transaction or as of the date of the Holder’s request
pursuant to Section 4(c) if such request is prior to the date of the consummation of the applicable
Fundamental Transaction and (iv) an expected volatility equal to the greater of 100% and the 100
day volatility obtained from the HVT function on Bloomberg (determined utilizing a 365 day
annualization factor) as of the Trading Day immediately following the earliest to occur of (x) the
public disclosure of the applicable Fundamental Transaction, (y) the consummation of the applicable
Fundamental Transaction and (z) the date on which the Holder first became aware of the applicable
Fundamental Transaction.

     (d) “Bloomberg” means Bloomberg, L.P.

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

     (f) “Closing Sale Price” means, for any security as of any date, the last closing trade price
for such security on the Principal Market, as reported by Bloomberg, or, if the Principal Market
begins to operate on an extended hours basis and does not designate the closing trade price, then
the last trade price of such security prior to 4:00:00 p.m., New York time, as reported by
Bloomberg, or, if the Principal Market is not the principal securities exchange or trading market
for such security, the last trade price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg, or if the
foregoing does not apply, the last trade price of such security in the over-the-counter market on
the electronic bulletin board for such security as reported by Bloomberg, or, if no last trade
price is reported for such security by Bloomberg, the average of the ask prices of any market
makers for such security as reported in the “pink sheets” by Pink OTC Markets Inc.(formerly Pink
Sheets LLC). If the Closing Sale Price cannot be calculated for a security on a particular date on
any of the foregoing bases, the Closing Sale Price of such security on such date shall be the fair
market value as mutually determined by the Company and the Holder. If the Company and the Holder
are unable to agree upon the fair market value of such security, then such dispute shall be
resolved in accordance with the procedures in Section 13. All such determinations shall be
appropriately adjusted for any stock dividend, stock split, stock combination or other similar
transaction during such period.

     (g) “Common Stock” means (i) the Company’s shares of common stock, $0.0001 par value per
share, and (ii) any capital stock into which such common stock shall have been changed or any share
capital resulting from a reclassification of such common stock.

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     (h) “Convertible Securities” means any stock or other security (other than Options) that is at
any time and under any circumstances, directly or indirectly, convertible into, exercisable or
exchangeable for, or which otherwise entitles the holder thereof to acquire, any shares of Common
Stock.

     (i) “Eligible Market” means The New York Stock Exchange, the NYSE Amex, the Nasdaq Global
Select Market, the Nasdaq Global Market or the Principal Market.

     (j) “Expiration Date” means the date that is the fifth (5th) anniversary of the
Initial Exercise Date or, if such date falls on a day other than a Business Day or on which trading
does not take place on the Principal Market (a “Holiday”), the next date that is not a Holiday.

     (k) “Fundamental Transaction” means that (i) (1) the Company or any of its Subsidiaries shall,
directly or indirectly, in one or more related transactions, consolidate or merge with or into
(whether or not the Company or any of its Subsidiaries is the surviving corporation) any other
Person, or (2) the Company or any of its Significant Subsidiaries (as defined in the Notes) shall,
directly or indirectly, in one or more related transactions, sell, lease, license, assign,
transfer, convey or otherwise dispose of all or substantially all of its respective properties or
assets to any other Person, or (3) the Company or any of its Subsidiaries shall, directly or
indirectly, in one or more related transactions, allow any other Person to make a purchase, tender
or exchange offer that is accepted by the holders of more than 50% of the outstanding shares of
Voting Stock of the Company (not including any shares of Voting Stock of the Company held by the
Person or Persons making or party to, or associated or affiliated with the Persons making or party
to, such purchase, tender or exchange offer), or (4) the Company or any of its Subsidiaries shall,
directly or indirectly, in one or more related transactions, consummate a stock or share purchase
agreement or other business combination (including, without limitation, a reorganization,
recapitalization, spin-off or scheme of arrangement) with any other Person whereby such other
Person acquires more than 50% of the outstanding shares of Voting Stock of the Company (not
including any shares of Voting Stock of the Company held by the other Person or other Persons
making or party to, or associated or affiliated with the other Persons making or party to, such
stock or share purchase agreement or other business combination), or (5) the Company or any of its
Subsidiaries shall, directly or indirectly, in one or more related transactions, reorganize,
recapitalize or reclassify the Common Stock (which shall not include a reverse stock split), or
(ii) any “person” or “group” (as these terms are used for purposes of Sections 13(d) and 14(d) of
the 1934 Act and the rules and regulations promulgated thereunder) is or shall become the
“beneficial owner” (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of 50% of
the aggregate ordinary voting power represented by issued and outstanding Voting Stock of the
Company.

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

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

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

     (o) “Principal Market” means the Nasdaq Capital Market.

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

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

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

     (s) “VWAP” means, for any security as of any date, the dollar volume-weighted average price
for such security on the Principal Market (or, if the Principal Market is not the principal trading
market for such security, then on the principal securities exchange or securities market on which
such security is then traded) during the period beginning at 9:30:01 a.m., New York time, and
ending at 4:00:00 p.m., New York time, as reported by Bloomberg through its “Volume at Price”
function or, if the foregoing does not apply, the dollar volume-weighted average price of such
security in the over-the-counter market on the electronic bulletin board for such security during
the period beginning at 9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York time, as
reported by Bloomberg, or, if no dollar volume-weighted average price is reported for such security
by Bloomberg for such hours, the average of the highest closing bid price and the lowest closing
ask price of any of the market makers for such security as reported in the “pink sheets” by Pink
OTC Markets Inc.(formerly Pink Sheets LLC). If VWAP cannot be calculated for such security on such
date on any of the foregoing bases, the VWAP of such security on such date shall be the fair market
value as mutually determined by the Company and the Holder. If the Company and the Holder are
unable to agree upon the fair market value of such security, then such dispute shall be resolved in
accordance with the procedures in Section 13. All such determinations shall be appropriately
adjusted for any stock dividend, stock split, stock combination or other similar transaction during
such period.

[signature page follows]

20

 

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

	 	 	 	 	 
	 	CONVERTED ORGANICS INC.

 	 
	 	By:  	 	 
	 	Name:  	 	 
	 	Title:  	 	 
	 

 

 

EXHIBIT A

EXERCISE
NOTICE

TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS

WARRANT TO PURCHASE COMMON STOCK

CONVERTED ORGANICS INC.

     The undersigned holder hereby exercises the right to purchase _________________ of the shares
of Common Stock (“Warrant Shares”) of Converted Organics Inc., a Delaware corporation (the
“Company”), evidenced by Series A Warrant No. _______ (the “Warrant”). Capitalized terms used
herein and not otherwise defined shall have the respective meanings set forth in the Warrant.

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

	 	 	 	 	 

	 

	 	____________
	 	a “Cash Exercise”
with respect to
_________________ Warrant Shares; and/or
	 
	 	 	 	 
	 

	 	____________
	 	a “Cashless
Exercise” with respect to _______________ Warrant Shares.

     In the event that the Holder has elected a Cashless Exercise with respect to some or all of
the Warrant Shares to be issued pursuant hereto, the Holder hereby represents and warrants that (i)
this Exercise Notice was executed by the Holder at __________ [a.m.][p.m.] on the date set forth
below and (ii) if applicable, the Bid Price as of such time of execution of this Exercise Notice
was $_______.

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

     3. Delivery of Warrant Shares. The Company shall deliver to Holder, or its designee
or agent as specified below, __________ Warrant Shares in accordance with the terms of the Warrant.
Delivery shall be made to Holder, or for its benefit, to the following address:

_______________________

_______________________

_______________________

_______________________

Date: _______________ __, ______

	 	 	 
	 	 	 

	Name of Registered Holder

	 	 

 

 

	 	 	 	 	 
	 	 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 

 

 

EXHIBIT B

ACKNOWLEDGMENT

     The Company hereby acknowledges this Exercise Notice and hereby directs ______________ to
issue the above indicated number of shares of Common Stock in accordance with the Transfer Agent
Instructions dated _________, 20__, from the Company and acknowledged and agreed to by
______________.

	 	 	 	 	 
	 	CONVERTED ORGANICS INC.

 	 
	 	By:  	 	 
	 	Name:  	 	 
	 	Title:

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