Document:

EXHIBIT
10.41

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

WARRANT

TO PURCHASE COMMON
STOCK

OF

EARTH BIOFUELS,
INC.

	
  Issue Date: June 7, 2006

  	
  Warrant
  No. 1r

  

 

THIS CERTIFIES that CAPITAL
VENTURES INTERNATIONAL or any subsequent holder hereof (the “Holder”), has the
right to purchase from EARTH BIOFUELS, INC.,
a Delaware corporation (the “Company”), up to 375,000 fully paid and
nonassessable shares of the Company’s common stock, par value $0.001 per share
(the “Common Stock”),
subject to adjustment as provided herein, at a price per share equal to the
Exercise Price (as defined below), at any time and from time to time beginning
on the date on which this Warrant is issued (the “Issue Date”) and ending at 5:00 p.m.,
eastern time, on the fifth (5th) anniversary of the Issue Date or, if such day is not a
Business Day, on the next succeeding Business Day (the “Expiration Date”).  This Warrant is issued pursuant to a
Securities Purchase Agreement, dated as of June 7, 2006 (the “Securities Purchase Agreement”).  Capitalized terms used herein and not
otherwise defined shall have the respective meanings set forth in the
Securities Purchase Agreement.

1.               EXERCISE.

(a)   Right to Exercise; Exercise Price.  The Holder shall have the right to exercise
this Warrant at any time and from time to time during the period beginning on
the Issue Date and ending on the Expiration Date as to all or any part of the
shares of Common Stock covered hereby (the “Warrant Shares”).  The “Exercise Price” for each Warrant Share purchased
by the Holder upon the exercise of this Warrant shall be $2.50, subject to
adjustment for the events specified in Section 6 below.

 

 

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

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

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

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

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

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or
regulations of the Principal Market (the “Exchange Cap”), except that such
limitation shall not apply in the event that the Company (A) obtains the
approval of its shareholders as required by the applicable rules of the
Principal Market for issuances of shares of Common Stock in excess of such
amount or (B) obtains a written opinion from outside counsel to the Company
that such approval is not required, which opinion shall be reasonably
satisfactory to the holders of the Warrant representing at least a majority of
the shares of Common Stock underlying the Warrants then outstanding issued
under the Securities Purchase Agreement.  Until such approval or written
opinion is obtained, no Purchaser shall be issued, upon exercise of any
Warrants, shares of Common Stock in an amount greater than the product of the
Exchange Cap multiplied by a fraction, the numerator of which is the total
number of shares of Common Stock issued to such Purchaser pursuant to the
Securities Purchase Agreement on the Issuance Date and the denominator of which
is the aggregate number of shares of Common Stock issued to the Purchasers
pursuant to the Securities Purchase Agreement on the Issuance Date (with
respect to each Purchaser, the “Exchange Cap Allocation”“).  In the event
that any Purchaser shall sell or otherwise transfer any of such Purchaser’s
Warrants, the transferee shall be allocated a pro rata portion of such
Purchaser’s Exchange Cap Allocation, and the restrictions of the prior sentence
shall apply to such transferee with respect to the portion of the Exchange Cap
Allocation allocated to such transferee.  In the event that any holder of
Warrants shall exercise all of such holder’s Warrants into a number of shares
of Common Stock which, in the aggregate, is less than such holder’s Exchange
Cap Allocation, then the difference between such holder’s Exchange Cap
Allocation and the number of shares of Common Stock actually issued to such
holder shall be allocated to the respective Exchange Cap Allocations of the
remaining holders of Warrants on a pro rata basis in proportion to the shares
of Common Stock underlying the Warrants then held by each such holder.  In
the event that the Company is prohibited from issuing any Warrant Shares for
which an Exercise Notice has been received as a result of the operation of this
Section 1(f), the Company shall pay cash in exchange for cancellation of such
Warrant Shares, at a price per Warrant Share equal to the difference between
the closing sale price and the Exercise Price as of the date of the attempted
exercise.

2.               DELIVERY OF WARRANT SHARES UPON EXERCISE.

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

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

3.               FAILURE TO DELIVER WARRANT SHARES.

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

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

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4.               EXERCISE LIMITATION.

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

5.               PAYMENT OF THE EXERCISE PRICE; CASHLESS EXERCISE.

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

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

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

	
  

  	
  X = Y x (A-B)/A

  
	
   

  	
   

  
	
  where:

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

  
	
   

  	
   

  
	
   

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

  

 

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

  
	
   

  	
   

  
	
   

  	
  B = the Exercise Price.

  

 

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

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

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

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

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

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

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

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

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

(e)                                  Dilutive
Issuances.

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

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

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

	
  N0 + N1

  
	
  N0 + N2

  

 

where:

	
  N0 =

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

  
	
   

  	
   

  
	
  N1 =

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

  
	
   

  	
   

  
	
  N2 = 

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

  

 

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  sold or deemed
  issued or sold in such Dilutive Issuance.

  

 

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

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

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

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

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

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

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

 10
 

 

 

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

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

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

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

7.               MISCELLANEOUS.

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

 11
 

 

 

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

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

	
  if to the Company:

  
	
   

  	
   

  
	
   

  	
  Earth Biofuels, Inc.

  
	
   

  	
  3001 Knox Street, Suite 403,

  
	
   

  	
  Dallas, Texas 75205

  
	
   

  	
  Telephone:

  	
  214.389.9800

  
	
   

  	
  Facsimile:

  	
  214.389.9806

  
	
   

  	
  Attention:

  	
  Dennis McLaughlin

  
	
   

  	
   

  	
   

  
	
  with a copy (for informational purposes only) to:

  
	
   

  	
   

  	
   

  
	
   

  	
  Scheef & Stone, LLP

  
	
   

  	
  Telephone:

  	
  214.706.4200

  
	
   

  	
  Facsimile:

  	
  214.706.4242

  
	
   

  	
  Attention:

  	
  Roger A. Crabb, Esq.

  

 

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

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

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

 12
 

 

 

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

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

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

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

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

[Signature Page to
Follow]

 13

 

 

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

	
  

  	
  EARTH BIOFUELS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/DENNIS G. MCLAUGHLIN, III

  	
   

  
	
   

  	
   

  	
  Name: Dennis G. McLaughlin, III

  
	
   

  	
   

  	
  Title: Chief Executive Officer

  

 

 

 

EXHIBIT A to WARRANT

EXERCISE NOTICE

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

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

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

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

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

	
  Date:

  	
   

  	
   

  
	
   

  
	
   

  
	
   

  	
   

  
	
  Name of
  Registered Holder

  	
   

  
	
   

  
	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
					

 

By tendering this Exercise Notice, the Holder
represents to the Company that it is an “accredited investor” as that term is
defined in Rule 501 of Regulation D, and that it is acquiring the Warrants
Shares solely for its own account, and not with a present view to the public
resale or distribution of all or any part thereof, except pursuant to sales
that are registered under the Securities Act or are exempt from the
registration requirements of the Securities Act; provided, however,
that, in making such representation, the Holder does not agree to hold the
Warrants Shares for any minimum or specific term and reserves the right to
sell, transfer or otherwise dispose of the Warrants Shares at any time in
accordance with the provisions of the Warrant and with Federal and state
securities laws applicable to such sale, transfer or disposition.EXHIBIT 10.46

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

WARRANT

TO PURCHASE COMMON STOCK

OF

EARTH
BIOFUELS, INC.

	
  Issue Date: June 7, 2006

  	
  Warrant No. 1r

  

 

THIS CERTIFIES that RADCLIFFE SPC, LTD. FOR AND ON
BEHALF OF THE CLASS A CONVERTIBLE CROSSOVER SEGREGATED PORTFOLIO or any
subsequent holder hereof (the “Holder”), has the right to purchase from EARTH BIOFUELS,
INC., a Delaware corporation (the “Company”), up to
375,000 fully paid and nonassessable shares of the Company’s common stock, par
value $0.001 per share (the “Common Stock”), subject to adjustment as provided
herein, at a price per share equal to the Exercise Price (as defined below), at
any time and from time to time beginning on the date on which this Warrant is
issued (the “Issue Date”)
and ending at 5:00 p.m., eastern time, on the fifth (5th) anniversary of the Issue
Date or, if such day is not a Business Day, on the next succeeding Business Day
(the “Expiration Date”).  This Warrant is issued pursuant to a
Securities Purchase Agreement, dated as of June 7, 2006 (the “Securities Purchase Agreement”).  Capitalized terms used herein and not
otherwise defined shall have the respective meanings set forth in the
Securities Purchase Agreement.

1.                                       EXERCISE.

(a)           Right to Exercise; Exercise Price.  The Holder shall have the right to exercise
this Warrant at any time and from time to time during the period beginning on
the Issue Date and ending on the Expiration Date as to all or any part of the
shares of Common Stock covered hereby (the “Warrant Shares”).  The “Exercise Price” for each Warrant Share
purchased by the Holder upon the exercise of this Warrant shall be $2.50,
subject to adjustment for the events specified in Section 6 below.

 

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

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

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

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

(f)            Principal Market Regulation. 
The Company shall not be obligated to issue any shares of Common Stock upon
exercise of this Warrant if the issuance of such shares of Common Stock would
exceed that number of shares of Common Stock which the Company may

 2
 

 

issue upon exercise of this Warrant without breaching
the Company’s obligations under the rules or regulations of the Principal
Market (the “Exchange Cap”), except that such limitation shall not apply in the
event that the Company (A) obtains the approval of its shareholders as required
by the applicable rules of the Principal Market for issuances of shares of
Common Stock in excess of such amount or (B) obtains a written opinion from
outside counsel to the Company that such approval is not required, which
opinion shall be reasonably satisfactory to the holders of the Warrant
representing at least a majority of the shares of Common Stock underlying the
Warrants then outstanding issued under the Securities Purchase Agreement. 
Until such approval or written opinion is obtained, no Purchaser shall be
issued, upon exercise of any Warrants, shares of Common Stock in an amount
greater than the product of the Exchange Cap multiplied by a fraction, the
numerator of which is the total number of shares of Common Stock issued to such
Purchaser pursuant to the Securities Purchase Agreement on the Issuance Date
and the denominator of which is the aggregate number of shares of Common Stock
issued to the Purchasers pursuant to the Securities Purchase Agreement on the
Issuance Date (with respect to each Purchaser, the “Exchange Cap Allocation”“). 
In the event that any Purchaser shall sell or otherwise transfer any of such
Purchaser’s Warrants, the transferee shall be allocated a pro rata portion of
such Purchaser’s Exchange Cap Allocation, and the restrictions of the prior
sentence shall apply to such transferee with respect to the portion of the
Exchange Cap Allocation allocated to such transferee.  In the event that
any holder of Warrants shall exercise all of such holder’s Warrants into a
number of shares of Common Stock which, in the aggregate, is less than such
holder’s Exchange Cap Allocation, then the difference between such holder’s
Exchange Cap Allocation and the number of shares of Common Stock actually
issued to such holder shall be allocated to the respective Exchange Cap
Allocations of the remaining holders of Warrants on a pro rata basis in
proportion to the shares of Common Stock underlying the Warrants then held by
each such holder.  In the event that the Company is prohibited from
issuing any Warrant Shares for which an Exercise Notice has been received as a
result of the operation of this Section 1(f), the Company shall pay cash in
exchange for cancellation of such Warrant Shares, at a price per Warrant Share
equal to the difference between the closing sale price and the Exercise Price
as of the date of the attempted exercise.

2.             DELIVERY OF
WARRANT SHARES UPON EXERCISE.

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

 3
 

 

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

3.             FAILURE TO DELIVER
WARRANT SHARES.

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

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

 4
 

 

4.             EXERCISE LIMITATION.

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

5.                                       PAYMENT OF THE EXERCISE PRICE; CASHLESS EXERCISE.

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

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

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

	
  

  	
  X = Y x (A-B)/A

  
	
   

  	
   

  
	
  where:

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

  
	
   

  	
   

  
	
   

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

  

 

 5
 

 

 

	
  

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

  
	
   

  	
   

  
	
   

  	
  B = the Exercise Price.

  
	
   

  	
   

  

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

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

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

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

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

 6
 

 

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

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

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

 7
 

 

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

(e)           Dilutive
Issuances.

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

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

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

N0 + N1

N0 + N2

where:

N0 =                         the number of shares of Common
Stock outstanding immediately prior to such Dilutive Issuance (without taking
into account any Convertible Securities or Options, including the Notes and
Warrants);

N1 =                        the number of shares of Common
Stock which the aggregate consideration, if any, received or receivable by the
Company for the total number of such additional shares of Common Stock so
issued, sold or deemed issued or sold in such Dilutive Issuance (which, in the
case of a deemed issuance or sale, shall be calculated in accordance with Section 6(e)(ii)
below) would purchase at the Exercise Price in effect immediately prior to such
Dilutive Issuance; and

N2 =                         the number of such additional
shares of Common Stock so issued,

 8
 

 

sold or deemed
issued or sold in such Dilutive Issuance.

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

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

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

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

 9
 

 

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

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

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

 10

 

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

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

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

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

7.             MISCELLANEOUS.

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

 11
 

 

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

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

 

if to the Company:

 

Earth
Biofuels, Inc.

3001
Knox Street, Suite 403,

Dallas,
Texas 75205

Telephone:  214.389.9800

Facsimile:          214.389.9806

Attention:       Dennis McLaughlin

 

with a copy (for
informational purposes only) to:

 

Scheef
& Stone, LLP

Telephone:  214.706.4200

Facsimile:          214.706.4242

Attention:       Roger A. Crabb, Esq.

 

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

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

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

 12
 

 

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

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

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

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

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

[Signature Page to
Follow]

 13

 

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

	
   

  	
   

  
	
  

  	
  EARTH BIOFUELS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ DENNIS G. MCLAUGHLIN, III

  	
   

  
	
   

  	
   

  	
  Name: Dennis G. McLaughlin, III

  
	
   

  	
   

  	
  Title: Chief Executive Officer

  

 

 

EXHIBIT A to WARRANT

EXERCISE NOTICE

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

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

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

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

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

	
  Date:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Name of
  Registered Holder

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  
						

 

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

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