Document:

ex101.htm

    
      Exhibit
10.1

       

       

      AMENDMENT
TO TRANSACTION DOCUMENTS

      

      This AMENDMENT TO TRANSACTION
DOCUMENTS (this “Amendment”) is made as of the 28th day of April 2009, by
and between URIGEN
PHARMACEUTICALS, INC., a Delaware corporation with its principal place of
business at 27 Maiden Lane, Suite 595, San Francisco, California 94108 (the
“Borrower”), Urigen N.A., Inc., a Delaware corporation with its principal place
of business at 27 Maiden Lane, Suite 595, San Francisco, CA 94108 (the
“Guarantor”), and
PLATINUM-MONTAUR LIFE SCIENCES, LLC, a Delaware limited liability company
(the “Lender”).

      

      WHEREAS, the Lender and the
Borrower previously entered into a Note Purchase Agreement, dated as of January
9, 2009 (the “Purchase Agreement”), which provided for the issuance to the
Lender of a Senior Secured Convertible Promissory Note as set forth therein (the
“Original Note”), and the parties have executed certain documents and
instruments in connection therewith;

      

      WHEREAS, the Guarantor
guaranteed the obligations of the Borrower pursuant to the Guaranty, dated as of
January 9, 2009, delivered to the Lender (the “Guaranty”);

      

      WHEREAS, the Borrower’s
obligations under the Original Note, and the Guarantor’s obligations under the
Guaranty, are secured pursuant to the Security Agreement (the “Security
Agreement”), dated as of January 9, 2009, among the parties hereto, and the
Patent, Trademark and Copyright Security Agreement (the “IP Security
Agreement”), dated January 9, 2009, among the parties hereto; and

      

      WHEREAS, the Borrower has
requested that the Lender extend additional credit in the form of an additional
Senior Secured Convertible Promissory Note, in the principal amount of $40,000
(the “New Note”), in substantially the form attached hereto.

       

      NOW, THEREFORE, in
consideration of the foregoing and for the covenants contained herein, and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties agree as follows:

       

      

      SECTION ONE

      DEFINITIONS;
REPRESENTATIONS

       

      Section 1.1        Terms Defined.  Unless
otherwise defined herein, capitalized terms used herein shall have the meanings
given to such terms in the Purchase Agreement.

       

      Section
1.2         Representations and Warranties of
Borrower.The Borrower and the Guarantor  represent and warrant
to the Lender as follows:

      

      (a)           Except
as otherwise set forth herein or in the Schedules and Exhibits hereto, the
representations and warranties of the Borrower and the Guarantor made in the
Transaction Documents remain true, complete and accurate in all material
respects, and the covenants of the Borrower and the Guarantor are hereby
reaffirmed, as of the date hereof.

       

       

       

      
        
           

        

        
          1

          
            

          

        

        
           

        

      

       

      
 

      (b)           The
Borrower and the Guarantor has each performed, in all material respects, all
obligations to be performed by it to date under the Transaction Documents and no
default or Event of Default exists thereunder or an event that with the passage
of time or giving of notice or both, would constitute a default or an Event of
Default.

      

      (c)           Each
of the Borrower and the Guarantor is a corporation duly organized, qualified,
and existing in good standing under the laws of the State of Delaware and has
full power and authority to consummate the transactions contemplated
hereby.  The Borrower and the Guarantor are each duly qualified to do
business in all states and other jurisdictions in which the character of the
property owned by it or the nature of its activities causes such qualification
to be necessary.

      

      (d)           The
execution, delivery and performance of this Amendment has been duly authorized
by all necessary corporate actions of each of the Borrower and the Guarantor,
are within the corporate power of Borrower and the Guarantor and are not in
contravention of law, the Borrower’s or the Guarantor’s Articles of
Incorporation, By-laws or the terms of any other documents, agreements or
undertakings to which the Borrower or the Guarantor is a party or by which the
Borrower or the Guarantor is bound.  No approval of any person,
corporation, governmental body or other entity is a prerequisite to the
execution, delivery and performance by the Borrower and the Guarantor of this
Amendment to ensure the validity or enforceability hereof.

      

      (e)           This
Amendment will constitute the legally binding obligation of Borrower and the
Guarantor, enforceable in accordance with its terms, subject to the effect of
applicable bankruptcy, insolvency, reorganization, moratorium and other similar
laws now existing or hereafter enacted relating to or affecting the enforcement
of creditors’ rights generally, and as enforceability may be subject to
limitations based on general principles of equity (regardless of whether such
enforceability is considered a proceeding in equity or at law).

      

      

      SECTION TWO

      AMENDMENTS

       

      The
Lender, the Borrower and the Guarantor have agreed to amend certain provisions
of the Purchase Agreement  and the other Transaction Documents as set
forth herein.

       

      

      Section
2.1        References in Purchase
Agreement.  The parties hereto agree that (i) the term “Notes”
in the Purchase Agreement shall be deemed to include within its meaning the New
Note, (ii) the term “Conversion Shares” in the Purchase Agreement shall be
deemed to include within its meaning the shares of Common Stock issuable upon
conversion of the New Note, and (iii) the term “Transaction Documents” in the
Purchase Agreement shall be deemed to include within its meaning the New
Note.

      

      Section
2.2        References in the Original
Note. The parties hereto agree that all references to the “Other
Notes” in the Original Note shall mean and include the New Note.

      

      Section
2.3        The Guaranty.  The
Guarantor hereby acknowledges and agrees that the “Obligations”, as defined in
the Guaranty, include all obligations of the Borrower under the New
Note.

      

      Section
2.4        Security
Documents.  The Borrower and the Guarantor intend that the
obligations under the New Note be secured by the collateral securing the
obligations under the Original Note, including pursuant to the Security
Agreement and the IP Security Agreement.  In connection therewith, the
parties hereto agree that (i) the term “Notes” in the Security Agreement shall
be deemed to include within its meaning the New Note, (ii) the term
“Obligations” in the Security Agreement shall be deemed to include within its
meaning all obligations of the Borrower under the Note and the Guarantor under
the Guaranty (as amended hereby) and (iii) the term “Obligations” in the IP
Security Agreement shall be deemed to include within its meaning all obligations
of the Borrower under the New Note and the Guarantor under the
Guaranty.

       

       

       

      
        
           

        

        
          2

          
            

          

        

        
           

        

      

       

      
 

      SECTION THREE

      CLOSING CONDITIONS

       

      Section
3.1         Closing
Conditions.  The obligations of the Lender hereunder are
subject to fulfillment of the following conditions precedent:

      

      (A)           Amendment
Documents.  The Borrower shall execute and deliver to the
Lender this Amendment and all other Amendment Documents (as defined below)
applicable to it.

      

      (B)           Corporation
Resolutions.  The Lender shall have received a copy, certified
by the Secretary of the Borrower and the Guarantor, of a resolution of the Board
of Directors of the Borrower and the Guarantor authorizing the execution,
delivery and performance of this Amendment and each of the documents to be
executed by the Borrower and the Guarantor in connection with this Amendment
(the “Amendment Documents”), including the New Note.

      

      (C)           Instruments.  All
instruments and documents whose execution and delivery are required or
contemplated by this Amendment and such other and further instruments and
documents as the Lender may reasonably require shall have been duly executed and
delivered in form and in substance reasonably satisfactory to the Lender,
including the New Note.

      

      (D)           Closing
Expenses.  The Borrower shall pay all closing expenses,
including reasonable attorneys’ fees, filing fees and recording fees, reasonably
incurred by the Lender in connection with this Amendment and the other Amendment
Documents.

      

      

      Section
3.2         Funding.  Upon
satisfaction of the conditions set forth in Section 3.1 above, the Lender shall
purchase the New Note for the cash consideration of $40,000.  The
Closing hereunder shall take place at the offices of the Lender at 152 West
57th
Street, New York, NY.

       

      

      SECTION FOUR

      MISCELLANEOUS

      

      Section
4.1         Transaction Documents.  The
Borrower shall deliver this Amendment, and all other Amendment Documents to the
Lender, and these documents shall be included in the term “Transaction
Documents” in the Purchase Agreement.

      

      Section
4.2         Future
References.  All references to the Purchase Agreement and the
other Transaction Documents shall hereinafter refer to such agreement as amended
hereby.

      

      Section
4.3        Continuing
Effect.  The provisions of the Transaction Documents, as
modified herein, shall remain in full force and effect in accordance with their
terms and are hereby ratified and confirmed.  The Lender does not in
any way waive the Borrower’s or the Guarantor’s obligations to comply with any
of the provisions, covenants and terms of the Purchase Agreement and the other
Transaction Documents, nor does the Lender waive any other right the Lender may
have at law or in equity.

       

      Section
4.4         Expenses.  Borrower
agrees, regardless of whether or not the transactions contemplated hereby shall
be consummated, to pay all reasonable expenses incurred by the Lender incident
to such transactions in the preparation of documentation relating thereto,
including all fees and disbursements of the counsel to the Lender, for services
to the Lender.

       

      Section
4.5         General.  Borrower
and the Guarantor shall execute and deliver such additional documents and do
such other acts as the Lender may reasonably require to implement the intent of
this Amendment fully.  This Amendment may be executed in several
counterparts by the Borrowers and the Lender, each of which shall be deemed an
original but all of which together shall constitute one and the same
Amendment.  This Amendment shall be governed by the laws of the State
of New York, without regards to the conflict of law provisions
thereof.

       

       

      
        
           

        

        
          3

          
            

          

        

        
           

        

      

       

       

       

      IN WITNESS WHEREOF, the
undersigned have caused this Amendment to the Purchase Agreement to be executed
as of the date first above written.

       

      
        
          
            
              	 	BORROWER:	 
	 	 	 
	 	URIGEN
      PHARMACEUTICALS, INC.	 
	 	 	 	 
	
                       

                    	
                      By:
      

                    	/s/ William
      J. Garner 	 
	 	 	Name:
      William J. Garner	 
	 	 	Title:
      CEO	 
	 	 	 	 

            

          

        

      

      
        
          
            
              	 	GUARANTOR:	 
	 	 	 
	 	URIGEN
      N.A., INC.	 
	 	 	 	 
	
                       

                    	
                      By:
      

                    	/s/ Martin
      E. Shmagin	 
	 	 	Name:
      Martin E. Shmagin	 
	 	 	Title:
      CFO	 
	 	 	 	 

            

          

        

      

      
        
          
            
              	 	LENDER:	 
	 	 	 
	 	      
                      PLATINUM-MONTAUR
      LIFE SCIENCES, LLC

                    	 
	 	 	 	 
	
                       

                    	
                      By:
      

                    	/s/ Michael
      Goldberg	 
	 	 	Name:
      Michael Goldberg	 
	 	 	Title:  Portfolio
      Manager	 
	 	 	 	 

            

          

        

       

       

            

      
        
           

        

        
          4

          
            

          

        

        
           

        

      

            

      

      EXHIBITS/ATTACHMENTS

      

      
 

       

       

       

       

       

       

       

       

      5ex102.htm

    Exhibit
10.2

     

     

    THIS
NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR RECEIPT BY THE MAKER OF AN
OPINION OF COUNSEL IN THE FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO
THE MAKER THAT THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION
HEREOF MAY BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION
FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS.

    

    

    URIGEN
PHARMACEUTICALS, INC.

    

    Senior
Secured Convertible Promissory Note

    due
October 9, 2009

     

    
      	No. 2	 	
               $40,000

            
	Dated:  April
      28, 2009	 	 

    

     

     

    For value
received, Urigen Pharmaceuticals, Inc., a Delaware corporation (the “Maker”), hereby
promises to pay to the order of Platinum-Montaur Life Sciences, LLC (together
with its successors, representatives, and permitted assigns, the “Holder”), in
accordance with the terms hereinafter provided, the principal amount of Forty
Thousand Dollars ($40,000), together with interest thereon.  Prior to
the issuance of this Note, the Maker has issued a senior secured convertible
promissory note (referred to herein as the “Other Note”) to the
Holder pursuant to the Purchase Agreement (as defined in Section 1.1
hereof).

     

    All
payments under or pursuant to this Note shall be made in United States Dollars
in immediately available funds to the Holder at the address of the Holder first
set forth above or at such other place as the Holder may designate from time to
time in writing to the Maker or by wire transfer of funds to the Holder’s
account, instructions for which are attached hereto as Exhibit A. The
outstanding principal balance of this Note shall be due and payable on October
9, 2009 (the “Maturity
Date”) or at such earlier time as provided herein.

     

     

    ARTICLE
I

     

    Section
1.1 Purchase
Agreement.  This Note has been executed and delivered pursuant
to the Note Purchase Agreement, dated as of January 9, 2009 (the “Purchase Agreement”),
by and among the Maker and the purchasers listed therein and the Amendment to
Transaction Documents, dated April 28, 2009 (the
“Amendment”).  Capitalized terms used and not otherwise defined herein
shall have the meanings set forth for such terms in the Purchase
Agreement.

     

     

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

     

     

    Section
1.2 ­Interest.  Beginning
on the issuance date of this Note (the “Issuance Date”), the outstanding
principal balance of this Note shall bear interest, in arrears, at a rate per
annum equal to ten percent (10%), payable quarterly on October 1, January 1,
April 1 and July 1 of each year (each, an “Interest Payment Date”), commencing
April 1, 2009, and on the Maturity Date. Interest shall be payable at the option
of the Maker in (A) cash or (B) in registered shares of the Maker’s common
stock, par value $0.001 per share (the “Common Stock”);  provided,
however, (i) payment of interest in shares of Common Stock may only occur if
during the 20 Trading Days immediately prior to the applicable Interest Payment
Date and through and including the date such shares of Common Stock are issued
to the Holder all of the Equity Conditions, unless waived by the Holder in
writing, have been met and the Maker shall have given the Holder notice in
accordance with the notice requirements set forth below, and (ii) as to such
Interest Payment Date, on or prior to such Interest Payment Date, the Maker
shall have delivered to the Holder’s account with The Depository Trust Company a
number of shares of Common Stock to be applied against such interest payment
equal to the quotient of (x) the applicable interest payment divided by (y) 90%
of the average VWAP for the five (5) Trading Days immediately preceding the
Interest Payment Date.  Interest shall be computed on the basis of a
360-day year of twelve (12) 30-day months, shall compound monthly and shall
accrue commencing on the Issuance Date.  Furthermore, upon the
occurrence of an Event of Default (as defined in Section 2.1 hereof), the Maker
will pay interest to the Holder, payable on demand, on the outstanding principal
balance of and unpaid interest on the Note from the date of the Event of Default
until such Event of Default is cured at the rate of the lesser of eighteen
percent (18%) and the maximum applicable legal rate per
annum.   Notwithstanding the above, the Maker may not issue a
number of shares of Common Stock in excess of the Maximum Monthly Interest Share
Amount toward the payment of Interest, as to all outstanding Series A Notes and
Series B Notes, in the aggregate, during any rolling twenty (20) Trading Day
period. For purposes hereof, “Maximum Monthly Interest Share Amount” means 20%
of the aggregate dollar trading volume (as reported on Bloomberg) of the Common
Stock on the principal Trading Market over the twenty (20) consecutive Trading
Day period immediately prior to the applicable Interest Payment
Date.

     

    Section
1.3 Payment of Principal;
Prepayment.   The Principal Amount hereof shall be paid in
full on the Maturity Date or, if earlier, upon acceleration of this Note in
accordance with the terms hereof. Any amount of principal repaid hereunder may
not be reborrowed.  The Maker may prepay any portion of the principal
amount of this Note without the prior written consent of the Holder by
delivering Holder notice thereof at least 10 days prior to the date of
prepayment; provided, that, the Maker shall be obligated to honor all conversion
requests delivered by the Holder during such 10 day period.

     

    Section
1.4 Security
Agreement.  The obligations of the Maker hereunder are secured
by a continuing security interest in certain assets of the Maker and its
subsidiaries (the “Guarantors”) pursuant
to the terms of a Security Agreement dated as of January 9, 2009 by and among
the Maker and the Maker’s subsidiaries, on the one hand, and the Holder, on the
other hand.  Reference is made to the Purchase Agreement and the
Amendment Agreement for further provisions relating to the collateral pledged to
secure this Note.

     

    Section
1.5 Payment on Non-Business
Days.  Whenever any payment to be made shall be due on a
Saturday, Sunday or a public holiday under the laws of the State of New York,
such payment may be due on the next succeeding business day and such next
succeeding day shall be included in the calculation of the amount of accrued
interest payable on such date.

     

     

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    Section
1.6 Transfer.  This
Note may be transferred or sold, subject to the provisions of Section 5.8 of
this Note, or pledged, hypothecated or otherwise granted as security by the
Holder.

     

    Section
1.7 Replacement.  Upon
receipt of a duly executed, notarized and unsecured written statement from the
Holder with respect to the loss, theft or destruction of this Note (or any
replacement hereof) and a standard indemnity, or, in the case of a mutilation of
this Note, upon surrender and cancellation of such Note, the Maker shall issue a
new Note, of like tenor and amount, in lieu of such lost, stolen, destroyed or
mutilated Note.

     

    Section
1.8 Use of
Proceeds.  The proceeds from the issuance of the Note shall be
used by the Maker to retain CEOcast, Inc. to render investor relations services
to the Maker.

     

     

    ARTICLE
II

    EVENTS OF
DEFAULT;  REMEDIES

     

    Section
2.1 ­Events of
Default.  The occurrence of any of the following events shall
be an “Event of
Default” under this Note:

     

    (a) any
default in the payment of (1) the principal amount hereunder when due, or (2)
interest on, or liquidated damages in respect of, this Note, as and when the
same shall become due and payable (whether on the Maturity Date or by
acceleration or otherwise); or

     

    (b) the Maker
shall fail to observe or perform any other covenant or agreement contained in
this Note or the Other Note which failure is not cured, if possible to cure,
within 3 business days after the occurrence thereof; or

     

    (c) the
suspension from listing, without subsequent listing on any one of, or the
failure of the Common Stock to be listed on at least one of the OTC Bulletin
Board, the American Stock Exchange, the Nasdaq Capital Markets, the Nasdaq
Global Market, the Nasdaq Global Select Market or The New York Stock Exchange,
Inc. for a period of five (5) consecutive Trading Days; or

     

    (d) the
Maker’s notice to the Holder, including by way of public announcement, at any
time, of its inability to comply (including for any of the reasons described in
Section 3.7(a) hereof) or its intention not to comply with proper requests for
conversion of this Note into shares of Common Stock; or

     

    (e) the Maker
shall fail to (i) timely deliver the shares of Common Stock upon conversion of
the Note or any interest accrued and unpaid, or (ii) make the payment of any
fees and/or liquidated damages under this Note, the Purchase Agreement or the
other Transaction Documents, which failure is not remedied within three (3)
business days after the occurrence thereof; or

     

    (f) [reserved];
or

     

     

     

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

     

    (g) default
shall be made in the performance or observance of (i) any covenant, condition or
agreement contained in this Note and such default is not fully cured within
three (3) business days after the occurrence thereof or (ii) any material
covenant, condition or agreement contained in the Purchase Agreement, the Other
Note or any other Transaction Document (including, without limitation, any use
of the proceeds of this Note and the Other Note other than as permitted in the
Purchase Agreement) that is not covered by any other provisions of this Section
2.1 and such default is not fully cured within three (3) business days after the
Maker receives notice from the Holder of the occurrence
thereof;  or

     

    (h) any
material representation or warranty made by the Maker or Guarantor herein or in
the Purchase Agreement, the Other Note or any other Transaction Document shall
prove to have been false or incorrect or breached in a material respect on the
date as of which made; or

     

    (i) the Maker
or any Guarantor shall (A) default in any payment of any amount or amounts of
principal of or interest on any Indebtedness (other than the Indebtedness
hereunder) the aggregate principal amount of which Indebtedness is in excess of
$25,000 or (B)
default in the observance or performance of any other agreement or condition
relating to any Indebtedness or contained in any instrument or agreement
evidencing, securing or relating thereto, or any other event shall occur or
condition exist, the effect of which default or other event or condition is to
cause, or to permit the holder or holders or beneficiary or beneficiaries of
such Indebtedness to cause with the giving of notice if required, such
Indebtedness to become due prior to its stated maturity; or

     

    (j) the Maker
or any Guarantor shall (i) apply for or consent to the appointment of, or the
taking of possession by, a receiver, custodian, trustee or liquidator of itself
or of all or a substantial part of its property or assets, (ii) make a general
assignment for the benefit of its creditors, (iii) commence a voluntary case
under the United States Bankruptcy Code (as now or hereafter in effect) or under
the comparable laws of any jurisdiction (foreign or domestic), (iv) file a
petition seeking to take advantage of any bankruptcy, insolvency, moratorium,
reorganization or other similar law affecting the enforcement of creditors’
rights generally, (v) acquiesce in writing to any petition filed against it in
an involuntary case under United States Bankruptcy Code (as now or hereafter in
effect) or under the comparable laws of any jurisdiction (foreign or domestic),
(vi) issue a notice of bankruptcy or winding down of its operations or issue a
press release regarding same, or (vii) take any action under the laws of any
jurisdiction (foreign or domestic) analogous to any of the foregoing;
or

     

    (k) a
proceeding or case shall be commenced in respect of the Maker or any Guarantor,
without its application or consent, in any court of competent jurisdiction,
seeking (i) the liquidation, reorganization, moratorium, dissolution, winding
up, or composition or readjustment of its debts, (ii) the appointment of a
trustee, receiver, custodian, liquidator or the like of it or of all or any
substantial part of its assets in connection with the liquidation or dissolution
of the Maker or any Guarantor or (iii) similar relief in respect of it under any
law providing for the relief of debtors, and such proceeding or case described
in clause (i), (ii) or (iii) shall continue undismissed, or unstayed and in
effect, for a period of thirty (30) days or any order for relief shall be
entered in an involuntary case under United States Bankruptcy Code (as now or
hereafter in effect) or under the comparable laws of any jurisdiction (foreign
or domestic) against the Maker or any Guarantor or action under the laws of any
jurisdiction (foreign or domestic) analogous to any of the foregoing shall be
taken with respect to the Maker or any Guarantor and shall continue undismissed,
or unstayed and in effect for a period of sixty (60) days; or

     

     

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

     

    (l) the
failure of the Maker to instruct its transfer agent to remove any legends from
shares of Common Stock eligible to be sold under Rule 144 of the Securities Act
and issue such unlegended certificates to the Holder within three (3) business
days of the Holder’s request so long as the Holder has provided reasonable
assurances to the Maker that such shares of Common Stock can be sold pursuant to
Rule 144; or

     

    (m) the
occurrence of any Event of Default under the Other Note.

     

    Section
2.2 ­Remedies Upon An Event
of Default.  If an Event of Default shall have occurred and
shall be continuing, the Holder of this Note may at any time at its option
declare the entire unpaid principal balance of this Note, together with all
interest accrued hereon, due and payable, and thereupon, the same shall be
accelerated and so due and payable, without presentment, demand, protest, or
notice, all of which are hereby expressly unconditionally and irrevocably waived
by the Maker; provided, however, that upon
the occurrence of an Event of Default described (i) in Sections 2.1(j) or (k)
above, the outstanding principal balance shall become immediately due and
payable and (ii) in Sections 2.1(b)-(i) and (l) –(m) above, the Holder, in its
sole and absolute discretion, may (a) demand the prepayment of this Note
pursuant to Section 3.6(a) hereof (to the extent permitted by Section 3.6(a)
hereof), (b) demand that the principal amount of this Note then outstanding and
all accrued and unpaid interest thereon shall be converted into shares of Common
Stock at the Conversion Price per share on the Trading Day immediately preceding
the date the Holder demands conversion pursuant to this clause, or (c) exercise
or otherwise enforce any one or more of the Holder’s rights, powers, privileges,
remedies and interests under this Note, the Purchase Agreement or applicable
law.  No course of delay on the part of the Holder shall operate as a
waiver thereof or otherwise prejudice the right of the Holder.  No
remedy conferred hereby shall be exclusive of any other remedy referred to
herein or now or hereafter available at law, in equity, by statute or
otherwise.

     

     

    ARTICLE
III

    ­CONVERSION;
ANTIDILUTION; PREPAYMENT

     

    Section
3.1 ­Conversion
Option.  At any time and from time to time on or after the
Issuance Date, this Note shall be convertible (in whole or in part), at the
option of the Holder (the “Conversion Option”), into such number of fully paid
and non-assessable shares of Common Stock (the “Conversion Rate”) as is
determined by dividing (x) that portion of the outstanding principal balance
plus any accrued but unpaid interest under this Note as of such date that the
Holder elects to convert by (y) the Conversion Price (as defined in Section 3.2
hereof) then in effect on the date on which the Holder faxes a notice of
conversion (the “Conversion Notice”), duly executed, to the Maker (facsimile
number: 866-816-1107, Attn.: Martin E. Shmagin) (the “Voluntary Conversion Date”
or “Conversion Date”), provided, however, that the Conversion Price shall be
subject to adjustment as described in Section 3.5 below.  The Holder
shall deliver this Note to the Maker at the address designated in the Purchase
Agreement at such time that this Note is fully converted.  With
respect to partial conversions of this Note, the Maker shall keep written
records of the amount of this Note converted as of each Conversion
Date.

     

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

     

     

    Section
3.2 Conversion
Price.  The term “Conversion Price” shall mean $0.10, subject
to adjustment under Section 3.5 hereof.

     

    
      	
              Section
      3.3  

            	
              Mechanics of
      Conversion.

            

    

     

    (a) Not later
than three (3) Trading Days after any Conversion Date, the Maker or its
designated transfer agent, as applicable, shall issue and deliver to the
Depository Trust Company (“DTC”) account on the
Holder’s behalf via the Deposit Withdrawal Agent Commission System (“DWAC”) as specified
in the Conversion Notice, registered in the name of the Holder or its designee,
for the number of shares of Common Stock to which the Holder shall be
entitled.  In the alternative, not later than three (3) Trading Days
after any Conversion Date, the Maker shall deliver to the applicable Holder by
express courier a certificate or certificates which shall be free of restrictive
legends and trading restrictions (other than those required by Section 5.1 of
the Purchase Agreement) representing the number of shares of Common Stock being
acquired upon the conversion of this Note (the “Delivery
Date”).  Notwithstanding the foregoing to the contrary, the
Maker or its transfer agent shall only be obligated to issue and deliver the
shares to the DTC on the Holder’s behalf via DWAC (or certificates free of
restrictive legends) if such conversion is in connection with a sale and the
Holder has complied with the applicable prospectus delivery requirements (as
evidenced by documentation furnished to and reasonably satisfactory to the
Maker) or such shares may be sold pursuant to Rule 144 (without restriction as
to volume).  If in the case of any Conversion Notice such certificate
or certificates are not delivered to or as directed by the applicable Holder by
the Delivery Date, the Holder shall be entitled by written notice to the Maker
at any time on or before its receipt of such certificate or certificates
thereafter, to rescind such conversion, in which event the Maker shall
immediately return this Note tendered for conversion, whereupon the Maker and
the Holder shall each be restored to their respective positions immediately
prior to the delivery of such notice of revocation, except that any amounts
described in Sections 3.3(b) and (c) shall be payable through the date notice of
rescission is given to the Maker.

     

    (b) The Maker
understands that a delay in the delivery of the shares of Common Stock upon
conversion of this Note beyond the Delivery Date could result in economic loss
to the Holder.  If the Maker fails to deliver to the Holder such
shares via DWAC (or, if applicable, certificates) by the Delivery Date, the
Maker shall pay to such Holder, in cash, an amount per Trading Day for each
Trading Day until such shares are delivered via DWAC or certificates are
delivered (if applicable), together with interest on such amount at a rate of
10% per annum, accruing until such amount and any accrued interest thereon is
paid in full, equal to the greater of (A) (i) 1% of the aggregate principal
amount of the Notes requested to be converted for the first five (5) Trading
Days after the Delivery Date and (ii) 2% of the aggregate principal amount of
the Notes requested to be converted for each Trading Day thereafter and (B)
$2,000 per day (which amount shall be paid as liquidated damages and not as a
penalty).  Nothing herein shall limit a Holder’s right to pursue
actual damages for the Maker’s failure to deliver certificates representing
shares of Common Stock upon conversion within the period specified herein and
such Holder shall have the right to pursue all remedies available to it at law
or in equity (including, without limitation, a decree of specific performance
and/or injunctive relief).  Notwithstanding anything to the contrary
contained herein, the Holder shall be entitled to withdraw a Conversion Notice,
and upon such withdrawal the Maker shall only be obligated to pay the liquidated
damages accrued in accordance with this Section 3.3(b) through the date the
Conversion Notice is withdrawn.

     

     

     

    
      
        
        

      

      
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    (c) In
addition to any other rights available to the Holder, if the Maker fails to
cause its transfer agent to transmit via DWAC or transmit to the Holder a
certificate or certificates representing the shares of Common Stock issuable
upon conversion of this Note on or before the Delivery Date, and if after such
date the Holder is required by its broker to purchase (in an open market
transaction or otherwise) shares of Common Stock to deliver in satisfaction of a
sale by the Holder of the shares of Common Stock issuable upon conversion of
this Note which the Holder anticipated receiving upon such conversion (a “Buy-In”), then the
Maker shall (1) pay in cash to the Holder the amount by which (x) the Holder’s
total purchase price (including brokerage commissions, if any) for the shares of
Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the
number of shares of Common Stock issuable upon conversion of this Note that the
Maker was required to deliver to the Holder in connection with the conversion at
issue times (B) the price at which the sell order giving rise to such purchase
obligation was executed, and (2) at the option of the Holder, either reinstate
the portion of the Note and equivalent number of shares of Common Stock for
which such conversion was not honored or deliver to the Holder the number of
shares of Common Stock that would have been issued had the Maker timely complied
with its conversion and delivery obligations hereunder.  For example,
if the Holder purchases Common Stock having a total purchase price of $11,000 to
cover a Buy-In with respect to an attempted conversion of shares of Common Stock
with an aggregate sale price giving rise to such purchase obligation of $10,000,
under clause (1) of the immediately preceding sentence the Maker shall be
required to pay the Holder $1,000. The Holder shall provide the Maker written
notice indicating the amounts payable to the Holder in respect of the Buy-In,
together with applicable confirmations and other evidence reasonably requested
by the Maker.  Nothing herein shall limit a Holder’s right to pursue
any other remedies available to it hereunder, at law or in equity including,
without limitation, a decree of specific performance and/or injunctive relief
with respect to the Maker’s failure to timely deliver certificates representing
shares of Common Stock upon conversion of this Note as required pursuant to the
terms hereof.

     

    
      	
              Section
      3.4  

            	
              Ownership Cap and
      Certain Conversion
Restrictions.

            

    

     

    (a) Notwithstanding
anything to the contrary set forth in this Note, at no time may all or a portion
of this Note be converted if the number of shares of Common Stock to be issued
pursuant to such conversion would exceed, when aggregated with all other shares
of Common Stock owned by the Holder at such time, the number of shares of Common
Stock which would result in the Holder beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act and the rules thereunder) more
than 4.99% of all of the Common Stock outstanding at such time; provided, however, that upon
the Holder providing the Maker with sixty-one (61) days notice (pursuant to
Section 4.1 hereof) (the “Waiver Notice”) that
the Holder would like to waive this Section 3.4(a) with regard to any or all
shares of Common Stock issuable upon conversion of this Note, this Section
3.4(a) will be of no force or effect with regard to all or a portion of the Note
referenced in the Waiver Notice.

     

    (b) Notwithstanding
anything to the contrary set forth in this Note, at no time may all or a portion
of this Note be converted if the number of shares of Common Stock to be issued
pursuant to such conversion, when aggregated with all other shares of Common
Stock owned by the Holder at such time, would result in the Holder beneficially
owning (as determined in accordance with Section 13(d) of the Exchange Act and
the rules thereunder) in excess of 9.99% of the then issued and outstanding
shares of Common Stock outstanding at such time.  The provisions of
this Section 3.4(b) may not be amended or waived by the Holder or the
Maker.

     

    Section
3.5 Adjustment of Conversion
Price.

     

    (a) Until the
Note has been paid in full or converted in full, the Conversion Price shall be
subject to adjustment from time to time as follows (but shall not be increased,
other than pursuant to Section 3.5(a)(i) hereof):

     

     

    
      
        
        

      

      
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    (i) Adjustments for Stock Splits
and Combinations.  If the Maker shall at any time or from time
to time after the Issuance Date, effect a stock split of the outstanding Common
Stock, the applicable Conversion Price in effect immediately prior to the stock
split shall be proportionately decreased.  If the Maker shall at any
time or from time to time after the Issuance Date, combine the outstanding
shares of Common Stock, the applicable Conversion Price in effect immediately
prior to the combination shall be proportionately increased.  Any
adjustments under this Section 3.5(a)(i) shall be effective at the close of
business on the date the stock split or combination occurs.

     

    (ii)           Adjustments for Certain
Dividends and Distributions.  If the Maker shall at any time or
from time to time after the Issuance Date, make or issue or set a record date
for the determination of holders of Common Stock entitled to receive a dividend
or other distribution payable in shares of Common Stock, then, and in each
event, the applicable Conversion Price in effect immediately prior to such event
shall be decreased as of the time of such issuance or, in the event such record
date shall have been fixed, as of the close of business on such record date, by
multiplying, the applicable Conversion Price then in effect by a
fraction:

     

    (1)           the
numerator of which shall be the total number of shares of Common Stock issued
and outstanding immediately prior to the time of such issuance or the close of
business on such record date; and

     

    (2)           the
denominator of which shall be the total number of shares of Common Stock issued
and outstanding immediately prior to the time of such issuance or the close of
business on such record date plus the number of shares of Common Stock issuable
in payment of such dividend or distribution.

     

    (iii)           Adjustment for Other
Dividends and Distributions.  If the Maker shall at any time or
from time to time after the Issuance Date, make or issue or set a record date
for the determination of holders of Common Stock entitled to receive a dividend
or other distribution payable in other than shares of Common Stock, then, and in
each event, an appropriate revision to the applicable Conversion Price shall be
made and provision shall be made (by adjustments of the Conversion Price or
otherwise) so that the holders of this Note shall receive upon conversions
thereof, in addition to the number of shares of Common Stock receivable thereon,
the number of securities of the Maker or other issuer (as applicable) which they
would have received had this Note been converted into Common Stock on the date
of such event and had thereafter, during the period from the date of such event
to and including the Conversion Date, retained such securities (together with
any distributions payable thereon during such period), giving application to all
adjustments called for during such period under this Section 3.5(a)(iii) with
respect to the rights of the holders of this Note and the Other Note; provided, however, that if such
record date shall have been fixed and such dividend is not fully paid or if such
distribution is not fully made on the date fixed therefor, the Conversion Price
shall be adjusted pursuant to this paragraph as of the time of actual payment of
such dividends or distributions.

     

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

     

     

    (iv)           Adjustments for
Reclassification, Exchange or Substitution.  If the Common
Stock issuable upon conversion of this Note at any time or from time to time
after the Issuance Date shall be changed to the same or different number of
shares of any class or classes of stock, whether by reclassification, exchange,
substitution or otherwise (other than by way of a stock split or combination of
shares or stock dividends provided for in Sections 3.5(a)(i), (ii) and (iii), or
a reorganization, merger, consolidation, or sale of assets provided for in
Section 3.5(a)(v)), then, and in each event, an appropriate revision to the
Conversion Price shall be made and provisions shall be made (by adjustments of
the Conversion Price or otherwise) so that the Holder shall have the right
thereafter to convert this Note into the kind and amount of shares of stock and
other securities receivable upon reclassification, exchange, substitution or
other change, by holders of the number of shares of Common Stock into which such
Note might have been converted immediately prior to such reclassification,
exchange, substitution or other change, all subject to further adjustment as
provided herein.

     

    (v)           Adjustments for
Reorganization, Merger, Consolidation or Sales of Assets.  If
at any time or from time to time after the Issuance Date there shall be a
capital reorganization of the Maker (other than by way of a stock split or
combination of shares or stock dividends or distributions provided for in
Section 3.5(a)(i), (ii) and (iii), or a reclassification, exchange or
substitution of shares provided for in Section 3.5(a)(iv)), or a merger or
consolidation of the Maker with or into another Person where the holders of
outstanding voting securities prior to such merger or consolidation do not own
over fifty percent (50%) of the outstanding voting securities of the merged or
consolidated entity, immediately after such merger or consolidation, or the sale
of all or substantially all of the Maker’s properties or assets to any other
Person (an “Organic
Change”), then as a part of such Organic Change, (A) if the surviving
entity in any such Organic Change is a public company that is registered
pursuant to the Securities Exchange Act of 1934, as amended, and its common
stock is listed or quoted on a national exchange or the OTC Bulletin Board, an
appropriate revision to the Conversion Price shall be made and provision shall
be made (by adjustments of the Conversion Price or otherwise) so that the Holder
shall have the right thereafter to convert such Note into the kind and amount of
shares of stock and other securities or property of the Maker or any successor
corporation resulting from Organic Change, and (B) if the surviving entity in
any such Organic Change is not a public company that is registered pursuant to
the Securities Exchange Act of 1934, as amended, or its common stock is not
listed or quoted on a national exchange or the OTC Bulletin Board, the Holder
shall have the right to demand prepayment pursuant to Section 3.6(b)
hereof.  In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 3.5(a)(v) with respect to the
rights of the Holder after the Organic Change to the end that the provisions of
this Section 3.5(a)(v) (including any adjustment in the applicable Conversion
Price then in effect and the number of shares of stock or other securities
deliverable upon conversion of this Note and the Other Note) shall be applied
after that event in as nearly an equivalent manner as may be
practicable.

     

    (vi)           Adjustments for Issuance of
Additional Shares of Common Stock. In the event the Maker, shall, at any
time, from time to time, issue or sell any additional shares of common stock
(otherwise than as provided  in the foregoing subsections (i) through
(v) of this Section 3.5(a) or pursuant to Common Stock Equivalents (hereafter
defined) granted or issued prior to the Issuance Date) (“Additional Shares of Common
Stock”), at a price per share less than the Conversion Price then in
effect or without consideration, then the Conversion Price upon each such
issuance shall be reduced to a price equal to the consideration per share paid
for such Additional Shares of Common Stock.

     

     

     

     

    
      
        
        

      

      
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    (vii)                      Issuance of Common Stock
Equivalents.  The provisions of this Section 3.5(a)(vii) shall
apply if (a) the Maker, at any time after the Issuance Date, shall issue any
securities convertible into or exchangeable for, directly or indirectly, Common
Stock (“Convertible
Securities”), other than the Notes, or (b) any rights or warrants or
options to purchase any such Common Stock or Convertible Securities
(collectively, the “Common Stock
Equivalents”) shall be issued or sold.  If the price per share
for which Additional Shares of Common Stock may be issuable pursuant to any such
Common Stock Equivalent shall be less than the applicable Conversion Price then
in effect, or if, after any such issuance of Common Stock Equivalents, the price
per share for which Additional Shares of Common Stock may be issuable thereafter
is amended or adjusted, and such price as so amended shall be less than the
applicable Conversion Price in effect at the time of such amendment or
adjustment, then the applicable Conversion Price upon each such issuance or
amendment shall be adjusted as provided in the first sentence of subsection (vi)
of this Section 3.5(a).

     

    (viii)                      Consideration for
Stock.  In case any shares of Common Stock or any Common Stock
Equivalents shall be issued or sold:

     

    (1)           in
connection with any merger or consolidation in which the Maker is the surviving
corporation (other than any consolidation or merger in which the previously
outstanding shares of Common Stock of the Maker shall be changed to or exchanged
for the stock or other securities of another corporation), the amount of
consideration therefor shall be, deemed to be the fair value, as determined
reasonably and in good faith by the Board of Directors of the Maker, of such
portion of the assets and business of the nonsurviving corporation as such Board
may determine to be attributable to such shares of Common Stock, Convertible
Securities, rights or warrants or options, as the case may be; or

     

    (2)           in
the event of any consolidation or merger of the Maker in which the Maker is not
the surviving corporation or in which the previously outstanding shares of
Common Stock of the Maker shall be changed into or exchanged for the stock or
other securities of another corporation, or in the event of any sale of all or
substantially all of the assets of the Maker for stock or other securities of
any corporation, the Maker shall be deemed to have issued a number of shares of
its Common Stock for stock or securities or other property of the other
corporation computed on the basis of the actual exchange ratio on which the
transaction was predicated, and for a consideration equal to the fair market
value on the date of such transaction of all such stock or securities or other
property of the other corporation.  If any such calculation results in
adjustment of the applicable Conversion Price, or the number of shares of Common
Stock issuable upon conversion of the Notes, the determination of the applicable
Conversion Price or the number of shares of Common Stock issuable upon
conversion of the Notes immediately prior to such merger, consolidation or sale,
shall be made after giving effect to such adjustment of the number of shares of
Common Stock issuable upon conversion of the Notes.  In the event
Common Stock is issued with other shares or securities or other assets of the
Maker for consideration which covers both, the consideration computed as
provided in this Section 3.5(a)(viii) shall be allocated among such securities
and assets as determined in good faith by the Board of Directors of the Maker;
or

     

     

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

     

    (3)           for
services, other than as permitted pursuant to Section 3.5(c) hereof, the amount
of consideration therefor shall be deemed to be the par value of the Common
Stock.

    

    (b) Record
Date.  In case the Maker shall take record of the holders of
its Common Stock for the purpose of entitling them to subscribe for or purchase
Common Stock or Convertible Securities, then the date of the issue or sale of
the shares of Common Stock shall be deemed to be such record date.

     

    (c) Certain Issues
Excepted.  Anything herein to the contrary notwithstanding, the
Maker shall not be required to make any adjustment to the Conversion Price in
connection with the following: (a) issuances of shares of Common Stock or
options to employees, officers or directors of the Maker pursuant to any stock
or option plan existing on the date hereof (and not amended to increase the
shares available for grant or issuance thereunder) if such grants were duly
approved by a majority of the non-employee members of the Board of Directors of
the Maker or a majority of the members of a committee of non-employee directors
established for such purpose and, in the case of any options, the exercise price
of such options are in excess of the closing price of the Common Stock on the
date of grant; (b) issuances of securities upon the exercise or exchange of or
conversion of any securities issued hereunder and/or securities exercisable or
exchangeable for or convertible into shares of Common Stock issued and
outstanding on the Issuance Date, provided that such securities have not been
amended since the Issuance Date to increase the number of such securities or to
decrease the exercise, exchange or conversion price of any such securities, and
(c) securities issued pursuant to acquisitions or strategic transactions,
provided any such issuance shall only be to a person which is, itself or through
its subsidiaries, an operating company in a business synergistic with the
business of the Maker and in which the Maker receives benefits in addition to
the investment of funds, but shall not include a transaction in which the Maker
is issuing securities primarily for the purpose of raising capital or to an
entity whose primary business is investing in securities.

    

    (d)           No
Impairment.  The Maker shall not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, 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 to be observed or performed hereunder by the Maker, but will at all
times in good faith, assist in the carrying out of all the provisions of this
Section 3.5 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the Holder against
impairment.  In the event a Holder shall elect to convert any Notes as
provided herein, the Maker cannot refuse conversion based on any claim that such
Holder or any one associated or affiliated with such Holder has been engaged in
any violation of law, violation of an agreement to which such Holder is a party
or for any reason whatsoever, unless, an injunction from a court, or notice,
restraining and or adjoining conversion of all or of said Notes shall have
issued and the Maker posts a surety bond for the benefit of such Holder in an
amount equal to one hundred thirty percent (130%) of the amount of the Notes the
Holder has elected to convert, which bond shall remain in effect until the
completion of arbitration/litigation of the dispute and the proceeds of which
shall be payable to such Holder (as liquidated damages) in the event it obtains
judgment.

     

     

     

    
      
        
        

      

      
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    (e)           Certificates as to
Adjustments.  Upon occurrence of each adjustment or
readjustment of the Conversion Price or number of shares of Common Stock
issuable upon conversion of this Note pursuant to this Section 3.5, the Maker at
its expense shall promptly compute such adjustment or readjustment in accordance
with the terms hereof and furnish to the Holder a certificate setting forth such
adjustment and readjustment, showing in detail the facts upon which such
adjustment or readjustment is based.  The Maker shall, upon written
request of the Holder, at any time, furnish or cause to be furnished to the
Holder a like certificate setting forth such adjustments and readjustments, the
applicable Conversion Price in effect at the time, and the number of shares of
Common Stock and the amount, if any, of other securities or property which at
the time would be received upon the conversion of this
Note.  Notwithstanding the foregoing, the Maker shall not be obligated
to deliver a certificate unless such certificate would reflect an increase or
decrease of at least one percent (1%) of such adjusted amount.

     

    (f)           Issue
Taxes.  The Maker shall pay any and all issue and other taxes,
excluding federal, state or local income taxes, that may be payable in respect
of any issue or delivery of shares of Common Stock on conversion of this Note
pursuant thereto; provided, however, that the
Maker shall not be obligated to pay any transfer taxes resulting from any
transfer requested by the Holder in connection with any such
conversion.

     

    (g)           Fractional
Shares.  No fractional shares of Common Stock shall be issued
upon conversion of this Note.  In lieu of any fractional shares to
which the Holder would otherwise be entitled, the Maker shall pay cash equal to
the product of such fraction multiplied by the average of the Closing Bid Prices
of the Common Stock for the five (5) consecutive Trading Days immediately
preceding the Conversion Date.

     

    (h)           Reservation of Common
Stock.  The Maker shall at all times when this Note shall be
outstanding, reserve and keep available out of its authorized but unissued
Common Stock, such number of shares of Common Stock as shall from time to time
be sufficient to effect the conversion of this Note and all interest accrued
thereon; provided that the
number of shares of Common Stock so reserved shall at no time be less than one
hundred twenty percent (120%) of the number of shares of Common Stock for which
this Note and all interest accrued thereon are at any time
convertible.  The Maker shall, from time to time in accordance with
Delaware law, increase the authorized number of shares of Common Stock if at any
time the unissued number of authorized shares shall not be sufficient to satisfy
the Maker’s obligations under this Section 3.5(h).

     

    (i)           ­Regulatory
Compliance.  If any shares of Common Stock to be reserved for
the purpose of conversion of this Note or any interest accrued thereon require
registration or listing with or approval of any governmental authority, stock
exchange or other regulatory body under any federal or state law or regulation
or otherwise before such shares may be validly issued or delivered upon
conversion, the Maker shall, at its sole cost and expense, in good faith and as
expeditiously as possible, endeavor to secure such registration, listing or
approval, as the case may be.

    

    Section
3.6 Prepayment.

     

    (a)           Prepayment Upon an Event of
Default.  Notwithstanding anything to the contrary contained
herein, upon the occurrence of an Event of Default described in Sections
2.1(b)-(i) or (l)-(m) hereof, the Holder shall have the right, at such Holder’s
option, to require the Maker to prepay in cash all or a portion of this Note at
a price equal to one hundred and ten percent (110%) of the aggregate principal
amount of this Note plus all accrued and unpaid interest applicable at the time
of such request.  Nothing in this Section 3.6(a) shall limit the
Holder’s rights under Section 2.2 hereof.

     

     

     

    
      
        
        

      

      
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    (b)           Prepayment Option Upon Major
Transaction.  In addition to all other rights of the Holder
contained herein, simultaneous with the occurrence of a Major Transaction (as
defined below), the Holder shall have the right, at the Holder’s option, to
require the Maker to prepay all or a portion of the Holder’s Notes in cash at a
price equal to the sum of (i) the greater of (A) one hundred and ten percent
(110%) of the aggregate principal amount of this Note plus all accrued and
unpaid interest and (B) in the event at such time the Holder is unable to obtain
the benefit of its conversion rights through the conversion of this Note and
resale of the shares of Common Stock issuable upon conversion hereof in
accordance with the terms of this Note and the other Transaction Documents or
the Equity Conditions are not satisfied with respect to all such shares of
Common Stock, the aggregate principal amount of this Note plus all accrued but
unpaid interest hereon, divided by the Conversion Price on (x) the date the
Prepayment Price (as defined below) is demanded or otherwise due or (y) the date
the Major Transaction Prepayment Price is paid in full, whichever is less,
multiplied by the VWAP on (x) the date the Major Transaction Prepayment Price is
demanded or otherwise due, and (y) the date the Major Transaction Prepayment
Price is paid in full, whichever is greater, and (ii) all other amounts, costs,
expenses and liquidated damages due in respect of this Note and the other
Transaction Documents (the “Major Transaction Prepayment
Price”).

     

    (c)           Prepayment Option Upon
Triggering Event.  In addition to all other rights of the
Holder contained herein, after a Triggering Event (as defined below), the Holder
shall have the right, at the Holder’s option, to require the Maker to prepay all
or a portion of this Note in cash at a price equal to the sum of (i) the greater
of (A) one hundred and ten percent (110%) of the aggregate principal amount of
this Note plus all accrued and unpaid interest and (B) the aggregate principal
amount of this Note plus all accrued but unpaid interest hereon, divided by the
Conversion Price on (x) the date the Prepayment Price (as defined below) is
demanded or otherwise due or (y) the date the Prepayment Price is paid in full,
whichever is less, multiplied by the VWAP on (x) the date the Prepayment Price
is demanded or otherwise due, and (y) the date the Prepayment Price is paid in
full, whichever is greater, and (ii) all other amounts, costs, expenses and
liquidated damages due in respect of this Note and the other Transaction
Documents (the “Triggering Event Prepayment
Price,” and, collectively with the Major Transaction Prepayment Price,
the “Prepayment
Price”).

     

    (d)           “Major
Transaction.”  A “Major Transaction”
shall be deemed to have occurred at such time as any of the following
events:

     

    (i)           the
consolidation, merger or other business combination of the Maker with or into
another Person (other than (A) pursuant to a migratory merger effected solely
for the purpose of changing the jurisdiction of incorporation of the Maker or
(B) a consolidation, merger or other business combination in which the Maker is
the surviving entity and the holders of the Maker’s voting power immediately
prior to the transaction continue after the transaction to hold, directly or
indirectly, the voting power of the surviving entity or entities necessary to
elect a majority of the members of the board of directors (or their equivalent
if other than a corporation) of such entity or entities).

     

    (ii)           the
sale or transfer of more than fifty percent (50%) of the Maker’s assets (based
on the fair market value as determined in good faith by the Maker’s Board of
Directors) other than inventory in the ordinary course of business in one or a
related series of transactions; or

     

    (iii)           closing
of a purchase, tender or exchange offer made to the holders of more than fifty
percent (50%) of the outstanding shares of Common Stock in which more than fifty
percent (50%) of the outstanding shares of Common Stock were tendered and
accepted.

     

    
      	
              (e)  

            	
              [Reserved]

            

    

    

    (f) “Triggering Event.” A
“Triggering Event” shall be deemed to have occurred at such time as any of the
following events:

     

    (i) the
suspension from listing, without subsequent listing on any one of, or the
failure of the Common Stock to be listed on at least one of the OTC Bulletin
Board, the American Stock Exchange, the Nasdaq Capital Markets, the Nasdaq
Global Market, the Nasdaq Global Select Market or The New York Stock Exchange,
Inc. for a period of five (5) consecutive Trading Days;

     

    (ii) the
Maker’s notice to any holder of the Notes, including by way of public
announcement, at any time, of its inability to comply (including for any of the
reasons described in Section 3.7) or its intention not to comply with proper
requests for conversion of any Notes into shares of Common Stock;
or

     

    (iii) the
Maker’s failure to comply with a Conversion Notice tendered in accordance with
the provisions of this Note within ten (10) business days after the receipt by
the Maker of the Conversion Notice; or

     

     

     

    
      
        
        

      

      
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    (iv) the Maker
deregisters its shares of Common Stock and as a result such shares of Common
Stock are no longer publicly traded; or

     

    (v) the Maker
consummates a “going private” transaction and as a result the Common Stock is no
longer registered under Sections 12(b) or 12(g) of the Exchange Act;
or

     

    (vi) the Maker
defaults in the payment of (1) the principal amount hereunder when due, or (2)
interest on, or liquidated damages in respect of, this Note, as and when the
same shall become due and payable (whether on the Maturity Date or by
acceleration or otherwise); or

     

    (vii) the Maker
shall fail to comply with Section 5.12(c) of this Note.

     

    (g)           [Reserved]

    

    (h)           Mechanics of Prepayment at
Option of Holder Upon Major Transaction.  No sooner than
fifteen (15) days nor later than ten (10) days prior to the consummation of a
Major Transaction, but not prior to the public announcement of such Major
Transaction, the Maker shall deliver written notice thereof via facsimile and
overnight courier (“Notice of Major
Transaction”) to the Holder of this Note.  At any time after
receipt of a Notice of Major Transaction (or, in the event a Notice of Major
Transaction is not delivered at least ten (10) days prior to a Major
Transaction, at any time within ten (10) days prior to a Major Transaction), any
holder of the Notes then outstanding may require the Maker to prepay, effective
immediately prior to the consummation of such Major Transaction, all of the
holder’s Notes then outstanding by delivering written notice thereof via
facsimile and overnight courier (“Notice of Prepayment at
Option of Holder Upon Major Transaction”) to the Maker, which Notice of
Prepayment at Option of Holder Upon Major Transaction shall indicate (i) the
principal amount of the Notes that such holder is electing to have prepaid and
(ii) the applicable Major Transaction Prepayment Price, as calculated pursuant
to Section 3.6(b) above.

     

    (i)           Mechanics of Prepayment at
Option of Holder Upon Triggering Event.  Within one (1)
business day after the occurrence of a Triggering Event, the Maker shall deliver
written notice thereof via facsimile and overnight courier (“Notice of Triggering
Event”) to each holder of the Notes.  At any time after the
earlier of a holder’s receipt of a Notice of Triggering Event and such holder
becoming aware of a Triggering Event, any holder of this Note and the Other Note
then outstanding may require the Maker to prepay all of the Notes on a pro rata
basis by delivering written notice thereof via facsimile and overnight courier
(“Notice of Prepayment
at Option of Holder Upon Triggering Event”) to the Maker, which Notice of
Prepayment at Option of Holder Upon Triggering Event shall indicate (i) the
amount of the Note that such holder is electing to have prepaid and (ii) the
applicable Triggering Event Prepayment Price, as calculated pursuant to Section
3.6(c) above.  A holder shall only be permitted to require the Maker
to prepay the Note pursuant to Section 3.6 hereof for the greater of a period of
ten (10) days after receipt by such holder of a Notice of Triggering Event or
for so long as such Triggering Event is continuing.

     

     

    
      
        
        

      

      
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    (j)           Payment of Prepayment
Price.  Upon the Maker’s receipt of a Notice(s) of Prepayment
at Option of Holder Upon Triggering Event or a Notice(s) of Prepayment at Option
of Holder Upon Major Transaction from any holder of the Notes, the Maker shall
immediately notify each holder of the Notes by facsimile of the Maker’s receipt
of such Notice(s) of Prepayment at Option of Holder Upon Triggering Event or
Notice(s) of Prepayment at Option of Holder Upon Major Transaction and each
holder which has sent such a notice shall promptly submit to the Maker such
holder’s certificates representing the Notes which such holder has elected to
have prepaid.  The Maker shall deliver the applicable Triggering Event
Prepayment Price, in the case of a prepayment pursuant to Section 3.6(i), to
such holder within five (5) business days after the Maker’s receipt of a Notice
of Prepayment at Option of Holder Upon Triggering Event and, in the case of a
prepayment pursuant to Section 3.6(h), the Maker shall deliver the applicable
Major Transaction Prepayment Price immediately prior to the consummation of the
Major Transaction; provided that a holder’s original Note shall have been so
delivered to the Maker; provided further that if the Maker is unable to prepay
all of the Notes to be prepaid, the Maker shall prepay an amount from each
holder of the Notes being prepaid equal to such holder’s pro-rata amount (based
on the number of Notes and the Other Note held by such holder relative to the
number of Notes and the Other Note outstanding) of all Notes being
prepaid.  If the Maker shall fail to prepay all of the Notes submitted
for prepayment (other than pursuant to a dispute as to the arithmetic
calculation of the Prepayment Price), in addition to any remedy such holder of
the Notes may have under this Note and the Purchase Agreement, the applicable
Prepayment Price payable in respect of such Notes not prepaid shall bear
interest at the rate of two percent (2%) per month (prorated for partial months)
until paid in full.  Until the Maker pays such unpaid applicable
Prepayment Price in full to a holder of the Notes submitted for prepayment, such
holder shall have the option (the “Void Optional Prepayment
Option”) to, in lieu of prepayment, require the Maker to promptly return
to such holder(s) all of the Notes that were submitted for prepayment by such
holder(s) under this Section 3.6 and for which the applicable Prepayment Price
has not been paid, by sending written notice thereof to the Maker via facsimile
(the “Void Optional
Prepayment Notice”).  Upon the Maker’s receipt of such Void
Optional Prepayment Notice(s) and prior to payment of the full applicable
Prepayment Price to such holder, (i) the Notice(s) of Prepayment at Option of
Holder Upon Triggering Event or the Notice(s) of Prepayment at Option of Holder
Upon Major Transaction, as the case may be, shall be null and void with respect
to those Notes submitted for prepayment and for which the applicable Prepayment
Price has not been paid, (ii) the Maker shall immediately return any Notes
submitted to the Maker by each holder for prepayment under this Section 3.6(j)
and for which the applicable Prepayment Price has not been paid and (iii) the
Conversion Price of such returned Notes shall be adjusted to the lesser of (A)
the Conversion Price as in effect on the date on which the Void Optional
Prepayment Notice(s) is delivered to the Maker and (B) the lowest Closing Bid
Price during the period beginning on the date on which the Notice(s) of
Prepayment of Option of Holder Upon Major Transaction or the Notice(s) of
Prepayment at Option of Holder Upon Triggering Event, as the case may be, is
delivered to the Maker and ending on the date on which the Void Optional
Prepayment Notice(s) is delivered to the Maker; provided that no adjustment
shall be made if such adjustment would result in an increase of the Conversion
Price then in effect.  A holder’s delivery of a Void Optional
Prepayment Notice and exercise of its rights following such notice shall not
effect the Maker’s obligations to make any payments which have accrued prior to
the date of such notice.  Payments provided for in this Section 3.6
shall have priority to payments to other stockholders in connection with a Major
Transaction.

     

    Section
3.7 Inability to Fully
Convert.

     

    (a)           Holder’s Option if Maker
Cannot Fully Convert.  If, upon the Maker’s receipt of a
Conversion Notice, the Maker cannot issue shares of Common Stock for any reason,
including, without limitation, because the Maker (x) does not have a sufficient
number of shares of Common Stock authorized and available, or (y) is otherwise
prohibited by applicable law or by the rules or regulations of any stock
exchange, interdealer quotation system or other self-regulatory organization
with jurisdiction over the Maker or any of its securities from issuing all of
the Common Stock which is to be issued to the Holder pursuant to a Conversion
Notice, then the Maker shall issue as many shares of Common Stock as it is able
to issue in accordance with the Holder’s Conversion Notice and, with respect to
the unconverted portion of this Note, the Holder, solely at Holder’s option, can
elect to:

     

    (i) If the
Maker’s inability to honor any conversion fully is pursuant to Section 3.7(a)(x)
above, require the Maker to prepay that portion of this Note for which the Maker
is unable to issue Common Stock in accordance with the Holder’s Conversion
Notice (the “Mandatory
Prepayment”) at a price per share equal to the Triggering Event
Prepayment Price as of such Conversion Date (the “Mandatory Prepayment
Price”);

     

     

     

     

    
      
        
        

      

      
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    (ii) if the
Maker’s inability to fully convert is pursuant to Section 3.7(a)(y) above,
require the Maker to issue restricted shares of Common Stock in accordance with
such holder’s Conversion Notice;

     

    (iii) void its
Conversion Notice and retain or have returned, as the case may be, this Note
that was to be converted pursuant to the Conversion Notice (provided that the
Holder’s voiding its Conversion Notice shall not effect the Maker’s obligations
to make any payments which have accrued prior to the date of such
notice);

     

    (iv) exercise
its Buy-In rights pursuant to and in accordance with the terms and provisions of
Section 3.3(c) of this Note.

     

    In the
event a Holder shall elect to convert any portion of its Notes as provided
herein, the Maker cannot refuse conversion based on any claim that such Holder
or any one associated or affiliated with such Holder has been engaged in any
violation of law, violation of an agreement to which such Holder is a party or
for any reason whatsoever, unless, an injunction from a court, on notice,
restraining and or adjoining conversion of all or of said Notes shall have been
issued and the Maker posts a surety bond for the benefit of such Holder in an
amount equal to 130% of the principal amount of the Notes the Holder has elected
to convert, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be payable
to such Holder in the event it obtains judgment.

    

    (b)           Mechanics of Fulfilling
Holder’s Election.  The Maker shall immediately send via
facsimile to the Holder, upon receipt of a facsimile copy of a Conversion Notice
from the Holder which cannot be fully satisfied as described in Section 3.7(a)
above, a notice of the Maker’s inability to fully satisfy the Conversion Notice
(the “Inability to
Fully Convert Notice”).  Such Inability to Fully Convert Notice
shall indicate (i) the reason why the Maker is unable to fully satisfy such
holder’s Conversion Notice, (ii) the amount of this Note which cannot be
converted and (iii) the applicable Mandatory Prepayment Price.  The
Holder shall notify the Maker of its election pursuant to Section 3.7(a) above
by delivering written notice via facsimile to the Maker (“Notice in Response to
Inability to Convert”).

     

    (c)           Payment of Prepayment
Price.  If the Holder shall elect to have its Notes prepaid
pursuant to Section 3.7(a)(i) above, the Maker shall pay the Mandatory
Prepayment Price to the Holder within thirty (30) days of the Maker’s receipt of
the Holder’s Notice in Response to Inability to Convert, provided that prior
to the Maker’s receipt of the Holder’s Notice in Response to Inability to
Convert the Maker has not delivered a notice to the Holder stating, to the
satisfaction of the Holder, that the event or condition resulting in the
Mandatory Prepayment has been cured and all Conversion Shares issuable to the
Holder can and will be delivered to the Holder in accordance with the terms of
this Note.  If the Maker shall fail to pay the applicable Mandatory
Prepayment Price to the Holder on the date that is one (1) business day
following the Maker’s receipt of the Holder’s Notice in Response to Inability to
Convert (other than pursuant to a dispute as to the determination of the
arithmetic calculation of the Prepayment Price), in addition to any remedy the
Holder may have under this Note and the Purchase Agreement, such unpaid amount
shall bear interest at the rate of two percent (2%) per month (prorated for
partial months) until paid in full.  Until the full Mandatory
Prepayment Price is paid in full to the Holder, the Holder may (i) void the
Mandatory Prepayment with respect to that portion of the Note for which the full
Mandatory Prepayment Price has not been paid, (ii) receive back such Note, and
(iii) require that the Conversion Price of such returned Note be adjusted to the
lesser of (A) the Conversion Price as in effect on the date on which the Holder
voided the Mandatory Prepayment and (B) the lowest Closing Bid Price during the
period beginning on the Conversion Date and ending on the date the Holder voided
the Mandatory Prepayment.

     

    (d)           Pro-rata Conversion and
Prepayment.  In the event the Maker receives a Conversion
Notice from more than one holder of the Notes on the same day and the Maker can
convert and prepay some, but not all, of the Notes pursuant to this Section 3.7,
the Maker shall convert and prepay from each holder of the Notes electing to
have its Notes converted and prepaid at such time an amount equal to such
holder’s pro-rata amount (based on the principal amount of the Notes held by
such holder relative to the principal amount of the Notes and the Other Note
outstanding) of all the Notes being converted and prepaid at such
time.

     

    Section
3.8 No Rights as
Shareholder.  Nothing contained in this Note shall be construed
as conferring upon the Holder, prior to the conversion of this Note, the right
to vote or to receive dividends or to consent or to receive notice as a
shareholder in respect of any meeting of shareholders for the election of
directors of the Maker or of any other matter, or any other rights as a
shareholder of the Maker.

     

     

    
      
        
        

      

      
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    ARTICLE
IV

    COVENANTS

    

    For so long as this Note is
outstanding, without the prior written consent of the holders of at least a
majority of the aggregate principal amount of the Notes and the Other Note
(together, as one class):

    

    Section
4.1 No
Liens.  Other than Permitted Liens, the Maker shall not, and
shall not permit the Guarantors to, enter into, create, incur, assume or suffer
to exist any liens, security interests, charges, claims or other encumbrances of
any kind (collectively, “Liens”) on or with respect to any of its assets now
owned or hereafter acquired or any interest therein or any income or profits
therefrom.

     

    Section
4.2 No
Indebtedness.  Other than Indebtedness existing on the date
hereof and disclosed in the Commission Documents and Permitted Subordinated
Indebtedness, the Maker shall not, and shall not permit any Guarantor to, enter
into, create, incur, assume or suffer to exist any Indebtedness.

     

    Section
4.3 Compliance with Transaction
Documents.  The Maker shall, and shall cause the Guarantors to,
comply with its obligations under this Note and the other Transaction
Documents.

     

    Section
4.4 Compliance with
Law.  The Maker shall, and shall cause each of the Guarantors
to, comply with law and duly observe and conform in all material respects to all
valid requirements of governmental authorities relating to the conduct of its
business or to its properties or assets.

     

    Section
4.5 Transactions with
Affiliates.  The Maker shall not, and shall not permit the
Guarantors to, engage in any transactions with any officer, director, employee
or any Affiliate of the Maker, including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring payments
to or from any officer, director or such employee or, to the knowledge of the
Maker, any entity in which any officer, director, or any such employee has a
substantial interest or is an officer, director, trustee or partner, in each
case in excess of $50,000, other than (i) for payment of reasonable salary for
services actually rendered, as approved by the Board of Directors of the Maker
as fair in all respects to the Maker, and (ii) reimbursement for expenses
incurred on behalf of the Maker.

     

    Section
4.6 No
Dividends.  the Maker shall not, and shall not permit any
Guarantor to, (i) declare or pay any dividends or make any distributions to any
holder(s) of Common Stock or other equity security of the Maker or such
Guarantors (other than dividend and distributions from a Guarantor to the Maker
which are applied immediately to the repayment of this Note), (ii) purchase or
otherwise acquire for value, directly or indirectly, any shares or other equity
security of the Maker or any Guarantor, (iii) form, create or permit to exist
any subsidiary (other than the Guarantors existing on the date hereof) or become
a partner in any partnership or joint venture, or make any acquisition of any
interest in any Person or acquire substantially all of the assets of any Person,
or (iv) transfer, assign, pledge, issue or otherwise permit any equity or other
ownership interests in the Guarantors to be beneficially owned or held by any
person other than the Maker.

     

    Section
4.7 No Merger or Sale of
Assets.  The Maker shall not, and shall not permit any
Guarantor to, (i) merge or consolidate or sell or dispose of all its assets or
any substantial portion thereof or (ii) in any way or manner alter its
organizational structure or effect a change of entity;

     

    Section
4.8 Payment of Taxes,
Etc.  The Maker shall, and shall cause each of the Guarantors
to, promptly pay and discharge, or cause to be paid and discharged, when due and
payable, all lawful taxes, assessments and governmental charges or levies
imposed upon the income, profits, property or business of the Maker and the
Guarantors, except for such failures to pay that, individually or in the
aggregate, have not had and would not reasonably be expected to have a Material
Adverse Effect; provided, however, that any such tax, assessment, charge or levy
need not be paid if the validity thereof shall currently be contested in good
faith by appropriate proceedings and if the Maker or such Guarantors shall have
set aside on its books adequate reserves with respect thereto, and provided,
further, that the Maker and such Guarantors will pay all such taxes,
assessments, charges or levies forthwith upon the commencement of proceedings to
foreclose any lien which may have attached as security therefor.

     

     

     

    
      
        
        

      

      
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    Section
4.9 Corporate
Existence.  The Maker shall, and shall cause each of the
Guarantors to, maintain in full force and effect its corporate existence, rights
and franchises and all licenses and other rights to use property owned or
possessed by it and reasonably deemed to be necessary to the conduct of its
business.

     

    Section
4.10 Investment Company
Act.  The Maker shall conduct its businesses in a manner so
that it will not become subject to the Investment Company Act of 1940, as
amended.

     

    Section
4.11  Maintenance of
Assets.  The Maker shall, and shall cause the Guarantors to,
keep its properties in good repair, working order and condition, reasonable wear
and tear excepted, and from time to time make all necessary and proper repairs,
renewals, replacements, additions and improvements thereto.

     

    Section
4.12 Indebtedness to
Affiliates.   The Maker shall not, and shall not permit
any Guarantor to, make any payment on any indebtedness owed to officers,
directors or Affiliates, or any indebtedness described on Schedule 2.1(k) of the
Purchase Agreement.

     

    Section
4.13 Restriction on
Dividends.  The Maker shall not, and shall not permit any
Guarantor to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Guarantor to pay dividends or distributions to the Maker, pay any indebtedness
owed to the Maker or transfer any properties or assets to the
Maker.

     

    Section
4.14 No
Investments.  The Maker shall not, and shall not permit any
Guarantor to, make or suffer to exist any Investments or commitments therefor,
other than Investments made in the ordinary course of business.

     

    Section
4.15 No Lien on
IP.  The Maker shall not, and the Maker shall not permit any
Guarantor to, directly or indirectly, to encumber or allow any Liens on, any of
its copyright rights, copyright applications, copyright registrations and like
protections in each work of authorship and derivative work, whether published or
unpublished, any patents, patent applications and like protections, including
improvements, divisions, continuations, renewals, reissues, extensions, and
continuations-in-part of the same, trademarks, service marks and, to the extent
permitted under applicable law, any applications therefor, whether registered or
not, and the goodwill of the business of the Maker and its Subsidiaries
connected with and symbolized thereby, know-how, operating manuals, trade secret
rights, rights to unpatented inventions, and any claims for damage by way of any
past, present, or future infringement of any of the foregoing, other than
Permitted Liens

     

    ARTICLE
V

    ­MISCELLANEOUS

     

    Section
5.1 ­Notices.  Any
notice, demand, request, waiver or other communication required or permitted to
be given hereunder shall be in writing and shall be effective (a) upon hand
delivery, telecopy or facsimile at the address or number designated in the
Purchase Agreement (if delivered on a business day during normal business hours
where such notice is to be received), or the first business day following such
delivery (if delivered other than on a business day during normal business hours
where such notice is to be received) or (b) on the second business day following
the date of mailing by express courier service, fully prepaid, addressed to such
address, or upon actual receipt of such mailing, whichever shall first
occur.  The Maker will give written notice to the Holder at least ten
(10) days prior to the date on which the Maker takes a record (x) with respect
to any dividend or distribution upon the Common Stock, (y) with respect to any
pro rata subscription offer to holders of Common Stock or (z) for determining
rights to vote with respect to any Organic Change, dissolution, liquidation or
winding-up and in no event shall such notice be provided to such holder prior to
such information being made known to the public.  The Maker will also
give written notice to the Holder at least ten (10) days prior to the date on
which any Organic Change, dissolution, liquidation or winding-up will take place
and in no event shall such notice be provided to the Holder prior to such
information being made known to the public. The Maker shall promptly notify the
Holder of this Note of any notices sent or received, or any actions taken with
respect to the Other Note.

     

     

    
      
        
        

      

      
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    Section
5.2 Governing
Law.  This Note shall be governed by and construed in
accordance with the internal laws of the State of New York, without giving
effect to any of the conflicts of law principles which would result in the
application of the substantive law of another jurisdiction.  This Note
shall not be interpreted or construed with any presumption against the party
causing this Note to be drafted.  All payment obligations arising
under this Note are subject to the express condition that at no time shall the
Borrower be obligated or required to pay interest at a rate which could subject
the Holder to either civil or criminal liability as a result of being in excess
of the maximum rate which the Borrower is permitted by law to contract or agree
to pay. If by the terms of this Note, the Borrower is at any time required or
obligated to pay interest at a rate in excess of such maximum rate, the
applicable rate of interest shall be deemed to be immediately reduced to such
maximum rate, and interest thus payable shall be computed at such maximum rate,
and the portion of all prior interest payments in excess of such maximum rate
shall be applied and shall be deemed to have been payments in reduction of
principal.

     

    Section
5.3 ­Headings.  Article
and section headings in this Note are included herein for purposes of
convenience of reference only and shall not constitute a part of this Note for
any other purpose.

     

    Section
5.4 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, at law or in equity (including, without
limitation, a decree of specific performance and/or other injunctive relief), no
remedy contained herein shall be deemed a waiver of compliance with the
provisions giving rise to such remedy and nothing herein shall limit a holder’s
right to pursue actual damages for any failure by the Maker 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 thereof and shall not, except as
expressly provided herein, be subject to any other obligation of the Maker (or
the performance thereof).  The Maker acknowledges that a breach by it
of its obligations hereunder will cause irreparable and material harm to the
Holder and that the remedy at law for any such breach may be inadequate.
Therefore the Maker agrees that, in the event of any such breach or threatened
breach, the Holder shall be entitled, in addition to all other available rights
and remedies, at law or in equity, to seek and obtain such equitable relief,
including but not limited to an injunction restraining any such breach or
threatened breach, without the necessity of showing economic loss and without
any bond or other security being required.

     

    Section
5.5 Enforcement
Expenses.  The Maker agrees to pay all costs and expenses of
enforcement of this Note, including, without limitation, reasonable attorneys’
fees and expenses.

     

    Section
5.6 Binding
Effect.   The obligations of the Maker and the Holder set
forth herein shall be binding upon the successors and assigns of each such
party, whether or not such successors or assigns are permitted by the terms
hereof.

     

    Section
5.7 Amendments.  This
Note may not be modified or amended in any manner except in writing executed by
the Maker and the Holder.

     

    Section
5.8 Compliance with Securities
Laws.  The Holder of this Note acknowledges that this Note is
being acquired solely for the Holder’s own account and not as a nominee for any
other party, and for investment, and that the Holder shall not offer, sell or
otherwise dispose of this Note except in compliance with applicable securities
laws.  This Note and any Note issued in substitution or replacement
therefor shall be stamped or imprinted with a legend in substantially the
following form:

     

    “THIS NOTE AND THE SHARES OF COMMON
STOCK ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE SECURITIES
LAWS, AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR
RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL IN THE FORM, SUBSTANCE AND SCOPE
REASONABLY SATISFACTORY TO THE MAKER THAT THIS NOTE AND THE SHARES OF COMMON
STOCK ISSUABLE UPON CONVERSION HEREOF HAVE MAY BE SOLD, TRANSFERRED,
HYPOTHECATED OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION FROM REGISTRATION
UNDER THE ACT AND SUCH STATE SECURITIES LAWS.”

     

     

     

    
      
        
        

      

      
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    Section
5.9 ­Consent to
Jurisdiction.  Each of the Maker and the Holder (i) hereby
irrevocably submits to the exclusive jurisdiction of the United States District
Court sitting in the Southern District of New York and the courts of the State
of New York located in New York county for the purposes of any suit, action or
proceeding arising out of or relating to this Note and (ii) hereby waives, and
agrees not to assert in any such suit, action or proceeding, any claim that it
is not personally subject to the jurisdiction of such court, that the suit,
action or proceeding is brought in an inconvenient forum or that the venue of
the suit, action or proceeding is improper.  Each of the Maker and the
Holder consents to process being served in any such suit, action or proceeding
by mailing a copy thereof to such party at the address in effect for notices to
it under the Purchase Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof.  Nothing in
this Section 5.9 shall affect or limit any right to serve process in any other
manner permitted by law.  Each of the Maker and the Holder hereby
agree that the prevailing party in any suit, action or proceeding arising out of
or relating to this Note shall be entitled to reimbursement for reasonable legal
fees from the non-prevailing party.

     

    Section
5.10 ­Parties in
Interest.  This Note shall be binding upon, inure to the
benefit of and be enforceable by the Maker, the Holder and their respective
successors and permitted assigns.

     

    Section
5.11 ­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.

     

    Section
5.12 ­Maker Waivers; Dispute
Resolution.  Except as otherwise specifically provided herein,
the Maker and all others that may become liable for all or any part of the
obligations evidenced by this Note, hereby waive presentment, demand, notice of
nonpayment, protest and all other demands’ and notices in connection with the
delivery, acceptance, performance and enforcement of this Note, and do hereby
consent to any number of renewals of extensions of the time or payment hereof
and agree that any such renewals or extensions may be made without notice to any
such persons and without affecting their liability herein and do further consent
to the release of any person liable hereon, all without affecting the liability
of the other persons, firms or Maker liable for the payment of this Note, AND DO
HEREBY WAIVE TRIAL BY JURY.

     

    (a) No delay
or omission on the part of the Holder in exercising its rights under this Note,
or course of conduct relating hereto, shall operate as a waiver of such rights
or any other right of the Holder, nor shall any waiver by the Holder of any such
right or rights on any one occasion be deemed a waiver of the same right or
rights on any future occasion.

     

    (b) THE MAKER
ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS NOTE IS A PART IS A COMMERCIAL
TRANSACTION, AND TO THE EXTENT ALLOWED BY APPLICABLE LAW, HEREBY WAIVES ITS
RIGHT TO NOTICE AND HEARING WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH THE
HOLDER OR ITS SUCCESSORS OR ASSIGNS MAY DESIRE TO USE.

     

     

     

    
      
        
        

      

      
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    (c) In the
case of a dispute as to the determination of the Closing Bid Price or the VWAP
or the arithmetic calculation of the Conversion Price, any adjustment to the
Conversion Price, liquidated damages amount, interest or dividend calculation,
or any redemption price, redemption amount, adjusted Conversion Price, or
similar calculation, or as to whether a subsequent issuance of securities is
prohibited hereunder or would lead to an adjustment to the Conversion Price, the
Maker shall submit the disputed determinations or arithmetic calculations via
facsimile within two (2) Business Days of receipt, or deemed receipt, of the
Conversion Notice, any redemption notice, default notice or other event giving
rise to such dispute, as the case may be, to the Holder. If the Holder and the
Maker are unable to agree upon such determination or calculation within two (2)
Business Days of such disputed determination or arithmetic calculation being
submitted to the Holder, then the Maker shall, within two (2) Business Days
submit via facsimile (a) the disputed determination of the Closing Price or the
VWAP to an independent, reputable investment bank selected by the Maker and
approved by the Holder, which approval shall not be unreasonably withheld, (b)
the disputed arithmetic calculation of the Conversion Price, adjusted Conversion
Price or any redemption price, redemption amount or default amount to the
Maker’s independent, outside accountant or (c) the disputed facts regarding
whether a subsequent issuance of securities is prohibited hereunder or would
lead to an adjustment to the Conversion Price (or any of the other above
described facts not expressly designated to the investment bank or accountant),
to an expert attorney from a nationally recognized outside law firm (having at
least 100 attorneys and having with no prior relationship with the Maker)
selected by the Maker and approved by the Lead Purchaser as defined in the
Purchase Agreement).  The Maker, at the Maker’s expense, shall cause
the investment bank, the accountant, the law firm, or other expert, as the case
may be, to perform the determinations or calculations and notify the Maker and
the Holder of the results no later than five (5) Business Days from the time it
receives the disputed determinations or calculations. Such investment bank’s,
accountant’s or attorney’s determination or calculation, as the case may be,
shall be binding upon all parties absent demonstrable error.

     

    Section
5.13 Definitions.  Terms
used herein and not defined shall have the meanings set forth in the Purchase
Agreement.  For the purposes hereof, the following terms shall have
the following meanings:

     

    “Closing Bid Price”
shall mean, on any particular date (i) the last trading price per share of the
Common Stock on such date on the OTC Bulletin Board or another registered
national stock exchange on which the Common Stock is then listed, or if there is
no such price on such date, then the last trading price on such exchange or
quotation system on the date nearest preceding such date, or (ii) if the Common
Stock is not then listed or traded on a registered national securities exchange
or quoted on the OTC Bulletin Board, then the average of the “Pink Sheet” quotes
for the relevant conversion period, as determined in good faith by the Holder,
or (iii) if the Common Stock is not then publicly traded the fair market value
of a share of Common Stock as determined by the Holder and reasonably acceptable
to the Maker.

    

    “Equity Conditions”
shall mean, during the period in question, (i) the Maker shall have duly honored
all conversions and redemptions scheduled to occur or occurring by virtue of one
or more Conversion Notices of the Holder, if any, (ii) all liquidated damages
and other amounts owing to the Holder in respect of this Note shall have been
paid; (iii) (A) there is an effective registration statement pursuant to which
the Holder is permitted to utilize the prospectus thereunder to resell all of
the shares issuable pursuant to this Note as a payment of interest or principal,
or (B) such shares may be sold by the Holder pursuant to Rule 144 under the
Securities Act without regards to volume limitations and the Maker and its
counsel shall have delivered all legal opinions and other documents necessary to
effect such sale, (iv) the Common Stock is trading on the Trading Market and all
of the shares issuable pursuant to the Transaction Documents are listed for
trading on a Trading Market (and the Maker believes, in good faith, that trading
of the Common Stock on a Trading Market will continue uninterrupted for the
foreseeable future), (v) there is a sufficient number of authorized but unissued
and otherwise unreserved shares of Common Stock for the issuance of all of the
shares issuable pursuant to the Transaction Documents, (vi) there is then
existing no Event of Default or event which, with the passage of time or the
giving of notice, would constitute an Event of Default, (vii) the issuance of
the shares in question to the Holder would not violate the limitations set forth
in Section 3.4(a) or 3.4(b) hereof, (viii) no public announcement of a pending
or proposed Major Transaction or Triggering Event has occurred and (ix) the
average daily trading dollar volume of the Common Stock for each three
consecutive Trading Days throughout such period exceeds $100,000.

     

     

     

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

    

     

    
 

    “Indebtedness” means
(a) all obligations for borrowed money, (b) all obligations evidenced by bonds,
debentures, notes, or other similar instruments and all reimbursement or other
obligations in respect of letters of credit, bankers acceptances, current swap
agreements, interest rate hedging agreements, interest rate swaps, or other
financial products, (c) all capital lease obligations that exceed $10,000 in the
aggregate in any fiscal year, (d) all obligations or liabilities secured by a
lien or encumbrance on any asset of the Maker, irrespective of whether such
obligation or liability is assumed, (e) all obligations for the deferred
purchase price of assets, together with trade debt and other accounts payable
that exceed $10,000 in the aggregate in any fiscal year, (f) all synthetic
leases, and (g) any obligation guaranteeing or intended to guarantee (whether
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse) any of the foregoing obligations of any other person; provided,
however, Indebtedness shall not include (a) usual and customary trade debt
incurred in the ordinary course of business and (b) endorsements for collection
or deposit in the ordinary course of business.

    

    “Investment” means,
with respect to any Person, all investments in any other Person, whether by way
of extension of credit, loan, advance, purchase of stock or other ownership
interest (other than ownership interests in such Person), bonds, notes,
debentures or other securities, or otherwise, and whether existing on the date
of this Agreement or thereafter made, but such term shall not include the cash
surrender value of life insurance policies on the lives of officers or
employees, excluding amounts due from customers for services or products
delivered or sold in the ordinary course of business.

    

    “Permitted Lien”
means the individual and collective reference to the following: (a) Liens for
taxes, assessments and other governmental charges or levies not yet due or Liens
for taxes, assessments and other governmental charges or levies being contested
in good faith and by appropriate proceedings for which adequate reserves (in the
good faith judgment of the management of the Maker) have been established in
accordance with GAAP; (b) Liens imposed by law which were incurred in the
ordinary course of the Maker’s business, such as carriers’, warehousemen’s and
mechanics’ Liens, statutory landlords’ Liens, and other similar Liens arising in
the ordinary course of the Maker’s business, and which (x) do not individually
or in the aggregate materially detract from the value of such property or assets
or materially impair the use thereof in the operation of the business of the
Maker and its consolidated subsidiaries or (y) are being contested in good faith
by appropriate proceedings, which proceedings have the effect of preventing for
the foreseeable future the forfeiture or sale of the property or asset subject
to such Lien; and (c) Liens securing the Permitted Subordinated Indebtedness to
the extent such Liens are expressly subordinate to the Liens securing this
Note.

    

    “Permitted Subordinated
Indebtedness” means Indebtedness incurred after the date hereof in an
aggregate amount not in excess of $257,000 that (i) shall be expressly
subordinate in right of payment to this Note in form and substance satisfactory
to the Holder in its reasonable discretion, (ii) shall not be secured by any
asset, agreement, guarantee or other collateral, other than Liens expressly
subordinate to the liens securing this Note, and (iii) in the event of any
bankruptcy, liquidation or other similar proceeding, shall provide for the
payment in full of this Note prior to the payment of any amounts in respect
thereof.

    

    “Person” means an
individual or a corporation, partnership, trust, incorporated or unincorporated
association, joint venture, limited liability company, joint stock company,
government (or an agency or political subdivision thereof) or other entity of
any kind.

    

    “Trading Day” means
(a) a day on which the Common Stock is traded on the OTC Bulletin Board or a
registered national securities exchange, or (b) if the Common Stock is not
traded on the OTC Bulletin Board or a registered national securities exchange, a
day on which the Common Stock is quoted in the over-the-counter market as
reported by the National Quotation Bureau Incorporated (or any similar
organization or agency succeeding its functions of reporting prices); provided, however, that in the
event that the Common Stock is not listed or quoted as set forth in (a) or (b)
hereof, then Trading Day shall mean any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government action
to close.

    

    “Trading Market” means
the Over the Counter Bulletin Board, the New York Stock Exchange, the Nasdaq
Capital Markets, the Nasdaq Global Markets, the Nasdaq Global Select Market or
the American Stock Exchange.

    

    “VWAP” means, for any
date, (i) the daily volume weighted average price of the Common Stock for such
date on the OTC Bulletin Board as reported by Bloomberg Financial L.P. (based on
a Trading Day from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time);
(ii) if the Common Stock is not then listed or quoted on the OTC Bulletin
Board and if prices for the Common Stock are then reported in the “Pink Sheets”
published by the Pink Sheets, LLC (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent bid price per
share of the Common Stock so reported; or (iii) in all other cases, the
fair market value of a share of Common Stock as determined by an independent
appraiser selected in good faith by the Holder and reasonably acceptable to the
Maker.

    

    

    
      
        
        

      

      
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    IN WITNESS WHEREOF, the Maker
has caused this Note to be duly executed by its duly authorized officer as of
the date first above indicated.

    

    
      
        	 	URIGEN PHARMACEUTICALS,
      INC.	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ William J.
    Garner	 
	 	 	Name:
      William J. Garner	 
	 	 	Title:
      CEO	 
	 	 	 	 

      

    

            

            

    EXHIBIT
A

    

    WIRE
INSTRUCTIONS

     

    

     

    
      
        
        

      

      
        23

        
          

        

      

      
        
        

      

    

    

     

    FORM
OF

     

    NOTICE OF
CONVERSION

     

    (To be
Executed by the Registered Holder in order to Convert the Note)

     

    The
undersigned hereby irrevocably elects to convert $ ________________ of the
principal amount [and accrued interest thereon] of the above Note No. ___ into
shares of Common Stock of Urigen Pharmaceuticals, Inc. (the “Maker”) according
to the conditions hereof, as of the date written below.

     

    Date of
Conversion
________________________________________________________________________________________________________

     

    Applicable
Conversion Price
__________________________________________________________________________________________________

     

    Number of
shares of Common Stock beneficially owned or deemed beneficially owned by the
Holder on the Date of Conversion: _________________________

     

    Signature_________________________________________________________________________________________________________________

    [Name]

     

    Address:_________________________________________________________________________________________________________________

     

    _________________________________________________________________________________________________________________

     

    

     

    

     

    

     

    24

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