Document:

exv10w1

Exhibit 10.1

EXCHANGE AGREEMENT

          This Exchange Agreement (the “Agreement”) is entered into as of the
11th day of January 2010, by and among NGAS Resources, Inc., a corporation incorporated
under the laws of the Province of British Columbia (“NGAS”), and                                          (the
“Holder”), with reference to the following facts:

          WHEREAS, NGAS, the Holder and various others entered into that certain Securities Purchase
Agreement, dated as of December 13, 2005 (as may be amended from time to time, the “Securities
Purchase Agreement”);

          WHEREAS, simultaneously with the consummation of the transactions contemplated by the
Securities Purchase Agreement, NGAS issued and sold to the Holder (i) a 6.00% Convertible Note due
December 15, 2010 in the original principal amount set forth on Schedule I attached hereto
(the “Old Note”), which is convertible into common shares, no par value, of NGAS (the
“Common Shares”), and (ii) a warrant exercisable for Common Shares (the “2005
Warrant”) (as exercised, the “Old Warrant Shares”);

          WHEREAS, in exchange for the Old Note, NGAS has duly authorized the issuance to the Holder of
(i) a 6.00% Amortizing Convertible Note due May 1, 2012 (including all notes issued in exchange
therefor or replacement thereof, the “Holder Note”) of NGAS in the original principal
amount as set forth on Schedule I attached hereto, which is initially convertible into the
number of Common Shares set forth on Schedule I attached hereto (such Common Shares
issuable upon conversion of the Holder Note or otherwise pursuant to the terms of the Holder Note,
the “Holder Conversion Shares”), (ii) a warrant (including all warrants issued in exchange
therefor or replacement thereof, the “Holder Warrant”) to acquire up to the number of
Common Shares set forth on Schedule I attached hereto (the “Holder Warrant
Shares”), (iii) the number of Common Shares set forth on Schedule I attached hereto
(including all share capital of NGAS issued in exchange therefor or replacement thereof, the
“Holder Exchange Shares”, and together with the Holder Note, the Holder Conversion Shares,
the Holder Warrant and the Holder Warrant Shares, the “Holder Securities”) and (iv) the
amount of cash set forth on Schedule I attached hereto (the “Cash Payment”);

          WHEREAS, NGAS wishes to effectuate such exchange on the basis and subject to the terms and
conditions set forth in this Agreement; and

          WHEREAS, the exchange of the Old Note for the Holder Note, the Holder Warrant, the Holder
Exchange Shares and the Cash Payment is being made in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act (as defined below).

          WHEREAS, capitalized terms used but not otherwise defined herein shall have the meanings set
forth or referenced in Section 8.

          NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants
hereinafter contained, the parties hereto agree as follows:

     1. Exchange. Subject to the satisfaction (or waiver) of the conditions set forth in
Sections 5.1 and 5.2 below, the Holder shall, and NGAS shall, pursuant to Section 4(2) of the
Securities Act, exchange the Old Note for (i) the Holder Note, (ii) the Holder Warrant, (iii)
Holder Exchange Shares and (iv) the Cash Payment, in each case, as set forth on Schedule I
attached hereto. At the Closing (as defined below), the following transactions shall occur (such
transactions in this Section 1, the “Exchange”):

          1.1 Holder shall deliver or cause to be delivered to NGAS (or its designee) the Old Note free
and clear of all Liens (other than as set forth in the Transaction Documents and under applicable
securities laws). As of the Closing Date, all of the Holder’s rights under the Old Note shall be
extinguished.

          1.2 NGAS shall pay or cause to be paid to the Holder in cash, by wire transfer in U.S. dollars
and immediately available funds in accordance with the wire instructions delivered by the Holder to
NGAS on or

 

 

prior to the Closing Date (as defined below), the sum of (a) all accrued and unpaid interest
on the Old Note exchanged by the Holder pursuant to Section 1.1 to, but not including, the Closing
Date (which amount is set forth on Schedule I attached hereto), and (b) in lieu of issuing
fractional interests in a Holder Note, an amount equal to the principal amount (not to exceed
$1,000 for any Holder) of any fractional interests in the Holder Note which would have been issued
but for the last sentence of Section 1.3.

          1.3 In exchange for the Old Note, NGAS shall deliver or cause to be delivered to the Holder
(i) the Holder Note, (ii) the Holder Warrant, (iii) the Holder Exchange Shares and (iv) the Cash
Payment, in each case, as set forth on Schedule I attached hereto. Subject to NGAS’s
compliance with Section 1.2 above, the Holder Note shall be issued only in minimum denominations of
$1,000 and integral multiples thereof, and no fractional interests in a Holder Note shall be
issued.

          1.4 The Holder Note and the Holder Warrant shall be issued in the forms annexed hereto as
Exhibit A and Exhibit B, respectively. NGAS and the Holder shall execute and/or
deliver such other documents and agreements as are customary and reasonably necessary to effectuate
the Exchange.

          1.5 Closing. Upon confirmation that the conditions to closing specified in this
Agreement have been satisfied or duly waived by the Holder or NGAS, as applicable, the closing of
the Exchange (the “Closing”) shall occur on January 12, 2010 or such other date as is
mutually acceptable to the Holder and NGAS (the “Closing Date”).

     2. Representations and Warranties of NGAS. NGAS represents and warrants to the
Holder, as of the date hereof, and as of the Closing Date, that:

          2.1 Organization and Qualification. NGAS and its Subsidiaries are entities duly
organized and validly existing and in good standing under the laws of the jurisdiction in which
they are formed, are up to date in all filings under the laws of the jurisdiction in which they are
formed and have the requisite power and authorization to own their properties and to carry on their
business as now being conducted. Each of NGAS and its Subsidiaries is duly qualified as a foreign
entity to do business and is in good standing in every jurisdiction in which its ownership of
property or the nature of the business conducted by it makes such qualification necessary, except
to the extent that the failure to be so qualified or be in good standing would not have a Material
Adverse Effect.

          2.2 Authorization and Binding Obligation. NGAS has the requisite power and authority
to enter into and perform its obligations under this Agreement, the 2009 Notes, the Irrevocable
Transfer Agent Instructions (as defined below), the 2009 Warrants and each of the other agreements
entered into by the parties hereto in connection with the transactions contemplated by this
Agreement (collectively, the “Exchange Documents”) and to issue the Securities in
accordance with the terms hereof and thereof. The execution and delivery of the Exchange Documents
by NGAS and the consummation by NGAS of the transactions contemplated hereby and thereby,
including, without limitation, the issuance of the 2009 Notes, the 2009 Warrants and the Exchange
Shares and the making of the Cash Payment, the reservation for issuance and the issuance of the
2009 Conversion Shares issuable upon conversion or otherwise pursuant to the terms of the 2009
Notes, or redemption of the 2009 Notes and the reservation for issuance and issuance of 2009
Warrant Shares issuable upon exercise of the 2009 Warrants have been duly authorized by the Board
of Directors of NGAS and, other than (i) such filings required under applicable securities or “Blue
Sky” laws of the states of the United States or the provinces of Canada, (ii) the filing with the
United States Securities and Exchange Commission (the “SEC”) of one or more registration
statements to register the resale of the 2009 Warrant Shares, (iii) the filing of a Form D with
respect to the 2009 Notes and 2009 Warrants as required under Regulation D, and (iv) the
Shareholder Approval (as defined below) (the foregoing, the “Required Approvals”), no
further filing, consent, or authorization is required by NGAS or of its Board of Directors or its
shareholders. This Agreement and the other Exchange Documents have been duly executed and
delivered by NGAS and constitute the legal, valid and binding obligations of NGAS enforceable
against NGAS in accordance with their respective terms, except as such enforceability may be
limited by general principles of equity or applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of
applicable creditors’ rights and remedies.

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          2.3 No Conflict; Required Filings and Consents.

               (a) The execution, delivery and performance of the Exchange Documents by NGAS and the
consummation by NGAS of the transactions contemplated hereby and thereby (including, without
limitation, the issuance of the 2009 Notes, the 2009 Warrants and the 2009 Exchange Shares and
reservation for issuance and issuance of the 2009 Conversion Shares and the 2009 Warrant Shares)
will not (i) result in a violation of the Articles of Incorporation, the terms of any share capital
of NGAS or any of its Subsidiaries, the Bylaws or any of the organizational documents of NGAS or
any of its Subsidiaries or (ii) conflict with, or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to
which NGAS or any of its Subsidiaries is a party, or (iii) assuming all Required Approvals have
been obtained, result in a violation of any law, rule, regulation, order, judgment or decree
(including U.S. federal and state securities laws or Canadian securities laws and regulations and
the rules and regulations of the Nasdaq Global Select Market (the “Principal Market”))
applicable to NGAS or any of its Subsidiaries or by which any property or asset of NGAS or any of
its Subsidiaries is bound or affected.

               (b) Neither NGAS nor any of its Subsidiaries is required to obtain any consent, authorization
or order of, or, other than the Required Approvals, make any filing or registration with, any
court, governmental agency or any regulatory or self-regulatory agency or any other Person in order
for it to execute, deliver or perform any of its obligations under or contemplated by the Exchange
Documents, in each case in accordance with the terms hereof or thereof. All consents,
authorizations, orders, filings and registrations (which NGAS is required to obtain pursuant to the
preceding sentence) have been obtained or effected, or will have been obtained or effected, on or
prior to the Closing Date, and NGAS and its Subsidiaries are unaware of any facts or circumstances
that might prevent NGAS from obtaining or effecting any of the registration, application or filings
pursuant to the preceding sentence. NGAS is not in violation of the listing requirements of the
Principal Market and has no knowledge of any facts that would reasonably lead to delisting or
suspension of the Common Shares by the Principal Market in the foreseeable future.

          2.4 Material Disclosure. Since December 31, 2008 and except as disclosed in
Schedule 2.4 or in the SEC-CSA Documents (as defined below), there has been no material
adverse change and no material adverse development in the business, properties, operations,
condition (financial or otherwise), results of operations or prospects of NGAS. Since December 31,
2008 and except as disclosed in Schedule 2.4 or in the SEC-CSA Documents, neither NGAS nor
any of its Subsidiaries has (i) declared or paid any dividends, (ii) sold any assets, individually
or in the aggregate, in excess of $100,000 outside of the ordinary course of business or (iii) had
capital expenditures, individually or in the aggregate, in excess of $100,000. Neither NGAS nor
any of its Subsidiaries has taken any steps to seek protection pursuant to any bankruptcy law nor
does NGAS have any knowledge or reason to believe that its creditors intend to initiate involuntary
bankruptcy proceedings or any actual knowledge of any fact that would reasonably lead a creditor to
do so. NGAS and its Subsidiaries, individually and on a consolidated basis, are not as of the date
hereof, and after giving effect to the transactions contemplated hereby to occur at the Closing
will not be, Insolvent.

          2.5 No Integration. None of NGAS, its Subsidiaries, any of their affiliates, or any
Person acting on their behalf has, directly or indirectly, made any offers or sales of any security
or solicited any offers to buy any security, under circumstances that would require registration of
any of the Securities under the Securities Act or cause this offering of the Securities to be
integrated with prior offerings by NGAS for purposes of the Securities Act or any applicable
shareholder approval provisions, including, without limitation, under the rules and regulations of
any exchange or automated quotation system on which any of the securities of NGAS are listed or
designated. None of NGAS, its Subsidiaries, their affiliates or any Person acting on their behalf
will take any action or steps referred to in the preceding sentence that would require registration
of any of the Securities under the Securities Act or cause the offering of the Securities to be
integrated with other offerings.

          2.6 No General Solicitation. Neither NGAS nor any of its affiliates or any other
Person acting on its or their behalf (other than the Holder or its affiliates or any other Person
acting on their behalf, as to which no representation is made) has solicited offers for, or offered
or sold, the 2009 Notes or the 2009 Warrants or the 2009 Exchange Shares by means of any form of
general solicitation or general advertising within the meaning of Rule 502(c) of Regulation D under
the Securities Act or in any manner involving a public offering within the meaning of Section 4(2)
of the Securities Act.

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          2.7 Securities Law Exemptions. Assuming the accuracy of the representations and
warranties of the Holder contained herein, the offer and issuance by NGAS of the Securities is
exempt from registration under the Securities Act and all applicable Canadian securities laws. The
offer and issuance of the Securities is exempt from registration under the Securities Act pursuant
to the exemption provided by Section 4(2) thereof.

          2.8 Public Documents. During the two (2) years prior to the date hereof, NGAS has
filed all reports, schedules, forms, statements and other documents required to be filed by it with
the SEC and the Canadian Securities Administrators (the “CSA”) pursuant to the reporting
requirements of the Exchange Act (as defined below) and the securities legislation and regulations
and regulations of, and the instruments, policies, rules, orders, codes, notices and published
interpretation notes of, the securities regulatory authorities of the provinces and territories of
Canada (the “Canadian Securities Laws”) (all of the foregoing filed prior to the date
hereof and all exhibits included therein and financial statements, notes and schedules thereto and
documents incorporated by reference therein being hereinafter referred to as the “SEC-CSA
Documents”). NGAS has delivered to the Holder or its representatives true, correct and
complete copies of all SEC-CSA Documents not available on the EDGAR and SEDAR systems, if any. As
of their respective dates, the SEC-CSA Documents complied in all material respects with the
requirements of the Exchange Act and the Canadian Securities Laws and the rules and regulations of
the SEC and the CSA promulgated thereunder applicable to the SEC-CSA Documents, and none of the
SEC-CSA Documents, at the time they were filed with the SEC or CSA, as applicable, contained any
untrue statement of a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. As of their respective dates, the financial statements
of NGAS included in the SEC-CSA Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of the SEC and the CSA
with respect thereto. Such financial statements have been prepared in accordance with generally
accepted accounting principles, consistently applied, during the periods involved (except (i) as
may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case
of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or
summary statements) and fairly present in all material respects the financial position of NGAS as
of the dates thereof and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit adjustments). No other
information provided by or on behalf of NGAS to the Holder which is not included in the SEC-CSA
Documents, including, without limitation, information referred to in Section 3.6 of this Agreement,
contains any untrue statement of a material fact or omits to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under which they are or
were made, not misleading.

          2.9 Underlying Shares. The issuance of the 2009 Notes, the 2009 Warrants and the 2009
Exchange Shares are duly authorized and are free from all taxes, liens and charges with respect to
the issue thereof. As of the Closing, NGAS shall have reserved from its duly authorized share
capital not less than the sum of 125% of the maximum number of Common Shares (A) issuable upon
conversion of the 2009 Notes and otherwise pursuant to the terms of the 2009 Notes (without taking
into account any limitations on the conversion or such other issuance pursuant to the terms of the
2009 Notes, or redemption of the 2009 Notes set forth therein, and assuming that all Installment
Amounts (as defined in the 2009 Notes) are paid in cash and that no Change of Control (as defined
in the 2009 Notes) has occurred) and (B) issuable upon exercise of the 2009 Warrants (without
taking into account any limitations on the exercise of the 2009 Warrants set forth therein). Upon
issuance or conversion in accordance with the 2009 Notes or exercise in accordance with the 2009
Warrants, as the case may be, the 2009 Conversion Shares and the 2009 Warrant Shares, respectively,
will be validly issued, fully paid and nonassessable and free from all preemptive or similar
rights, taxes, liens and charges with respect to the issue thereof, with the holders being entitled
to all rights accorded to a holder of Common Shares. Upon issuance, the 2009 Exchange Shares will
be validly issued, fully paid and nonassessable and free from all preemptive or similar rights,
taxes, liens and charges with respect to the issue thereof, with the holders being entitled to all
rights accorded to a holder of Common Shares.

          2.10 Capitalization. As of the date hereof, the authorized share capital of NGAS
consists of (i) 100,000,000 Common Shares, of which, as of the date hereof, 30,484,361 are issued
and outstanding, 4,414,141 shares are reserved for issuance pursuant to Approved Share Plans and
1,740,000 shares are reserved for issuance (subject to antidilution adjustments resulting from the
Exchange with respect to the securities listed on Schedule 2.10(a)) pursuant to securities
(other than the 2009 Notes and the 2009 Warrants) exercisable or exchangeable for, or convertible
into, Common Shares and (ii) 5,000,000 shares of preferred shares, no par value, of which as of the
date hereof none of which is issued and outstanding or reserved for issuance. All of such
outstanding shares have been,

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or upon issuance will be, validly issued and are fully paid and nonassessable. Except as
disclosed in Schedule 2.10(b): (i) none of NGAS’s shares are subject to preemptive rights
or any other similar rights or any liens or encumbrances suffered or permitted by NGAS; (ii) there
are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into, or exercisable or
exchangeable for, any share capital of NGAS or any of its Subsidiaries, or contracts, commitments,
understandings or arrangements by which NGAS or any of its Subsidiaries is or may become bound to
issue additional share capital of NGAS or any of its Subsidiaries or options, warrants, scrip,
rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities
or rights convertible into, or exercisable or exchangeable for, any share capital of NGAS or any of
its Subsidiaries; (iii) there are no outstanding debt securities, notes, credit agreements, credit
facilities or other agreements, documents or instruments evidencing Indebtedness of NGAS or any of
its Subsidiaries or by which NGAS or any of its Subsidiaries is or may become bound; (iv) there are
no financing statements securing obligations in any material amounts, either singly or in the
aggregate, filed in connection with NGAS or any of its Subsidiaries; (v) there are no agreements or
arrangements under which NGAS or any of its Subsidiaries is obligated to register the sale of any
of their securities under the Securities Act (other than the filing with the SEC of one or more
registration statements to register the resale of the 2009 Warrant Shares); (vi) there are no
outstanding securities or instruments of NGAS or any of its Subsidiaries which contain any
redemption or similar provisions, and there are no contracts, commitments, understandings or
arrangements by which NGAS or any of its Subsidiaries is or may become bound to redeem a security
of NGAS or any of its Subsidiaries; (vii) there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of the Securities;
(viii) NGAS does not have any share appreciation rights or “phantom share” plans or agreements or
any similar plan or agreement; and (ix) NGAS and its Subsidiaries have no liabilities or
obligations required to be disclosed in the SEC-CSA Documents but not so disclosed in the SEC-CSA
Documents, other than those incurred in the ordinary course of NGAS’s or its Subsidiaries’
respective businesses and which, individually or in the aggregate, do not or could not reasonably
be expected to have a Material Adverse Effect. NGAS has made available to the Holder true, correct
and complete copies of the Articles of Incorporation and the Bylaws, and the terms of all
securities convertible into, or exercisable or exchangeable for, Common Shares and the material
rights of the holders thereof in respect thereto.

          2.11 Application of Takeover Protections; Rights Agreement. NGAS and its board of
directors have taken all necessary action, if any, in order to render inapplicable any control
share acquisition, business combination, poison pill (including any distribution under a rights
agreement) or other similar anti-takeover provision under the Articles of Incorporation, the Bylaws
or the laws of the jurisdiction of its incorporation which is or could become applicable to the
Holder as a result of the transactions contemplated by this Agreement, including, without
limitation, the issuance by NGAS of the Securities and the Holder’s ownership of the Securities.
NGAS has not adopted a shareholder rights plan or similar arrangement relating to accumulations of
beneficial ownership of Common Shares or a change in control of NGAS.

          2.12 No Undisclosed Events, Liabilities, Developments or Circumstances. No event,
liability, development or circumstance has occurred or exists, or is contemplated to occur with
respect to NGAS or its Subsidiaries or their respective business, properties, prospects, operations
or financial condition, that (i) would be required to be disclosed by NGAS in the SEC-CSA Documents
but are not so disclosed in the SEC-CSA Documents or (ii) could reasonably be expected to have a
Material Adverse Effect.

          2.13 Transfer Taxes. On the Closing Date, all share transfer or other taxes (other
than income or similar taxes) which are required to be paid in connection with the issuance of the
Securities to be exchanged with the Holder hereunder will be, or will have been, fully paid or
provided for by NGAS, and all laws imposing such taxes will be or will have been complied with.

          2.14 Acknowledgment Regarding Holder’s Trading Activity. It is understood and
acknowledged by NGAS (i) that, other than as set forth in Section 3.11 hereof, the Holder has not
been asked by NGAS or its Subsidiaries to agree, nor has the Holder agreed, to desist from
purchasing or selling, long and/or short, securities of NGAS, or “derivative” securities based on
securities issued by NGAS or to hold the Securities for any specified term, (ii) that the Holder,
and counter parties in “derivative” transactions to which the Holder is a party, directly or
indirectly, presently may have a “short” position in the Common Shares, and (iii) that the Holder
shall not be deemed to have any affiliation with or control over any arm’s length counter-party in
any “derivative” transaction. NGAS further understands and acknowledges that the Holder may engage
in hedging and/or trading activities at various times during the period that the Securities are
outstanding, including, without limitation, during the periods

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that the value of the Conversion Shares and the Warrant Shares deliverable with respect to
Securities are being determined and (b) such hedging and/or trading activities, if any, can reduce
the value of the existing shareholders’ equity interest in NGAS both at and after the time the
hedging and/or trading activities are being conducted. NGAS acknowledges that such aforementioned
hedging and/or trading activities do not constitute a breach of this Agreement, any of the
Securities or any of the documents executed in connection herewith.

          2.15 Acknowledgment Regarding the Holder’s Acquisition of Securities. NGAS
acknowledges and agrees that the Holder is acting solely in the capacity of arm’s length acquiror
with respect to the Exchange Documents and the transactions contemplated hereby and thereby and
that the Holder is not (i) an officer or director of NGAS, (ii) an “affiliate” of NGAS or any of
its Subsidiaries (as defined in Rule 144 under the Securities Act) or (iii) to the knowledge of
NGAS, a “beneficial owner” of more than 10% of the Common Shares (as defined for purposes of Rule
13d-3 under the Exchange Act). NGAS further acknowledges that the Holder is not acting as a
financial advisor or fiduciary of NGAS or any of its Subsidiaries (or in any similar capacity) with
respect to the Exchange Documents and the transactions contemplated hereby and thereby, and any
advice given by the Holder or any of its representatives or agents in connection with the Exchange
Documents and the transactions contemplated hereby and thereby is merely incidental to the Holder’s
acquisition of the Securities. NGAS further represents to the Holder that NGAS’s decision to enter
into the Exchange Documents has been based solely on the independent evaluation by NGAS and its
representatives.

          2.16 Manipulation of Price. NGAS has not, and to its knowledge no one acting on its
behalf has, (i) taken, directly or indirectly, any action designed to cause or to result in the
stabilization or manipulation of the price of any security of NGAS to facilitate the sale or resale
of any of the Securities, (ii) sold, bid for, purchased, or paid any compensation for soliciting
the exchange of, any of the Securities, or (iii) paid or agreed to pay to any Person any
compensation for soliciting another to purchase any other securities of NGAS.

          2.17 Shell Company Status. NGAS is not, and has never been, an issuer identified in,
or subject to, Rule 144(i) under the Securities Act.

          2.18 Disclosure. Except for the transactions contemplated by this Agreement, NGAS
confirms that neither it nor any other Person acting on its behalf has provided the Holder or its
agents or counsel with any information that constitutes or could reasonably be expected to
constitute material, nonpublic information. NGAS understands and confirms that the Holder will
rely on the foregoing representations in effecting transactions in the Securities. All disclosure
provided to the Holder regarding NGAS and its Subsidiaries, their business and the transactions
contemplated hereby, including the schedules to this Agreement, furnished by or on behalf of NGAS
is true and correct and does not contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. Each press release issued by NGAS or its
Subsidiaries during the twelve (12) months preceding the date of this Agreement did not at the time
of release contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. No event or circumstance has
occurred or information exists with respect to NGAS or any of its Subsidiaries or its or their
business, properties, prospects, operations or financial conditions, which, under applicable law,
rule or regulation, requires public disclosure or announcement by NGAS but which has not been so
publicly announced or disclosed.

     3. Representations and Warranties of the Holder.

          The Holder represents and warrants to NGAS, as of the date of the execution of this Agreement,
as follows:

          3.1 Organization’s Authority. The Holder is an entity duly organized and validly
existing under the laws of the jurisdiction of its organization with the requisite power and
authority to enter into and to consummate the transactions contemplated by the Exchange Documents
to which it is a party and otherwise to carry out its obligations hereunder and thereunder.

          3.2 Ownership of Securities. The Holder owns all of the Old Note free and clear of
any Liens (other than the obligations pursuant to this Agreement, the Transaction Documents and
applicable securities laws).

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          3.3 No Sale or Distribution. The Holder is acquiring the Holder Note, the Holder
Warrant and the Holder Exchange Shares, and upon conversion of the Holder Note and exercise of the
Holder Warrant (other than pursuant to a Cashless Exercise, as defined in the Holder Warrant) will
acquire the Holder Conversion Shares issuable upon conversion of the Holder Note and the Holder
Warrant Shares issuable upon exercise of the Holder Warrant for its own account and not with a view
towards, or for resale in connection with, the public sale or distribution thereof, except pursuant
to sales registered or exempted under the Securities Act; provided, however, that by making the
representations herein, the Holder does not agree to hold any of the Holder Securities for any
minimum or other specific term and reserves the right to dispose of the Holder Securities at any
time in accordance with or pursuant to a registration statement or an exemption under the
Securities Act and pursuant to the applicable terms of the Exchange Documents. The Holder is
acquiring the Holder Securities hereunder in the ordinary course of its business. The Holder does
not presently have any agreement or understanding, directly or indirectly, with any Person to
distribute any of the Holder Securities.

          3.4 Accredited Investor Status. The Holder is an “accredited investor” as that term
is defined in Rule 501(a) of Regulation D.

          3.5 Reliance on Exemptions. The Holder understands that the Holder Securities are
being offered and exchanged in reliance on specific exemptions from the registration requirements
of United States federal and state securities laws and that NGAS is relying in part upon the truth
and accuracy of, and the Holder’s compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Holder set forth herein and in the Exchange Documents in
order to determine the availability of such exemptions and the eligibility of the Holder to acquire
the Holder Securities.

          3.6 Information. The Holder and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of NGAS and materials relating to the
offer and sale of the Holder Securities that have been requested by Holder. The Holder and its
advisors, if any, have been afforded the opportunity to ask questions of NGAS. Neither such
inquiries nor any other due diligence investigations conducted by the Holder or its advisors, if
any, or its representatives shall modify, amend or affect the Holder’s right to rely on NGAS’s
representations and warranties contained herein. The Holder understands that its acquisition of the
Holder Securities involves a high degree of risk and is able to afford a complete loss thereof.
The Holder has sought such accounting, legal and tax advice from Persons other than NGAS as it has
considered necessary to make an informed investment decision with respect to its acquisition of the
Holder Securities.

          3.7 No Governmental Review. The Holder understands that no Canadian, United States
federal or state agency or any other government or governmental agency has passed on or made any
recommendation or endorsement of the Holder Securities or the fairness or suitability of the
investment in the Holder Securities nor have such authorities passed upon or endorsed the merits of
the offering of the Holder Securities.

          3.8 Transfer or Resale. The Holder understands that: (i) the Holder Securities have
not been and are not being registered under the Securities Act or any state securities laws, and
may not be offered for sale, sold, assigned or transferred unless (A) subsequently registered
thereunder, (B) the Holder shall have delivered to NGAS an opinion of counsel, in a generally
acceptable form, to the effect that such Holder Securities to be sold, assigned or transferred may
be sold, assigned or transferred pursuant to an exemption from such registration, or (C) the Holder
provides NGAS with reasonable assurance that such Holder Securities can be sold, assigned or
transferred pursuant to Rule 144 or Rule 144A promulgated under the Securities Act, as amended (or
a successor rule thereto) (collectively, “Rule 144”) (which shall not include an opinion of
counsel); (ii) any sale of the Holder Securities made in reliance on Rule 144 may be made only in
accordance with the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of the
Holder Securities under circumstances in which the seller (or the Person) through whom the sale is
made) may be deemed to be an underwriter (as that term is defined in the Securities Act) may
require compliance with some other exemption under the Securities Act or the rules and regulations
of the SEC thereunder; and (iii) neither NGAS nor any other Person is under any obligation to
register the Holder Securities under the Securities Act or any state securities laws.

          3.9 Validity; Enforcement. This Agreement and the Exchange Documents to which the
Holder is a party have been duly and validly authorized, executed and delivered on behalf of the
Holder and shall constitute the legal, valid and binding obligations of the Holder enforceable
against the Holder in accordance with

7

 

their respective terms, except as such enforceability may be limited by general principles of
equity or to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other
similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights
and remedies.

          3.10 No Conflicts. The execution, delivery and performance by the Holder of this
Agreement and the Exchange Documents to which the Holder is a party, and the consummation by the
Holder of the transactions contemplated hereby and thereby will not (i) result in a violation of
the organizational documents of the Holder or (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Holder is a party, or (iii) result in a violation of any law, rule,
regulation, order, judgment or decree (including federal and state securities laws) applicable to
the Holder, except in the case of clauses (ii) and (iii) above, for such conflicts, defaults,
rights or violations which would not, individually or in the aggregate, reasonably be expected to
have a material adverse effect on the ability of the Holder to perform its obligations hereunder.

          3.11 Certain Trading Activities. Other than with respect to this Agreement and the
transactions contemplated herein, since the time that the Holder was first contacted by NGAS,
Lazard Freres & Co. (the “Agent”) or any other Person regarding the transaction
contemplated by this Agreement, neither the Holder nor any affiliate (as defined by Rule 405
promulgated pursuant to the Securities Act) of the Holder which (i) had knowledge of the
transactions contemplated hereby, (ii) has or shares discretion relating to the Holder’s
investments and trading or information concerning the Holder’s investments and (iii) is subject to
the Holder’s review or input concerning such affiliate’s investments or trading (collectively,
“Trading Affiliates”) has directly or indirectly, nor has any Person acting on behalf of or
pursuant to any understanding with the Holder or any Trading Affiliate, effected or agreed to
effect any transactions in the securities of NGAS. The Holder hereby covenants and agrees not to,
and shall cause its Trading Affiliates not to, engage, directly or indirectly, in any transactions
in the securities of NGAS or involving NGAS’s securities during the period from the date hereof
until such time as (a) the transactions contemplated by this Agreement are first publicly announced
as described in Section 4.3 hereof or (b) this Agreement is terminated pursuant to Section 6.
Notwithstanding the foregoing, for the avoidance of doubt, nothing contained herein shall
constitute a representation or warranty, or preclude any actions, with respect to the
identification of the availability of, or securing of, available shares to borrow in order to
effect short sales or similar transactions in the future.

     4. Covenants.

          4.1 Reasonable Best Efforts to Close. NGAS shall use its reasonable best efforts to
timely satisfy each of the conditions to be satisfied by it as provided in Section 5.1 of this
Agreement. The Holder shall use its reasonable best efforts to timely satisfy each of the
conditions to be satisfied by it as provided in Section 5.2 of this Agreement.

          4.2 Limitations on Transfer. During the period between the execution of this
Agreement and ending at the earlier of (a) the termination of this Agreement or (b) the Closing
Date, except as contemplated by this Agreement, the Holder shall not sell, assign or transfer any
interest in its Old Note, or otherwise take any action which would inhibit or impair the Holder’s
ability to deliver its Old Note at the Closing in compliance with the terms of this Agreement.

          4.3 Disclosure. On or before 8:30 a.m., New York time, on the first Business Day
following the date of this Agreement, NGAS shall issue a press release reasonably acceptable to the
Holder disclosing all material terms of the transactions contemplated hereby (the “Press
Release”) and on or before 11:00 a.m., New York time, on the first Business Day following the
date of this Agreement, file a Current Report on Form 8-K describing the terms of the transactions
contemplated by the Exchange Documents in the form required by the Exchange Act and attaching the
material Exchange Documents (including, without limitation, this Agreement, the form of the 2009
Notes and the form of 2009 Warrants) as exhibits to such filing (including all attachments, the
“8-K Filing”) and a material change report on Form 51-102F3 in accordance with National
Instrument 51-102 of the CSA with respect thereto (the “Material Change Report”). From and
after the issuance of the Press Release, the Holder shall not be in possession of any material,
nonpublic information received from NGAS or any of its Subsidiaries or any of its respective
officers, directors, employees or agents based upon information communicated to the Holder (or its
officers, directors, employees or agents) on or prior to the time of the issuance of the Press
Release. NGAS shall not,

8

 

and shall cause each of its Subsidiaries and its and each of their respective officers,
directors, employees and agents, not to, provide the Holder with any material, nonpublic
information regarding NGAS or any of its Subsidiaries from and after the issuance of the Press
Release without the prior express written consent of the Holder. If the Holder has, or believes it
has, received any material, nonpublic information regarding NGAS or any of its Subsidiaries in
breach or violation of the terms and conditions of this Agreement, the Holder Note and/or the
Holder Warrant, it shall provide NGAS with written notice thereof. NGAS shall, within five (5)
Trading Days (as defined in the Holder Note) of receipt of such notice, make public disclosure of
such material, nonpublic information. In the event of a breach of any of the foregoing covenants
by NGAS, any of its Subsidiaries, or any of its or their respective officers, directors, employees
and agents, in addition to any other remedy provided herein or in the Exchange Documents, the
Holder shall have the right to make a public disclosure, in the form of a press release, public
advertisement or otherwise, of such material, nonpublic information without the prior approval by
NGAS, its Subsidiaries, or any of its or their respective officers, directors, employees or agents.
The Holder shall not have any liability to NGAS, its Subsidiaries, or any of its or their
respective officers, directors, employees, shareholders or agents for any such disclosure. Subject
to the foregoing, neither NGAS, its Subsidiaries nor the Holder shall issue any press releases or
any other public statements with respect to the transactions contemplated hereby; provided,
however, that NGAS shall be entitled, without the prior approval of the Holder, to make any
press release or other public disclosure with respect to such transactions (i) in substantial
conformity with the Press Release and 8-K Filing and contemporaneously therewith and (ii) as is
required by applicable law and regulations (provided that in the case of clause (i) the Holder
shall be consulted by NGAS in connection with any such press release or other public disclosure
prior to its release). Without the prior written consent of the Holder, neither NGAS nor any of
its Subsidiaries shall disclose the name of the Holder in any filing, announcement, release or
otherwise; provided, that the Company may disclose the name of the Holder by filing a conformed
copy of this Agreement as an exhibit to the 8-K Filing.

          4.4 No Integration. None of NGAS, its Subsidiaries, any of their affiliates, or any
Person acting on their behalf shall, directly or indirectly, make any offers or sales of any
security (as defined in the Securities Act) or solicit any offers to buy any security or take any
other actions, under circumstances that would require registration of any of the Securities under
the Securities Act or cause this offering of the Securities to be integrated with such offering or
any prior offerings by NGAS for purposes of the Securities Act or any applicable shareholder
approval provisions, including, without limitation, under the rules and regulations of the
Principal Market and/or any exchange or automated quotation system on which any of the securities
of NGAS are listed or designated.

          4.5 No General Solicitation. None of NGAS or any of its affiliates or any other
Person acting on its or their behalf (other than the Holder and its affiliates, as to which no
covenant is given) will solicit offers for, or offer or sell, the 2009 Notes, the 2009 Warrants or
the 2009 Exchange Shares by means of any form of general solicitation or general advertising within
the meaning of Rule 502(c) of Regulation D under the Securities Act or in any manner involving a
public offering within the meaning of Section 4(2) of the Securities Act.

          4.6 Cancellation; No Distribution of Old Note. Upon receipt of the Old Note by NGAS,
the Old Note will be cancelled and will cease to be outstanding. NGAS shall not resell or reissue
the Old Note.

          4.7 Tax Treatment. The parties agree to treat the issuance of the Holder Note, Holder
Warrant and Holder Exchange Shares in exchange for the Old Note as a recapitalization described in
Section 368(a)(1)(E) of the Internal Revenue Code, as amended, unless otherwise required by law.

          4.8 Reporting Status. Until the date on which none of the 2009 Notes and 2009
Warrants are outstanding (the “Reporting Period”), NGAS shall timely file all reports
required to be filed with the SEC pursuant to the Exchange Act and the CSA under applicable
Canadian Securities Laws, and NGAS shall continue to timely file reports under the Exchange Act
even if the Exchange Act or the rules and regulations thereunder would otherwise no longer require
or permit such filings and will remain in good standing under Canadian Securities Law and eligible
to use the POP System; provided, that the Company shall have an obligation under this Agreement to
file reports pursuant to the CSA and to remain in good standing under Canadian Securities Law and
eligible to use the POP System only so long as the Company remains incorporated under the laws of
the Province of British Columbia.

9

 

          4.9 Listing. NGAS shall promptly secure the listing or designation for quotation (as
applicable) of all of the 2009 Conversion Shares, the Warrant Shares and the 2009 Exchange Shares
upon each national securities exchange and automated quotation system, if any, upon which the
Common Shares is then listed or designated for quotation (as applicable) (subject to official
notice of issuance) and shall maintain such listing of all the 2009 Conversion Shares, the Warrant
Shares and the 2009 Exchange Shares from time to time issuable under the terms of the Exchange
Documents. NGAS shall maintain the Common Shares’ authorization for quotation on the Principal
Market. Neither NGAS nor any of its Subsidiaries shall take any action which would be reasonably
expected to result in the delisting or suspension of the Common Shares on the Principal Market;
provided, however, that NGAS makes no covenant regarding the trading price of the
Common Shares. NGAS shall pay all fees and expenses in connection with satisfying its obligations
under this Section 4.9. Notwithstanding the foregoing, in connection with a Change of Control, the
Company will comply with the provision of Section 4.16 in lieu of this Section.

          4.10 Participation Right. Until the eighteen month anniversary of the Closing Date,
and with respect to any Holder as long as 75% of their 2009 Notes remain outstanding, NGAS will
not, directly or indirectly, effect any Subsequent Placement unless NGAS shall have first complied
with this Section 4.10; provided, that the Company shall not be required to comply with this
Section 4.10 during the six-month period immediately following Closing if such Subsequent Placement
(i) would be integrated with the Exchange for purposes of the Securities Act or any applicable
shareholder approval provisions, including, without limitation, under the rules and regulations of
any exchange or automated quotation system on which any of the securities of NGAS are listed or
designated, and (ii) does not involve more than $5,000,000 of the Company’s securities or the
issuance of Common Shares for a purchase price of less than $1.00 per share.

     (a) At least two (2) Business Days prior to any proposed or intended Subsequent
Placement, NGAS or its agent shall orally contact the Holder and ask whether such Holder is
willing to agree to receive material non-public information (each such notice, a
“Pre-Notice”), provided that neither NGAS nor its agents shall provide any material,
non-public information with respect to the Company or any of its Subsidiaries to the Holder
without the expressed written consent of the Holder to receive such material, non-public
information. Upon the written request of the Holder no later than one (1) Business Day
after the Holder’s receipt of such Pre-Notice, and only upon a written request by the
Holder, NGAS shall promptly, but no later than one (1) Business Day after such request,
deliver to the Holder by facsimile an irrevocable written notice (the “Offer
Notice”) of any proposed or intended issuance or sale or exchange (the “Offer”)
of the securities being offered (the “Offered Securities”) in a Subsequent Placement
within one (1) Business Day of the determination of the terms of such Subsequent Placement,
which Offer Notice shall (w) identify and describe the Offered Securities, (x) describe the
price and other final terms upon which they are to be issued, sold or exchanged, and the
number or amount of the Offered Securities to be issued, sold or exchanged, (y) identify the
persons or entities (if known) to which or with which the Offered Securities are to be
offered, issued, sold or exchanged and (z) offer to issue and sell to or exchange with the
Holder (which offer being non-transferable to any successor to the Holder) a pro rata
portion of at least 25% of the Offered Securities allocated among the Holder and the Other
Note Holders (as defined herein) (a) based on the Holder’s pro rata portion of all the 2009
Notes (the “Basic Amount”), and (b) if the Holder elects to purchase its Basic
Amount, any additional portion of the Offered Securities attributable to the Basic Amounts
of the Other Note Holders as the Holder shall indicate it will purchase or acquire should
the Other Note Holders subscribe for less than their Basic Amounts (the
“Undersubscription Amount”).

     (b) To accept an Offer, in whole or in part, the Holder must deliver a written notice
to NGAS prior to the end of the first (1st) full Business Day after the Holder’s
receipt of the Offer Notice (for purposes of this Section 4.10(b), receipt of the Offer
Notice shall not be deemed to have occurred until the Holder shall have physically received
such Offer Notice) (the “Offer Period”), setting forth the portion of the Holder’s
Basic Amount that the Holder elects to purchase and, if the Holder shall elect to purchase
all of its Basic Amount, the Undersubscription Amount, if any, that the Holder elects to
purchase (in either case, the “Notice of Acceptance”). If the Basic Amounts
subscribed for by the Holder and all Other Note Holders are less than the total of all of
the Basic Amounts, then, if the Holder has set forth an Undersubscription Amount in its
Notice of Acceptance, the Holder shall be entitled to purchase, in addition to the Basic
Amounts subscribed for, the Undersubscription Amount it has subscribed for;
provided, however, that if the Undersubscription Amounts subscribed for
exceed the difference between the total of all the Basic Amounts and the Basic Amounts
subscribed for (the “Available Undersubscription Amount”),

10

 

if the Holder has subscribed for any Undersubscription Amount, then the Holder shall be
entitled to purchase only that portion of the Available Undersubscription Amount as the
Basic Amount of the Holder bears to the total Basic Amounts of all Other Note Holders that
have subscribed for Undersubscription Amounts, subject to rounding by NGAS to the extent it
deems reasonably necessary.

     (c) NGAS shall have thirty (30) Business Days from the expiration of the Offer Period
above to offer, issue, sell or exchange all or any part of such Offered Securities as to
which a Notice of Acceptance has not been given by the Holder (the “Refused
Securities”), but only to the offerees described in the Offer Notice (if so described
therein) and only upon terms and conditions (including, without limitation, unit prices and
interest rates) that are not more favorable to the acquiring Person or Persons or less
favorable to NGAS than those set forth in the Offer Notice.

     (d) In the event NGAS shall propose to sell less than all the Refused Securities (any
such sale to be in the manner and on the terms specified in Section 4.10(c) above), then the
Holder may, at its sole option and in its sole discretion, reduce the number or amount of
the Offered Securities specified in its Notice of Acceptance to an amount that shall be not
less than the number or amount of the Offered Securities that the Holder elected to purchase
pursuant to Section 4.10(b) above multiplied by a fraction, (i) the numerator of which shall
be the number or amount of Offered Securities NGAS actually proposes to issue, sell or
exchange (including Offered Securities to be issued or sold to the Holder pursuant to
Section 4.10(c) above prior to such reduction) and (ii) the denominator of which shall be
the original amount of the Offered Securities. In the event that the Holder so elects to
reduce the number or amount of Offered Securities specified in its Notice of Acceptance,
NGAS may not issue, sell or exchange more than the reduced number or amount of the Offered
Securities unless and until such securities have again been offered to the Holder in
accordance with Section 4.10(a) above.

     (e) Upon the closing of the issuance, sale or exchange of all or less than all of the
Refused Securities, the Holder shall acquire from NGAS, and NGAS shall issue to the Holder,
the number or amount of Offered Securities specified in the Holder’s Notice of Acceptance,
as reduced pursuant to Section 4.10(c) above if the Holder has so elected, upon the terms
and conditions specified in the Offer. The purchase by the Holder of any Offered Securities
is subject in all cases to (i) the preparation, execution and delivery by NGAS and the
Holder of a purchase agreement relating to such Offered Securities reasonably satisfactory
in form and substance to the Holder and its respective counsel (the “Subsequent
Placement Agreement”), (ii) the Holder’s satisfaction, in its sole discretion, with the
final terms and/or conditions that differ from those contained in the Offer Notice, and
(iii) the Holder’s reasonable satisfaction with the identity of the other Persons to which
the Offered Securities will be sold.

     (f) Any Offered Securities not acquired by the Holder or other Persons in accordance
with this Section 4.10 may not be issued, sold or exchanged until they are again offered to
the Holder under the procedures specified in this Agreement.

     (g) NGAS and the Holder agree that if the Holder elects to participate in the Offer,
without the written consent of the Holder, neither the Subsequent Placement Agreement with
respect to such Offer nor any other transaction documents related thereto shall include any
term or provision whereby the Holder shall be required to agree to any restrictions on
trading as to any securities of NGAS with respect to any period after the public
announcement of such Subsequent Placement beyond those restrictions on the transfer or sale
of the securities purchased in such Subsequent Placement agreed to by other purchasers in
such Subsequent Placement or be required to consent to any amendment to or termination of,
or grant any waiver or release under or in connection with, any agreement previously entered
into with NGAS or any instrument received from NGAS.

     (h) The restrictions contained in this Section 4.10 shall not apply (1) in connection
with the issuance of any Excluded Securities (as defined below) and (2) to the extent that
in the written opinion of counsel to NGAS (which opinion shall be reasonably satisfactory to
the Holder) with respect to a Subsequent Placement of Offered Securities that are not being
issued pursuant to a registration statement under the Securities Act, the exercising of the
participation right would result in NGAS not being able to offer or sell the Offered
Securities pursuant to any exemption from the registration requirements of the Securities
Act. “Excluded Securities” means, collectively, (i) Common Shares issued (including
upon

11

 

exercise of standard options to purchase Common Shares) to directors, officers or
employees of NGAS in their capacity as such pursuant to an Approved Share Plan, provided
that (1) all such issuances (taking into account the Common Shares issuable upon exercise of
such options) after the date hereof pursuant to this clause (A) do not, in the aggregate,
exceed more than 5% of the Common Shares issued and outstanding immediately prior to the
date hereof and (2) such options are not amended to increase the number of shares issuable
thereunder or to lower the exercise price thereof or to otherwise materially change the
terms or conditions thereof in any manner that adversely affects the Holder, (ii) the 2009
Conversion Shares, (iii) the 2009 Warrant Shares, (iv) the 2009 Exchange Shares, and (v)
Common Shares issued pursuant to a bona fide firm commitment underwritten public offering
with a nationally recognized underwriter which generates gross proceeds to NGAS in excess of
$25,000,000 (but expressly excluding “at-the-market offerings” (as defined in Rule 415(a)(4)
under the Securities Act) and “equity lines”).

          4.11 Shareholder Approval. NGAS shall provide each shareholder entitled to vote at a
special or annual meeting of shareholders of NGAS (the “Shareholder Meeting”), which shall
be promptly called and held not later than June 30, 2010 (the “Shareholder Meeting
Deadline”), a proxy statement, substantially in the form which has been previously reviewed by
the Holder and a counsel of its choice, soliciting each such shareholder’s affirmative vote at the
Shareholder Meeting for approval of resolutions providing for NGAS’s issuance of all of the
Securities as described in the Exchange Documents in accordance with applicable law and the rules
and regulations of the Principal Market (such affirmative approval being referred to herein as the
“Shareholder Approval”), and NGAS shall use its best efforts to solicit its shareholders’
approval of such resolutions (which best efforts shall include, without limitation, the requirement
to hire a reputable proxy solicitor) and to cause the Board of Directors of NGAS to recommend to
the shareholders that they approve such resolutions. NGAS shall be obligated to seek to obtain the
Shareholder Approval by the Shareholder Meeting Deadline. If, despite NGAS’s best efforts the
Shareholder Approval is not obtained on or prior to the Shareholder Meeting Deadline, NGAS shall
cause two additional Shareholder Meetings to be held each calendar year thereafter until such
Shareholder Approval is obtained. NGAS shall reimburse the Holder for the fees and disbursements
of its legal counsel in connection with review of the above mentioned proxy statement(s), which
amount shall be limited to $15,000.

          4.12 Holding Period. For the purposes of Rule 144, NGAS acknowledges that the holding
period of the 2009 Conversion Shares, the 2009 Warrant Shares (if acquired using a Cashless
Exercise (as defined in the 2009 Warrant)) and the 2009 Exchange Shares may be tacked onto the
holding period of the Old Note, and NGAS agrees not to take a position contrary to this Section
4.12. NGAS agrees to take all actions, including, without limitation, the issuance by its legal
counsel of any necessary legal opinions, necessary to issue the 2009 Conversion Shares, the 2009
Warrant Shares (if acquired using a Cashless Exercise (as defined in the 2009 Warrant)) and the
2009 Exchange Shares that are freely tradable on the Principal Market without restriction and not
containing any restrictive legend without the need for any action by the Holder.

          4.13 Pledge of Securities. NGAS acknowledges and agrees that the Securities may be
pledged by the Holder in connection with a bona fide margin agreement or other loan or financing
arrangement that is secured by the Securities. The pledge of Securities shall not be deemed to be a
transfer, sale or assignment of the Securities hereunder, and if the Holder effects a pledge of
Securities it shall not be required to provide NGAS with any notice thereof or otherwise make any
delivery to NGAS pursuant to this Agreement or any other Exchange Document. NGAS hereby agrees to
execute and deliver such documentation as a pledgee of the Securities may reasonably request in
connection with a pledge of the Securities to such pledgee by the Holder.

          4.14 Restriction on Redemption and Dividends. So long as any 2009 Notes or 2009
Warrants are outstanding, NGAS shall not, directly or indirectly, redeem, repurchase or otherwise
acquire for value or declare or pay any dividend or distribution on, any share capital of the
Company without the prior express written consent of the holders of 2009 Notes representing not
less than a majority of the then outstanding 2009 Notes unless, solely with respect to an issuance
of non-convertible preferred shares of the Company after the Closing Date, (i) concurrently with
the issuance of such non-convertible preferred shares, a portion of the proceeds of such issuance
greater than or equal to the aggregate cash dividends payable under such non-convertible preferred
shares during the period commencing on such issuance date and ending on the Maturity Date (as
defined in the 2009 Notes) shall be deposited by the Company (or the purchasers of such securities)
into an escrow account with BNY Mellon or such other similar FDIC insured financial institution
(such portion of the proceeds of such issuance so deposited in the escrow account, the “Escrow
Property”), (ii) the Company does not pay or otherwise distribute to any holder of non-convertible
preferred shares any cash dividends or other distributions with respect to such non-convertible

12

 

preferred shares except from the Escrow Property held in such escrow account, and (iii) so
long as such non-convertible preferred shares remain outstanding, the Company does not release any
of the Escrow Property from such escrow account except (A) to the extent permitted by clause (ii)
above or (B) on any given date to the extent of the excess, if any, of (x) the amount of cash in
such escrow account as of such date and (y) the amount of dividends payable pursuant to the
non-convertible preferred shares then outstanding during the period commencing on such given date
and ending on the Maturity Date.

          4.15 Additional Notes; Variable Securities. So long as the Holder beneficially owns
any Securities, NGAS will not issue any 2009 Notes (other than as contemplated hereby and by the
Other Exchange Agreements) and NGAS shall not issue any other securities that would cause a breach
or default under the 2009 Notes. For so long as any 2009 Notes or 2009 Warrants remain
outstanding, NGAS shall not, in any manner, issue or sell any rights, warrants or options to
subscribe for or purchase Common Shares or directly or indirectly convertible into or exchangeable
or exercisable for Common Shares at a price which varies or may vary with the market price of the
Common Shares, including by way of one or more reset(s) to any fixed price unless the conversion,
exchange or exercise price of any such security cannot be less than the then applicable Conversion
Price (as defined in the 2009 Notes) with respect to the Common Shares into which any 2009 Note is
convertible or the then applicable Exercise Price (as defined in the 2009 Warrants) with respect to
the Common Shares into which any 2009 Warrant is exercisable.

          4.16 Corporate Existence. So long as the Holder beneficially owns any Securities,
NGAS shall not be party to any Fundamental Transaction (as defined in the 2009 Notes) unless the
Company is in compliance with the applicable provisions governing Fundamental Transactions set
forth in the 2009 Notes and the 2009 Warrants.

          4.17 Conduct of Business. The business of NGAS and its Subsidiaries shall not be
conducted in violation of any law, ordinance or regulation of any governmental entity, except where
such violations would not result, either individually or in the aggregate, in a Material Adverse
Effect.

          4.18 Form D and Blue Sky. The Company shall make all filings and reports relating to
the Exchange required under applicable securities or “Blue Sky” laws of the states of the United
States following the Closing Date, if any.

          4.19 Register. NGAS shall maintain at its principal executive offices (or such other
office or agency of NGAS as it may designate by notice to each holder of Securities), a register
for the 2009 Notes and the 2009 Warrants in which NGAS shall record the name and address of the
Person in whose name the 2009 Notes and the 2009 Warrants have been issued (including the name and
address of each transferee), the principal amount of the 2009 Notes held by such Person, the number
of 2009 Conversion Shares issuable upon conversion of the 2009 Notes and the number of 2009 Warrant
Shares issuable upon exercise of the 2009 Warrants held by such Person. NGAS shall keep the
register open and available at all times during business hours for inspection of the Holder or its
legal representatives.

          4.20 Transfer Agent Instructions. NGAS shall issue irrevocable instructions to its
transfer agent, and any subsequent transfer agent, to issue certificates or credit shares to the
applicable balance accounts at The Depository Trust Company (“DTC”), registered in the name
of the Holder or its respective nominee(s), for the Conversion Shares, the Warrant Shares and the
2005 Warrant Shares issued upon conversion of the 2009 Notes or exercise of the 2009 Warrants and
the 2009 Exchange Shares in such amounts as specified from time to time by the Holder to NGAS upon
conversion of the 2009 Notes or exercise of the 2009 Warrants in the form attached hereto as
Exhibit C (the “Irrevocable Transfer Agent Instructions”). NGAS warrants that no
instruction other than the Irrevocable Transfer Agent Instructions referred to in this Section
4.20, and stop transfer instructions to give effect to Section 3.8 hereof, will be given by NGAS to
its transfer agent, and that the Securities shall otherwise be freely transferable (assuming a
Cashless Exercise of any 2009 Warrants) on the books and records of NGAS as and to the extent
provided in this Agreement and the other Exchange Documents. If the Holder effects a sale,
assignment or transfer of the Securities in accordance with Section 3.8, NGAS shall permit the
transfer and NGAS shall promptly instruct its transfer agent to issue one or more certificates or
credit shares to the applicable balance accounts at DTC in such name and in such denominations as
specified by the Holder to effect such sale, transfer or assignment. In the event that such sale,
assignment or transfer involves 2009 Conversion Shares, 2009 Warrant Shares or 2009 Exchange Shares
sold, assigned or transferred pursuant to an effective registration statement or pursuant to Rule
144,

13

 

the transfer agent shall issue such Securities to the Holder, assignee or transferee, as the
case may be, without any restrictive legend. NGAS acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holder. Accordingly, NGAS acknowledges
that the remedy at law for a breach of its obligations under this Section 4.20 will be inadequate
and agrees, in the event of a breach or threatened breach by NGAS of the provisions of this Section
4.20, that the Holder shall be entitled, in addition to all other available remedies, to an order
and/or injunction restraining any breach and requiring immediate issuance and transfer, without the
necessity of showing economic loss and without any bond or other security being required.

     4.21 Legends. NGAS and the Holder acknowledge and agree that the certificates or
other instruments representing the 2009 Notes, 2009 Exchange Shares, 2009 Warrant and the 2009
Warrant Shares (assuming a Cashless Exercise of such 2009 Warrants) shall not bear any restrictive
legend. Any 2009 Warrant Shares that are issued by NGAS other than pursuant to a Cashless Exercise
of a 2009 Warrant, except as set forth below, shall bear any legend as required by the “blue sky”
laws of any state and a restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of such share certificates):

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE
ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY
ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS
SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE
FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

The legend set forth above shall be removed and NGAS shall issue a certificate without such legend
to the holder of any Securities upon which it is stamped, if, unless otherwise required by state
securities laws, (i) such Securities are registered for resale under the Securities Act and sold
under an effective registration statement in a transaction either exempt from the prospectus
delivery requirements or in which the prospectus delivery requirements were satisfied, (ii) in
connection with a sale, assignment or other transfer, such holder provides NGAS with an opinion of
a law firm reasonably acceptable to NGAS, in a generally acceptable form, to the effect that such
sale, assignment or transfer of the Securities may be made without registration under the
applicable requirements of the Securities Act, or (iii) such holder provides NGAS with reasonable
assurance that the Securities are eligible to be sold, assigned or transferred pursuant to Rule 144
(which shall not include an opinion of counsel). If a legend is not required pursuant to the
foregoing, NGAS shall no later than two (2) Trading Days (as defined in the 2009 Warrants)
following the delivery by the Holder to NGAS or the transfer agent (with notice to NGAS) of a
legended certificate representing such Securities (endorsed or with share powers attached,
signatures guaranteed, and otherwise in form necessary to affect the reissuance and/or transfer, if
applicable), either: (A) provided that NGAS’s transfer agent is participating in The Depository
Trust Company’s (“DTC”) Fast Automated Securities Transfer Program credit the aggregate
number of Common Shares 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 (B) if NGAS’s
transfer agent is not participating in the DTC Fast Automated Securities Transfer Program, issue
and deliver (via reputable overnight courier) to the Holder, a certificate that is free from all
restrictive and other legends, registered in the name of the Holder or its designee, for the number
of Common Shares to which the Holder shall be entitled.

          4.22 Limitations on Voting. The Holder agrees that it shall not vote any of its
Holder Exchange Shares, Holder Warrant Shares or Holder Conversion Shares in connection with the
Shareholder Approval. The Holder further agrees that it shall not sell, assign or transfer any
interest in its Holder Exchange Shares, Holder Warrant Shares or Holder Conversion Shares unless
the transferee of such shares agrees to be bound by the provisions of this Section 4.22; provided,
however, that if such shares are transferred in a transaction effected over a national or
international securities exchange, the restrictions set forth in this Section 4.22 shall no longer
apply to the shares sold in such manner.

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     5. Conditions to Closing.

          5.1 Conditions to the Obligations of the Holder. The obligations of the Holder to
close the Exchange are subject to the fulfillment on or before the Closing Date of the following:

               (a) No Injunction or Proceeding. There shall be no injunction, stay or restraining
order in effect with respect to the transactions provided for herein and there shall not be pending
any action, proceeding or investigation involving the Holder challenging or seeking damages from
the Holder in connection with the Exchange or seeking to restrain or prohibit the consummation of
the Exchange.

               (b) Accuracy of Representations and Compliance with Covenants. The representations
and warranties made by NGAS in this Agreement shall have been accurate in all respects as of the
date of this Agreement and shall be accurate in all material respects as of the Closing Date as if
made on the Closing Date (except those qualified by materiality or Material Adverse Effect, which
shall be accurate in all respects), and the covenants and obligations that NGAS is required to
comply with or to perform pursuant to this Agreement at or prior to the Closing shall have been
complied with and performed in all respects. The Holder shall have received a certificate, executed
by the Chief Executive Officer of NGAS, dated as of the Closing Date, to the foregoing effect.

               (c) Execution and Delivery of Exchange Documents. The Exchange Documents to which
NGAS is a party shall have been executed and delivered by NGAS and delivered to the Holder.

               (d) Opinion. Skadden, Arps, Slate, Meagher & Flom LLP, special counsel for NGAS,
Maitland & Company, Canadian counsel for NGAS, and Stahl & Zelmanovitz, United States counsel for
NGAS, shall have furnished to the Holder their written opinions, dated the Closing Date and
addressed to the Holder, in the forms attached to this Agreement as Exhibit D, Exhibit
E and Exhibit F, respectively.

               (e) NGAS shall have delivered to the Holder a copy of the Irrevocable Transfer Agent
Instructions, which instructions shall have been delivered to and acknowledged in writing by NGAS’s
transfer agent.

               (f) NGAS shall have delivered to the Holder a certificate of status with the Business
Corporations Act (British Columbia) of NGAS as of a date within 10 days of the Closing Date.

               (g) NGAS shall have delivered to the Holder a notarially certified copy of the Articles of
Incorporation to a date within ten (10) days of the Closing Date.

               (h) NGAS shall have delivered to the Holder a certificate, in a form reasonably acceptable to
the Holder, executed by the Secretary of NGAS dated as of the Closing Date, as to (i) the
resolutions consistent with Section 2.2 as adopted by Board of Directors of NGAS, (ii) the Articles
of Incorporation, as in effect at the Closing and (iii) the Bylaws, as in effect at the Closing.

               (i) NGAS shall have delivered to the Holder a letter from NGAS’s transfer agent certifying the
number of Common Shares outstanding as of a date within five days of the Closing Date.

               (j) The Common Shares (i) shall be designated for quotation or listed on the Principal Market
and (ii) shall not have been suspended, as of the Closing Date, by the SEC, the CSA or the
Principal Market from trading on the Principal Market nor shall suspension by the SEC, the CSA or
the Principal Market have been threatened, as of the Closing Date, either (A) in writing by the
SEC, the CSA or the Principal Market or (B) by falling below the minimum listing maintenance
requirements of the Principal Market.

               (k) NGAS shall have obtained all governmental, regulatory or third party consents and
approvals, if any, necessary for the issuance of the Securities (other than the Required
Approvals).

               (l) NGAS shall have delivered to the Holder such other documents relating to the transactions
contemplated by this Agreement as the Holder or its counsel have reasonably requested in writing
prior to the date hereof.

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               (m) Since the date of execution of this Agreement, no event or series of events shall have
occurred that reasonably would have or result in a Material Adverse Effect.

               (n) Each of the Other 2005 Note Holders shall have (i) executed the Other Exchange Agreements,
(ii) satisfied or waived all conditions to the closings contemplated by such agreements and
(iii) surrendered their Other 2005 Notes being exchanged at such closings.

          5.2 Conditions to the Obligations of NGAS. The obligations of NGAS to close the
Exchange are subject to the fulfillment on or before the Closing Date of the following:

               (a) No Injunction or Proceeding. There shall be no injunction, stay or restraining
order in effect with respect to the transactions provided for herein and there shall not be pending
any action, proceeding or investigation challenging or seeking damages in connection with the
Exchange or seeking to restrain or prohibit the consummation of the Exchange.

               (b) Accuracy of Representations and Compliance with Covenants. The representations
and warranties made by the Holder in this Agreement shall have been accurate in all respects as of
the date of this Agreement and shall be accurate in all material respects as of the Closing Date as
if made on the Closing Date (except those qualified by materiality or Material Adverse Effect,
which shall be accurate in all respects), and the covenants and obligations that the Holder is
required to comply with or to perform pursuant to this Agreement at or prior to the Closing shall
have been complied with and performed in all respects. NGAS shall have received a certificate,
executed by an authorized officer of the Holder, dated as of the Closing Date, to the foregoing
effect.

               (c) Execution and Delivery of Exchange Documents. The Exchange Documents to which the
Holder is a party shall have been executed and delivered by the Holder and delivered to NGAS.

               (d) Obligations of Other 2005 Note Holders. Each of the Other 2005 Note Holders shall
have (i) executed the Other Exchange Agreements, (ii) satisfied or waived all conditions to the
closings contemplated by such agreements and (iii) surrendered their Other 2005 Notes being
exchanged at such closings.

     6. Termination.

          6.1 By Mutual Consent. This Agreement may be terminated at any time prior to the
Closing Date by the mutual written consent of NGAS and the Holder.

          6.2 By the Holder. This Agreement may be terminated by the Holder upon a material
breach of any representation, warranty, covenant or agreement of NGAS set forth in this Agreement.

          6.3 By NGAS. This Agreement may be terminated by NGAS upon a material breach of any
representation, warranty, covenant or agreement of the Holder set forth in this Agreement.

          6.4 Failure to Close. If the Closing does not occur on or before January 15, 2010,
then the Holder or NGAS may terminate this Agreement by delivery of written notice of termination
to the other party; provided, however, any party that is in material breach of this Agreement shall
not have the right to terminate this Agreement pursuant to this Section 6.4.

          6.5 Effect of Termination. If this Agreement is terminated as provided in this
Section 6, then this Agreement will forthwith become null and void and there will be no liability
on the part of any party hereto to any other party hereto or any other Person in respect thereof,
provided that: (i) the obligations of the parties described in Sections 7.3 and 7.14 will survive
any such termination; and (ii) no such termination will relieve any party from liability for breach
of its obligations under this Agreement, and in such event the other parties shall have all rights
and remedies available at law or equity, including the right of specific performance against such
party.

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     7. Miscellaneous.

          7.1 Governing Law. This Agreement shall be governed in all respects by the internal
laws of the State of New York without regard to principles of conflicts of law or choice of law.

          7.2 Further Assurances; Additional Documents. The parties shall take any actions and
execute any other documents that may be necessary or desirable to the implementation and
consummation of this Agreement upon the reasonable request of the other party.

          7.3 Fees and Expenses. Each party shall be responsible for its own fees and expenses
incurred in connection with this Agreement; provided, that NGAS shall reimburse the Holder for an
aggregate of up to $75,000 of their reasonable documented out-of-pocket legal expenses incurred in
connection with the transactions contemplated by this Agreement, which amount shall be paid by NGAS
by wire transfer of immediately available funds at the Closing or upon termination of this
Agreement so long as such termination did not occur as a result of a material breach by the Holder
of any of its obligations hereunder (as the case may be). NGAS shall be responsible for the
payment of any placement agent’s fees, financial advisory fees, or broker’s commissions (other than
for Persons engaged by the Holder) relating to or arising out of the transactions contemplated
hereby. NGAS shall pay, and hold the Holder harmless against, any liability, loss or expense
(including, without limitation, reasonable attorneys’ fees and out-of-pocket expenses) arising in
connection with any claim relating to any such payment.

          7.4 Severability. If any term or provision of this Agreement is determined by a court
of competent jurisdiction to be invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other terms and provisions of this Agreement shall nevertheless remain in
full force and effect so long as the economic or legal substance of the transactions contemplated
hereby is not affected in any manner materially adverse to any party. Upon determination that any
term or other provision of this Agreement is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to attempt to agree on a modification of this
Agreement so as to effect the original intent of the parties as closely as possible to the fullest
extent permitted by law in an acceptable manner to the end that the transactions contemplated
hereby are fulfilled to the greatest extent possible. Notwithstanding anything to the contrary
contained in this Agreement or any other Exchange Document (and without implication that the
following is required or applicable), it is the intention of the parties that in no event shall
amounts and value paid by NGAS, or payable to or received by the Holder, under the Exchange
Documents, including without limitation, any amounts that would be characterized as “interest”
under applicable law (including, without limitation, any applicable Canadian or British Columbia
law), exceed amounts permitted under any such applicable law. Accordingly, if any obligation to
pay, payment made to the Holder, or collection by the Holder pursuant the Exchange Documents is
finally judicially determined to be contrary to any such applicable law, such obligation to pay,
payment or collection shall be deemed to have been made by mutual mistake of the Holder and NGAS
and such amount shall be deemed to have been adjusted with retroactive effect to the maximum amount
or rate of interest, as the case may be, as would not be so prohibited by the applicable law. Such
adjustment shall be effected, to the extent necessary, by reducing or refunding, at the option of
the Holder, the amount of interest or any other amounts which would constitute unlawful amounts
required to be paid or actually paid to the Holder under the Exchange Documents. For greater
certainty, to the extent that any interest, charges, fees, expenses or other amounts required to be
paid to or received by the Holder under any of the Exchange Documents or related thereto are held
to be within the meaning of “interest” or another applicable term to otherwise be violative of
applicable law, such amounts shall be pro-rated over the period of time to which they relate.

          7.5 Entire Agreement. This Agreement and the other Exchange Documents represent the
entire agreement and understandings between the parties concerning the Exchange and the other
matters described herein and therein and supersedes and replaces any and all prior agreements and
understandings solely with respect to the subject matter hereof and thereof; provided, however,
except as expressly set forth in the immediately following sentence, nothing contained in this
Agreement or any other Exchange Document shall (or shall be deemed to) (i) have any effect on any
agreements the Holder has entered into with NGAS or any of its Subsidiaries prior to the date
hereof with respect to any prior investment made by the Holder in NGAS or any of its Subsidiaries
or (ii) waive, alter, modify or amend in any respect any obligations of NAGS or any of its
Subsidiaries, or any rights of or benefits to the Holder or any other Person, in any agreement
entered into prior to the date hereof between or among NGAS and/or any of its Subsidiaries and the
Holder and all such agreements shall continue in full force and effect. Sections 4(c), 4(f), 4(j),
4(k) and 4(o) of the Securities Purchase Agreement are superseded in their entirety by Sections
4.8, 4.9, 4.10, 4.14 and 4.15 of this Agreement. Without limiting the foregoing, NGAS confirms that
the

17

 

Holder has made not any commitment or promise or has any other obligation to provide any
financing to NGAS, any Subsidiary or otherwise.

          7.6 No Oral Modification. This Agreement may only be amended in writing signed by
NGAS and by the Holder. All waivers relating to any provision of this Agreement must be in writing
and signed by the waiving party.

          7.7 Notices. All notices, requests and other communications hereunder shall be in
writing and shall be deemed to have been duly given at the time of receipt if delivered by hand, by
reputable overnight courier or by facsimile transmission (with receipt of successful and full
transmission) to the applicable parties hereto at the address stated on the signature pages hereto
or if any party shall have designated a different address or facsimile number by notice to the
other party given as provided above, then to the last address or facsimile number so designated.

          7.8 Submission to Jurisdiction. Each of the parties hereto (a) consents to submit
itself to the personal jurisdiction of any federal court located in the state of New York or any
New York state court in the event any dispute arises out of this Agreement, the other Exchange
Documents or any of the transactions contemplated hereby or thereby, (b) agrees that it will not
attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any
such court and (c) agrees that it will not bring any action relating to this Agreement, any of the
other Exchange Documents or any of the transactions contemplated hereby or thereby in any court
other than a federal or state court sitting in the state of New York. The Company hereby appoints
C T Corporation System, 4169 Westport Road, Louisville, KY 40207 as its agent for service of
process in the United States. If service of process is effected pursuant to the above sentence,
such service will be deemed sufficient under New York law and the Company shall not assert
otherwise. Nothing contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law.

          7.9 EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHTS TO TRIAL BY JURY
IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER EXCHANGE DOCUMENTS
OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.

          7.10 Counterparts. This Agreement may be executed in two or more identical
counterparts, all of which shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each party and delivered to the other party. In the
event that any signature is delivered by facsimile transmission or by an e-mail which contains a
portable document format (.pdf) file of an executed signature page, such signature page shall
create a valid and binding obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such signature page were an original thereof.

          7.11 Headings; Gender. The headings of this Agreement are for convenience of reference
and shall not form part of, or affect the interpretation of, this Agreement. Unless the context
clearly indicates otherwise, each pronoun herein shall be deemed to include the masculine,
feminine, neuter, singular and plural forms thereof. The terms “including,” “includes,” “include”
and words of like import shall be construed broadly as if followed by the words “without
limitation.” The terms “herein,” “hereunder,” “hereof” and words of like import refer to this
entire Agreement instead of just the provision in which they are found. For purposes of this
Agreement for the Holder’s benefit, the word “state” or “states” includes any “province” or
“provinces” in Canada and the concept of “law, rules or regulations” includes laws, rules and
regulations under applicable law, rules and regulations in Canada.

          7.12 No Third Party Beneficiaries. This Agreement is intended for the benefit of the
parties hereto and their respective permitted successors and assigns, and is not for the benefit
of, nor may any provision hereof be enforced by, any other Person, other than the Indemnitees
referred to in Section 7.14.

          7.13 Survival; No Strict Construction. Unless this Agreement is terminated under
Section 6 in accordance with the terms thereof, the representations, warranties, agreements and
covenants shall survive the Closing. The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent, and no rules of strict construction
will be applied against any party.

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     7.14 Indemnification.

          (a) In consideration of the Holder’s execution and delivery of the Exchange Documents to which
it is a party and acquiring the Securities thereunder and in addition to all of NGAS’s other
obligations under the Exchange Documents, NGAS shall defend, protect, indemnify and hold harmless
the Holder and each affiliate of the Holder that holds any Securities and all of their
shareholders, partners, members, officers, directors, employees and direct or indirect investors
and any of the foregoing Persons’ agents or other representatives (including, without limitation,
those retained in connection with the transactions contemplated by this Agreement) (collectively,
the “Indemnitees”) from and against any and all actions, causes of action, suits, claims,
losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Indemnitee is a party to the action for which indemnification
hereunder is sought), and including reasonable attorneys’ fees and disbursements (the
“Indemnified Liabilities”), incurred by any Indemnitee as a result of, or arising out of,
or relating to (a) any misrepresentation or breach of any representation or warranty made by NGAS
in any of the Exchange Documents, (b) any breach of any covenant, agreement or obligation of NGAS
contained in any of the Exchange Documents or (c) any cause of action, suit or claim brought or
made against such Indemnitee by a third party (including for these purposes a derivative action
brought on behalf of NGAS) and arising out of or resulting from (i) the execution, delivery,
performance or enforcement of any of the Exchange Documents, (ii) any disclosure properly made by
the Holder pursuant to Section 4.3 or (iii) the status of the Holder or holder of the Securities as
a holder of securities of NGAS pursuant to the transactions contemplated by the Exchange Documents,
except, with respect to clause (c) above, to the extent (but only to the extent) such Indemnified
Liability arises from the Holder’s bad faith or willful misconduct. To the extent that the
foregoing undertaking by NGAS may be unenforceable for any reason, NGAS shall make the maximum
contribution to the payment and satisfaction of each of the Indemnified Liabilities which is
permissible under applicable law.

          (b) Promptly after receipt by an Indemnitee under this Section 7.14 of notice of the
commencement of any action or proceeding (including any governmental action or proceeding)
involving an Indemnified Liability, such Indemnitee shall, if an Indemnified Liability in respect
thereof is to be made against NGAS under this Section 7.14, deliver to NGAS a written notice of the
commencement thereof, and NGAS shall have the right to participate in, and, to the extent NGAS so
desires, to assume control of the defense thereof with counsel mutually satisfactory to NGAS and
the Indemnitee; provided, however, that an Indemnitee shall have the right to retain its own
counsel with the fees and expenses of not more than one counsel for such Indemnitee to be paid by
NGAS, if, in the reasonable opinion of counsel retained by NGAS, the representation by such counsel
of the Indemnitee and NGAS would be inappropriate due to actual or potential differing interests
between such Indemnitee and any other party represented by such counsel in such proceeding. In the
case of an Indemnitee, legal counsel referred to in the immediately preceding sentence shall be
selected by the Indemnitees holding a majority of the then outstanding 2009 Notes. The Indemnitee
shall cooperate fully with NGAS in connection with any negotiation or defense of any such
Indemnified Liability by NGAS and shall furnish to NGAS all information reasonably available to the
Indemnitee which relates to such Indemnified Liability. NGAS shall keep the Indemnitee reasonably
apprised at all times as to the status of the defense or any settlement negotiations with respect
thereto. NGAS shall not be liable for any settlement of any action, claim or proceeding effected
without its prior written consent, provided, however, that NGAS shall not unreasonably withhold,
delay or condition its consent. NGAS shall not, without the prior written consent of the
Indemnitee, consent to entry of any judgment or enter into any settlement or other compromise which
does not include as an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnitee of a release from all liability in respect to such Indemnified Liability. Following
indemnification as provided for hereunder, NGAS shall be subrogated to all rights of the Indemnitee
with respect to all third parties, firms or corporations relating to the matter for which
indemnification has been made. The failure to deliver written notice to NGAS within a reasonable
time of the commencement of any such action shall not relieve NGAS of any liability to the
Indemnitee under this Section 7.14, except to the extent that NGAS is prejudiced in its ability to
defend such action.

          (c) The indemnification required by this Section 7.14 shall be made by periodic payments of
the amount thereof during the course of the investigation or defense, as and when bills are
received or Indemnified Liabilities are incurred.

          (d) The indemnification required by this Section 7.14 shall be in addition to (i) any cause of
action or similar right of the Indemnitee against NGAS or others, and (ii) any liabilities NGAS may
be subject to pursuant to the law.

19

 

          7.15 Remedies. The Holder and each affiliate of the Holder that holds any Securities
shall have all rights and remedies set forth in the Exchange Documents and all rights and remedies
which such holders have been granted at any time under any other agreement or contract and all of
the rights which such holders have under any law. Any Person having any rights under any provision
of this Agreement shall be entitled to enforce such rights specifically (without posting a bond or
other security), to recover damages by reason of any breach of any provision of this Agreement and
to exercise all other rights granted by law. Furthermore, NGAS recognizes that in the event that it
fails to perform, observe, or discharge any or all of its obligations under any of the Exchange
Documents, any remedy at law may prove to be inadequate relief to the Holder. NGAS therefore agrees
that the Holder shall be entitled to seek specific performance and/or temporary, preliminary and
permanent injunctive or other equitable relief from any court of competent jurisdiction in any such
case without the necessity of proving damages and without posting a bond or other security.

          7.16 Withdrawal Right. Notwithstanding anything to the contrary contained in (and
without limiting any similar provisions of) the Exchange Documents, whenever the Holder exercises a
right, election, demand or option under an Exchange Document and NGAS does not timely perform its
related obligations within the periods therein provided, then the Holder may rescind or withdraw,
in its sole discretion from time to time upon written notice to NGAS, any relevant notice, demand
or election in whole or in part without prejudice to its future actions and rights.

          7.17 Payment Set Aside. To the extent that NGAS makes a payment or payments to the
Holder hereunder or the Holder enforces or exercises its rights hereunder or thereunder, and such
payment or payments or the proceeds of such enforcement or exercise or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from,
disgorged by or are required to be refunded, repaid or otherwise restored to NGAS, a trustee,
receiver or any other Person under any law (including, without limitation, any bankruptcy law,
foreign, state or federal law, common law or equitable cause of action), then to the extent of any
such restoration the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been made or such
enforcement or setoff had not occurred. Unless otherwise expressly indicated, all dollar amounts
referred to in this Agreement and the other Exchange Documents are in United States Dollars
(“US Dollars”), and all amounts owing under this Agreement and all other Exchange Documents
shall be paid in US Dollars. All amounts denominated in other currencies shall be converted in the
US 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 US
Dollars pursuant to this Agreement, the US Dollar exchange rate as published in the Wall Street
Journal on the relevant date of calculation.

          7.18 Independent Nature of the Holder’s Obligations and Rights. The obligations of
the Holder under the Exchange Documents are several and not joint with the obligations of any Other
Note Holder under the Other Exchange Documents, and the Holder shall not be responsible in any way
for the performance of the obligations of any Other Note Holders under any Other Exchange
Documents. Nothing contained herein or in any other Exchange Document, and no action taken by the
Holder pursuant hereto or any Other Note Holder pursuant to any Other Exchange Documents, shall be
deemed to constitute the Holder or any Other Note Holder as, and NGAS acknowledges that the Holder
and the Other Note Holders do not so constitute, a partnership, an association, a joint venture or
any other kind of group or entity, or create a presumption that the Holder and any Other Note
Holder are in any way acting in concert or as a group or entity with respect to such obligations or
the transactions contemplated by the Exchange Documents, the Other Exchange Documents or any
matters, and NGAS acknowledges that the Holder and the Other Note Holders are not acting in concert
or as a group or entity, and NGAS shall not assert any such claim, with respect to such obligations
or the transactions contemplated by the Exchange Documents and the Other Exchange Documents. The
decision of the Holder to acquire the Securities pursuant to the Exchange Documents has been made
by the Holder independently of any Other Note Holder. The Holder acknowledges that no Other Note
Holder has acted as agent for the Holder in connection with the Holder making its acquisition
hereunder and that no Other Note Holder will be acting as agent of the Holder in connection with
monitoring the Holder’s Securities or enforcing its rights under the Exchange Documents. NGAS and
the Holder confirm that the Holder has independently participated with NGAS in the negotiation of
the transaction contemplated hereby with the advice of its own counsel and advisors. The Holder
shall be entitled to independently protect and enforce its rights, including, without limitation,
the rights arising out of this Agreement or out of any of the other Exchange Documents, and it
shall not be necessary for any Other Note Holder to be joined as an additional party in any
proceeding for such purpose. To the extent that any of the Other Note Holders and NGAS enter into
the same or similar documents, all such matters are solely in the control of NGAS, not the action
or decision of the Holder, and

20

 

would be solely for the convenience of NGAS and not because it was required or requested to do
so by the Holder or any Other Note Holder. For clarification purposes only and without implication
that the contrary would otherwise be true, the transactions contemplated by the Exchange Documents
include only the transaction between NGAS and the Holder and do not include any other transaction
between NGAS and any Other Note Holder.

     7.19 Reaffirmation. Except as otherwise expressly provided in the second sentence of
Section 7.5, (i) the Securities Purchase Agreement and each other Transaction Document is, and
shall continue to be, in full force and effect and is hereby ratified and confirmed in all
respects, except that on and after the Closing Date (A) all references in the Securities Purchase
Agreement to the “Securities Purchase Agreement,” “hereto,” “hereof,” “this Agreement,” “hereunder”
or words of like import referring to the Securities Purchase Agreement shall mean the Securities
Purchase Agreement as amended by this Agreement and the Other Exchange Agreements and (B) all
references in the other Transaction Documents to the “Securities Purchase Agreement,” “thereto,”
“thereof,” “thereunder” or words of like import referring to the Securities Purchase Agreement
shall mean the Securities Purchase Agreement as amended by this Agreement and the Other Exchange
Agreements, and (ii) the execution, delivery and effectiveness of this Agreement shall not operate
as an amendment or waiver of any right, power or remedy of the Holder under any Transaction
Document, nor constitute an amendment or waiver of any provision of any Transaction Document and
all of them shall continue in full force and effect, as amended or modified by this Agreement and
the Other Exchange Agreements.

     7.20 Most Favored Nation. NGAS hereby represents and warrants as of the date hereof
and covenants and agrees from and after the date hereof that, except as set forth in the term sheet
attached hereto as Exhibit G, none of the terms offered to any Person with respect to any
consent, release, amendment, settlement or waiver relating to the terms, conditions and
transactions contemplated hereby (each a “Settlement Document”), is or will be more
favorable to such Person than those of the Holder and this Agreement. If, and whenever on or after
the date hereof, NGAS enters into a Settlement Document, then (i) NGAS shall provide notice thereof
to the Holder immediately following the occurrence thereof and (ii) the terms and conditions of
this Agreement, the other Exchange Documents and the Securities (other than any limitations on
conversion or exercise set forth therein) shall be, without any further action by the Holder or
NGAS, automatically amended and modified in an economically and legally equivalent manner such that
the Holder shall receive the benefit of the more favorable terms and/or conditions (as the case may
be), provided that upon written notice to NGAS at any time the Holder may elect not to accept the
benefit of any such amended or modified term or condition, in which event the term or condition
contained in this Agreement or the Securities (as the case may be) shall apply to the Holder as it
was in effect immediately prior to such amendment or modification as if such amendment or
modification never occurred with respect to the Holder. The provisions of this Section 7.20 shall
apply similarly and equally to each Settlement Document.

     7.21 Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors and assigns, including any purchasers of any
of the Holder Note or the Holder Warrant, but not to any transferee of any Exchange Shares, 2009
Conversion Shares or 2009 Warrant Shares. NGAS shall not assign this Agreement, the other Exchange
Documents or any rights or obligations hereunder without the prior written consent of the Holder,
including, without limitation, by way of a Fundamental Transaction (as defined in the 2009 Notes)
(unless NGAS is in compliance with the applicable provisions governing Fundamental Transactions set
forth in the 2009 Warrants and the 2005 Warrant and the 2009 Warrants). The Holder may assign some
or all of its rights hereunder in connection with transfer of any of its Securities without the
consent of NGAS, in which event such assignee shall be deemed to be a Holder hereunder with respect
to such assigned rights.

     7.22 Judgment Currency.

               (a) If for the purpose of obtaining or enforcing judgment against the Company in any court in
any jurisdiction it becomes necessary to convert into any other currency (such other currency being
hereinafter in this Section 7.22 referred to as the “Judgment Currency”) an amount due in
U.S. dollars under this Agreement, the conversion shall be made at the Exchange Rate prevailing on
the Trading Day immediately preceding:

21

 

     (i) the date actual payment of the amount due, in the case of any proceeding in the
courts of New York or in the courts of any other jurisdiction that will give effect to such
conversion being made on such date: or

     (ii) the date on which the foreign court determines, in the case of any proceeding in
the courts of any other jurisdiction (the date as of which such conversion is made pursuant
to this Section 7.22(a)(ii) being hereinafter referred to as the “Judgment Conversion
Date”).

               (b) If in the case of any proceeding in the court of any jurisdiction referred to in Section
7.22(a)(ii) above, there is a change in the Exchange Rate prevailing between the Judgment
Conversion Date and the date of actual payment of the amount due, the applicable party shall pay
such adjusted amount as may be necessary to ensure that the amount paid in the Judgment Currency,
when converted at the Exchange Rate prevailing on the date of payment, will produce the amount of
U.S. dollars which could have been purchased with the amount of Judgment Currency stipulated in the
judgment or judicial order at the Exchange Rate prevailing on the Judgment Conversion Date.

               (c) Any amount due from the Company under this provision shall be due as a separate debt and
shall not be affected by judgment being obtained for any other amounts due under or in respect of
this Agreement.

          7.23 Taxes.

               (a) Any and all payments by the Company hereunder shall be made free and clear of and without
deduction for any and all present or future taxes, levies, imposts, deductions, charges or
withholdings, and all liabilities with respect thereto, imposed under Part XIII of the Income Tax
Act (Canada) (collectively referred to as “Part XIII Taxes”) and Article XI of the Canada
United States Tax Convention (1980) (together with Part XIII Taxes, the “Canadian Taxes”)
unless the Company is required to withhold or deduct any amounts for, or on account of, Canadian
Taxes pursuant to any applicable law. If the Company shall be required to withhold or deduct any
Canadian Taxes from or in respect of any sum payable hereunder to the Holder, (x) the sum payable
shall be increased by the amount by which the sum payable would otherwise have to be increased (the
“tax make-whole amount”) to ensure that after making all required withholdings and
deductions (including deductions applicable to the tax make-whole amount) the Holder would receive
an amount equal to the sum it would have received had no such deductions been made, (y) the Company
shall make such deductions, and (z) the Company shall pay the full amount withheld or deducted to
the Canada Revenue Agency within the time required.

               (b) In addition, the Company agrees to pay to the relevant governmental authority in
accordance with applicable law any present or future stamp or documentary taxes or any other excise
or property taxes, charges or similar levies that arise from any payment made hereunder or in
connection with the execution, delivery, registration or performance of, or otherwise with respect
to, this Agreement (“Other Taxes”).

               (c) The Company shall deliver to the Holder official receipts, if any, in respect of any
Canadian Taxes and Other Taxes payable hereunder promptly after payment of such Canadian Taxes,
Other Taxes or other evidence of payment reasonably acceptable to the Holder.

               (d) If the Company fails to pay any amounts in accordance with this Section 7.23, the Company
shall indemnify the Holder within ten (10) calendar days after written demand therefor, for the
full amount of any Canadian Taxes or Other Taxes, plus any related interest or penalties, that are
paid by the Holder to the Canada Revenue Agency or other relevant governmental authority as a
result of such failure.

               (e) The obligations of the Company under this Section 7.23 shall survive the termination of
this Agreement and the payment of all other amounts payable hereunder.

     8. Certain Definitions.

               8.1 Definitions. For purposes of this Agreement, the following terms shall have the
following meanings:

22

 

          “2005 Warrant Shares” means, collectively, the Old Warrant Shares and the Other 2005
Warrant Shares.

          “2005 Warrants” means, collectively, the 2005 Warrant and the Other 2005 Warrants.

          “2009 Conversion Shares” means, collectively, the Common Shares issuable upon
conversion of the 2009 Notes or otherwise pursuant to the terms of the 2009 Notes.

          “2009 Exchange Shares” means, collectively, the Holder Exchange Shares and the Other
Exchange Shares.

          “2009 Notes” means, collectively, the Holder Note and the Other Notes.

          “2009 Warrant Shares” means, collectively, the Holder Warrant Shares and the Other
2009 Warrant Shares.

          “2009 Warrants” means, collectively, the Holder Warrant and the Other 2009 Warrants.

          “Approved Share Plan” means any employee benefit plan which has been approved by the
board of directors of NGAS prior to or subsequent to the date hereof pursuant to which Common
Shares and standard options to purchase Common Shares may be issued to any employee, officer or
director for services provided to NGAS in their capacity as such.

          “Common Share Equivalents” means, collectively, Options and Convertible Securities.

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

          “Exchange Act” means the Securities Exchange Act of 1934, as amended and the rules and
regulations thereunder.

          “Governmental Authority” means the United States of America, any state, commonwealth,
territory or possession of the United States of America, any foreign state and any political
subdivision or quasi governmental authority of any of the same, including any court, tribunal,
department, commission, board, bureau, agency, county, municipality, province, parish or other
instrumentality of any of the foregoing.

          “Legal Requirement” means applicable common law and any statute, ordinance, code or
other law, rule, regulation, order, technical or other written standard, requirement, policy or
procedure enacted, adopted, promulgated, applied or followed by any Governmental Authority,
including any judgment or order and all judicial decisions applying common law or interpreting any
other Legal Requirement, in each case, as amended.

          “Lien” means any security interest, any interest retained by the transferor under a
conditional sale or other title retention agreement, mortgage, lien, pledge, option, encumbrance,
adverse interest, constructive exception to, defect in or other condition affecting title or other
ownership interest of any kind, which constitutes an interest in or claim against property, whether
or not arising pursuant to any Legal Requirement.

          “Material Adverse Effect” means any material adverse effect on the business,
properties, assets, operations, results of operations, condition (financial or otherwise) or
prospects of any of NGAS or their respective Subsidiaries, individually or taken as a whole, or on
the transactions contemplated hereby or in any of the other Exchange Documents or by any of the
agreements and instruments to be entered into in connection herewith or therewith, or on the
authority or ability of NGAS to perform its obligations under the Exchange Documents.

          “Options” means any rights, warrants or options to subscribe for or purchase Common
Shares or Convertible Securities.

23

 

          “Other 2005 Note Holders” means, collectively, the holders (other than the Holder) of
Other 2005 Notes.

          “Other 2005 Notes” means, collectively, the 6.00% Convertible Note due December 15,
2010 issued pursuant to the Securities Purchase Agreement (other than to the Holder);

          “Other 2005 Warrant Shares” means, collectively, the Common Shares issuable upon
exercise of the Other 2005 Warrants.

          “Other 2005 Warrants” means, collectively, the warrants issued to the Other 2005 Note
Holders pursuant to the Securities Purchase Agreement.

          “Other 2009 Warrant Shares” means, collectively, the Common Shares issuable upon
exercise of the Other 2009 Warrants.

          “Other 2009 Warrants” means, collectively, the warrants issued to the Other Note
Holders pursuant to the Other Exchange Agreements, and shall include all warrants issued in
exchange therefor or replacement thereof.

          “Other Exchange Agreements” means, collectively, the separate exchange agreements,
each dated as of January 8, 2010, entered into between NGAS and each of the Other 2005 Note
Holders, as may be amended from time to time.

          “Other Exchange Documents” means, collectively, the Other Exchange Agreements, the
Other Notes and all other agreements, documents and instruments executed and delivered in
connection with the transactions contemplated thereby, as may be amended from time to time.

          “Other Exchange Shares” means the Common Shares issued to the Other Note Holders
pursuant to the Other Exchange Agreements.

          “Other Note Holders” means, collectively, the holders (other than the Holder) of Other
Notes;

          “Other Notes” means, collectively, the convertible notes issued pursuant to the Other
Exchange Agreements, and shall include all notes issued in exchange therefor or replacement
thereof.

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

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

          “Securities” means the 2009 Notes, the 2009 Conversion Shares, the Warrants, the
Warrant Shares and the 2009 Exchange Shares.

          “Subsequent Placement” means the offer, sale, grant of any option to purchase, or
other disposition of (or the announcement of any offer, sale, grant of any option to purchase or
other disposition of), by the Company, directly or indirectly, of any of the Company’s or its
Subsidiaries’ equity or equity equivalent securities, including, without limitation, any debt,
preferred stock or other instrument or security that is, at any time during its life and under any
circumstances, convertible into or exchangeable or exercisable for Common Shares or Common Share
Equivalents.

          “Warrants” means the 2009 Warrants and the 2005 Warrants.

          “Warrant Shares” means the 2009 Warrant Shares and the 2005 Warrant Shares.

[NEXT PAGE IS SIGNATURE PAGE]

24

 

NGAS’S SIGNATURE PAGE TO EXCHANGE AGREEMENT

          IN WITNESS WHEREOF the parties have executed this Agreement on the date set forth below.

	 	 	 	 	 	 	 
	Dated: January 11, 2010	 	NGAS RESOURCES, INC.
	 
	 	 	 	 	 	 
	 	 	 	 	By:                                    
	 	 	 	 	Name:
	 	 	 	 	Title:
	 
	 	 	 	 	 	 
	Notice Address:	 	With a copy to:
	 
	 	 	 	 	 	 
	NGAS Resources, Inc.	 	Skadden, Arps, Slate, Meagher & Flom LLP
	120 Prosperous Place, Suite 201	 	525 University Avenue, Suite 1100
	Lexington, Kentucky 40509	 	Palo Alto, CA 94301
	Facsimile:

	 	(859) 263-4228
	 	Facsimile:
	 	(650)470-4570
	Attention:

	 	William G. Barr, III
	 	Attention:
	 	Thomas Ivey, Esq.
	 

	 	Vice President	 	 	 	 

 

 

HOLDER’S SIGNATURE PAGE TO EXCHANGE AGREEMENT

	 	 	 	 	 
	Dated: January 11, 2010     	[HOLDER]

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 

Notice Address:

Attention:

Name of nominee holder or DTC Participant(s) holding Old Note for the benefit of Holder:

DTC Participant Name:

DTC Participant Number:

Holder Name and Address:

Fax Number:exv10w2

Exhibit 10.2

[FORM OF AMORTIZING CONVERTIBLE NOTE]

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 18(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.

NGAS Resources, Inc.

Amortizing Convertible Note

	 	 	 
	Original Issuance Date: January ___, 2010

	 	Original Principal Amount: U.S. $[                     ]

          FOR VALUE RECEIVED, NGAS Resources, Inc., a corporation incorporated under the laws of
the Province of British Columbia (the “Company”), hereby promises to pay to [HOLDER] or registered
assigns (the “Holder”) the amount set out above as the Original Principal Amount (as reduced
pursuant to the terms hereof pursuant to redemption, conversion or otherwise, the “Principal”) when
due, whether upon the Maturity Date (as defined below), on any Installment Date with respect to the
Installment Amount due on such Installment Date, upon acceleration or redemption, or otherwise (in
each case in accordance with the terms hereof), and to pay interest (“Interest”) on any outstanding
Principal at the applicable Interest Rate from the date set out above as the Original Issuance Date
(the “Original Issuance Date”) until the same becomes due and payable, whether upon an Interest
Date (as defined below), any Installment Date, the Maturity Date, acceleration, conversion,
redemption or otherwise (in each case in accordance with the terms hereof). This Amortizing
Convertible Note is one of the Amortizing Convertible Notes issued in exchange for a portion of an
outstanding Convertible Note, dated as of December 14, 2005, with an original principal amount of
U.S. $[      ] and an outstanding principal amount as of the calendar day immediately preceding the
Exchange Date (as defined below) of U.S. $[     ], (the “Existing Note” and such other
outstanding Convertible Notes, the “Existing Notes”), issued pursuant to the Securities Purchase
Agreement (as defined below), but shall not, except as set forth herein or in the Exchange
Agreements (as defined below), constitute a release of any claim under any Transaction Document (as
defined in the Securities Purchase Agreement). This Amortizing Convertible Note (including all
Amortizing Convertible Notes issued in exchange, transfer or replacement hereof, this “Note”) is
one of an issue of Amortizing Convertible Notes (collectively, the “Notes” and such other
Amortizing Convertible Notes, the “Other Notes”) issued in exchange for a portion of the Existing
Notes pursuant to those certain Exchange Agreements, dated as of January ___, 2010 (the “Exchange
Date”), each by and between the holder of Existing Notes as of the Exchange Date and the Company
(the “Exchange Agreements”). Certain capitalized terms used herein are defined in Section 30.

          (1) PAYMENTS OF PRINCIPAL. On each Installment Date, the Company shall pay to the
Holder an amount equal to the Installment Amount due on such Installment Date in accordance with
Section 8. On the Maturity Date, the Company shall pay to the Holder an amount in cash (or shares
of the Company’s common shares, no par value (the “Common Shares”), to the extent permitted
pursuant to Section 8) representing all outstanding Principal, accrued and unpaid Interest and
accrued and unpaid Late Charges on such Principal and Interest. The “Maturity Date” shall be May
1, 2012, as may be extended at the option of the Holder (i) in the event that, and for so long as,
an Event of Default (as defined in Section 4(a)) shall have occurred and be continuing on the
Maturity Date (as may be extended pursuant to this Section 1) or any event shall have occurred and
be continuing on the Maturity Date (as may be extended pursuant to this Section 1) that with the
passage of time and the failure to cure would result in an Event of Default, (ii) through the date
that is ten (10) Business Days after the consummation of a Change of Control in the event that a
Change of Control is publicly announced or a Change of Control Notice (as defined in Section 5(b))
is delivered prior to the Maturity Date and (iii) to the latest designated date for repayment upon
the deferral of payment of any Installment Amount in accordance with Section 8(d). Other than as
specifically permitted by this Note, the Company may not, without the prior written consent of the
Holder, prepay

 

 

any portion of the outstanding Principal, accrued and unpaid Interest or accrued and unpaid
Late Charges on Principal and Interest, if any.

          (2) INTEREST; INTEREST RATE. Interest on this Note shall commence accruing on the
Original Issuance Date and shall be computed on the basis of a 360-day year comprised of twelve
30-day months and shall be payable in arrears for each Calendar Quarter on the first day of the
succeeding Calendar Quarter during the period beginning on the Original Issuance Date and ending
on, and including, the Maturity Date (each, an “Interest Date”) with the first Interest Date being
April 1, 2010 . Interest shall be payable on each Interest Date in cash. Prior to the payment of
Interest on an Interest Date, Interest on this Note shall accrue at the Interest Rate and be
payable in cash upon any conversion in accordance with Section 3(c)(i) or upon any conversion or
redemption in accordance with Section 8. Upon the occurrence and during the continuance of an
Event of Default, the Interest Rate shall be increased to twelve percent (12.0%) per annum (the
“Default Rate”). 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 at such increased rate during the continuance of such
Event of Default shall continue to apply to the extent relating to the days after the occurrence of
such Event of Default through and including the date of cure of such Event of Default. Interest on
overdue interest shall accrue at the same rate compounded quarterly.

          (3) CONVERSION OF NOTES. This Note shall be convertible into Common Shares, on the
terms and conditions set forth in this Section 3.

               (a) Conversion Right. Subject to the provisions of Section 3(d), the Holder shall be
entitled to convert (i) during the period commencing on the Original Issuance Date and ending on
[six-months from Exchange Date] (the “Full Conversion Eligibility Date”), up to such portion of the
outstanding and unpaid Conversion Amount (as defined below) that is convertible, in the aggregate,
into the Holder’s Exchange Cap Allocation (as defined below) of Common Shares and (ii) at any time
or times on or after the Full Conversion Eligibility Date, any portion of the outstanding and
unpaid Conversion Amount (as defined below), in each case, into fully paid and nonassessable Common
Shares in accordance with Section 3(c), at the Conversion Rate (as defined below). The Company
shall not issue any fraction of a Common Share upon any conversion. If the conversion would result
in the issuance of a fraction of a Common Share, the Company shall round such fraction of a Common
Share up to the nearest whole share. The Company shall pay any and all transfer, stamp and similar
taxes that may be payable with respect to the issuance and delivery of Common Shares upon
conversion of any Conversion Amount.

               (b) Conversion Rate. The number of Common Shares 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 (such quotient being, the “Conversion Rate”).

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

               (ii) “Conversion Price” means, as of any Conversion Date (as defined below) or other
date of determination, $2.18, subject to adjustment as provided herein.

               (c) Mechanics of Conversion.

               (i) Optional Conversion. To convert any Conversion Amount into Common Shares
on any date (a “Conversion Date”), the Holder shall (A) transmit by facsimile (or otherwise
deliver), for receipt on or prior to 11:59 p.m., New York time, on such date, a copy of an
executed notice of conversion in the form attached hereto as Exhibit I (the
“Conversion Notice”) to the Company and (B) if required by Section 3(c)(iii), surrender this
Note to a common carrier for delivery to the Company as soon as practicable on or following
such date (or an indemnification undertaking with respect to this Note in the case of its
loss, theft or destruction). On or before the first (1st) Trading Day following
the date of receipt of a Conversion Notice, the Company shall transmit by facsimile a
confirmation of receipt of such Conversion Notice to the Holder and the Company’s transfer
agent (the “Transfer Agent”). On or before the third (3rd) Trading Day following
the date of receipt of a Conversion Notice (the “Share Delivery Date”), the Company shall
(1) (x) provided that the Transfer Agent is participating in the Depository Trust Company’s
(“DTC”) Fast Automated Securities Transfer Program, credit such aggregate number of Common
Shares 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 (y) if the

2

 

Transfer Agent is not participating in the DTC Fast Automated Securities Transfer
Program, issue and deliver to the address as specified in the Conversion Notice, a
certificate, registered in the name of the Holder or its designee, for the number of Common
Shares to which the Holder shall be entitled and (2) pay to the Holder in cash, by wire
transfer of immediately available funds, an amount equal to the accrued and unpaid Interest
on the Conversion Amount and Late Charges, if any, on such Conversion Amount and Interest.
If this Note is physically surrendered for conversion as required by 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) Trading Days after receipt of this Note and at its own expense,
issue and deliver to the holder a new Note (in accordance with Section 18(d)) representing
the outstanding Principal not converted. The Person or Persons entitled to receive the
Common Shares issuable upon a conversion of this Note shall be treated for all purposes as
the record holder or holders of such Common Shares 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 next succeeding Installment Amounts relating to the Installment Dates as
set forth in the Conversion Notice.

               (ii) Company’s Failure to Timely Convert. If the Company shall fail to issue a
certificate to the Holder or credit the Holder’s balance account with DTC, as applicable,
for the number of Common Shares to which the Holder is entitled upon conversion of any
Conversion Amount on or prior to the date which is three (3) Trading Days after the
Conversion Date (a “Conversion Failure”), then (without limiting any of the Holder’s other
rights or remedies hereunder or at law or in equity) (A) the Company shall pay damages to
the Holder for each Trading Day of such Conversion Failure in an amount equal to 1.5% of the
product of (1) the aggregate number of Common Shares not issued to the Holder on or prior to
the Share Delivery Date and to which the Holder is entitled, and (2) the Closing Sale Price
of the Common Shares on the Share Delivery Date and (B) 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 the facsimile copy of a
Conversion Notice the Company shall fail, as applicable, to issue and deliver a certificate
to the Holder or credit the Holder’s balance account with DTC for the number of Common
Shares to which the Holder is entitled upon such holder’s conversion of any Conversion
Amount or on any date of the Company’s obligation to deliver Common Shares as contemplated
pursuant to clause (y) below, and if on or after such Trading Day the Holder purchases (in
an open market transaction or otherwise) Common Shares to deliver in satisfaction of a sale
by the Holder of a number of Common Shares that the Holder anticipated receiving from the
Company upon such conversion (a “Buy-In”), then the Company shall, within three (3) Trading
Days after the Holder’s request and in the Holder’s discretion, either (x) 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 Common Shares so purchased
(the “Buy-In Price”), at which point the Company’s obligation to deliver such certificate
(and to issue such Common Shares) shall terminate, or (y) promptly honor its obligation to
deliver to the Holder a certificate or certificates representing such Common Shares and pay
cash to the Holder in an amount equal to the excess (if any) of the Buy-In Price over the
product of (I) such number of Common Shares, times (II) the Closing Bid Price on the
Conversion Date.

               (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 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 or sell all or part of any Registered Note by a Holder, 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 20.
Notwithstanding anything to the contrary set forth herein, upon conversion of any portion
of this Note in accordance with the terms hereof, the Holder shall not be required to
physically surrender this

3

 

Note to the Company unless (A) the full Conversion Amount represented by this Note is
being converted or (B) the Holder has provided the Company with prior written notice (which
notice may be included in a Conversion Notice) requesting reissuance of this Note upon
physical surrender of this Note. The Holder and the Company shall maintain records showing
the Principal, Interest and Late Charges, if any, converted and the dates of such
conversions or shall use such other method, reasonably satisfactory to the Holder and the
Company, so as not to require physical surrender of this Note upon conversion.

               (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 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
Common Shares issuable to the Holder in connection with a conversion of this Note, the
Company shall issue to the Holder the number of Common Shares not in dispute and resolve
such dispute in accordance with Section 23.

               (d) Limitations on Conversions; Settlement Upon Conversion.

               (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 Common Shares 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 4.99% (the “Maximum Percentage”) of the Common Shares. 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) 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 Common Shares, 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 Exchange Act and the rules and
regulations promulgated thereunder. The limitations contained in this paragraph shall apply to a
successor Holder of this Note. The holders of Common Shares 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 Shares. 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 Common Shares then outstanding, including by virtue of any prior conversion or
exercise of convertible or exercisable securities into Common Shares, including, without
limitation, pursuant to this Note or securities issued pursuant to the Securities Purchase
Agreement or any Exchange Agreement. By written notice to the Company, the Holder may increase or
decrease the Maximum Percentage to any other percentage not in excess of 9.99% specified in such
notice; provided that (w) any such increase will not be effective until the sixty-first (61st) day
after such notice is delivered to the Company, (x) any such increase or decrease will apply only
to the Holder and not to any other holder of Notes, (y) at any time the Equity Conditions have
been satisfied (or waived in writing by the Holder), the Holder may not decrease the Maximum
Percentage to any percentage below 4.99% and (z) at any time the Maximum Percentage is less than
4.99%, unless there is an Equity Conditions Failure, on the sixty-first (61st) day (the “Maximum
Percentage Increase Date”) following the Holder’s receipt of written notice from the Company,
including evidence, reasonably satisfactory to the Holder, that the Equity Conditions are
satisfied (or waived in writing by the Holder) (the “Maximum Percentage Increase Notice Date”),
the Maximum Percentage shall be automatically increased to 4.99%.

               (ii) Market Regulation. The Company shall not be obligated to issue Common
Shares upon conversion of this Note or otherwise pursuant to the terms of this Note to the
extent (and only to the extent) the issuance of such Common Shares would exceed the
difference (as calculated immediately following the Exchange Date) between (x) the aggregate
number of Common Shares which the Company may issue upon conversion or exercise, as
applicable, of the Notes and Warrants or as payment of any Installment Amount hereunder or
otherwise pursuant to the terms of the Notes and Warrants together with the Exchange Shares
(as defined in the Exchange Agreement) without breaching the

4

 

Company’s obligations under the rules or regulations of the Principal Market and (y)
the number of Exchange Shares issued pursuant to any Exchange Agreement (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 such Principal
Market for issuances of Common Shares in excess of such amount or (B) a written opinion from
outside counsel to the Company that such approval is not required, which opinion shall be
reasonably satisfactory to the Required Holders. Until such approval or written opinion is
obtained, no purchaser of the Notes pursuant to the Exchange Agreements (the “Purchasers”)
shall be issued in the aggregate, upon conversion or exercise, as applicable, of Notes or
Warrants, or as payment of any Installment Amount hereunder or otherwise hereunder, Common
Shares in an amount greater than the product of the Exchange Cap multiplied by a fraction,
the numerator of which is the principal amount of Notes issued to a Purchaser pursuant to
the Exchange Agreements and outstanding on the Exchange Date and the denominator of which is
the aggregate principal amount of all Notes issued to the Purchasers pursuant to the
Exchange Agreements and outstanding on the Exchange Date (with respect to each Purchaser,
the “Exchange Cap Allocation”). In the event that any Purchaser shall sell or otherwise
transfer any of such Purchaser’s Notes, the transferee shall be allocated a pro rata portion
of such Purchaser’s Exchange Cap Allocation, and the restrictions of the prior sentence
shall apply to such transferee with respect to the portion of the Exchange Cap Allocation
allocated to such transferee. In the event that any Purchaser shall sell or otherwise
transfer any Warrants to any transferee, such Purchaser’s Exchange Cap Allocation shall not
be transferred with such Warrant to such transferee unless such Purchaser delivers written
notice to the Company specifying (x) the identity of such transferee and (y) the amount of
such Purchaser’s Exchange Cap Allocation being transferred to such transferee. In the event
that any holder of Notes on any given date shall convert all of such holder’s Notes into a
number of Common Shares, which together with the number of Common Shares actually issued to
such holder in connection with the Notes and Warrants of such holder on or prior to such
date and any Common Shares issuable upon exercise of the Warrants of such holder as of such
date, in the aggregate, is less than such holder’s Exchange Cap Allocation, then the
difference between such holder’s Exchange Cap Allocation and the sum of the number of Common
Shares (w) actually issued upon conversion of, or otherwise in connection with, the Notes of
such holder on or prior to such date, (y) actually issued upon exercise of the Warrants of
such holder on or prior to such date and (y) issuable upon exercise of the Warrants of such
holder as of such date shall be allocated to the respective Exchange Cap Allocations of the
remaining holders of Notes on a pro rata basis in proportion to the aggregate principal
amount of the Notes then held by each such holder.

               (iii) Settlement Upon Conversion.

               (1) General. Notwithstanding anything herein to the
contrary, if the Company has delivered a written notice (a “Settlement Upon
Conversion Election Notice”) to the Holder at least five (5) Trading Days prior to
the applicable Conversion Date (a “Settlement Upon Conversion Election Notice
Effective Date”) electing to settle in cash all or any part of the conversion
obligations of the Company hereunder (a “Settlement Upon Conversion”, and such
number of Common Shares to be settled in cash pursuant to this Section 3(d)(iii) as
specified in such Settlement Upon Conversion Election Notice, the “Settlement Upon
Conversion Election Shares”), in lieu of the Company’s obligations to deliver any
such Settlement Upon Conversion Election Shares hereunder to the Holder in any
conversion under this Note (such number of Settlement Upon Conversion Election
Shares in such conversion, the “Settlement Upon Conversion Shares”), the Company
shall, by wire transfer of U.S. dollars in immediately available funds to the
account designated by the Holder, pay cash to the Holder in an amount (the
“Settlement Upon Conversion Amount”) equal to product of (x) the number of
Settlement Upon Conversion Shares in such conversion and (y) the applicable
Settlement Upon Conversion Market Price. For the purpose of this Section 3(d)(iii),
as of the Original Issuance Date the Company shall be deemed to have properly
delivered a Settlement Upon Conversion Election Notice electing to settle in cash
pursuant to this Section 3(d)(iii) any conversion obligations of the Company with
respect to the Holder, which would result in the issuance of Common Shares to the
Holder in excess of such Holder’s Exchange Cap Allocation. Subject to the five (5)
Trading Day period prior to effectiveness set forth above, any Settlement Upon
Conversion Election Notice may be revoked or amended by the Company at any time.

5

 

               (2) Pro Rata Settlement Upon Conversion; Disputes. If the
Company delivers a Settlement Upon Conversion Election Notice to the Holder (or
changes, revokes or amends any previous Settlement Upon Conversion Election Notice
with respect to this Note) and elects or withdraws any election, in whole or in
part, to effect a Settlement Upon Conversion with respect to all or any part of the
Principal of this Note submitted for conversion pursuant to any Conversion Notice
delivered on or after the subsequent Settlement Upon Conversion Notice Effective
Date then it must simultaneously take the same action in the same proportion with
respect to the Other Notes. 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 pay the Settlement Upon Conversion Amount with respect to some, but not
all, of such portions of the Notes submitted for Settlement Upon Conversion, the
Company shall pay with a Settlement Upon Conversion from each holder of Notes
electing to have Notes converted on such date a pro rata amount of such holder’s
portion of its Notes submitted for conversion based on the principal amount of Notes
submitted for conversion on such date by such holder relative to the aggregate
principal amount of all Notes submitted for conversion on such date. In the event
of a dispute as to the Settlement Upon Conversion Amount payable to the Holder in
connection with a Settlement Upon Conversion of this Note, the Company shall pay to
the Holder such portion of the Settlement Upon Conversion Amount not in dispute and
resolve such dispute in accordance with Section 23.

(4) RIGHTS UPON EVENT OF DEFAULT.

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

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

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

               (iii) at any time following the tenth (10th) consecutive Trading Day that
the Holder’s Authorized Share Allocation is less than the number of Common Shares 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);

               (iv) other than with respect to an Event of Default pursuant to clause (x) below, the
Company’s failure to pay to the Holder any amount of Principal, Interest, Late Charges or
other amounts when and as due under this Note (including, without limitation, the Company’s
failure to pay any redemption amounts or Conversion Cash Settlement Amount hereunder) or any
other Transaction Document (as defined in the Securities Purchase Agreement) or any other
agreement, document, certificate or other instrument delivered in connection with the
transactions contemplated hereby and thereby to which the Holder is a party, except, in the
case of a failure to pay Interest and/or Late Charges when and as due, in which case only if
such failure continues for a period of at least five (5) Business Days;

               (v) any default under, redemption of or acceleration prior to maturity of any
Indebtedness of the Company or any of its Subsidiaries (as defined in Section 3(a) of the
Securities Purchase Agreement) that individually or in the aggregate, has a principal amount
equal to or exceeding $100,000, other than with respect to any Other Notes;

               (vi) the Company or any of its Subsidiaries, pursuant to or within the meaning of Title
11, U.S. Code, the Bankruptcy and Insolvency Act (Canada), the Companies Creditors
Arrangement Act (Canada) or any similar Federal, foreign, provincial or state law for the
relief of debtors (collectively, “Bankruptcy Law”), (A) commences a voluntary case, (B)
consents to the entry of an order for relief against it in an involuntary case, (C) consents
to the appointment of a receiver, interim receiver, receiver and manager, trustee, assignee,
liquidator or similar official (a “Custodian”), (D) makes a general

6

 

assignment for the benefit of its creditors or (E) admits in writing that it is
generally unable to pay its debts as they become due;

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

               (viii) a final judgment or judgments for the payment of money aggregating in excess of
$100,000 is or are (as the case may be) rendered against the Company or any of its
Subsidiaries and which is or are (as the case may be) not, within sixty (60) days after the
entry thereof, bonded, discharged or stayed pending appeal, or is or are (as the case may
be) not discharged within sixty (60) days after the expiration of such stay; provided,
however, that any judgment which is covered by insurance or an indemnity from a credit
worthy party shall not be included in calculating the $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 will
receive the proceeds of such insurance or indemnity within thirty (30) days of the issuance
of such judgment;

               (ix) other than as specifically set forth in another clause of this Section 4(a), the
Company breaches any representation, warranty, covenant or other term or condition of any
Transaction Document, except, in the case of a breach of a covenant or other term or
condition of any Transaction Document which is curable, only if such breach continues for a
period of at least fifteen (15) consecutive Business Days;

               (x) any breach or failure in any respect to comply with Section 8 of this Note, which
failure continues for a period of five (5) consecutive Business Days; or

               (xi) other than with respect to an Event of Default pursuant to clause (vi) or (vii)
above, any Event of Default (as defined in the Other Notes) occurs with respect to any Other
Notes.

               (b) Redemption Right. Upon the occurrence of an Event of Default with respect to this
Note or any Other Note, the Company shall within one (1) Business Day deliver written notice
thereof via facsimile and overnight courier (an “Event of Default Notice”) to the Holder. At any
time after the earlier of: (x) the Holder’s receipt of an Event of Default Notice; and (y) the
Holder becoming aware of an Event of Default; the Holder may require the Company to redeem all or
any portion of this Note by delivering written notice thereof (the “Event of Default Redemption
Notice”) to the Company, which Event of Default Redemption Notice shall indicate the Conversion
Amount of this Note the Holder is electing to require the Company to redeem. Each portion of this
Note subject to redemption by the Company pursuant to this Section 4(b) shall be redeemed by the
Company at a price equal to the greater of (i) the product of (A) the sum of (x) the Conversion
Amount to be redeemed and (y) any accrued and unpaid Interest thereon and Late Charges, if any, on
such Conversion Amount and Interest through the Event of Default Redemption Date and (B) the
Redemption Premium and (ii) the sum of (A) the product of (x) the Conversion Rate with respect to
such Conversion Amount in effect at such time as the Holder delivers an Event of Default Redemption
Notice and (y) the Closing Sale Price of the Common Shares on the date immediately preceding such
Event of Default and (B) any accrued and unpaid Interest on the Conversion Amount and Late Charges,
if any, on such Conversion Amount and Interest through the Event of Default Redemption Date (the
“Event of Default Redemption Price”). Redemptions required by this Section 4(b) shall be made in
accordance with the provisions of Section 12. To the extent redemptions required by this Section
4(b) are deemed or determined by a court of competent jurisdiction to be prepayments of the Note by
the Company, such redemptions shall be deemed to be voluntary prepayments consented to by the
Holder in accordance with the last sentence of Section 1 hereof. In the event of a partial
redemption of this Note pursuant hereto, the principal amount redeemed shall be deducted from the
Installment Amounts relating to the applicable Installment Dates as specified by the Holder set
forth in the Event of Default Redemption Notice. The parties hereto agree that in the event of the
Company’s redemption of any portion of the Note under this Section 4(b), the Holder’s damages would
be uncertain and difficult to estimate because of the parties’ inability to predict future interest
rates and the uncertainty of the availability of a suitable substitute investment opportunity for
the Holder. Accordingly, any Redemption Premium due under this Section 4(b) is intended by the
parties to be, and shall be deemed, a reasonable estimate of the Holder’s actual loss of its
investment opportunity and not as a penalty.

7

 

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

               (a) Assumption. The Company shall not consummate a Fundamental Transaction (other
than an Involuntary Change of Control) or permit the consummation of any Involuntary Change of
Control unless (i) (x) the Successor Entity (if a Person other than the Company) assumes in writing
all of the obligations of the Company under this Note and the other Transaction Documents in
accordance with the provisions of this Section 5(a) pursuant to written agreements in form and
substance reasonably satisfactory to the Required Holders and approved by the Required Holders
prior to such Fundamental Transaction, including agreements to deliver to each holder of Notes in
exchange for such Notes a security of the Successor Entity evidenced by a written instrument
substantially similar in form and substance to the Notes, including, without limitation, having a
principal amount and interest rate equal to the principal amounts and the interest rates of the
Notes then outstanding held by such holder, having similar conversion rights and having similar
ranking to the Notes, and reasonably satisfactory to the Required Holders and (y) the Successor
Entity (including its Parent Entity) is a publicly traded corporation whose common stock is quoted
on or listed for trading on an Eligible Market (a “Public Successor Entity”) (each such Fundamental
Transaction, an “Assumption Fundamental Transaction”) or (ii) solely with respect to Fundamental
Transactions that are not Assumption Fundamental Transactions, no Event of Default has occurred and
is continuing and the Company has complied in all respects (or will comply in all respects, solely
with respect to the payment of any Change of Control Redemption Price or delivery of any Change of
Control Notice or Change of Control Redemption Notice that in accordance with this Section 5 is
scheduled to occur after the consummation of such Change of Control) with its obligations pursuant
to Sections 5 and 24(a) hereof, including without limitation, the delivery of the Change of Control
Notice and, with respect to any Change of Control Redemption Notice delivered by the Holder either
(x) prior to the date of the consummation of such Change of Control (other than an Involuntary
Change of Control) or (y) prior to the Change of Control Redemption Right Termination Date (as
defined below) with respect to any Involuntary Change of Control, payment of the Change of Control
Redemption Price to the Holder in accordance with Section 5(b) below. Upon the occurrence of any
Assumption Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for
(so that from and after the date of such Assumption Fundamental Transaction, the provisions of this
Note referring to the “Company” shall refer instead to the Successor Entity), and may exercise
every right and power of the Company and shall assume all of the obligations of the Company under
this Note with the same effect as if such Successor Entity had been named as the Company herein.
Upon consummation of the Assumption 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 the Assumption Fundamental Transaction, in lieu of the shares of
the Company’s Common Shares (or other securities, cash, assets or other property) issuable upon the
conversion or redemption of the Notes prior to such Assumption Fundamental Transaction, such shares
of the publicly traded common stock (or their equivalent) of the Successor Entity (including its
Parent Entity), as adjusted in accordance with the provisions of this Note. Notwithstanding the
foregoing, but except with respect to an Assumption Fundamental Transaction in which the Company
does not survive the consummation thereof, the Holder may elect, at its sole option, by delivery of
written notice to the Company to waive this Section 5(a) to permit the Assumption Fundamental
Transaction without the assumption of this Note. The provisions of this Section shall apply
similarly and equally to successive Fundamental Transactions and shall be applied without regard to
any limitations on the conversion or redemption of this Note.

               (b) Redemption Right. No sooner than fifteen (15) days nor later than (I) ten (10)
days prior to the consummation of a Change of Control (other than an Involuntary Change of Control)
or (II) the earlier to occur of (A) one (1) Trading Day after the Company receives notice or
otherwise has actual knowledge of any pending or consummated Involuntary Change of Control or (B)
five (5) Trading Days after the consummation of any Involuntary Change of Control, but not prior to
the public announcement of such Change of Control, the Company shall deliver written notice thereof
via facsimile and overnight courier to the Holder (a “Change of Control Notice”). At any time and
from time to time during the period commencing on the earlier to occur of (x) any oral or written
agreement by the Company or any of its Subsidiaries, which upon consummation of the transaction
contemplated thereby would reasonably be expected to result in a Change of Control and (y) the
Holder’s receipt of a Change of Control Notice and ending on the date (the “Change of Control
Redemption Right Termination Date”) that is twenty (20) Trading Days after either (A) the date of
the consummation of such Change of Control (other than an Involuntary Change of Control) or (B) the
later of (I) the date of the consummation of such Involuntary Change of Control and (II) the date
of the Holder’s receipt of a Change of Control Notice with respect to such Involuntary Change of
Control, the Holder may require the Company to redeem all or any portion of this Note by delivering
written notice thereof (a “Change of Control Redemption Notice”) to the Company, which Change of
Control Redemption Notice shall indicate the Conversion Amount the Holder is electing to require
the Company

8

 

to redeem. Any portion of this Note required to be redeemed pursuant to this Section 5(b)
shall be redeemed by the Company in cash at a price equal to 110% of the sum of (1) the Conversion
Amount being redeemed and (2) the amount of any accrued and unpaid Interest thereon and Late
Charges, if any, on such Conversion Amount and Interest through the applicable redemption date (the
“Change of Control Redemption Price”). Redemptions required by this Section 5 shall be made in
accordance with the provisions of Section 12 and, to the extent such Change of Control Redemption
Price is required to be paid to the Holder on or prior to the consummation of such Change of
Control in accordance with this Section 5(b) or Section 12, shall have priority to payments to
shareholders in connection with such Change of Control. To the extent redemptions required by this
Section 5(b) are deemed or determined by a court of competent jurisdiction to be prepayments of the
Note by the Company, such redemptions shall be deemed to be voluntary prepayments consented to by
the Holder in accordance with the last sentence of Section 1 hereof. Notwithstanding anything to
the contrary in this Section 5, but subject to Section 3(d), until the Change of Control Redemption
Price (together with any interest thereon) is paid in full, the Conversion Amount submitted for
redemption under this Section 5(b) (together with any interest thereon) may be converted, in whole
or in part, by the Holder into Common Shares, or in the event the Conversion Date is after the
consummation of the Change of Control, shares or equity interests of the Successor Entity
substantially equivalent to the Company’s Common Shares pursuant to Section 3. In the event of a
partial redemption of this Note pursuant hereto, the principal amount redeemed shall be deducted
from the Installment Amounts relating to the applicable Installment Dates as set forth as specified
by the Holder in the Change of Control Redemption Notice. The parties hereto agree that in the
event of the Company’s redemption of any portion of the Note under this Section 5(b), the Holder’s
damages would be uncertain and difficult to estimate because of the parties’ inability to predict
future interest rates and the uncertainty of the availability of a suitable substitute investment
opportunity for the Holder. Accordingly, any Change of Control redemption premium due under this
Section 5(b) is intended by the parties to be, and shall be deemed, a reasonable estimate of the
Holder’s actual loss of its investment opportunity and not as a penalty.

               (c) Adjustment to the Conversion Rate Upon a Change of Control.

                    (i) In connection with a Change of Control, if the Holder converts its Note at any time
beginning on the date of the Change of Control Notice and ending either (x) at the close of
business on the Trading Day immediately prior to the date of the consummation of such Change of
Control (other than an Involuntary Change of Control) or (y) at the close of business on the Change
of Control Redemption Right Termination Date with respect to any Involuntary Change of Control, the
Company will increase the Conversion Rate per $1,000 principal amount of Notes converted by a
number of additional shares (the “Additional Shares”) for such Note as described in Section
5(c)(ii) hereof; provided that (A) such increase in the Conversion Rate shall not take place if
such Change of Control is not consummated, (B) with respect to an Involuntary Change of Control
that is consummated prior to the Holder’s receipt of the Change of Control Notice, the Company
shall issue Common Shares at the Conversion Rate (including such increase) on the third (3rd)
Trading Day after the Conversion Date and (C) with respect to any Change of Control (other than an
Involuntary Change of Control that is consummated prior to the Holder’s receipt of the Change of
Control Notice), the Company shall (I) issue Common Shares at the Conversion Rate (not including
such increase) on the earlier to occur of (X) the third (3rd) Trading Day after the Conversion Date
and (Y) the time immediately prior to such Change of Control and (II) issue such Additional Shares
at the time immediately prior to such Change of Control; provided, that if the issuance of any
Additional Shares would cause the Holder or any of its affiliates to beneficially own Common Shares
(or common stock of the Public Successor Entity or other issuer upon the consummation of the Change
of Control) in excess of the Maximum Percentage (a “Maximum Percentage Event”), the Holder shall
have the right, exercisable by the delivery of one or more written notices to the Company, to cause
the Company to alternatively issue to the Holder such Additional Shares (or the cash, securities
and/or other consideration to be issued in exchange for such Additional Shares in such Change of
Control, if applicable), or such portion thereof as set forth in the applicable notice, on or prior
to the third (3rd) Trading Day after the Holder delivers the applicable notice to the
Company (or the Public Successor Entity or other issuer, as applicable) that the issuance of such
Additional Shares (or the cash, securities and/or other consideration to be issued in exchange for
such Additional Shares in such Change of Control, if applicable), or such portion thereof as set
forth in the applicable Notice, would not result in a Maximum Percentage Event.

                    (ii) The number of Additional Shares will be determined by reference to the table below, based
on the Change of Control Date and the price of the Common Shares (the “Share Price”) set forth
below. If the consideration for the Common Shares in such Change of Control consists solely of
cash, then the

9

 

Share Price will be the cash amount paid per share of the Common Shares in the Fundamental
Transaction. Otherwise, the Share Price will be the average of the Closing Sale Price per share of
the Common Shares for the five (5) consecutive Trading Days immediately preceding the Change of
Control Date.

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Share Price:	 	$1.90	 	$2.00	 	$2.10	 	$2.25	 	$2.50	 	$2.75	 	$3.00	 	$3.50
	1/7/2010
	 	 	104.986	 	 	 	90.597	 	 	 	78.129	 	 	 	62.364	 	 	 	41.980	 	 	 	26.732	 	 	 	14.981	 	 	 	0.000	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	5/1/2010
	 	 	103.357	 	 	 	88.617	 	 	 	75.906	 	 	 	59.978	 	 	 	39.900	 	 	 	25.721	 	 	 	15.739	 	 	 	0.000	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	11/1/2010
	 	 	99.392	 	 	 	84.200	 	 	 	71.180	 	 	 	54.967	 	 	 	34.637	 	 	 	20.230	 	 	 	9.924	 	 	 	0.000	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	5/1/2011
	 	 	92.477	 	 	 	76.514	 	 	 	63.066	 	 	 	46.759	 	 	 	27.470	 	 	 	15.143	 	 	 	7.492	 	 	 	0.000	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	11/1/2011
	 	 	80.052	 	 	 	62.268	 	 	 	47.538	 	 	 	30.199	 	 	 	10.955	 	 	 	0.012	 	 	 	0.000	 	 	 	0.000	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	5/1/2012
	 	 	67.494	 	 	 	41.184	 	 	 	17.379	 	 	 	0.000	 	 	 	0.000	 	 	 	0.000	 	 	 	0.000	 	 	 	0.000	 

The Share Prices and Additional Share amounts set forth in the table will be adjusted as of any
date on which the Conversion Price of the Note are adjusted. The adjusted Share Prices will equal
the Share Prices applicable immediately prior to the adjustment divided by a fraction, the
numerator of which is the Conversion Price immediately prior to the adjustment to the Conversion
Price and the denominator of which is the Conversion Price as so adjusted. Each of the Additional
Share amounts set forth in the body of the table above shall be adjusted if and when the prices are
adjusted, by multiplying such Additional Share amounts by a fraction, the numerator of which is the
Conversion Price immediately prior to such adjustment and the denominator of which is the
Conversion Price so adjusted.

                    (iv) The exact Share Price and Change of Control Date may not be set forth in the table, in
which case:

                         (A) If the Share Price is between two Share Prices in the table or the Change of Control Date
is between two Change of Control Dates in the table, the number of Additional Shares will be
determined by straight-line interpolation between the Additional Share amounts setting forth the
higher and lower Share Prices and the two Change of Control Dates, as applicable, based on a three
hundred and sixty-five (365)-day year;

                         (B) If the Share Price is in excess of $3.50 per share (subject to adjustment in the same
manner as the Share Price), no Additional Shares will be added to the Conversion Rate; and

                         (C) If the Share Price is less than or equal to $1.90 per share (subject to adjustment in the
same manner as the Share Price), no Additional Shares will be added to the Conversion Rate.

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

               (a) Purchase Rights. If at any time the Company grants, issues or sells any Options,
Convertible Securities or rights to purchase shares, warrants, securities or other property pro
rata to all or substantially all of the record holders of any class of Common Shares (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 Common Shares 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 Shares 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 Common Shares 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).

10

 

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

          (7) RIGHTS UPON ISSUANCE OF OTHER SECURITIES

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

          (8) COMPANY INSTALLMENT CONVERSION OR REDEMPTION.

               (a) General. On each applicable Installment Date, provided there has been no Equity
Conditions Failure, the Company shall pay to the Holder of this Note the Installment Amount due on
such date by converting such Installment Amount, in accordance with this Section 8 (a “Company
Conversion”); provided, however, that the Company may, at its option following notice to the
Holder, pay the Installment Amount in cash by redeeming such Installment Amount (a “Company
Redemption”) or by any combination of a Company Conversion and a Company Redemption so long as all
of the outstanding applicable Installment Amount shall be converted and/or redeemed by the Company
on the applicable Installment Date, subject to the provisions of this Section 8. Notwithstanding
the foregoing, the Company may not effect a Company Conversion of any Installment Amount under this
Section in excess of the Holder Pro Rata Amount of the applicable Installment Volume Limitation.
At or prior to 9:00 a.m., New York time on the tenth (10th) Trading Day prior to each Installment
Date (each, an “Installment Notice Due Time”), the Company shall deliver written notice (each, a
“Company Installment Notice” and the date all of the holders receive such notice is referred to as
to the “Company Installment Notice Date”), to each holder of Notes which Company Installment Notice
shall (i) either (A) confirm that the applicable Installment Amount of such holder’s Note shall be
converted in whole pursuant to a Company Conversion (such amount to be converted, the “Company
Conversion Amount”) or (B) (1) state that the Company elects to redeem, or is required to redeem in
accordance with the provisions of the Notes, in whole or in part, the applicable Installment Amount
pursuant to a Company Redemption and (2) specify the portion (including Interest and Late Charges,
if any, on such amount and Interest) which the Company elects or is required to redeem pursuant to
a Company Redemption (such amount to be redeemed, the “Company Redemption Amount”) and the portion
(including Interest and Late Charges, if any, on such amount and Interest), if any, that the
Company is permitted to and elects to convert pursuant to a Company Conversion (such amount also, a
“Company Conversion Amount”), which amounts when added together, must equal the applicable
Installment Amount and (ii) if the Installment Amount is to be paid, in whole or in part, pursuant
to a Company Conversion, certify that the Equity Conditions have been satisfied as of the date of
the Company Installment Notice. Each Company Installment Notice shall be irrevocable.
Notwithstanding the foregoing, (i) if on or prior to the tenth (10th) Trading Day
immediately prior to the applicable Installment Date the Holder has not delivered a written notice
to the Company (a “Maximum Percentage Violation Notice”) that the number of Common Shares to be
issued to the Holder on the next Installment Date (assuming for calculation purposes only that 100%
of the Installment Amount (or such lesser amount as set forth in a Company Installment Notice for
such next Installment Date delivered to the Holder prior to the date of such Maximum Percentage
Violation Notice) will be converted pursuant to a Company Conversion at the Maximum Percentage
Violation Price) would result in a violation of the provisions of Section 3(d) of this Note, the
Holder shall be deemed to have represented to the Company that after giving effect to such issuance
of Common Shares to the Holder pursuant to such Installment Notice, the Holder (together with its
affiliates) will not have

11

 

beneficial ownership (together with the beneficial ownership of such Person’s affiliates) of a
number of Common Shares which exceeds the Maximum Percentage (as defined in the Note) of the total
outstanding Common Shares of the Company as determined pursuant to the provisions of Section 3(d)
of the Note and (ii) upon the Company’s receipt of a Maximum Percentage Violation Notice from the
Holder on or prior to the tenth (10th) Trading Day immediately prior to the applicable
Installment Date, the Company Redemption Amount shall automatically be increased to reflect the
redemption of such portion of the Company Conversion Amount on the applicable Installment Date
corresponding to such number of Common Shares that if issued to the Holder in a Company Conversion
would result in a violation of the provisions of Section 3(d) of this Note. If the Company does
not timely deliver a Company Installment Notice in accordance with this Section 8, then the Company
shall be deemed to have delivered an irrevocable Company Installment Notice confirming a Company
Conversion and shall be deemed to have certified that the Equity Conditions in connection with any
such conversion have been satisfied. 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 Installment Amount being
converted and/or redeemed hereunder. The Company Conversion Amount (whether set forth in the
Company Installment Notice or by operation of this Section 8) shall be converted in accordance with
Section 8(b) and the Company Redemption Amount shall be redeemed in accordance with Section 8(c).

               (b) Mechanics of Company Conversion. (i) If the Company delivers, or is deemed to
have delivered, a Company Installment Notice and confirms, or is deemed to have confirmed, in whole
or in part, a Company Conversion in accordance with Section 8(a), then on the Trading Day prior to
the Installment Date the Company shall, or shall cause the Transfer Agent to, deliver to the
Holder’s account with DTC, or issue and deliver to the Holder a certificate for, a number of Common
Shares equal to the quotient of (A) such Company Conversion Amount divided by (B) the Initial
Company Conversion Price (the “Pre-Installment Conversion Shares”). On the Trading Day immediately
after the end of the Company Conversion Measuring Period (the “Installment Settlement Date”), the
Company shall, or shall cause the Transfer Agent to, deliver to the Holder’s account with DTC, or
issue and deliver to the Holder a certificate for, a number of additional Common Shares, if any,
equal to the Installment Balance Conversion Shares. If an Event of Default occurs during any
applicable Company Conversion Measuring Period and the Holder elects an Event of Default Redemption
in accordance with Section 4(b), then, at the Holder’s option, either (1) the Holder, upon receipt
of the Event of Default Redemption Price (which Conversion Amount in such Event of Default
Redemption includes the Company Conversion Amount represented by Pre-Installment Conversion
Shares), shall return an amount of Common Shares to the Company equal to the number of
Pre-Installment Conversion Shares delivered by the Company to the Holder in connection with the
applicable Installment Date or (2) 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.

                    (ii) If there is an Equity Conditions Failure or the Installment Volume Limitation is
exceeded at any time prior to the Installment Date or the Installment Settlement Date, as
applicable, then at the option of the Holder designated in writing to the Company, the
Holder may require the Company to do either of the following (or may elect to do (A) in part
and (B) in part): (A) the Company shall redeem all or any part designated by the Holder of
the unconverted Company Conversion Amount in cash (such designated amount is referred to as
the “First Redemption Amount”) on such Installment Date or Installment Settlement Date, as
applicable, and the Company shall pay to the Holder on such Installment Date, by wire
transfer of U.S. Dollars and immediately available funds, an amount in cash equal to (x) if
an applicable Equity Conditions Failure is due to the occurrence of an Event of Default,
125% or (y) otherwise, 100% of such First Redemption Amount, and/or (B) the Company
Conversion shall be null and void with respect to all or any part designated by the Holder
of the unconverted Company Conversion Amount and the Holder shall be entitled to all the
rights of a holder of this Note with respect to such amount of the Company Conversion
Amount; provided, however, that the Conversion Price solely for such unconverted Company
Conversion Amount (and not for any other portion of the then outstanding Conversion Amount)
shall thereafter be adjusted to equal the lesser of (1) the Company Conversion Price as in
effect on the date on which the Holder voided the Company Conversion and (2) the Company
Conversion Price as would be in effect for a Company Conversion on the date on which the
Holder delivers a Conversion Notice relating thereto. In the event the Holder elects to
require payment of the First Redemption Amount upon an Equity Conditions Failure following
the Installment Date, at the Holder’s option, either (x) the Holder shall, upon receipt of a
First Redemption Amount (which amount includes the

12

 

Company Conversion Amount represented by Pre-Installment Conversion Shares), shall
return an amount of Common Shares to the Company equal to the number of Pre-Installment
Conversion Shares delivered by the Company to the Holder in connection with the applicable
Installment Date (the “Returned Common Shares”) or (y) the Holder shall not deliver such
Returned Common Shares to the Company and any related First Redemption Amount shall be
reduced by the product of (I) the Company Conversion Amount applicable to such Installment
Date multiplied by (II) the Conversion Share Ratio. If the Company fails to redeem any
First Redemption Amount on or before the applicable Installment Date or Installment
Settlement Date, as applicable, by payment of such amount on the applicable Installment Date
or Installment Settlement Date, as applicable, then the Holder shall have the rights set
forth in Section 12(a) as if the Company failed to pay the applicable Company Redemption
Price and all other rights under this Note (including, without limitation, such failure
constituting an Event of Default described in Section 4(a)(x)). Notwithstanding anything to
the contrary in this Section 8(b), but subject to 3(d), until the Company delivers Common
Shares representing the Company Conversion Amount to the Holder, the Company Conversion
Amount may be converted by the Holder into Common Shares pursuant to Section 3. In the
event that the Holder elects to convert the Company Conversion Amount prior to the
applicable Installment Date as set forth in the immediately preceding sentence, the Company
Conversion Amount so converted shall be deducted from the Installment Amounts relating to
the applicable Installment Dates as set forth in the applicable Conversion Notice.

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

               (d) Deferred Installment Amount. Notwithstanding any provision of this Section 8 to
the contrary, the Holder may, at its option and in its sole discretion, deliver a written notice to
the Company at least two (2) days prior to any Installment Notice Due Time electing to have the
payment of all or any portion of an Installment Amount payable on the next Installment Date
deferred (such amount deferred, the “Deferral Amount”) to the Maturity Date. Any notice delivered
by the Holder pursuant to this Section 8(d) shall set forth the Deferral Amount. Any amount
deferred pursuant to this Section 8(d) shall continue to accrue Interest through the date of
repayment or conversion thereof, as applicable, including, without limitation, through the Maturity
Date, as the case may be, and shall be paid on such date in cash.

          (9) OPTIONAL REDEMPTION AT THE COMPANY’S ELECTION.

               (a) General. If at any time after the Shareholder Approval Date (the “Company
Optional Redemption Eligibility Date”), (i) the Closing Sale Price of the Common Shares listed on
the Principal Market exceeds 175% of the Conversion Price then in effect for each of twenty (20)
Trading Days out of any thirty (30) consecutive Trading Day period following the Company Optional
Redemption Eligibility Date (the “Company Optional Redemption Measuring Period”), (ii) the average
daily dollar trading volume (as reported on Bloomberg) of the Common Shares on the Principal Market
over the twenty (20) consecutive Trading Day period ending on the Trading Day immediately preceding
the Company Optional Redemption Notice Date exceeds $1 million and (iii) no Equity Conditions
Failure has occurred, the Company shall have the right to redeem all or any portion of the
Conversion Amount then remaining under this Note (the “Company Optional Redemption Amount”) in the
Company Optional Redemption Notice (as defined below) on the Company Optional Redemption

13

 

Date (each as defined below) (an “Company Optional Redemption”). The portion of this Note
subject to redemption pursuant to this Section 9(a) shall be redeemed by the Company in cash at a
price (the “Company Optional Redemption Price”) equal to the Conversion Amount being redeemed
together with the Make-Whole Amount and any accrued and unpaid Interest and Late Charges, if any,
on such Conversion Amount and Interest through the Company Optional Redemption Date (as defined
below). The Company may exercise its right to require redemption under this Section 9 by
delivering a written notice thereof by facsimile and overnight courier to all, but not less than
all, of the holders of Notes (the “Company Optional Redemption Notice” and the date all of the
holders of Notes received such notice is referred to as the “Company Optional Redemption Notice
Date”). The Company may not effect more than one (1) Company Optional Redemption in any thirty
(30) Trading Day period. The Company may deliver only two (2) Company Optional Redemption Notices
hereunder and each such Company Optional Redemption Notice shall be irrevocable. The Company
Optional Redemption Notice shall (x) state the date on which the Company Optional Redemption shall
occur (the “Company Optional Redemption Date”) which date shall not be less than ten (10) Trading
Days nor more than thirty (30) Trading Days following the Company Optional Redemption Notice Date,
(y) certify that there has been no Equity Conditions Failure and (z) state the aggregate Conversion
Amount of the Notes which is being redeemed in such Company Optional Redemption from the Holder and
all of the other holders of the Notes pursuant to this Section 9(a) (and analogous provisions under
the Other Notes) on the Company Optional Redemption Date. Notwithstanding anything to the contrary
in this Section 9, at any time prior to the date the Company Optional Redemption Price is paid, in
full, the Company Optional Redemption Amount may be converted, in whole or in part, by the Holders
into Common Shares pursuant to Section 3. All Conversion Amounts converted by the Holder after the
Company Optional Redemption Notice Date shall reduce the Company Optional Redemption Amount of this
Note required to be redeemed on the Company Optional Redemption Date. Redemptions made pursuant to
this Section 9 shall be made in accordance with Section 12.

               (b) Pro Rata Redemption Requirement. If the Company elects to cause a Company
Optional Redemption of this Note pursuant to Section 9(a), then it must simultaneously take the
same action with respect to the Other Notes. If the Company elects to cause a Company Optional
Redemption pursuant to Section 9(a) (or similar provisions under the Other Notes) with respect to
less than all of the Conversion Amounts of the Notes then outstanding, then the Company shall
require redemption of a Conversion Amount from each of the holders of the Notes equal to the
product of (i) the aggregate Conversion Amount of Notes which the Company has elected to cause to
be redeemed pursuant to Section 9(a), multiplied by (ii) the fraction, the numerator of which is
the sum of the aggregate Original Principal Amount of the Notes purchased by such holder of
outstanding Notes and the denominator of which is the sum of the aggregate Original Principal
Amount of the Notes purchased by all holders holding outstanding Notes (such fraction with respect
to each holder is referred to as its “Company Redemption Allocation Percentage”, and such amount
with respect to each holder is referred to as its “Pro Rata Company Redemption Amount”); provided,
however, that in the event that any holder’s Pro Rata Company Redemption Amount exceeds the
outstanding Principal amount of such holder’s Note, then such excess Pro Rata Company Redemption
Amount shall be allocated amongst the remaining holders of Notes in accordance with the foregoing
formula. In the event that the initial holder of any Notes shall sell or otherwise transfer any of
such holder’s Notes, the transferee shall be allocated a pro rata portion of such holder’s Company
Redemption Allocation Percentage and Pro Rata Company Redemption Amount.

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

          (11) RESERVATION OF AUTHORIZED SHARES.

               (a) Reservation. The Company shall initially reserve out of its authorized and
unissued Common Shares a number of Common Shares for each of the Notes equal to 125% of the
Conversion Rate with respect to the Conversion Amount of each such Note as of the Original Issuance
Date. So long as any of the Notes are outstanding, the Company shall take all action necessary to
reserve and keep available out of its authorized and unissued Common Shares, solely for the purpose
of effecting the conversion of the Notes, 125% of the number of Common Shares 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 Common Shares so reserved be less than the number

14

 

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 Common Shares reserved for
conversions of the Notes and each increase in the number of shares so reserved shall be allocated
pro rata among the holders of the Notes based on the principal amount of the Notes held by each
holder at the Closing (as defined in the Exchange Agreements) 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 Common Shares reserved and
allocated to any Person which ceases to hold any Notes shall be allocated to the remaining holders
of Notes, pro rata based on the principal amount of the Notes then held by such holders.

               (b) Insufficient Authorized Shares. If at any time while any of the Notes remain
outstanding the Company does not have a sufficient number of authorized and unreserved Common
Shares to satisfy its obligation to reserve for issuance upon conversion of the Notes at least a
number of Common Shares 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 Common
Shares to an amount sufficient to allow the Company to reserve the Required Reserve Amount for the
Notes then outstanding. Without limiting the generality of the foregoing sentence, as soon as
practicable after the date of the occurrence of an Authorized Share Failure, but in no event later
than one hundred and eighty (180) days after the occurrence of such Authorized Share Failure, the
Company shall hold a meeting of its shareholders for the approval of an increase in the number of
authorized Common Shares. In connection with such meeting, the Company shall provide each
shareholder with a proxy statement and shall use its best efforts to solicit its shareholders’
approval of such increase in authorized Common Shares and to cause its board of directors to
recommend to the shareholders that they approve such proposal.

          (12) REDEMPTIONS.

               (a) Mechanics. The Company shall deliver the applicable Event of Default Redemption
Price to the Holder within five (5) Trading Days after the Company’s receipt of the Holder’s Event
of Default Redemption Notice. If the Holder has submitted a Change of Control Redemption Notice in
accordance with Section 5(b), the Company shall deliver the applicable Change of Control Redemption
Price to the Holder (i) concurrently with the consummation of such Change of Control if such notice
is received prior to the consummation of such Change of Control and (ii) within five (5) Trading
Days after the Company’s receipt of such Change of Control Redemption Notice otherwise. The
Company shall deliver the applicable Company Installment Redemption Price to the Holder on the
applicable Installment Date. The Company shall deliver the applicable Company Optional Redemption
Price on the Company Optional Redemption Date. In the event of a redemption of less than all of
the Conversion Amount of this Note, the Company shall promptly cause to be issued and delivered to
the Holder a new Note (in accordance with Section 18(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 18(d)) to the Holder representing such Conversion Amount to be redeemed and
(z) the Conversion Price of this Note or such new Notes shall be adjusted to the lesser of (A) the
Conversion Price as in effect on the date on which the applicable Redemption Notice is voided and
(B) the lowest Closing Bid Price of the Common Shares during the period beginning on and including
the date on which the applicable Redemption Notice is delivered to the Company and ending on and
including the date on which the applicable Redemption Notice is voided. The Holder’s delivery of a
notice voiding a Redemption Notice and exercise of its rights following such notice shall not
affect the Company’s obligations to make any payments of Late Charges which have accrued prior to
the date of such notice with respect to the Conversion Amount subject to such notice.

               (b) Redemption by Other Holders. Upon the Company’s receipt of notice from any of the
holders of the Other Notes for redemption or repayment as a result of an event or occurrence
substantially similar to the events or occurrences described in Section 4(b) or Section 5(b) (each,
an “Other Redemption Notice”), the Company shall immediately, but no later than one (1) Trading 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) Trading
Day period beginning on and including the date which is three (3)

15

 

Trading 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) Trading 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) Trading 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) Trading Day period.

          (13) VOTING RIGHTS. The Holder shall have no voting rights as the holder of this
Note, except as provided by law, the Business Corporations Act (British Columbia) and as expressly
provided in this Note.

          (14) [Intentionally Omitted]

          (15) PARTICIPATION. Except with respect to such dividends or other distributions in
which an adjustment has been made to the Conversion Price pursuant to Section 7(a) above, the
Holder, as the holder of this Note, shall be entitled to receive such dividends paid and
distributions made to the holders of Common Shares to the same extent as if the Holder had
converted this Note into Common Shares (without regard to any limitations on conversion herein or
elsewhere) and had held such Common Shares 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 Shares (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 Common Shares 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).

          (16) VOTE TO CHANGE THE TERMS OF, NOTES. The affirmative vote at a meeting duly
called for such purpose or the written consent without a meeting of the Required Holders shall be
required for any change or amendment to this Note or the Other Notes. Any change or amendment so
approved shall be binding upon all existing and future holders of this Note and any Other Notes.

          (17) TRANSFER. This Note and any Common Shares issued upon conversion of this Note
may be offered, sold, assigned or transferred by the Holder without the consent of the Company.

          (18) 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 18(d)), registered as the Holder may request, representing
the outstanding Principal being transferred by the Holder and, if less then the entire outstanding
Principal is being transferred, a new Note (in accordance with Section 18(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,
and, in the case of loss, theft or destruction, of any indemnification undertaking by the Holder to
the Company in customary form and, in the case of mutilation, upon surrender and cancellation of
this Note, the Company shall execute and deliver to the Holder a new Note (in accordance with
Section 18(d)) representing the outstanding Principal.

               (c) Note Exchangeable for Different Denominations. This Note is exchangeable, upon
the surrender hereof by the Holder at the principal office of the Company, for a new Note or Notes
(in accordance with Section 18(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 18(a) or Section 18(c), the Principal
designated by the Holder which, when added to the

16

 

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 Original Issuance Date, as indicated on the face of such new Note,
which is the same as the Original Issuance Date of this Note, (iv) shall have an Exchange Date, as
indicated on the face of such new Note, which is the same as the Exchange Date of this Note (v)
shall have the same rights and conditions as this Note, and (vi) shall represent accrued and unpaid
Interest and Late Charges, if any, on the Principal and Interest of this Note, from the Original
Issuance Date.

          (19) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.
The remedies provided in this Note shall be cumulative and in addition to all other remedies
available under this Note and any of the other Transaction Documents at law or in equity (including
a decree of specific performance and/or other injunctive relief), and nothing herein shall limit
the Holder’s right to pursue actual and consequential damages for any failure by the Company to
comply with the terms of this Note. Amounts set forth or provided for herein with respect to
payments, conversion and the like (and the computation thereof) shall be the amounts to be received
by the Holder and shall not, except as expressly provided herein, be subject to any other
obligation of the Company (or the performance thereof). The Company acknowledges that a breach by
it of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at
law for any such breach may be inadequate. The Company therefore agrees that, in the event of any
such breach or threatened breach, the Holder shall be entitled, in addition to all other available
remedies, to an injunction restraining any breach, without the necessity of showing economic loss
and without any bond or other security being required.

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

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

          (22) 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.

          (23) DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Settlement Upon Conversion Amount, the Closing Bid Price, the Closing Sale Price or the Weighted
Average Price or the arithmetic calculation of the Conversion Rate, the Conversion Price or any
Redemption Price, the Company shall submit the disputed determinations or arithmetic calculations
via facsimile within one (1) Trading Day of receipt, or deemed receipt, of the Conversion Notice or
Redemption Notice or other event giving rise to such dispute, as the case may be, to the Holder.
If the Holder and the Company are unable to agree upon such determination or calculation within one
(1) Trading Day of such disputed determination or arithmetic calculation being submitted to the
Holder, then the Company shall, within one Trading Day submit via facsimile (a) the disputed
determination of the Settlement Upon Conversion Amount, the Closing Bid Price, the Closing Sale
Price or the Weighted Average Price to an independent, reputable investment bank selected by the
Company and approved by the Holder or (b) the disputed arithmetic calculation of the Conversion
Rate, Conversion Price or any Redemption Price to the Company’s independent, outside accountant.
The Company, at the Company’s expense, shall cause the investment bank or the accountant, as the
case may be, to perform the determinations or calculations and notify the Company and the Holder of
the results no later than five (5) Trading Days from the time it receives the disputed
determinations or calculations. Such investment bank’s or accountant’s determination or
calculation, as the case may be, shall be binding upon all parties absent demonstrable error.

17

 

          (24) NOTICES; CURRENCY; TAXES; 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 7.7 of the
applicable Exchange Agreement. The Company shall provide the Holder with prompt written notice of
all actions taken pursuant to this Note, including in reasonable detail a description of such
action and the reason therefore. Without limiting the generality of the foregoing, the Company will
give written notice to the Holder (i) immediately upon any adjustment of the Conversion Price,
setting forth in reasonable detail, and certifying, the calculation of such adjustment and (ii) at
least twenty (20) days prior to the date on which the Company closes its books or takes a record
(A) with respect to any dividend or distribution upon the Common Shares, (B) with respect to pro
rata subscription offer to holders of Common Shares 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 principal, interest and other amounts owing under this Note or any
Transaction Document that, in accordance with their terms, are paid in cash shall be paid in US
dollars. All amounts denominated in other currencies shall be converted to the US 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 US dollars pursuant to this Note,
the US 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) Taxes.

                    (i) Any and all payments by the Company hereunder, including any amounts
received on a conversion or redemption of the Note and any amounts on account of
interest or deemed interest, shall be made free and clear of and without deduction
for any and all present or future taxes, levies, imposts, deductions, charges or
withholdings, and all liabilities with respect thereto, imposed under Part XIII of
the Income Tax Act (Canada) (collectively referred to as “Part XIII Taxes”) and
Article XI of the Canada United States Tax Convention (1980) (together with Part
XIII Taxes, the “Canadian Taxes”) unless the Company is required to withhold or
deduct any amounts for, or on account of, Canadian Taxes pursuant to any applicable
law. If the Company shall be required to withhold or deduct any Canadian Taxes from
or in respect of any sum payable hereunder to the Holder, (x) the sum payable shall
be increased by the amount by which the sum payable would otherwise have to be
increased (the “tax make-whole amount”) to ensure that after making all required
withholdings and deductions (including deductions applicable to the tax make-whole
amount) the Holder would receive an amount equal to the sum it would have received
had no such deductions been made, (y) the Company shall make such deductions, and
(z) the Company shall pay the full amount withheld or deducted to the Canada Revenue
Agency within the time required.

                    (ii) In addition, the Company agrees to pay to the relevant governmental
authority in accordance with applicable law any present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar levies
that arise from any payment made hereunder or in connection with the execution,
delivery, registration or performance of, or otherwise with respect to, this Note
(“Other Taxes”).

                    (iii) The Company shall deliver to the Holder official receipts, if any, in
respect of any Canadian Taxes and Other Taxes payable hereunder promptly after
payment of such Canadian Taxes, Other Taxes or other evidence of payment reasonably
acceptable to the Holder.

                    (iv) If the Company fails to pay any amounts in accordance with this Section
24(c), the Company shall indemnify the Holder within ten (10) calendar days after
written demand therefor, for the full amount of any Canadian Taxes or Other Taxes,
plus any related interest or penalties, that are paid by the Holder to the Canada
Revenue Agency or other relevant governmental authority as a result of such failure.

                    (v) The obligations of the Company under this Section 26(c) shall survive the
termination of this Note and the payment of the Note and all other amounts payable
hereunder.

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               (d) Payments. Whenever any payment of cash is to be made by the Company to any Person
pursuant to this Note, such payment shall be made in lawful money of the United States of America
via wire transfer of U.S. dollars and immediately available funds in accordance with the Holder’s
wire transfer instructions delivered to the Company on or prior to such payment date or, in the
absence of such instructions, by a check drawn on the account of the Company and sent via overnight
courier service to such Person at such address as previously provided to the Company in writing
(which address, in the case of each of the Purchasers, shall initially be as set forth in the
Exchange Agreement of such Purchaser). Whenever any amount expressed to be due by the terms of
this Note is due on any day which is not a Trading Day, the same shall instead be due on the next
succeeding day which is a Trading Day and, in the case of any Interest Date which is not the date
on which this Note is paid in full, the extension of the due date thereof shall not be taken into
account for purposes of determining the amount of Interest due on such date. Any amount of
Principal or other amounts due under the Transaction Documents 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 twelve percent (12%) per annum from the date such amount was due until
the same is paid in full (“Late Charge”).

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

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

          (27) 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 appoints C T Corporation System, 4169 Westport Road, Louisville, KY
40207 as its agent for service of process in the United States. If service of process is effected
pursuant to the above sentence, such service will be deemed sufficient under New York law and the
Company shall not assert otherwise. Nothing contained herein shall be deemed to limit in any way
any right to serve process in any manner permitted by law. THE COMPANY HEREBY IRREVOCABLY WAIVES
ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE
HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.

          (28) JUDGMENT CURRENCY.

               (a) If for the purpose of obtaining or enforcing judgment against the Company in any court in
any jurisdiction it becomes necessary to convert into any other currency (such other currency being
hereinafter in this Section 28 referred to as the “Judgment Currency”) an amount due in U.S.
dollars under this Note, the conversion shall be made at the Exchange Rate prevailing on the
Trading Day immediately preceding:

                    (i) the date actual payment of the amount due, in the case of any proceeding in
the courts of New York or in the courts of any other jurisdiction that will give
effect to such conversion being made on such date: or

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                    (ii) the date on which the foreign court determines, in the case of any
proceeding in the courts of any other jurisdiction (the date as of which such
conversion is made pursuant to this Section 28(a)(ii) being hereinafter referred to
as the “Judgment Conversion Date”).

               (b) If in the case of any proceeding in the court of any jurisdiction referred to in Section
28(a)(ii) above, there is a change in the Exchange Rate prevailing between the Judgment Conversion
Date and the date of actual payment of the amount due, the applicable party shall pay such adjusted
amount as may be necessary to ensure that the amount paid in the Judgment Currency, when converted
at the Exchange Rate prevailing on the date of payment, will produce the amount of US dollars which
could have been purchased with the amount of Judgment Currency stipulated in the judgment or
judicial order at the Exchange Rate prevailing on the Judgment Conversion Date.

               (c) Any amount due from the Company under this provision shall be due as a separate debt and
shall not be affected by judgment being obtained for any other amounts due under or in respect of
this Note.

          (29) MAXIMUM PAYMENTS. Nothing contained herein 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
hereunder exceed 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) CERTAIN DEFINITIONS. For purposes of this Note, the following terms shall have
the following meanings:

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

               (b) “Bloomberg” means Bloomberg Financial Markets.

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

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

               (e) “Change of Control” means any Fundamental Transaction (including, without limitation, any
Involuntary Change of Control) other than (i) any merger of the Company or any of its, direct or
indirect, wholly-owned Subsidiaries with or into any of the foregoing Persons, (ii) any
reorganization, recapitalization or reclassification of the Common Shares in which holders of the
Company’s voting power immediately prior to such reorganization, recapitalization or
reclassification continue after such reorganization, recapitalization or reclassification to hold
publicly traded securities and, directly or indirectly, are, in all material respects, the holders
of the voting power of the surviving entity (or entities with the authority or voting power to
elect the members of the board of directors (or their equivalent if other than a corporation) of
such entity or entities) after such reorganization, recapitalization or reclassification, or (iii)
pursuant to a migratory merger effected solely for the purpose of changing the jurisdiction of
incorporation of the Company or any of its Subsidiaries.

               (f) “Change of Control Date” means, with respect to any Change of Control, the date of the
consummation of such Change of Control.

               (g) “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

20

 

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 Sheets LLC (formerly
the National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing Sale Price cannot be
calculated for a security on a particular date on any of the foregoing bases, the Closing Bid Price
or the Closing Sale Price, as the case may be, of such security on such date shall be the fair
market value as mutually determined by the Company and the Holder. If the Company and the Holder
are unable to agree upon the fair market value of such security, then such dispute shall be
resolved pursuant to Section 23. All such determinations to be appropriately adjusted for any
share dividend, share split, share combination, reclassification or other similar transaction
during the applicable calculation period.

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

               (i) “Company Conversion Price” means, the lower of (i) the applicable Conversion Price and
(ii) that price which shall be computed as 95% of the quotient of (I) the sum of the Weighted
Average Price of the Common Shares on each of the twenty (20) consecutive Trading Days commencing
on the Trading Day immediately following the applicable Installment Date, divided by (II) twenty
(20) (each such period, a “Company Conversion Measuring Period”). All such determinations to be
appropriately adjusted for any share dividend, share split, share combination, reclassification or
similar transaction that proportionately decreases or increases the Common Shares during such
Company Conversion Measuring Period.

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

               (k) “Conversion Share Ratio” means, as to any 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 Conversion Shares relating to such Installment Date.

               (l) “Convertible Securities” means any shares or securities (other than Options) directly or
indirectly convertible into or exercisable or exchangeable for Common Shares.

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

               (n) “Equity Conditions” means that each of the following conditions is satisfied: (i) on each
day during the period beginning three (3) month prior to the applicable date of determination and
ending on and including the applicable date of determination (the “Equity Conditions Measuring
Period”), all Common Shares issuable upon conversion of the Notes and exercise of the Warrants
(assuming a cashless exercise thereof) shall be eligible for sale without restriction and without
the need for registration under any applicable federal or state securities laws and such shares
shall be freely tradable on the Principal Market or any other Eligible Market; (ii) on each day
during the period beginning two (3) month prior to the applicable date of determination and ending
on and including the applicable date of determination, the Common Shares is designated for
quotation on the Principal Market or any other Eligible Market and shall not have been suspended
from trading on such exchange or market (other than suspensions of not more than two (2) days and
occurring prior to the applicable date of determination due to business announcements by the
Company) nor shall delisting or suspension by such exchange or market been threatened or pending
either (A) in writing by such exchange or market or (B) by falling below the then effective minimum
listing maintenance requirements of such exchange or market for a period of ten (10) consecutive
Trading Days; (iii) during the one (1) year period ending on and including the date immediately
preceding the applicable date of determination, the Company shall have delivered Common Shares upon
conversion of the Notes (or cash in a Settlement Upon Conversion in accordance with Section
3(d)(iii) above, as applicable) and upon exercise of the Warrants to the holders on a timely basis
as set forth in Section 3(c)(ii) hereof (and analogous provisions under the

21

 

Other Notes) and Section 1(a) of the Warrants; (iv) any applicable Common Shares to be issued
in connection with the event requiring determination may be issued in full without violating
Section 3(d) hereof and the rules or regulations of the Principal Market or any applicable Eligible
Market; (v) during the Equity Conditions Measuring Period, the Company shall not have failed to
timely make any payments within five (5) Trading Days of when such payment is due pursuant to any
Transaction Document; (vi) during the Equity Conditions Measuring Period, there shall not have
occurred either (A) the public announcement of a pending, proposed or intended Fundamental
Transaction (other than a migratory merger effected solely for the purpose of changing the
jurisdiction of incorporation of the Company or any of its Subsidiaries) which has not been
abandoned, terminated or consummated, or (B) an Event of Default or (C) an event that with the
passage of time or giving of notice would constitute an Event of Default; (vii) the Company shall
have no knowledge of any fact that would cause any Common Shares issuable upon conversion of the
Notes, Common Shares issuable upon exercise of the Warrants (assuming a cashless exercise thereof)
not to be eligible for sale without restriction pursuant to Rule 144 and without the requirement by
the Company or any of its Subsidiaries to be in compliance with Rule 144(c)(1) (or any successor
thereto) promulgated under the 1933 and any applicable state securities laws; (viii) the Company
otherwise shall have been in material compliance with and shall not have materially breached any
provision, covenant, representation or warranty of any Transaction Document; and (ix) the Common
Shares have not traded below $0.50 per share in the immediately preceding twenty (20) consecutive
Trading Days.

               (o) “Equity Conditions Failure” means that (i) on any day during the period commencing ten
(10) Trading Days prior to the applicable Company Installment Notice Date through the applicable
Installment Date, (ii) on any day during the period commencing ten (10) Trading Days prior to the
applicable Optional Redemption Notice Date through the applicable Optional Redemption Date, or
(iii) on any day during the period commencing on the applicable Maximum Percentage Increase Notice
Date through the applicable Maximum Percentage Increase Date, the Equity Conditions have not been
satisfied (or waived in writing by the Holder).

               (p) “Exchange Act” means the Securities Exchange Act of 1934, as amended and the rules and
regulations thereunder.

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

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

               (s) “Holder Pro Rata Amount” means a fraction (i) the numerator of which is the Principal
amount of this Note on the Original Issuance Date and (ii) the denominator of which is the
aggregate principal amount of all Notes issued to the initial purchasers pursuant to the Exchange
Agreements on the Original Issuance Date.

               (t) “Indebtedness” of any Person means, without duplication (i) all indebtedness for borrowed
money, (ii) all obligations issued, undertaken or assumed as the deferred purchase price of
property or services, including (without limitation) “capital leases” in accordance with GAAP
(other than trade payables entered into in the ordinary course of business), (iii) all
reimbursement or payment obligations with respect to letters of credit, surety bonds and other
similar instruments, (iv) all obligations evidenced by notes, bonds, debentures or

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similar instruments, including obligations so evidenced incurred in connection with the
acquisition of property, assets or businesses, (v) all indebtedness created or arising under any
conditional sale or other title retention agreement, or incurred as financing, in either case with
respect to any property or assets acquired with the proceeds of such indebtedness (even though the
rights and remedies of the seller or bank under such agreement in the event of default are limited
to repossession or sale of such property), (vi) all monetary obligations under any leasing or
similar arrangement which, in connection with GAAP, consistently applied for the periods covered
thereby, is classified as a capital lease, (vii) all indebtedness referred to in clauses (i)
through (vi) above secured by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any mortgage, lien, pledge, charge, security interest or
other encumbrance upon or in any property or assets (including accounts and contract rights) owned
by any Person, even though the Person which owns such assets or property has not assumed or become
liable for the payment of such indebtedness, and (viii) all Contingent Obligations in respect of
indebtedness or obligations of others of the kinds referred to in clauses (i) through (vii) above.

               (u) “Initial Company Conversion Price” means, as of any date of determination, that price
which shall be the lower of (i) the applicable Conversion Price and (ii) that price computed as 95%
of the quotient of (I) the sum of the Weighted Average Price of the Common Shares on each of the
ten (10) consecutive Trading Days ending and including the second (2nd) Trading Day prior to the
Installment Date, divided by (II) ten (10) (such period, the “Initial Company Conversion Measuring
Period”). All such determinations to be appropriately adjusted for any share dividend, share
split, share combination, reclassification or similar transaction that proportionately decreases or
increases the Common Shares during such Initial Company Conversion Measuring Period.

               (v) “Installment Amount” means as to an Installment Date, an amount equal to the lesser of (i)
the quotient of (A) the Principal amount under this Note as of the Original Issuance Date
divided by (B) twenty four (24) and (ii) the Principal amount under this Note as of such
Installment Date, as any such Installment Amount may be reduced pursuant to the terms of this Note,
whether upon conversion, redemption or otherwise, together with, in each case the sum of any
accrued and unpaid Interest with respect to such Principal amount and accrued and unpaid Late
Charges, if any, with respect to such Principal amount and Interest. In the event the Holder shall
sell or otherwise transfer any portion of this Note, the transferee shall be allocated a pro rata
portion of the each unpaid Installment Amount hereunder.

               (w) “Installment Balance Conversion Shares” means, for any Installment Date, a number of
Common Shares equal to (i) the Post-Installment Conversion Shares for such date minus (ii)
the amount of any Pre-Installment Conversion Shares delivered before or on such date; provided that
in the event that the amount of Pre-Installment Conversion Shares exceeds the Post-Installment
Conversion Shares for such date (such excess, the “Installment Conversion Shares Excess”), the
outstanding Principal under this Note shall be reduced by the product of (x) the Installment
Conversion Share Excess and (y) the Company Conversion Price and the Installment Balance Conversion
Shares shall equal zero (0); provided, further, however that if all of the outstanding Principal
under this Note is being converted and/or redeemed on such Installment Date, then the Installment
Balance Conversion Shares shall equal zero (0).

               (x) “Installment Date” means, June 1, 2010 and, thereafter, the first (1st) day of
each calendar month through April 1, 2012.

               (y) “Installment Volume Limitation” means 30% of the aggregate dollar trading volume (as
reported on Bloomberg) of the Common Shares on the Principal Market for the over the twenty (20)
consecutive Trading Day period prior to the applicable Installment Notice Date.

               (z) “Interest Rate” means, 6.00% per annum, subject to adjustment as set forth in Section 2.

               (aa) “Involuntary Change of Control” means any Fundamental Transaction pursuant to clause
(A)(iii) or clause (B) of the definition of Fundamental Transaction herein that does not involve
any prior, direct or indirect, agreement, support or other assistance by the Company or any of its
Subsidiaries (or any employee, officer, director, consultant or agent of the Company or any of its
Subsidiaries) (other than the Company’s compliance with Regulation 14D under the Exchange Act).

               (bb) “Make-Whole Amount” means, as to any Company Optional Redemption on any Company Optional
Redemption Date, the amount of any Interest that, but for a Company Optional Redemption pursuant to
Section 9, would have accrued with respect to the Conversion Amount being converted or redeemed

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under this Note at the Interest Rate for the period from the applicable Company Optional
Redemption Date, as the case may be, through the Maturity Date, discounted to present value using
the published yield on two year notes of the U.S. federal government on the determination date.

               (cc) “Maximum Percentage Violation Price” means, as of any date of determination, that price
which shall be the lower of (i) the applicable Conversion Price and (ii) that price computed as 95%
of the quotient of (I) the sum of the Weighted Average Price of the Common Shares on each of the
ten (10) consecutive Trading Days ending and including the Trading Day prior to the date of
determination, divided by (II) ten (10) (such period, the “Maximum Percentage Violation Measuring
Period”). All such determinations shall be appropriately adjusted for any share dividend, share
split, share combination, reclassification or similar transaction that proportionately decreases or
increases the Common Shares during such Maximum Percentage Violation Measuring Period.

               (dd) “Options” means any rights, warrants or options to subscribe for or purchase Common
Shares or Convertible Securities.

               (ee) “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.

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

               (gg) “Post-Installment Conversion Shares” means, for any Installment Date, that number of
Common Shares equal to the applicable Company Conversion Amount for such Installment Date
divided by the Company Conversion Price (without taking into account the delivery of any
Pre-Installment Conversion Shares).

               (hh) “Principal Market” means The Nasdaq Global Select Market.

               (ii) “Redemption Notices” means, collectively, the Event of Default Redemption Notices, the
Change of Control Redemption Notices, the Company Installment Notice (if a Company Redemption has
been elected) and the Company Optional Redemption Notice, each of the foregoing, individually, a
Redemption Notice.

               (jj) “Redemption Premium” means (i) in the case of the Events of Default described in Section
4(a)(i) — (v) and (viii) — (xii), 125% or (ii) in the case of the Events of Default described in
Section 4(a)(vi) — (vii), 100%.

               (kk) “Redemption Prices” means, collectively, the Event of Default Redemption Price, Change of
Control Redemption Price, the Company Installment Redemption Price and the Company Optional
Redemption Price, each of the foregoing, individually, a Redemption Price.

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

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

               (nn) “Securities Purchase Agreement” means that certain securities purchase agreement dated as
of December 13, 2005, by and among the Company, the initial holder of the Exiting Note and certain
other investors pursuant to which the Company issued the Existing Note.

               (oo) “Settlement Upon Conversion Market Price” means the quotient of (a) the sum of the
Weighted Average Price of the Common Shares on each of the five consecutive Trading Days ending and
including the Trading Day immediately prior to the applicable Conversion Date, divided by (b) five.

               (pp) “Shareholder Approval” shall have the meaning as set forth in the Exchange Agreements.

               (qq) “Shareholder Approval Date” means the date the Company shall have obtained the
Shareholder Approval.

24

 

               (rr) “Significant Subsidiaries” means “significant subsidiaries” (as defined in Rule 1-02 of
Regulation S-X, except that all references to “10 percent” set forth therein shall be deemed
replaced with “20 percent”).

               (ss) “Subscription Date” means December 13, 2005.

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

               (uu) “Trading Day” means any day on which the Common Shares is traded on the Principal Market,
or, if the Principal Market is not the principal trading market for the Common Shares, then on the
principal securities exchange or securities market on which the Common Shares is then traded;
provided that “Trading Day” shall not include any day on which the Common Shares is scheduled to
trade on such exchange or market for less than 4.5 hours or any day that the Common Shares 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).

               (vv) “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).

               (ww) “Warrants” has the meaning ascribed to such term in the Exchange Agreements and shall
include all warrants issued in exchange therefor or replacement thereof.

               (xx) “Weighted Average Price” means, for any security as of any date, the dollar
volume-weighted average price for such security on the Principal Market during the period beginning
at 9:30:01 a.m., New York Time (or such other time as the Principal Market publicly announces is
the official open of trading), and ending at 4:00:00 p.m., New York Time (or such other time as the
Principal Market publicly announces is the official close of trading) as reported by Bloomberg
through its “Volume at Price” functions, or, if the foregoing does not apply, the dollar
volume-weighted average price of such security in the over-the-counter market on the electronic
bulletin board for such security during the period beginning at 9:30:01 a.m., New York Time (or
such other time as such market publicly announces is the official open of trading), and ending at
4:00:00 p.m., New York Time (or such other time as such market publicly announces is the official
close of trading) as reported by Bloomberg, or, if no dollar volume-weighted average price is
reported for such security by Bloomberg for such hours, the average of the highest closing bid
price and the lowest closing ask price of any of the market makers for such security as reported in
the “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If the
Weighted Average Price cannot be calculated for a security on a particular date on any of the
foregoing bases, the Weighted Average Price of such security on such date shall be the fair market
value as mutually determined by the Company and the Holder. If the Company and the Holder are
unable to agree upon the fair market value of such security, then such dispute shall be resolved
pursuant to Section 23. All such determinations to be appropriately adjusted for any share
dividend, share split, share combination, reclassification or similar transaction during the
applicable calculation period.

25

 

               (31) DISCLOSURE. Upon receipt or delivery by the Company of any notice in accordance
with the terms of this Note, unless the Company has in good faith determined that the matters
relating to such notice do not constitute material, nonpublic information relating to the Company
or its Subsidiaries, the Company shall within one (1) Business Day after any such receipt or
delivery publicly disclose such material, nonpublic information on a Current Report on Form 8-K or
otherwise. In the event that the Company believes that a notice contains material, nonpublic
information relating to the Company or its Subsidiaries, the Company so shall indicate to the
Holder contemporaneously with delivery of such notice, and in the absence of any such indication,
the Holder shall be allowed to presume that all matters relating to such notice do not constitute
material, nonpublic information relating to the Company or its Subsidiaries.

[Signature Page Follows]

26

 

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

	 	 	 	 	 
	 	NGAS Resources, Inc.

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 

 

EXHIBIT I

NGAS RESOURCES, INC.

CONVERSION NOTICE

Reference is made to the Amortizing Convertible Note (the “Note”) issued to the undersigned by
NGAS Resources, Inc., a corporation incorporated under the laws of the Province of British Columbia
(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 Common
Shares, no par value per share (the “Common Shares”) of the Company, as of the date specified
below.

     Date of Conversion:
 

Please confirm the following information:

     Conversion Price:
 

     (a) If such Conversion Amount is to be settled in Common Shares:

	 	 	 	 	 
	 

	 	Aggregate Conversion Amount to be converted:	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 

	 	Number of Common Shares to be issued:	 	 
	 

	 	 	 	 

     (b) If such Conversion Amount is to be settled in cash:

	 	 	 	 	 
	 

	 	Aggregate Conversion Amount to be settled in cash:	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 

	 	Number of Settlement Upon Conversion Shares:	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 

	 	Settlement Upon Conversion Market Price (1):	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 

	 	Settlement Upon Conversion Amount:	 	 
	 

	 	 	 	 

 

			
	(1)	 	The Settlement Upon Conversion Market Price equals the quotient of (a) the
sum of the Weighted Average Price of the Common Shares on each of the five
consecutive Trading Days ending and including the Trading Day immediately prior
to the applicable Conversion Date, divided by (b) five.

Notwithstanding anything to the contrary contained herein, this Conversion
Notice shall constitute a representation by the Holder of the Note submitting
this Conversion Notice that, after giving effect to the conversion provided for
in this Conversion Notice, such Holder (together with its affiliates) will not
have beneficial ownership (together with the beneficial ownership of such
Person’s affiliates) of a number of Common Shares which exceeds the Maximum
Percentage (as defined in the Note) of the total outstanding Common Shares of
the Company as determined pursuant to the provisions of Section 3(d) of the
Note.

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

	 	 	 	 	 
	 

	 	Issue to:	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 

	 	 	 	 

 

 

     Facsimile Number:
 

     Authorization:
 

     By:
 

            Title:

 

Dated:

 

     Account Number:
 

     (if electronic book entry transfer)

     Transaction Code Number:
 

     (if electronic book entry transfer)

Installment Amounts to be reduced and amount of reduction:                                         

 

 

ACKNOWLEDGMENT

          The Company hereby acknowledges this Conversion Notice and hereby directs Computershare
Investor Services Inc. to issue the above indicated number of Common Shares in accordance with the
Transfer Agent Instructions dated January ___, 2010 from the Company and acknowledged and agreed to
by Computershare Investor Services Inc.

	 	 	 	 	 
	 	NGAS RESOURCES, INC.

 	 
	 	By:  	
 	 
	 	 	Name:  	 	 
	 	 	Title:

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