Document:

Exhibit 10.55

 Exhibit 10.55 
  
 NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION IN RELIANCE
UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR AFTER
RECEIPT BY THE COMPANY OF AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT. 
  
 THIS DEBENTURE DOES NOT REQUIRE PHYSICAL SURRENDER OF THE DEBENTURE IN THE EVENT OF A PARTIAL REDEMPTION OR CONVERSION. AS A RESULT, FOLLOWING ANY REDEMPTION OR
CONVERSION OF ANY PORTION OF THIS DEBENTURE, THE OUTSTANDING PRINCIPAL AMOUNT REPRESENTED BY THIS DEBENTURE MAY BE LESS THAN THE PRINCIPAL AMOUNT AND ACCRUED INTEREST SET FORTH BELOW. 
  
 THESE SECURITIES REPRESENTED HEREBY ARE ALSO SUBJECT TO RIGHTS AND OBLIGATIONS AS SET FORTH IN A SECURITIES PURCHASE AGREEMENT DATED AS
OF MARCH 25, 2004, AND A REGISTRATION RIGHTS AGREEMENT DATED AS OF MARCH 25, 2004, IN EACH CASE AMONG STAR SCIENTIFIC, INC. AND CERTAIN OTHER PARTIES THERETO AS SUCH MAY BE AMENDED FROM TIME TO TIME. 
  
 THIS DEBT INSTRUMENT IS BEING ISSUED WITH “ORIGINAL ISSUE DISCOUNT”
(“OID”) WITHIN THE MEANING OF SECTION 1273(a) OF THE UNITED STATES INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE “CODE”). THE HOLDER MAY OBTAIN THE “ISSUE PRICE,” THE AMOUNT OF ORIGINAL ISSUE DISCOUNT, THE “ISSUE
DATE,” THE YIELD TO MATURITY, THE COMPARABLE YIELD AND THE PROJECTED PAYMENT SCHEDULE OF THIS DEBT INSTRUMENT BY SUBMITTING A REQUEST FOR SUCH INFORMATION TO THE COMPANY’S CHIEF FINANCIAL OFFICER, 801 LIBERTY WAY, CHESTER, VA 23836 (804)
530-0535. 
  
 8% SENIOR CONVERTIBLE DEBENTURE DUE MARCH
25, 2006 
  
 OF 
  
 STAR SCIENTIFIC, INC. 
  

			
	Debenture No.: 1	 	Original Principal Amount: $9,000,000
	Original Issuance Date: March 25, 2004	 	New York, New York

  
 THIS
DEBENTURE (“Debenture”) is a duly authorized debenture of STAR SCIENTIFIC, INC., a corporation duly organized and existing under the laws of the State of Delaware (the “Company”),
designated as the Company’s 8% Senior Convertible Debentures Due March 25, 2006 (“Maturity Date”). In the event that, pursuant to Section 6(f) below, this Debenture is exchanged or replaced with multiple Debentures or
issued to permitted assigns, such Debentures shall collectively be referred to as the “Debentures”. 
  
 FOR VALUE RECEIVED, the Company hereby promises to pay to the order of MANCHESTER SECURITIES CORP., a New
York corporation, or its permitted registered assigns or successors-in-interest (“Holder”) the principal sum of NINE MILLION DOLLARS (U.S. $9,000,000.00) together with all accrued but unpaid interest thereon, if any, when due,

 whether upon the Maturity Date, on any Put Payment Date with respect to the Put Amount due on such Put Payment Date (each
as defined herein) or upon acceleration, redemption or otherwise (in each case in accordance with the terms hereof) to the extent such principal amount and interest has not been converted into the Company’s Common Stock, $0.0001 par value per
share (the “Common Stock”), in accordance with the terms hereof. Interest on the unpaid principal balance hereof shall accrue at the rate of 8% per annum from the original date of issuance, March 25, 2004 (the
“Issuance Date”), until the same becomes due and payable on the Maturity Date, on any Interest Payment Date (as defined below), on any Put Payment (as defined below), or such earlier date upon acceleration or by conversion or
redemption in accordance with the terms hereof. Interest on this Debenture shall accrue daily commencing on the Issuance Date, shall be compounded quarterly and shall be computed on the basis of a 360-day year, 30-day months and actual days elapsed
and shall be payable in accordance with Section 1 hereof. Notwithstanding anything contained herein, this Debenture shall bear interest on the due and unpaid Principal Amount from and after the occurrence and during the continuance of an Event of
Default pursuant to Section 4(a), unless during that time a Monthly Delay Payment is accruing under the Registration Rights Agreement, at the rate (the “Default Rate”) equal to the lower of twelve percent (12%) per annum or the
highest rate permitted by law. Unless otherwise agreed or required by applicable law, payments will be applied first to any unpaid collection costs, then to unpaid interest and fees and any remaining amount to principal. 
  
 Except as provided in Section 1 below, all payments of principal and
interest on this Debenture shall be made in lawful money of the United States of America by wire transfer of immediately available funds to such account as the Holder may from time to time designate by written notice in accordance with the
provisions of this Debenture or by Company check. This Debenture may not be prepaid in whole or in part except as otherwise provided herein or in the Transaction Documents. Whenever any amount expressed to be due by the terms of this Debenture is
due on any day which is not a Business Day (as defined below), the same shall instead be due on the next succeeding day which is a Business Day. 
  
 Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Securities Purchase Agreement dated on or about the March
25, 2004 pursuant to which the Debentures were originally issued (the “Purchase Agreement”). For purposes hereof the following terms shall have the meanings ascribed to them below: 
  
 “Business Day” shall mean any day other than a
Saturday, Sunday or a day on which commercial banks in the City of New York are authorized or required by law or executive order to remain closed. 
  
 “Change in Control Transaction” will be deemed to exist if (i) there occurs any consolidation, merger or other business
combination of the Company with or into any other corporation or other entity or person (whether or not the Company is the surviving corporation), or any other corporate reorganization or transaction or series of related transactions in which in any
of such events the voting stockholders of the Company prior to such event cease to own 50% or more of the voting stock, or corresponding voting equity interests, of the surviving corporation after such event (including without limitation any
“going private” transaction under Rule 13e-3 promulgated pursuant to the Exchange Act or tender offer by the Company under Rule 13e-4 promulgated pursuant to the Exchange Act for 20% or more of the Company’s Common Stock), 

 

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 (ii) any person (as defined in Section 13(d) of the Exchange Act), together with its affiliates and associates (as such
terms are defined in Rule 405 under the Act), beneficially owns or is deemed to beneficially own (as described in Rule 13d-3 under the Exchange Act without regard to the 60-day exercise period) in excess of 50% of the Company’s voting power,
(iii) there is a replacement of more than one-half of the members of the Company’s Board of Directors which is not approved by those individuals who are members of the Company’s Board of Directors on the date thereof, or (iv) in one or a
series of related transactions, there is a sale or transfer of all or substantially all of the assets of the Company, determined on a consolidated basis, (v) the approval or public announcement of any of the events set forth in (i), (ii), (iii), or
(iv) above, or (vi) the execution by the Company of an agreement to which the Company is a party or which it is bound providing for an event set forth in (i), (ii), (iii) or (iv) above. 
  
 “Conversion Price” shall equal $3.73 (which Conversion Price shall be subject to adjustment
as set forth herein). 
  
 “Convertible
Securities” means any convertible securities, warrants, options or other rights to subscribe for or to purchase or exchange for, shares of Common Stock. 
  
 “Effective Date” means the date on which a Registration Statement covering all the Underlying Shares
and other Registrable Securities (as defined in the Registration Rights Agreement) is declared effective by the SEC. 
  
 “Effective Registration” shall have the meaning set forth in the Purchase Agreement. 
  
 “Exchange Act” shall mean the Securities Exchange Act
of 1934, as amended. 
  
 “Market Price”
shall equal the arithmetic mean of each of the daily VWAP’s during the twenty (20) Trading Days immediately preceding the date as of which such Market Price is being determined. The VWAP’s used to determine the Market Price shall be
appropriately and equitably adjusted for any stock splits, stock dividends, recapitalizations and the like. 
  
 “Per Share Selling Price” shall include the amount actually paid by third parties for each share of Common Stock in a sale or
issuance by the Company. In the event a fee, other than a customary brokers, finder’s or similar fee, is paid by the Company in connection with such transaction directly or indirectly to such third party or its affiliates, any such fee shall be
deducted from the selling price pro rata to all shares sold in the transaction to arrive at the Per Share Selling Price. A sale of shares of Common Stock shall include the sale or issuance of rights, options, warrants or convertible, exchangeable or
exercisable securities, issued or sold on or subsequent to the Closing Date, under which the Company is or may become obligated to issue shares of Common Stock, and in such circumstances the Per Share Selling Price of the Common Stock covered
thereby shall also include the exercise, exchange or conversion price thereof (in addition to the consideration received by the Company upon such sale or issuance less the fee amount as provided above). In case of any such security issued or sold on
or subsequent to the Closing Date in a Variable Rate Transaction or an MFN Transaction (each as defined in the Purchase Agreement), the Per Share Selling Price shall be deemed to be the lowest conversion or exercise price at which such securities
are converted or exercised or might have been converted or exercised in the case of a Variable Rate Transaction, or the lowest adjustment 
  

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 price in the case of an MFN Transaction, over the life of such securities. If shares are issued for a consideration other
than cash, the Per Share Selling Price shall be the fair value of such consideration as determined in good faith by independent certified public accountants mutually acceptable to the Company and the Purchaser. In the event the Company reduces the
conversion, exercise or exchange price for any Convertible Securities issued or sold on or subsequent to the Closing Date which are currently outstanding (other than pursuant to the terms of the transaction documentation for such securities as in
effect on the date hereof), then the Per Share Selling Price shall equal such effectively reduced conversion, exercise or exchange price. Notwithstanding the foregoing, the Per Share Selling Price shall be increased, on 20 Trading Days’ written
notice, to reverse any reduction that results from (i) any reduction in a conversion price or exercise or exchange price of a Convertible Security, or (ii) the calculation of a lowest potential price of a MFN Transaction or Variable Rate
Transaction, to the extent the applicable Convertible Security, MFN Transaction or Variable Rate Transaction terminates or expires without the issuance of securities to the holder thereof at such price. Notwithstanding the foregoing, no such
readjustment shall affect the terms of any conversion of this Debenture effected prior to the effectiveness of such readjustment. 
  
 “Principal Amount” shall refer to the sum of (i) the original principal amount of this Debenture, (ii) all accrued but unpaid
interest hereunder, and (iii) any default payments owing under the Transaction Documents (as defined in the Purchase Agreement) but not previously paid or added to the Principal Amount. 
  
 “Principal Market” shall mean the Nasdaq National Market or such other principal market or exchange
on which the Common Stock is then listed for trading. 
  
 “Registration Statement” shall have the meaning set forth in the Registration Rights Agreement. 
  
 “Securities Act” shall mean the Securities Act of 1933, as amended. 
  
 “Shareholder Approval” shall refer to the approval of the stockholders of the Company of the
transactions described in Transaction Documents in accordance with NASD Rule 4350(i) (or the equivalent thereof under the rules of the Principal Market). 
  
 “Trading Day” shall mean a day on which there is trading on the Principal Market or such other market or exchange on which the
Common Stock is then principally traded. 
  
 “Underlying Shares” means the shares of Common Stock into which the Debentures are convertible (including repayment in Common Stock as set forth herein) in accordance with the terms hereof. 
  
 “VWAP” shall mean the daily volume weighted average
price of the Common Stock on the Principal Market as reported by Bloomberg Financial L.P. (based on a trading day from 9:30 a.m. Eastern Time to 4:00 p.m. Eastern Time) using the “HP” function on the date in question. If the foregoing does
not apply, the dollar volume-weighted average price of such security in the over-the-counter market on the electronic bulletin board for such security during the period beginning at 9:30:01 a.m., New York City Time (or such other time as the
Principal Market publicly announces is the official open of trading), and ending at 4:00:00 p.m., New York City 
  

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 Time (or such other time as the Principal Market publicly announces is the official close of trading) as reported by
Bloomberg, or, if no dollar volume-weighted average price is reported for such security by Bloomberg for such hours, the average of the highest closing bid price and the lowest closing ask price of any of the market makers for such security as
reported in the “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If the VWAP cannot be calculated on a particular date on any of the foregoing bases, the VWAP on such date shall be the fair market value as
reasonably determined by the Holder. 
  
 The following terms and
conditions shall apply to this Debenture: 
  
 Section 1.
Payments of Principal and Interest. 
  
 (a)
Interest. Accrued interest on this Debenture shall be paid quarterly in cash, on each quarterly anniversary of the Issuance Date (each such payment date, an “Interest Payment Date”). 
  
 (b) Holder Put Right. Subject to the terms of this Section 1,
the Holder shall have the right (the “Put”) exercisable upon 5 Business Days written notice to the Company, to cause the Company to redeem, in cash, the lesser of (i) the remaining principal balance and (ii) 25% of the original
principal amount of this Debenture (together with all accrued and unpaid interest thereon) (the “Put Amount”), with such amount to be paid commencing on March 25, 2005 (the “Initial Put Payment Date”) and on
each succeeding Interest Payment Date thereafter (a “Put Payment Date”). In the event that Holder elects not to exercise its Put with respect to a given Put Payment Date, then the Put Amount for the following Put Payment Date shall
be increased by the Put Amount for the Put which was not exercised. 
  
 Section 2. Seniority. Obligations under this Debenture, including any Principal Payments and other payments due under this Debenture, (a) shall rank pari passu with all other Debentures and (b) shall be senior to all
other Indebtedness (as defined in the Purchase Agreement) of the Company and its Subsidiaries (as defined in the Purchase Agreement), other than Permitted Indebtedness. 
  
 Section 3. Conversion. 
  
 (a) Conversion Right of Holder. Subject to the terms hereof and restrictions and limitations contained herein, the
Holder shall have the right, at such Holder’s option, at any time and from time to time to convert the outstanding Principal Amount under this Debenture in whole or in part by delivering to the Company a fully executed notice of conversion in
the form of conversion notice attached hereto as Exhibit A (the “Conversion Notice”), which may be transmitted by facsimile. Notwithstanding anything to the contrary herein, this Debenture and the outstanding Principal Amount
hereunder shall not be convertible into Common Stock to the extent that such conversion would result in the Holder hereof exceeding the limitations contained in, or otherwise violating the provisions of, Section 3(i) below. Conversions of this
Debenture by Holder shall not affect the Put Amounts in Section 1(b) herein. 
  
 (b) Conversion Right of the Company. If, commencing on the date which is 90 days from the date the Registration Statement (as defined in the Registration Rights Agreement) is declared effective, the daily VWAP
of the Common Stock has been at or above 200% of 
  

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 the Conversion Price for at least 20 consecutive Trading Days (the “Trigger Period”), the Company shall have
the right, subject to the terms and conditions set forth in Section 3(c)(ii) below, to force the Holder to convert this Debenture into Common Shares. 
  
 (c) Common Stock Issuance Upon Conversion. 
  
 (i) Conversion Date Procedures. Upon conversion of this Debenture pursuant to Section 3(a) above, the outstanding Principal Amount hereunder shall
be converted into such number of fully paid, validly issued and non-assessable shares of Common Stock, free of any liens, claims and encumbrances (other than liens, claims and encumbrances due to actions taken by Holder), as is determined by
dividing the outstanding Principal Amount being converted by the then applicable Conversion Price and the rights of the Holders under the Debentures shall cease and the Holder shall be treated for all purposes as having become an owner of Common
Stock. The date of any Conversion Notice hereunder shall be referred to herein as the “Conversion Date”. If a conversion under this Debenture cannot be effected in full for any reason, or if the Holder is converting less than all of
the outstanding Principal Amount hereunder pursuant to a Conversion Notice, the Company shall, promptly after surrender by the Holder of this Debenture to the Company, promptly deliver to the Holder, upon request, (but no later than five Trading
Days after the later of the Conversion Date and such request) a Debenture for such outstanding Principal Amount as has not been converted if this Debenture has been surrendered to the Company for partial conversion. The Holder shall not be required
to physically surrender this Debenture to the Company upon any conversion hereunder unless the full outstanding Principal Amount represented by this Debenture is being converted or repaid, in which case the Holder shall promptly surrender this
Debenture to the Company. The Holder and the Company shall maintain records showing the outstanding Principal Amount so converted and repaid and the dates of such conversions or repayments or shall use such other method, reasonably satisfactory to
the Holder and the Company, so as not to require physical surrender of this Debenture upon each such conversion or repayment. 
  
 (ii) Mandatory Conversion Right of Company. To exercise its right to require the Holder to convert this Debenture following a Trigger Period, the
Company shall send to the Holder a written notice (a “Mandatory Conversion Notice”) which notice must be exercised within 3 Trading Days of the end of the Trigger Period, which notice shall specify the date (the “Mandatory Conversion
Date”) on which this Debenture shall be converted, which date shall be not less than 3 Trading Days nor more than 20 Trading Days from the date such notice is received by the Holder, and on the Mandatory Conversion Date, (i) the outstanding
Principal Amount hereunder shall be converted into such number of fully paid, validly issued and non-assessable shares of Common Stock, as is determined by dividing the outstanding Principal Amount being converted by the then applicable Conversion
Price and (ii) the rights of the Holders under the Debentures shall cease and the Holder shall be treated for all purposes as having become an owner of Common Stock. Notwithstanding the foregoing, the Company’s right to require the conversion
of this Debenture shall be subject to the following conditions: (i) conversion of this Debenture will be restricted to those numbers of shares of Common Stock that will not cause the Holder to exceed the limitations set forth in Section 3(j)(B)
below and will not cause the Holder to become the beneficial holder (when including the number of Warrant Shares, but no other shares beneficially owned by the Holder and pursuant to the rules and regulations promulgated under Section 13(d) of the
Exchange Act and further excluding any shares beneficially owned solely due to having voting power over such shares) of more than 9.99% of the total issued and outstanding 
  

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 shares of Common Stock; and (ii) at all times during the Trigger Period and from the date of the Mandatory Conversion
Notice to the Mandatory Conversion Date, (A) the Common Shares shall have been registered for resale under the Securities Act; (B) the use of the Prospectus contained in the Registration Statement shall not have been suspended; (C) the Common Stock
shall have been continually listed (and not suspended from trading) on the Principal Market; and (D) subject to satisfaction of any conditions to such delivery set forth in this Debenture, the Company shall have timely delivered all shares of Common
Stock pursuant to pending Conversion Notices and shall have delivered all applicable shares of Common Stock pursuant to all prior Conversion Notices. 
  
 (iii) Stock Certificates. If the Holder is the initial Purchaser under the Purchase Agreement or has otherwise assumed the Purchaser’s
obligations under the Purchase Agreement in accordance with the terms thereof, the Company will deliver to the Holder not later than five (5) Trading Days after the later of (i) the Conversion Date or Mandatory Conversion Date (ii) payment in
immediately available funds by the Holder of any transfer or similar tax required (provided, however, that no such payment shall be required if the Common Stock issuable upon conversion is to be issued in the name of the Holder) and (iii) delivery
to the Company of the Conversion Notice, together with any certificates or opinions required to be delivered therewith, provided that no such certificates or opinions shall be due if the Common Stock issuable upon conversion is to be issued in the
name of the Holder (such later date, the “Delivery Date”), a certificate or certificates which, if so required by the Purchase Agreement, shall be free of restrictive legends other than the Rights and obligations Legend) and trading
restrictions, representing the number of shares of Common Stock being acquired upon the conversion of this Debenture. If in the case of any conversion hereunder, such certificate or certificates are not delivered to or as directed by the Holder by
the Delivery Date, the Holder shall be entitled by written notice to the Company at any time on or before its receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Company shall immediately return
this Debenture tendered for conversion. 
  
 (d) Conversion
Price Adjustments. 
  
 Stock Dividends, Splits and
Combinations. If the Company or any of its Subsidiaries, at any time while the Debentures are outstanding (A) shall pay a stock dividend or otherwise make a distribution or distributions on any equity securities (including instruments or
securities convertible into or exchangeable for such equity securities) but excluding rights or warrants set forth in clause (ii) below, in shares of Common Stock, (B) subdivide outstanding Common Stock into a larger number of shares, or (C) combine
outstanding Common Stock into a smaller number of shares, then the Conversion Price shall be multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding before such event and the denominator of which
shall be the number of shares of Common Stock outstanding after such event. Any adjustment made pursuant to this Section 3(c)(i) shall become effective immediately after the record date for the determination of stockholders entitled to receive such
dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination. 
  
 (ii) Distributions. If the Company or any of its subsidiaries, at any time while the Debentures are outstanding, shall distribute to all holders
of Common Stock evidences of its indebtedness or assets or cash or rights or warrants to subscribe for or purchase any 
  

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 security of the Company or any of its subsidiaries (excluding those referred to in Section 3(c)(i) above), then
concurrently with such distributions to holders of Common Stock, the Company shall distribute to holders of the Debentures the amount of such indebtedness, assets, cash or rights or warrants which the holders of Debentures would have received had
all their Debentures been converted into Common Stock at the Conversion Price, immediately prior to the record date for such distribution. 
  
 (iii) Other Corporate Events. Prior to the consummation of any recapitalization, reorganization, consolidation, merger, spin-off or other business
combination (other than a Change of Control) pursuant to which holders of Common Stock are entitled to receive securities or other assets with respect to or in exchange for Common Stock (a “Corporate Event”), the Company shall make
appropriate provision to insure that the Holder will thereafter have the right to receive upon a conversion of this Debenture at the Conversion Price in lieu of the shares of Common Stock otherwise receivable upon such conversion, such securities or
other assets received by the holder of Common Stock in connection with the consummation of such Corporate Event in such amounts as the Holder would have been entitled to receive had this Debenture initially been issued with a conversion rights for
the form of such consideration (as opposed to shares of Common Stock) at a conversion ratio for such consideration equal to a fraction, the numerator of which is the outstanding Principal Amount and the denominator of which is the Conversion Price.
Provision made pursuant to the preceding sentence shall be in a form and substance satisfactory to the Holder. 
  
 (iv) Common Stock Issuances. In the event that the Company or any of its subsidiaries on or subsequent to the Closing Date (A) issues or sells any
Common Stock or any Convertible Securities (other than Debentures and Warrants under the Purchase Agreement and the Reedland Warrants (and shares of Common Stock to be issued pursuant to the Restated Non-Circumvention and Finder’s Fee
Agreement, entered into between the Company and Reedland Capital Partners, an Institutional Division of Financial West Group, as of March 24, 2004) or (B) reduces the conversion, exercise or exchange price for any Convertible Securities which are
currently outstanding (other than pursuant to terms existing on the date hereof, including the terms of the Reedland Warrants), at or to an effective Per Share Selling Price which is less than the Conversion Price in effect immediately prior to such
issue or sale or record date as applicable, then the Conversion Price shall, subject to readjustments as set forth in the definition of “Per Share Selling Price”, be reduced effectively concurrently with such issuance or sale equal such
lower Per Share Selling Price; provided that (i) the aggregate purchase price received by the Company pursuant to all such issuances or sales, or (ii) the number equal to (x) the amount by which the Conversion Price exceeds the Per Share Selling
Price multiplied by (y) the number of shares of Common Stock then issuable upon conversions of such Convertible Securities, as applicable, exceeds: (A) in the case of conversion of Indebtedness for borrowed money existing as of the Closing Date, $10
million; or (B) in all other cases $1 million. For purposes of determining the foregoing amounts, all issuances, sales of Common Stock or Convertible Securities, and reduction in the conversion prices thereof, shall be aggregated from the date of
this Debenture forward. 
  
 Notwithstanding the foregoing, no
adjustment to the Conversion Price shall be made hereunder upon issuance of any Excluded Securities. For purposes hereof, “Excluded Securities” means (1) shares of Common Stock issued or issuable to employees, consultants or
directors from time to time upon exercise of options, in such case granted or to be granted by the 
  

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 Board of Directors pursuant to one or more stock option plans or restricted stock plans in effect as of the Closing Date;
or (2) shares of common stock issued in connection with the acquisition by the Company of any other corporation or entity or other strategic transaction including, without limitation, additional investments in companies the Company had existing
investments in on the Closing Date. 
  
 (v) Rounding of
Adjustments. All calculations under this Section 3 or Section 1 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. 
  
 (vi) Notice of Adjustments. Whenever any Conversion Price is adjusted pursuant to Section 3(c)(iii) above,
the Company shall promptly deliver to each holder of the Debentures, a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment, provided that any failure to so
provide such notice shall not affect the automatic adjustment hereunder. 
  
 (vii) Change in Control Transactions. In case of any Change in Control Transaction, then without limiting other rights hereunder, the Holder shall have the right thereafter to, at its option, (A) convert this
Debenture, in whole or in part, at the Conversion Price, into the shares of stock and other securities, cash and/or property receivable upon or deemed to be held by holders of Common Stock following such Change in Control Transaction, and the Holder
shall be entitled upon such event to receive such amount of securities, cash or property as the shares of the Common Stock of the Company into which this Debenture could have been converted immediately prior to such Change in Control Transaction
would have been entitled if such conversion were permitted, subject to such further applicable adjustments set forth in this Section 3 or (B) require the Company or its successor to redeem this Debenture, in whole or in part, at a redemption price
equal to the Principal Amount. To the extent that Holder does not exercise its option described in the immediately preceding sentence, the terms of any such Change in Control Transaction shall include such terms so as to continue to give to the
Holders the right to receive the amount of securities, cash and/or property upon any conversion or redemption following such Change in Control Transaction to which a holder of the number of shares of Common Stock deliverable upon such conversion
would have been entitled in such Change in Control Transaction. This provision shall similarly apply to successive reclassifications, consolidations, mergers, sales, transfers or share exchanges. 
  
 (viii) Other Events. If any event occurs of the type contemplated by
the provisions of this Section 3(c) but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company’s
Board of Directors will make an appropriate adjustment in the Conversion Price so as to protect the rights of the Holder under this Debenture; provided that no such adjustment will increase the Conversion Price as otherwise determined pursuant to
this Section 3(c). 
  
 (ix) Notice of Certain Events. If:

  

	 	A.	the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any
rights; or 

  

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	 	B.	the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company, any consolidation or merger to which
the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any compulsory share of exchange whereby the Common Stock is converted into other securities, cash or property; or 

  

	 	C.	the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; 

  
 then the Company shall cause to be mailed to the Holder at its last address as it shall
appear upon the books of the Company, on or prior to the date notice to the Company’s stockholders generally is given, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption,
rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such
reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common
Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange. 
  
 (e) Reservation and Issuance of Underlying Securities. The Company covenants that it will at all times reserve and keep available out of its
authorized and unissued Common Stock solely for the purpose of issuance upon conversion of this Debenture, free from preemptive rights or any other actual contingent purchase rights of persons other than the holders of the Debentures, not less than
150% of such number of shares of Common Stock as shall (subject to any additional requirements of the Company as to reservation of such shares set forth in the Purchase Agreement) be issuable (taking into account the adjustments under this Section 3
but without regard to any ownership limitations contained herein) upon the conversion of this Debenture hereunder in Common Stock. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly authorized,
validly issued, fully paid, and nonassessable. 
  
 (f) No
Fractions. Upon a conversion hereunder the Company shall not be required to issue stock certificates representing fractions of shares of Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a
share based on the closing price of a share of Common Stock at such time. If the Company elects not, or is unable, to make such a cash payment, the Holder shall be entitled to receive, in lieu of the final fraction of a share, one whole share of
Common Stock. 
  
 (g) Charges, Taxes and Expenses. Issuance
of certificates for shares of Common Stock upon the conversion of this Debenture by the Holder or the Company shall be made without charge to the holder hereof for any issue or transfer tax or other similar incidental expense in respect of the
issuance of such certificate, all of which issue or transfer taxes and similar incidental expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or 
  

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 names as may be directed by the Holder; provided, however, that in the event certificates for shares of
Common Stock are to be issued in a name other than the name of the Holder, this Debenture when surrendered for conversion shall be accompanied by an assignment form; and provided further, that the Holder shall be required to pay any
tax or taxes which may be payable in respect of any such transfer. 
  
 (h) Cancellation. After all of the Principal Amount (including accrued but unpaid interest and default payments at any time owed on this Debenture) have been paid in full or converted into Common Stock, this Debenture shall
automatically be deemed canceled and the Holder shall promptly surrender the Debenture to the Company at the Company’s principal executive offices. 
  
 (i) Notices Procedures. Any and all notices or other communications or deliveries to be provided by the Holder hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally, by confirmed facsimile, or by a nationally recognized overnight courier service to the Company at the facsimile telephone number or address of the principal place of
business of the Company as set forth in the Purchase Agreement. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, or by a nationally
recognized overnight courier service addressed to the Holder at the facsimile telephone number or address of the Holder appearing on the books of the Company, or if no such facsimile telephone number or address appears, at the principal place of
business of the Holder. Any notice or other communication or deliveries hereunder shall be deemed delivered (i) upon receipt, when delivered personally, (ii) when sent by facsimile, upon receipt if received on a Business Day prior to 5:00 p.m.
(Eastern Time), or on the first Business Day following such receipt if received on a Business Day after 5:00 p.m. (Eastern Time) or (iii) upon receipt, when deposited with a nationally recognized overnight courier service. 
  
 (j) Conversion Limitations. 
  
 (A) 4.99% Limitation. Notwithstanding
anything to the contrary contained herein, the number of shares of Common Stock that may be acquired by the Holder upon conversion of this Debenture pursuant to the terms hereof shall not exceed a number that, when added to the total number of
shares of Common Stock deemed beneficially owned by such Holder (other than by virtue of the ownership of securities or rights to acquire securities (including the Debentures) that have limitations on the Holder’s right to convert, exercise or
purchase similar to the limitation set forth herein), as determined pursuant to the rules and regulations promulgated under Section 13(d) of the Exchange Act, including all shares of Common Stock deemed beneficially owned at such time (other than by
virtue of the ownership of securities or rights to acquire securities that have limitations on the right to convert, exercise or purchase similar to the limitation set forth herein) by persons that would be aggregated for purposes of determining
whether a group under Section 13(d) of the Exchange Act, exists, would exceed 4.99% of the total issued and outstanding shares of the Common Stock (the “Restricted Ownership Percentage”). Holder shall have the right (w) at any time
and from time to time to reduce its Restricted Ownership Percentage immediately upon notice to the Company and (x) (subject to waiver) at any time and from time to time, to increase its Restricted Ownership Percentage immediately in the event of the
announcement as pending or planned, of a Change in Control Transaction. 
  

 11 

 (B) Principal Market Regulation. The Company shall not be obligated to issue any
shares of Common Stock upon conversion of this Debenture, whether pursuant to this Section 3, or otherwise, if the issuance of such shares of Common Stock would exceed that number of shares of Common Stock which the Company may issue upon conversion
of the Debentures and exercises of the Warrants without breaching the Company’s obligations under the rules or regulations of the Principal Market minus 273,611 (the “Principal Market Cap”), which amount shall be calculated for
all the Debentures as the amount of the Principal Market Cap less the number of shares issued and issuable upon exercise in full of all Warrants, except that such limitation shall not apply in the event that the Company (A) obtains the Shareholder
Approval or (B) obtains a written opinion from outside counsel to the Company that such approval is not required, which opinion shall be reasonably satisfactory to the Holder. Until such approval or written opinion is obtained, the Holder pursuant
to the Purchase Agreement (the “Purchaser”) shall not be issued, upon conversion of Debentures or exercise of any Warrants held by the Purchaser, shares of Common Stock in an amount greater than the amount of the Principal Market
Cap allocated to it in accordance with this paragraph. Subject to the following sentence, the Principal Market Cap Allocation of a holder shall be: (i) in the case of the initial holder, prior to any transfers, the Principal Market Cap; (ii) in the
case of a transferor, the amount equal to (x) such transferor’s Principal Market Cap Allocation immediately prior to such transfer minus (y) the amount of the Principal Market Cap allocated to the applicable transferee pursuant to clause
(iii)(y), and (iii) in the case of any transferee, the sum of (x) such transferee’s Principal Market Cap Allocation immediately prior to the applicable transfer plus (y) the Principal Market Cap Allocation of the transferor immediately prior to
such transfer multiplied by a fraction, the numerator of which is the sum of (1) the principal balance (not including any accrued interest or penalties added to the Principal Amount) of the Debentures so transferred divided by the Conversion Price,
plus (2) the number of Warrant Shares issuable upon exercise of any Warrants so transferred, and the denominator of which is sum of (1) the principal balance (not including any accrued interest or penalties added to the Principal Amount) of the
Debentures held by the transferor immediately prior to such transfer divided by the Conversion Price, plus (2) the number of Warrant Shares issuable upon exercise of any Warrants held by the transferor immediately prior to such transfer, plus (3)
the aggregate number of Warrant Shares and Common Shares previously issued to the transferor upon conversion of Warrants or Debentures, respectively. In the event that the Purchaser shall sell or otherwise transfer any of its Debentures or Warrants,
the transferee shall be allocated a pro rata portion of its Principal Market Cap Allocation, and the restrictions of the prior sentence shall apply to such transferee with respect to the portion of the Principal Market Cap Allocation allocated to
such transferee. In the event that any holder of Debentures shall convert all of such holder’s Debentures and exercise all of such holder’s Warrants into a number of shares of Common Stock which, in the aggregate, is less than such
holder’s Principal Market Cap Allocation, then the difference between such holder’s Principal Market Cap Allocation and the number of shares of Common Stock actually issued to such holder shall be allocated to the respective Principal
Market Cap Allocations of the remaining holders of Debentures on a pro rata basis in proportion to the aggregate principal amount of the Debentures then held by each such holder. 
  

 12 

 Section 4. Defaults and Remedies. 
  
 (a) Events of Default. An “Event of Default” is: (i)
a default in payment of the Principal Amount or accrued but unpaid interest thereon of any of the Debentures on or after the date such payment is due (to the extent such principal and/or amount has not been converted into Common Stock in accordance
with the terms hereof), including without limitation payments due on any Put Payment Date or Interest Payment Date provided that a default with respect to the payment of interest will not be an Event of Default until it is continuing for five (5)
Business Days; (ii) a default in the timely issuance of Underlying Shares upon and in accordance with the terms hereof, which default continues for five Business Days after the Company has received written notice informing the Company that it has
failed to issue shares or deliver stock certificates within the fifth Trading Day following the Delivery Date; (iii) at any time following the twentieth consecutive Business Day that the number of shares reserved for issuance under this Debenture is
less than the number of shares of Common Stock that the Holder would be entitled to receive upon a conversion of the full Principal Amount of this Note (without regard to any limitations on conversion set forth in Section 3(c)(A)); or (iv) failure
by the Company for fifteen (15) days after written notice has been received by the Company to comply with any other material provision of any of the Debentures, the Purchase Agreement, the Subordination Agreement or the Registration Rights Agreement
(including without limitation, the covenants contained in Section 3 of the Purchase Agreement); (v) a breach by the Company of its material representations or warranties in the Purchase Agreement, the Security Agreement or the Registration Rights
Agreement; (vi) any default after any cure period under, or acceleration prior to maturity of, any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by
the Company or any of its subsidiaries for in excess of $750,000 or for money borrowed the repayment of which is guaranteed by the Company or any of its Subsidiaries for in excess of $750,000, whether such indebtedness or guarantee now exists or
shall be created hereafter; (vii) a final judgment or judgments for the payment of money aggregating in excess of $1,000,000 are rendered against the Company or any of its Subsidiaries and which judgments are not, within 60 days after the entry
hereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; provided, however, that any judgment which is covered by insurance or an indemnity from a credit worthy party shall not be
included in calculating the $1,000,000 amount set forth above so long as the Company provides the Holder a written statement from such insurer or indemnity provider (which written statement shall be reasonably satisfactory to the Holder) to the
effect that such judgment is covered by insurance or an indemnity and the Company will receive the proceeds of such insurance or indemnity within 60 days of the issuance of such judgment; (viii) if the Company or any of its Subsidiaries is subject
to any Bankruptcy Event (as defined below); (ix) the Company shall be in material breach of any of the terms of the Security Agreement (as defined below) and such breach shall not have been cured within fifteen (15) days written notice has been
received by the Company describing such breach in reasonable detail; (x) the holders of the Debentures shall cease to have a perfected first priority lien in a portion of the collateral under the Security Agreement having a fair market value of
$200,000 or more (a “Material Portion”); (xi) in the event that the Company fails, refuses or for any other reason is unable to cause the Registrable Securities (as defined in 
  

 13 

 the Registrable Rights Agreement) covered by the Registration Statement to be listed with the Principal Market or one of
the other Approved Markets (as defined in the Purchase Agreement) at all times during the period (“Listing Period”) from the date (“Effectiveness Commencement Date”) which is the earlier of the effectiveness of the Registration
Statement and the 90th day following the Closing Date (150th if the SEC elects to review the Registration Statement) until such time as the registration period specified in Section 5 of the Registration Rights Agreement
terminates, and such failure shall continue for fifteen (15) days after notice from the Holder; (xii) the Company shall be in default with respect to its obligation pursuant to Section 3.17 of the Purchase Agreement; (xiii) in the event that shares
of Common Stock of the Company are not listed on any of the Approved Markets at all times following the Closing Date, or are otherwise suspended from trading and remain unlisted or suspended for 3 consecutive days, and such failure shall continue
for fifteen (15) days after written notice from the Holders; (xiv) for so long as any payment under this Debenture is due and owing, and unless the Guarantor is otherwise released from the Guaranty pursuant to the terms thereof, the Guarantor
repudiates the Guaranty or the Guaranty ceases to be a valid, binding and enforceable obligation of Guarantor. 
  
 “Bankruptcy Event” means any of the following events: (a) the Company or any subsidiary commences a case or other proceeding under
any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to the Company or any subsidiary thereof; (b) there is commenced against the
Company or any subsidiary any such case or proceeding that is not dismissed within 60 days after commencement; (c) the Company or any subsidiary is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or
proceeding is entered; (d) the Company or any subsidiary suffers any appointment of any custodian or the like for it or any substantial part of its property that is not discharged or stayed within 60 days; (e) the Company or any subsidiary makes a
general assignment for the benefit of creditors; (f) the Company or any subsidiary fails to pay, or states that it is unable to pay or is unable to pay, its debts generally as they become due; (g) the Company or any subsidiary calls a meeting of its
creditors with a view to arranging a composition, adjustment or restructuring of its debts; or (h) the Company or any subsidiary, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing
or takes any corporate or other action for the purpose of effecting any of the foregoing. 
  
 (b) Remedies. If an Event of Default occurs and is continuing with respect to any of the Debentures, the Holder may declare all of the then outstanding Principal Amount of this Debenture and all other
Debentures held by the Holder, including any interest due thereon, to be due and payable immediately, except that in the case of an Event of Default arising from events described in clauses (vi) and (viii) of Section 4(a), this Debenture shall
become due and payable without further action or notice. In the event of an acceleration, the amount due and owing to the Holder shall be 110% of the outstanding Principal Amount of the Debentures held by Holder; provided, however,
that if at the time of acceleration the Holder is unable, due to failure of the Company to comply with this Agreement or the Registration Rights Agreement, to convert this Debenture in full (other than by reason of the limitations contained in
Section 3(j) hereof) and to sell all of the resulting shares of Common Stock either pursuant to a current prospectus (other than by reason of blackouts permitted pursuant to Section 2(b) of the Registration Rights Agreement) or Rule 144, then the
amount due and owing the Holder shall be the greater of (1) 110% of the outstanding Principal Amount of the Debentures held by the 
  

 14 

 Holder and (2) the product of (A) the average closing price for the Common Stock for the twenty (20) Trading days
immediately preceding the Holder’s acceleration and (B) the fraction, the numerator of which is the outstanding Principal Amount and the denominator of which is the Conversion Price. In either case the Company shall pay interest on such amount
in cash at the Default Rate to the Holder if such amount is not paid within seven days of Holder’s request. The remedies under this Debenture shall be cumulative. 
  
 Section 4A. Additional Redemption Rights. 
  
 (a) If the Company’s recovery pursuant to settlement or final judgment, with respect to its patent infringement suit
against R. J. Reynolds, described in Part II, Item 1 of the Company’s quarterly report on Form 10-Q for the period ended September 30, 2003, is less than $50 million, then upon sixty (60) days’ written notice, the Holder shall have the
right to require the Company to redeem this Debenture at the Principal Amount. 
  
 (b) If, commencing with the two fiscal quarters ending September 30, 2004, the Company has an “Operating Loss” (as defined below) for any two consecutive fiscal quarters in excess of $2 million then, upon
five (5) days written notice, the Holder shall have the right to require the Company to redeem this Debenture at the Principal Amount. 
  
 As used above “Operating Loss” shall mean the Company’s gross profit or loss from operations on a consolidated basis, less total operating
expenses, all determined in accordance with generally accepted accounting principles, applied on a consistent basis, as historically categorized in the financial statements of the Company if the resulting amount is a negative number. 
  
 (c) If the Registration Statement has not been declared effective within 180
days after the Closing Date, then the Holder shall have the right to sell, upon notice to the Company at any time after the 180th day after the Closing Date, any or all of its Debentures to the Company for consideration (the “Mandatory
Repurchase Price”) equal to, the greater of (x) 110% of the outstanding Principal Amount of all such Debentures being sold to the Company by the Holder, or (y) the Conversion Ratio (as defined below) multiplied by the average closing price
of the Common Stock for the 20 Trading Days immediately preceding the date of the Holder’s notice to the Company that the Holder intends to exercise its option pursuant to this Section 4A(c) to require sale of the Debentures, in each case
payable in cash within 60 days of such sale. Such sale will be effective on the date specified in the applicable notice, which date will be within 60 days of the date of such notice. As of the effective date of the sale, the rights of the Holders
under the Debentures shall cease, except with respect to payment of the Mandatory Repurchase Price. 
  
 As used above, “Conversion Ratio” means, at any time, a fraction, of which the numerator is the entire outstanding Principal Amount of the
Debentures held by the applicable Holder (or such portion thereof that is being redeemed or repurchased), and of which the denominator is the Conversion Price. 
  

Section 5. Security; Guaranty. The Company’s obligations under this Debenture are secured by a first priority lien on all finished
goods inventory and accounts receivable of the Company and its Subsidiaries pursuant to a Security Agreement (the “Security Agreement”) by and among, the Company, the Subsidiaries, the holders of the Debentures and Manchester 

 

 15 

 Securities Corp., a New York corporation, as collateral agent. The Company’s obligations under the Purchase
Agreement and the Debentures are guaranteed by a Subsidiary pursuant to a guaranty dated as of the date hereof. 
  
 Section 6. General. 
  
 (a) Payment of Expenses. The Company agrees to pay all reasonable charges and expenses, including attorneys’ fees and expenses, which may be
incurred by the Holder in successfully enforcing this Debenture and/or collecting any amount due under this Debenture. 
  
 (b) Savings Clause. In case any provision of this Debenture is held by a court of competent jurisdiction to be excessive in scope or otherwise
invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Debenture will not in any
way be affected or impaired thereby. In no event shall the amount of interest paid hereunder exceed the maximum rate of interest on the unpaid principal balance hereof allowable by applicable law. If any sum is collected in excess of the applicable
maximum rate, the excess collected shall be applied to reduce the principal debt. If the interest actually collected hereunder is still in excess of the applicable maximum rate, the interest rate shall be reduced so as not to exceed the maximum
allowable under law. 
  
 (c) Assignment, Etc. The Holder
may assign or transfer this Debenture to any transferee subject to compliance with applicable securities laws, provided that the Holder provide the Company with a legal opinion, reasonably satisfactory to the Company, indicating that such transfer
is exempt from the registration requirement of the Securities Act. The Holder shall notify the Company of any such assignment or transfer promptly. This Debenture shall be binding upon the Company and its successors and shall inure to the benefit of
the Holder and its successors and permitted assigns. 
  
 (d) No
Waiver. No failure on the part of the Holder to exercise, and no delay in exercising any right, remedy or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by the Holder of any right, remedy or power
hereunder preclude any other or future exercise of any other right, remedy or power. Each and every right, remedy or power hereby granted to the Holder or allowed it by law or other agreement shall be cumulative and not exclusive of any other, and
may be exercised by the Holder from time to time. 
  
 (e)
Governing Law; Jurisdiction. 
  
 (i) Governing Law.
THIS DEBENTURE WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ANY CONFLICTS OF LAWS PROVISIONS THEREOF THAT WOULD OTHERWISE REQUIRE THE APPLICATION OF THE LAW OF ANY OTHER JURISDICTION.

  
 (ii) Jurisdiction. The Company irrevocably submits to
the exclusive jurisdiction of any State or Federal Court sitting in the State of New York, County of New York, over any suit, action, or proceeding arising out of or relating to this Debenture. The Company 
  

 16 

 irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the
laying of the venue of any such suit, action, or proceeding brought in such a court and any claim that suit, action, or proceeding has been brought in an inconvenient forum. 
  
 The Company agrees that the service of process upon it mailed by certified or registered mail (and service so made shall be
deemed complete three days after the same has been posted as aforesaid) or by personal service shall be deemed in every respect effective service of process upon it in any such suit or proceeding. Nothing herein shall affect Holder’s right to
serve process in any other manner permitted by law. The Company agrees that a final non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful
manner. 
  
 (iii) NO JURY TRIAL. THE COMPANY HEREBY
KNOWINGLY AND VOLUNTARILY WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS DEBENTURE. 
  
 (f) Replacement Debentures. This Debenture may be exchanged by Holder
at any time and from time to time for a Debenture or Debentures with different denominations representing an equal aggregate outstanding principal balance, as reasonably requested by Holder, upon surrendering the same. No service charge will be made
for such registration or exchange. In the event that Holder notifies the Company that this Debenture has been lost, stolen or destroyed, a replacement Debenture identical in all respects to the original Debenture (except for registration number and
Principal Amount, if different than that shown on the original Debenture), shall be issued to the Holder, provided that the Holder executes and delivers to the Company an agreement reasonably satisfactory to the Company to indemnify the Company from
any loss incurred by it in connection with the Debenture. 
  
 (g)
Notwithstanding anything to the contrary in this Debenture, the Company (or its agent) shall be authorized to deduct and withhold any taxes imposed under the Internal Revenue Code of 1986, as amended (the “Code”), or any applicable
provision of state, local or foreign tax law, on amounts paid or deemed paid in respect of the Debenture, and any amount so deducted and withheld shall be treated as paid by the Company to holders of the Debenture in accordance with the terms
hereof. Without limiting the foregoing, in the event of a deemed dividend under section 305 of the Code, holders of the Debenture will pay to the Company the amount of any withholding taxes that become due, or the Company will be entitled to reduce
the amount of any other consideration payable to a holder of a Debenture in order to pay such withholding taxes. 
  
 [Signature Page Follows] 
  

 17 

 IN WITNESS WHEREOF, the Company has caused this Debenture to be duly executed on March 25,
2004. 
  

			
	STAR SCIENTIFIC, INC.
		
	 By:
	 	 /s/    Paul L. Perito

	 	 	 Name: Paul Perito

	 	 	 Title: Chairman, President & C.O.O.

  

			
	 Attest:

		
	 Sign:
	 	  

	 	 	 Print Name:

  

 18 

 EXHIBIT A 
  
 FORM OF CONVERSION NOTICE 
  
 (To be Executed by the Holder 
 in order to Convert a Debenture) 
  
 The
undersigned hereby elects to convert the aggregate outstanding Principal Amount (as defined in the Debenture) indicated below of this Debenture into shares of Common Stock, $0.0001 par value per share (the “Common Stock”), of STAR
SCIENTIFIC, INC. (the “Company”) according to the conditions hereof, as of the date written below. If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith, including an opinion of counsel reasonably satisfactory to the Company that registration of this issuance is
not required under the Securities Act of 1933, as amended. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any. The undersigned represents as of the date hereof that, after giving effect to the conversion
of this Debenture pursuant to this Conversion Notice, the undersigned will not exceed the “Restricted Ownership Percentage” contained in Section 3(j)(A) of this Debenture. 
  

			
	 Conversion information:
	  	  

	 	  	 Date to Effect Conversion

		
	 	  	  

	 	  	 Aggregate Principal Amount of Debenture Being Converted

		
	 	  	  

	 	  	 Number of shares of Common Stock to be Issued

		
	 	  	  

	 	  	 Applicable Conversion Price

		
	 	  	  

	 	  	 Signature

		
	 	  	  

	 	  	 Name

		
	 	  	  

	 	  	 AddressExhibit 10.56

 Exhibit 10.56 
  
 NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION IN RELIANCE UPON
AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR AFTER
RECEIPT BY THE COMPANY OF AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT. THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES. 
  
 THESE SECURITIES REPRESENTED
HEREBY ARE ALSO SUBJECT TO RIGHTS AND OBLIGATIONS AS SET FORTH IN A SECURITIES PURCHASE AGREEMENT DATED AS OF MARCH 25, 2004, AND A REGISTRATION RIGHTS AGREEMENT DATED AS OF MARCH 25, 2004, IN EACH CASE AMONG STAR SCIENTIFIC, INC. AND CERTAIN OTHER
PARTIES THERETO AS SUCH MAY BE AMENDED FROM TIME TO TIME. 
  
 COMMON STOCK PURCHASE WARRANT 
  
 To Purchase
502,681 Shares of $0.0001 par value Common Stock of 
  
 Star
Scientific, Inc. 
  
 THIS COMMON STOCK PURCHASE WARRANT (the
“Warrant”) CERTIFIES that, for value received, MANCHESTER SECURITIES CORP., a New York corporation (the “Holder”), is entitled, upon the terms and subject to the limitations on exercise and the conditions
hereinafter set forth, at any time on or after March 25, 2004 (the “Initial Exercise Date”) and on or prior to the close of business on the fifth (5th) anniversary of the Initial Exercise Date (the “Termination Date”) but not thereafter (the “Exercise Period”), to subscribe
for and purchase from Star Scientific, Inc., a corporation incorporated in Delaware (the “Company”), up to 502,681 shares (the “Warrant Shares”) of Common Stock, par value $0.0001 per share, of the Company (the
“Common Stock”). The purchase price of one share of Common Stock (the “Exercise Price”) under this Warrant shall be $4.476, subject to adjustment hereunder. The Exercise Price and the number of Warrant Shares for
which the Warrant is exercisable shall be subject to adjustment as provided herein. Capitalized terms used and not otherwise defined herein shall have the meanings set forth in that certain Securities Purchase Agreement (the “Purchase
Agreement”), dated March 25, 2004, between the Company and the purchaser signatory thereto. 
  

 1 

 1. Title to Warrant. Prior to the Termination Date and subject to compliance with applicable laws
and Section 7 of this Warrant, this Warrant and all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the Holder in person or by duly authorized attorney, upon surrender of this Warrant together with
the Assignment Form annexed hereto properly endorsed and (b) any other documentation reasonably necessary to satisfy the Company that such transfer is in compliance with all applicable securities laws. The term “Holder” shall refer to the
Purchaser or any subsequent transferee of this Warrant. 
  
 2.
Authorization of Warrant Shares. The Company represents and warrants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by
this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue and
any taxes, liens and charges due because of actions taken by Holder). 
  
 3. Exercise of Warrant. 
  
 (a) Except as
provided in Section 4 herein, exercise of the purchase rights represented by this Warrant may be made at any time or times on or after the Initial Exercise Date and on or before the Termination Date by (i) delivering (which may be by facsimile) this
Warrant with the Notice of Exercise Form annexed hereto completed and duly executed, to the offices of the Company (or such other office or agency (including the transfer agent, if applicable) of the Company as it may designate by notice in writing
to the registered Holder at the address of such Holder appearing on the books of the Company) and (ii) delivering payment of the Exercise Price of the shares thereby purchased by wire transfer or cashier’s check drawn on a United States bank or
by means of a cashless exercise pursuant to Section 3(d). The Holder exercising its purchase rights in accordance with the preceding sentence shall be entitled to receive a certificate for the number of Warrant Shares so purchased. Certificates for
shares purchased hereunder shall be delivered to the Holder within five (5) Trading Days after the date on which this Warrant shall have been exercised as aforesaid. This Warrant shall be deemed to have been exercised and such certificate or
certificates shall be deemed to have been issued, and the Holder or any other person so designated to be named therein (provided that the Holder complies with the restrictions in Section 1 and Section 7 for transfer) shall be deemed to no longer
hold this Warrant with respect to such shares and to have become a holder of record of such shares for all purposes, in each case as of the date the Warrant has been exercised by payment to the Company of the Exercise Price and all taxes required to
be paid by the Holder, if any, pursuant to Section 5 prior to the issuance of such shares, have been paid. If the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to this Section 3(a) by
the fifth Trading Day after the date of exercise, then the Holder will have the right to rescind such exercise. In addition to any other rights available to the Holder, if the Company fails to deliver to the Holder a certificate or certificates
representing the Warrant Shares pursuant to an exercise by the fifth Trading Day after the date of exercise and the Holder has not rescinded such exercise pursuant to this Section 3(a), and if after such fifth Trading Day 
  

 2 

 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 Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company 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 Warrant Shares that the Company was required to deliver to the Holder in
connection with the exercise at issue by (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 Warrant and equivalent number of Warrant
Shares for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise 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 exercise 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 Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In, together with applicable
confirmations and other evidence reasonably requested by the Company. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof. 
  
 (b) In the event that the Warrant is not exercised in full, the number of
Warrant Shares shall be reduced by the number of such Warrant Shares for which this Warrant is exercised and/or surrendered, and the Company, if requested by Holder and at its expense, shall within ten (10) Trading Days (as defined below) after
surrender by Holder of this Warrant to the Company, issue and deliver to the Holder a new Warrant of like tenor in the name of the Holder or as the Holder (upon payment by Holder of any applicable transfer taxes) may request, reflecting such
adjusted Warrant Shares. Notwithstanding anything to the contrary set forth herein, upon exercise of any portion of this Warrant in accordance with the terms hereof, the Holder shall not be required to physically surrender this Warrant to the
Company unless such Holder is purchasing the full amount of Warrant Shares represented by this Warrant, in which case the Holder shall promptly surrender the Warrant to the Company. The Holder and the Company shall maintain records showing the
number of Warrant Shares so purchased hereunder and the dates of such purchases or shall use such other method, reasonably satisfactory to the Holder and the Company, so as not to require physical surrender of this Warrant upon each such exercise.
The Holder and any assignee, by acceptance of this Warrant or a new Warrant, acknowledge and agree that, by reason of the provisions of this Section, following exercise of any portion of this Warrant, the number of Warrant Shares which may be
purchased upon exercise of this Warrant may be less than the number of Warrant Shares set forth on the face hereof. 
  

 3 

 (c) 4.99% and Principal Market Regulation Limitations. 
  
 (i) 4.99% Limitation. Notwithstanding anything to the
contrary contained herein, the number of shares of Common Stock that may be acquired by the Holder upon exercise pursuant to the terms hereof shall not, when added to the total number of shares of Common Stock deemed beneficially owned by such
Holder at such time (other than by virtue of the ownership of securities or rights to acquire securities (including the Warrant Shares) that have limitations on the Holder’s right to convert, exercise or purchase similar to the limitation set
forth herein), as determined pursuant to the rules and regulations promulgated under Section 13(d) of the Securities Exchange Act of 1934, as amended (the “1934 Act”), including all shares of Common Stock deemed beneficially owned
(other than by virtue of the ownership of securities or rights to acquire securities that have limitations on the right to convert, exercise or purchase similar to the limitations set forth herein) at such time by persons that would be aggregated
for purposes of determining whether a group under Section 13(d) of the 1934 Act exists, exceed 4.99% of the total issued and outstanding shares of the Common Stock (the “Restricted Ownership Percentage”). Holder shall have the right
(w) at any time and from time to time to reduce its Restricted Ownership Percentage immediately upon notice to the Company and (x) (subject to waiver) at any time and from time to time, to increase its Restricted Ownership Percentage immediately in
the event of the announcement as pending or planned, of a Change in Control Transaction (as defined in the Debentures). 
  
 (ii) Principal Market Regulation. The Company shall not be obligated to issue any Warrant Shares upon exercise of this Warrant if
the issuance of such shares of Common Stock would exceed that number of shares of Common Stock which the Company may issue upon exercise of this Warrant and conversion of the Debentures without breaching the Company’s obligations under the
rules or regulations of the Principal Market minus 273,611 shares (the “Principal Market Cap”), which amount shall be calculated for all the Warrants as the amount of the Principal Market Cap less the number of shares issued and
issuable upon full conversion of all Debentures, except that such limitation shall not apply in the event that the Company (A) obtains the approval of its stockholders as required by the applicable rules of the Principal Market for issuances of
Common Stock in excess of such amount or (B) obtains a written opinion from outside counsel to the Company that such approval is not required, which opinion shall be reasonably satisfactory to the Holder. Until such approval or written opinion is
obtained, Holder shall not be issued, upon exercise of any Warrants or conversion of Debentures held by such Purchaser, shares of Common Stock in an amount greater than the amount of the Principal Market Cap Allocation allocated to it in accordance
with this paragraph. Subject to the following sentence, the “Principal Market Cap Allocation” of a Holder shall be: (i) in the case of the initial Holder, prior to any transfers, the Principal Market Cap; (ii) in the case of a transferor,
the amount equal to (x) such transferor’s Principal Market Cap Allocation immediately prior to such transfer minus (y) the amount of the Principal Market Cap Allocation allocated to the applicable transferee pursuant to 
  

 4 

 clause (iii)(y), and (iii) in the case of any transferee, the sum of (x) such transferee’s Principal
Market Cap Allocation immediately prior to the applicable transfer plus (y) the Principal Market Cap Allocation of the transferor immediately prior to such transfer multiplied by a fraction, the numerator of which is the sum of (1) the principal
balance (not including any accrued interest or penalties added to the Principal Amount) of any Debentures so transferred divided by the Conversion Price, plus (2) the number of Warrant Shares issuable upon exercise of the Warrants so transferred,
and the denominator of which is sum of (I) the principal balance (not including any accrued interest or penalties added to the Principal Amount) of any Debentures held by the transferor immediately prior to such transfer divided by the Conversion
Price, plus (II) the number of Warrant Shares issuable upon exercise of the Warrants held by the transferor immediately prior to such transfer, plus (III) the aggregate number of Warrant Shares and Common Shares previously issued to the transferor
upon conversion of Warrants or Debentures, respectively. In the event that any holder of Debentures shall convert all of such holder’s Debentures and exercise all of such holder’s Warrants into a number of shares of Common Stock which, in
the aggregate, is less than such holder’s Principal Market Cap Allocation, then the difference between such holder’s Principal Market Cap Allocation and the number of shares of Common Stock actually issued to such holder shall be allocated
to the respective Principal Market Cap Allocations of the remaining holders of Debentures on a pro rata basis in proportion to the aggregate principal amount of the Debentures then held by each such holder. 
  
 (d) Notwithstanding the foregoing provision regarding payment of the Exercise
Price in cash, during any time after the Effectiveness Deadline (as defined in the Registration Rights Agreement) that the Warrant Shares are not subject to an effective Registration Statement as required by the terms of the Registration Rights
Agreement, the Holder, by indicating its intent to do so on the Notice of Exercise Form, may elect to receive a reduced number of Warrant Shares in lieu of tendering the Exercise Price in cash. In such case, the number of Warrant Shares to be issued
to the Holder shall be computed using the following formula: 
  

			
	X =	 	     Y x (A-B)

	 	             A

 (X) = the number of Warrant Shares to be issued to the Holder upon such “cashless
exercise”; 
  
 (A) = the VWAP (as defined in Section 18
below) on the Trading Day immediately preceding the date on which such exercise is effective; 
  
 (B) = the Exercise Price of the Warrants, as adjusted; and 
  

 5 

 (Y) = the number of Warrant Shares issuable upon exercise of this Warrant in accordance with the terms
of this Warrant. 
  
 4. No Fractional Shares or Scrip. No
fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash
adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price. 
  
 5. Charges, Taxes and Expenses. 
  
 (a) Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in
respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided,
however, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by
the Holder and payment in immediately available funds of a sum sufficient to reimburse the Company for any transfer tax incidental thereto. 
  
 (b) Notwithstanding anything to the contrary in this Warrant, the Company (or its agent) shall be authorized to deduct and withhold any taxes imposed
under the Internal Revenue Code of 1986, as amended (the “Code”), or any applicable provision of state, local or foreign tax law, on amounts paid or deemed paid in respect of the Warrant, and any amount so deducted and withheld shall be
treated as paid by the Company to holders of the Warrants in accordance with the terms hereof. Without limiting the foregoing, in the event of a deemed dividend under Section 305 of the Code, holders of the Warrant will pay to the Company the amount
of any withholding taxes that become due, or the Company will be entitled to reduce the amount of any other consideration payable to a holder of a Warrant in order to pay such withholding taxes. 
  
 6. Closing of Books. The Company will not close its stockholder books
or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof. 
  
 7. Transfer, Division and Combination. 
  
 (a) Subject to compliance with any applicable securities laws and the conditions set forth in Sections 1 and 7(e) hereof, this Warrant and all rights
hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its
agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new 
  

 6 

 Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such
instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. 
  
 (b) This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the
Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 7(a), as to any transfer which may be involved
in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. 
  
 (c) The Company shall prepare, issue and deliver at its own expense (other
than transfer taxes) the new Warrant or Warrants under this Section 7. 
  
 (d) The Company agrees to maintain, at its aforesaid office, books for the registration and the registration of transfer of the Warrants. 
  
 (e) The Company may require, as a condition of allowing any transfer of this Warrant (i) that the Holder or transferee of this Warrant, as the case may
be, furnish to the Company a written opinion of counsel (which opinion shall be in form, substance and scope reasonably satisfactory to the Company) to the effect that such transfer may be made without registration under the Securities Act and under
applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an “accredited
investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8) promulgated under the Securities Act or a qualified institutional buyer as defined in Rule 144A(a) under the Securities Act. 
  
 8. No Rights as Shareholder until Exercise. This Warrant does not
entitle the Holder to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof. Upon the surrender of this Warrant and the payment of the aggregate Exercise Price (or by means of a cashless exercise), the
Warrant Shares so purchased shall be and be deemed to be issued to such Holder as the record owner of such shares as of the close of business on the later of the date of such surrender or payment and this Warrant shall no longer be issuable with
respect to such Warrant Shares. 
  
 9. Loss, Theft, Destruction
or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and
in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate,
if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate. 
  

 7 

 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action
or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday. 
  
 11. Adjustments of Exercise Price and Number of Warrant Shares. The
number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following. In case the Company shall (i) pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock
into a smaller number of shares of Common Stock, or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be
adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which it would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. Upon
each such adjustment of the kind and number of Warrant Shares or other securities of the Company which are purchasable hereunder, the Holder shall thereafter be entitled to purchase the number of Warrant Shares or other securities resulting from
such adjustment at an Exercise Price per Warrant Share or other security obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares purchasable pursuant hereto immediately prior to such
adjustment and dividing by the number of Warrant Shares or other securities of the Company resulting from such adjustment. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event. 
  
 12.
Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets. In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation (where the Company is not
the surviving corporation or where there is a change in or distribution with respect to the Common Stock of the Company), or sell, transfer or otherwise dispose of all or substantially all its property, assets or business to another corporation and,
pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any
nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation (“Other Property”), are to be received by or distributed to the
holders of Common Stock of the Company, then the Holder shall have the right thereafter to receive upon exercise of this Warrant, the number of shares of common stock of the successor or acquiring corporation or Common Stock of the Company, if it is
the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a Holder of the number of shares of Common Stock for which this Warrant is
exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring 
  

 8 

 corporation (if other than the Company) shall expressly assume all the obligations and liabilities of the Company
hereunder, subject to such modifications as may be deemed appropriate (as determined in good faith by resolution of the Board of Directors of the Company) in order to provide for adjustments of Warrant Shares for which this Warrant is exercisable
which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 12. For purposes of this Section 12, “common stock of the successor or acquiring corporation” shall include stock of such corporation of any
class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are
convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing
provisions of this Section 12 shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations, spin-offs, or dispositions of assets. 
  
 13. Exercise Price Adjustment. 
  
 (a) In the event that on or subsequent to the Closing Date, the Company issues or sells any shares of Common Stock or other
securities which are convertible into or exchangeable for its Common Stock or any convertible securities, or any warrants or other rights to subscribe for or to purchase or any options for the purchase of its Common Stock or any such convertible
securities (other than shares or options issued or which may be issued pursuant to (i) the Company’s current employee option plans or shares issued upon exercise of options, warrants or rights outstanding on the date of the Purchase Agreement
and listed in the Company’s most recent periodic report filed under the 1934 Act or in the Purchase Agreement, or (ii) arrangements with the Holder) at an effective price per share price which is less than the Exercise Price then in effect
immediately prior to such issue or sale, then the Exercise Price in effect immediately prior to such issue or sale shall be reduced effective concurrently with such issue or sale to an amount determined by multiplying the Exercise Price then in
effect by a fraction, (x) the numerator of which shall be the sum of (1) the number of shares of Common Stock outstanding immediately prior to such issue or sale, plus (2) the number of shares of Common Stock which the aggregate consideration
received by the Company for such additional shares would purchase at the Exercise Price then in effect; and (y) the denominator of which shall be the number of shares of Common Stock of the Company outstanding immediately after such issue or
sale. 
  
 (b) For the purposes of the foregoing
adjustments, in the case of the issuance of any convertible securities, warrants, options or other rights to subscribe for or to purchase or exchange for, shares of Common Stock (“Convertible Securities”), the maximum number of
shares of Common Stock then issuable, whether or not vested, upon exercise, exchange or conversion of such Convertible Securities shall be deemed to be outstanding, provided that no further adjustment shall be made upon the actual issuance of Common
Stock upon exercise, exchange or conversion of such Convertible Securities. 
  

 9 

 (c) The number of shares which may be purchased hereunder shall be increased proportionately to any
reduction in Exercise Price pursuant to this Section 13, so that after such adjustments the aggregate Exercise Price payable hereunder for the increased number of shares shall be the same as the aggregate Exercise Price in effect just prior to such
adjustments for the number of shares this Warrant was exercisable into prior to such adjustment. 
  
 14. Other Distributions. If at any time after the date hereof the Company distributes to holders of its Common Stock, other than as part of its
dissolution, liquidation or the winding up of its affairs, any shares of its capital stock, any evidence of indebtedness or any of its assets (other than Common Stock), then, as part of such distribution, the Company shall make lawful provision so
that there shall thereafter be deliverable upon the exercise of this Warrant or any portion thereof, in addition to the number of Warrant Shares receivable upon exercise of the Warrant, and without payment of any additional consideration, the amount
of the dividend or other distribution to which the holder of the number of shares of Common Stock obtained upon exercise hereof would have been entitled to receive had the exercise occurred as of the record date for such dividend or distribution.

  
 15. Notice of Adjustment. Whenever the number of
Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall give notice thereof to the Holder, which notice shall state the
number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares (and other securities or property) after such adjustment, setting forth a brief statement of the
facts requiring such adjustment and setting forth the computation by which such adjustment was made. 
  
 16. Notice of Corporate Action. If at any time: 
  
 (a) the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or
any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right, or 
  
 (b) there shall be any capital reorganization of the Company, any reclassification or recapitalization of the capital stock
of the Company or any consolidation or merger of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to, another corporation or, 
  
 (c) there shall be a voluntary or involuntary dissolution, liquidation or
winding up of the Company; 
  
 then, in any one or more of such cases, the
Company shall give to Holder (i) at least ten (10) business days’ prior written notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in 
  

 10 

 respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, liquidation or
winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least ten (10) business days’ prior written notice of the date when
the same shall take place. Such notice in accordance with the foregoing clause also shall specify (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, the date on which the holders of Common
Stock shall be entitled to any such dividend, distribution or right, and the amount and character thereof, and (ii) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution,
liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their Warrant Shares for securities or other property deliverable upon such disposition,
dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of the Company and delivered in accordance with Section 19(d). 
  
 17. Authorized Shares. The Company covenants that during the period
the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company
further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the
exercise of the purchase rights under this Warrant. Subject to the limitations set forth in Section 3(c) above, the Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein
without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. 
  
 Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending 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
of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against
impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all
such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant, and (c) use commercially reasonable efforts to obtain all such
authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. 
  

 11 

 18. Call. At any time and from time to time following the six (6) month anniversary of the
Effective Date of the Registration Statement, the Company shall have the right, upon 20 Business Days’ prior written notice to the Holder (“Call Notice”), to call all or any portion of this Warrant at a price equal to $0.05 per
Warrant at any time provided that (i) the Warrant Shares are registered for resale pursuant to the Securities Act and have been for at least the 20-Trading Day period preceding the Call Notice, (ii) the Prospectus has not been suspended at any time
during the 20-Trading Day period preceding the Call Notice, (iii) the Common Stock is currently listed (and is not suspended from trading) on the Principal Market as of the date the Call Notice is delivered to the Holder through the effective date
of such call, (iv) the Company is not in default (or taken any action or failure to act which through the passage of time would result in a default) under the Registration Rights Agreement, (v) exercise of the Warrant in whole will not cause the
Holder to exceed the Section 3(c) limitations, (vi) the VWAP of the Common Stock on the Principal Market is equal to or greater than 200% of the Exercise Price (subject to adjustment to reflect forward or reverse stock splits, stock dividends,
recapitalizations and the like)(the “Threshold Price”) for at least 20 consecutive Trading Days (all of which shall have occurred after the six month anniversary of the Effective Date), and (vii) the Call Notice is delivered within
3 Business Days’ of the most recent day in the previous clause and that the Common Stock reached the Threshold Price. At any time prior to the effective date of such call, the Holder shall have the right to exercise this Warrant in accordance
with its terms. 
  
 “VWAP” shall mean for any
date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on an Approved Market, the daily volume weighted average price of the Common Stock for such date (or the nearest
preceding date) on the primary Approved Market on which the Common Stock is then listed or quoted as reported by Bloomberg Financial L.P. (based on a Trading Day from 9:30 a.m. ET to 4:02 p.m. Eastern Time) using the HP function; (b) if the Common
Stock is not then listed or quoted on an Approved Market and if prices for the Common Stock are then quoted on the OTC Bulletin Board, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the OTC
Bulletin Board; (c) if the Common Stock is not then 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 National Quotation Bureau Incorporated (or a similar
organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported; or (d) in all other cases, the fair market value of a share of Common Stock as determined by the Company
and Holder in good faith. 
  
 19. Miscellaneous.

  
 (a) Jurisdiction. This Warrant shall constitute a
contract under the laws of New York, without regard to its conflict of law, principles or rules. 
  
 (b) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have
restrictions upon resale imposed by state and federal securities laws and/or as set forth in the Purchase Agreement. 
  

 12 

 (c) Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right
hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder’s rights, powers or remedies, provided, however, that all rights hereunder terminate on the Termination Date. If the Company
willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not
limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder. 
  
 (d) Notices. Any notice, request or other document required or
permitted to be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Purchase Agreement. 
  
 (e) Limitation of Liability. No provision hereof, in the absence of any affirmative action by Holder to exercise this Warrant or purchase Warrant
Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or
by creditors of the Company. 
  
 (f) Remedies. Holder, in
addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation
for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. 
  
 (g) Successors and Assigns. Subject to applicable securities laws and
Sections 1 and 7 of this Warrant, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder. The provisions of this
Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and shall be enforceable by any such Holder or holder of Warrant Shares. 
  
 (h) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of
the Company and the Holder. 
  
 (i) Severability. Wherever
possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant. 
  

(j) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of
this Warrant. 
  

 13 

 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized.

  
 Dated: March 25, 2004 
  

			
	STAR SCIENTIFIC, INC.
		
	 By:
	 	 /s/    Paul L. Perito

	 	 	 Name:  Paul L. Perito

	 	 	 Title:  Chairman, President & C.O.O.

  

 14 

 NOTICE OF EXERCISE 
  
 To: Star Scientific, Inc. 
  
 (1) The undersigned hereby elects to purchase              Warrant Shares of Star
Scientific, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes and legal opinions, if any. 
  
 (2) Payment shall take the form of (check applicable box): 
  
  ̈ in lawful money of the United States; or 
  
  ̈ the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in
subsection 3(d), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 3(d). 
  
 (3) Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such
other name as is specified below: 
  

							
	 	  	_______________________________	  	 	  	 
	 	  	  
 _______________________________
	  	 	  	 
	 	  	  
 _______________________________
	  	 	  	 

  
 The Warrant Shares shall be delivered
to the following: 
  
  

							
	 	  	_______________________________	  	 	  	 
	 	  	  
 _______________________________
	  	 	  	 
	 	  	  
 _______________________________
	  	 	  	 

  
 (4) Accredited
Investor/Qualified Institutional Buyer. The undersigned is either: (i) an “accredited investor” as defined in Regulation D under the Securities Act of 1933, as amended. 
  

			
	[PURCHASER]
		
	 By:
	 	  

	 	 	 Name:

	 	 	 Title:

	 Dated:
	 	  

 ASSIGNMENT FORM 
  
 (To assign the foregoing warrant, execute 
 this form and supply required information. 
 Do not use this form to exercise the warrant.) 
  
 FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby
are hereby assigned to 
  

			
	  

	 	whose address is
	  

	  

  
 Dated:                     ,              
  

			
	 Holder’s Signature:
	  	  

	 	  	 
	 Holder’s Address:
	  	  

	 	  	  

	 	  	  

		
	 Signature Guaranteed:
	  	  

  
 NOTE: The signature to this Assignment
Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or
other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

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