PROMISSORY NOTE

Dated: May 20, 2009

 

$150,000.00
Principal Amount	State of Missouri

 

           For value received, the undersigned, AXIS Technologies, Inc hereby jointly and severally promise to pay to the order of MidAmerica Funding Co., Inc: or assigns, Route 2 Box 97, Adrian, Missouri 64720, the sum of One hundred fifty thousand Dollars and no cents ($150,000.00), together with interest at the rate of two percent (2%) per month on the unpaid balance. Said sum shall be paid in the manner following: Demand. If no demand, then paid in full on or before August 20, 2009 to MidAmerica Funding Company, Route 2 Box 97, Adrian, Missouri 64720.

 

          Security for this note is assignment of AXIS Technologies Invoice # 1495 dated 5/14/2009 to NEW CO, 11965 Venice Blvd. Ste 408 Los Angeles, CA 90066 in the amount of Two Hundred forty-seven Thousand five hundred Dollars($247,500.00). Additional security is AXIS Technologies, Inc stock certificate #3165 for One million shares of common stock (1,000,000) in the name of MidAmerica Funding Company, Inc.

 

          All payments shall be first applied to interest and the balance to principal. This note may be prepaid, at any time, in whole or in part, without penalty. All prepayments shall be applied in reverse order of maturity.

 

          This note shall at the option of any holder hereof be immediately due and payable upon the failure to make any payment due hereunder within ten (10) days of its due date.

 

          In the event this note shall be in default, and placed with an attorney for collection, then the undersigned agree to pay all reasonable attorney fees and costs of collection. Payments not made within Five (5) days of due date shall be subject to a late charge of Five percent (5%) of said payment All payments hereunder shall be made to such address as may from time to time de designated by any holder hereof.

 

 

          The undersigned and all other parties to this note, whether as endorsers, guarantors or sureties, agree to remain fully bound hereunder until this note shall be fully paid and waive demand, presentment and protest and all notices thereto and further agree to remain bound, notwithstanding any extension, renewal, modification, waiver, or other indulgence by any holder or upon discharge or release of any obligor hereunder or to this note, or upon the exchange, substitution, or release of any collateral granted as security for this note. No modification or indulgence by any holder hereof shall be binding unless in writing; and any indulgence on any one occasion shall not be an indulgence for any other or further occasion. Any modification or change of terms, hereunder granted by any holder hereof, shall be valid and binding upon each of the undersigned, not, withstanding the acknowledgement of any of the undersigned, and each of the undersigned does hereby irrevocably grant to each of the other a power of attorney to enter into such modification on (their behalf. The rights of any holder hereof shall be cumulative and not necessarily successive. This note shall take effect as a sealed instrument and shall be construed, governed and enforced in accordance with the laws of the State of Missouri. The undersigned hereby executes this note as principals and not as sureties.

 

Signed in the presence of:

 

 

 

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AMENDMENT AGREEMENT

 

This Amendment Agreement (this “ Agreement ”), dated as of December 30, 2009, is entered into by and among Axis Technologies Group, Inc., a Delaware corporation (the “ Company ”), Axis Technologies, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (“ Guarantor ”), GEMINI STRATEGIES, LLC, a Delaware limited liability company (the “ Collateral Agent ”), and GEMINI MASTER FUND, LTD., a Cayman Islands corporation (the “ Investor ”).  The Company and the Guarantor are sometimes referred to herein individually as an “ Axis Entity ” and collectively as the “ Axis Entities ”.

 

R E C I T A L S :

 

WHEREAS, the Company and the Investor are party to that certain Securities Purchase Agreement, dated as of April 25, 2008 (the “ Purchase Agreement ”), pursuant to which the Company issued to the Investor (i) a 10% Senior Secured Convertible Note in the original principal amount of $1,388,888.89 (the “ Initial Note ”), convertible into shares of common stock of the Company,   par value $0.001 per share (the “ Common Stock ”), and (ii) a Warrant to purchase 5,341,880 shares of Common Stock (the “ Warrant ”);

 

WHEREAS, on or about March 25, 2009, the Investor loaned the Company additional funds and in consideration therefor the Company issued to the Investor a 10% Senior Secured Note in the original principal amount of $150,000.00, which was due on June 23, 2009 (“ Second Note ”, and together with the “ Initial Note ”, the “ Notes ”);

 

WHEREAS, the Guarantor has entered into that certain Subsidiary Guarantee, dated as of April 25, 2008 (the “ Guarantee ”), pursuant to which each Guarantor has guaranteed the satisfaction of all the obligations of the Company under the Existing Transaction Documents (as defined below);

 

WHEREAS, Guarantor has entered into that certain Intellectual Property Security Agreement, dated as of April 25, 2008 (the “ IP Security Agreement ”), pursuant to which Guarantor granted a security interest in its intellectual property to the Investor and the Collateral Agent to secure the satisfaction of all the obligations of the Axis Entities under the Existing Transaction Documents;

 

WHEREAS, the Company and the Guarantor have entered into that certain Security Agreement dated as of April 25, 2008 (together with the IP Security Agreement, the “ Security Agreements ”), pursuant to which the Company and the Guarantor have each granted a security interest in its assets and properties to the Investor and the Collateral Agent to secure the satisfaction of all the obligations of the Axis Entities under the Existing Transaction Documents;

 

WHEREAS, the Company has failed to repay the Second Note and failed to make all Monthly Redemption payments required under the Initial Note, among other things;

 

WHEREAS, the aggregate Mandatory Default Amount under both Notes together as of the date hereof is $1,884,097.22; and

 

 

WHEREAS, the Company parties wish to extend certain due dates under Notes on the terms set forth herein;

 

A G R E E M E N T :

 

NOW, THEREFORE, in consideration of the foregoing and subject to the terms and conditions herein contained,   and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

 

1.             DEFINITIONS .

 

1.1            Certain Defined Terms .  As used in this Agreement, the following terms shall have the meanings set forth below:

 

“ Existing Transaction Documents ” means the Purchase Agreement, the Notes, the Warrant, the Security Agreements, the Guarantee and all other agreements, instruments and other documents executed and delivered by or on behalf of the Axis Entities or any of their officers in connection with any of the foregoing agreements.

 

“ Transaction Documents ” means the Existing Transaction Documents (as amended by this Agreement), this Agreement, the Amended and Restated Note (as defined below), the Warrant, and all other agreements, instruments and other documents executed and delivered by or on behalf of the Axis Entities or any of their officers in connection with this Agreement.

 

Each initially capitalized term used herein and not otherwise defined shall have the meaning set forth in the Existing Transaction Documents.

 

1.2            Terms Defined in the Purchase Agreement .  Capitalized terms used in this Agreement and not otherwise defined herein have the respective meanings ascribed to them in the Purchase Agreement.

 

2.             AMENDMENT AND RESTATEMENT OF NOTES .

 

2.1            The Note .  The Notes are hereby amended and are being combined into a single restated Note in the form attached hereto as Exhibit A (the “ Amended and Restated Note ”), which shall provide, among other things, that (i) the original principal face amount of the Amended and Restated Note is $1,884,097.22, (ii) the Conversion Price (as defined therein) in effect as of the date hereof is the lesser of $0.10 (subject to further adjustment as provided therein) and 80% of the lowest closing bid price during the 20 Trading Days preceding conversion; (iii) the Maturity Date shall be April 25, 2010 without any Monthly Redemptions; and (iv) the Company may prepay the Amended and Restated Note at any time with ten (10) Trading Days prior written notice.

 

 

2.2            Delivery .  The Company hereby irrevocably commits to deliver the Amended and Restated Note to the Investor on or prior to December 31, 2009 in exchange for the Notes.

 

3.             ADDITONAL AMENDMENTS AND OTHER AGREEMENTS .

 

3.1            Reservation of Common Stock .  At all times hereafter the Company shall cause to be authorized and reserved for issuance to the Investor from its duly authorized capital stock a number of shares of Common Stock for issuance of the Underlying Shares at least equal to the Required Minimum (after taking into account the amendments contemplated hereby).

 

3.2            References to Notes and Transaction Documents .  All references in the Existing Transaction Documents to (i) “Note” shall be deemed to be references to the Amended and Restated Note (together with any future Notes issued pursuant to the Purchase Agreement), and (ii) “Transaction Documents” shall be deemed to mean the Existing Transaction Documents (as amended by this Agreement), this Agreement, the Amended and Restated Note (together with any future Notes issued pursuant to the Purchase Agreement), and all other agreements, instruments and other documents executed and delivered by or on behalf of the Axis Entities or any of their officers in connection with this Agreement.

 

3.3            Indemnification of Investor and Collateral Agent .  Each of the Axis Entities will jointly and severally indemnify and hold the Investor and Collateral Agent and each of their directors, managers, officers, shareholders, members, partners, employees and agents (each, an “ Investor Party ”) harmless from any and all losses, liabilities, obligations, claims, contingencies, damages, costs and expenses, including all judgments, amounts paid in settlements, court costs and reasonable attorneys’ fees and costs of investigation that any such Investor Party may suffer or incur as a result of or relating to (a) any breach of any of the representations, warranties, covenants or agreements made by an Axis Entity in this Agreement or in the other Transaction Documents or (b) any action instituted against the Investor, or any of its Affiliates, by any shareholder of an Axis Entity who is not an Affiliate of the Investor, with respect to any of the transactions contemplated by the Transaction Documents.

 

3.4            No Novation; Rule 144 .  The Amended and Restated Note issued hereunder is in substitution for and not in satisfaction of the Notes.  Such Amended and Restated Note shall not constitute a novation or satisfaction and accord of the Notes.  The Company hereby acknowledges and agrees that such Amended and Restated Note shall amend, restate, modify, renew and continue the terms and provisions contained in the Notes and shall not extinguish or release the Company or Guarantor under any Transaction Document or otherwise constitute a novation of their obligations thereunder.  For purposes of Rule 144 promulgated under the Securities Act, the holding period of the Amended and Restated Note shall be tacked to the applicable holding period of the Notes.  Without limiting the foregoing, if at any time it is determined that such holding period does not so tack, the Company will promptly, but no later than 30 days thereafter, cause the registration of all such Underlying Shares under the Securities Act (without regard to any beneficial ownership or issuance limitations contained in the Amended and Restated Note).  In connection with any registration of Underlying Shares pursuant to this Section, the Company and the Investor shall enter into a registration rights agreement containing customary and reasonable provisions regarding the registration of securities under the Securities Act.

 

 

4.7            Security Continued .  The Axis Entities’ obligations under all the Transaction Documents, including without limitation this Agreement, the Amended and Restated Note and the Warrant, shall be secured by all the assets of the Axis Entities pursuant to the Security Agreements (and guaranteed by the Guarantor under the Guarantee) as if this Agreement and the Amended and Restated Note were each in effect at the time of execution of such Security Agreements and referenced therein.  The Company shall execute such other agreements, documents and financing statements reasonably requested by Investor, which will be filed at the Company’s expense with the applicable jurisdictions and authorities.

 

4.8            Disclosure .  The Company shall, by 8:30 a.m. (New York City time) on December 31, 2009, issue a press release disclosing the material terms of the transactions contemplated hereby.  The Company and the Investor shall consult with each other in issuing such press release and any other press releases with respect to the transactions contemplated hereby.

 

4.             REPRESENTATIONS AND WARRANTIES OF THE AXIS ENTITIES .

 

Each of the Axis Entities hereby jointly and severally represents and warrants to the Investor as of the date hereof:

 

4.1            Organization .  Such Axis Entity is duly organized, validly existing and in good standing under the laws of its organization.

 

4.2            Authorization .  Such Axis Entity has the requisite corporate power and authority to execute, deliver and perform this Agreement and the other Transaction Documents to which it is a party.  All corporate action on the part of such Axis Entity and by its officers, directors and shareholders necessary for the authorization, execution and delivery of, and the performance by such Axis Entity of its obligations under this Agreement and the other Transaction Documents to which it is a party has been taken, and no further consent or authorization of any other party is required.

 

4.3            Enforceability .  This Agreement and the other Transaction Documents to which such Axis Entity is a party constitute such Axis Entity’s valid and legally binding obligation, enforceable in accordance with its terms, subject to (i) applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws of general application relating to or affecting the enforcement of creditors’ rights generally and (ii) general principles of equity.

 

4.4            No Conflicts .  The execution, delivery and performance of this Agreement and the other Transaction Documents to which such Axis Entity is a party, and the consummation of the transactions contemplated hereby and thereby, will not result in any violation of any provisions of any of such Axis Entity’s organizational documents or in a default under any provision of any instrument or contract to which such Axis Entity is a party or by which any of its assets are bound, or in violation of any provision of any governmental requirement applicable to such Axis Entity or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument or contract or the triggering of any preemptive or anti-dilution rights (including without limitation pursuant to any “reset” or similar provisions) or rights of first refusal or first offer.

 

 

4.5            Valid Issuance .  The Amended and Restated Note has been duly authorized and, when issued and delivered in accordance with the terms of this Agreement, will be duly and validly issued, free and clear of any Liens imposed by or through any of the Axis Entities.

 

5.             REPRESENTATIONS AND WARRANTIES OF THE INVESTOR .

 

The Investor represents and warrants to the Company as of the date hereof:

 

5.1            Organization .  The Investor is duly organized, validly existing and in good standing under the laws of its organization.

 

5.2            Authorization .  The Investor has the requisite corporate power and authority to execute, deliver and perform this Agreement and the other Transaction Documents to which it is a party.  All corporate action on the part of the Investor and by its officers, directors and shareholders necessary for the authorization, execution and delivery of, and the performance by the Investor of its obligations under this Agreement and the other Transaction Documents to which it is a party has been taken, and no further consent or authorization of any other party is required.

 

5.3            Enforceability .  This Agreement and the other Transaction Documents to which the Investor is a party constitute the Investor’s valid and legally binding obligation, enforceable in accordance with its terms, subject to (i) applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws of general application relating to or affecting the enforcement of creditors’ rights generally and (ii) general principles of equity.

 

5.4            No Conflicts .  The execution, delivery and performance of this Agreement and the other Transaction Documents to which the Investor is a party, and the consummation of the transactions contemplated hereby and thereby, will not result in any violation of any provisions of any of the Investor’s organizational documents or in a default under any provision of any instrument or contract to which the Investor is a party or by which any of its assets are bound, or in violation of any provision of any governmental requirement applicable to the Investor or be in conflict with or constitute, with or without the passage of time and giving of notice, a default under any such provision, instrument or contract.

 

6.              MISCELLANEOUS .

 

6.1            Severability .  In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that in such case the parties shall negotiate in good faith to replace such provision with a new provision which is not illegal, unenforceable or void, as long as such new provision does not materially change the economic benefits of this Agreement to the parties.

 

 

6.2            Successors and Assigns .  The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and permitted assigns of the parties.  Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and permitted assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. The Investor may assign its rights and obligations hereunder, as long as, as a condition precedent to such transfer, the transferee executes an acknowledgment agreeing to be bound by the applicable provisions of this Agreement, in which case the term “Investor” shall be deemed to refer to such transferee as though such transferee were an original signatory hereto.  None of the Axis Entities may assign its rights or obligations under this Agreement.

 

6.3            No Reliance .  Each party acknowledges that (i) it has such knowledge in business and financial matters as to be fully capable of evaluating this Agreement and the transactions contemplated hereby and thereby, (ii) it is not relying on any advice or representation of any other party in connection with entering into this Agreement or such transactions (other than the representations made in this Agreement), (iii) it has not received from any other party any assurance or guarantee as to the merits (whether legal, regulatory, tax, financial or otherwise) of entering into this Agreement or the performance of its obligations hereunder and thereunder, and (iv) it has consulted with its own legal, regulatory, tax, business, investment, financial and accounting advisors to the extent that it has deemed necessary, and has entered into this Agreement based on its own independent judgment and, if applicable, on the advice of such advisors, and not on any view (whether written or oral) expressed by any other party.

 

6.4            Injunctive Relief .  Each of the Axis Entities acknowledges and agrees that a breach by it of its obligations hereunder will cause irreparable harm to the Investor and that the remedy or remedies at law for any such breach will be inadequate and agrees, in the event of any such breach, in addition to all other available remedies, the Investor shall be entitled to an injunction restraining any breach and requiring immediate and specific performance of such obligations without the necessity of showing economic loss or the posting of any bond.

 

6.5            Governing Law; Jurisdiction; Waiver of Jury Trial .  (a)  This Agreement shall be governed by and construed under the laws of the State of New York applicable to contracts made and to be performed entirely within the State of New York.  Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City and County of New York for the adjudication of any dispute hereunder or any other Transaction Document or in connection herewith or therewith or with any transaction contemplated hereby or thereby, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper.  Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law.

 

 

(b) EACH PARTY TO THIS AGREEMENT ACKNOWLEDGES AND AGREES THAT ANY DISPUTE OR CONTROVERSY THAT MAY ARISE UNDER THIS AGREEMENT OR THE OTHER TRANSACTION DOCUMENTS IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES AND, THEREFORE, EACH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE BREACH, TERMINATION OR VALIDITY OF THIS AGREEMENT OR THE OTHER TRANSACTION DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.

 

6.6            Counterparts .  This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument.  This Agreement may be executed and delivered by facsimile transmission or by email of a digital image format file.

 

6.7            Headings .  The headings used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

 

6.8            Notices .  Any notice, demand or request required or permitted to be given by an Axis Entity or the Investor pursuant to the terms of this Agreement shall be in writing and shall be deemed delivered (i) when delivered personally or by verifiable facsimile transmission, unless such delivery is made on a day that is not a Business Day, in which case such delivery will be deemed to be made on the next succeeding Business Day, (ii) on the next Business Day after timely delivery to an overnight courier and (iii) on the Business Day actually received if deposited in the U.S. mail (certified or registered mail, return receipt requested, postage prepaid), addressed in accordance with the notice provisions contained in the Purchase Agreement.

 

6.9            Entire Agreement; Amendments .  This Agreement and the other Transaction Documents constitute the entire agreement between the parties with regard to the subject matter hereof and thereof, superseding all prior agreements or understandings, whether written or oral, between or among the parties.

 

6.10            Full Force and Effect .  Except as specifically waived and amended hereby and for the purposes described herein, the Existing Transaction Documents shall remain in full force and effect in accordance with their respective terms.  Except for the waiver and amendment contained herein, this Agreement shall not in any way waive or prejudice any of the rights of the Investor or obligations of the Company under the Transaction Documents, or under any law, in equity or otherwise, and such waiver and amendment shall not constitute a waiver or amendment of any other provision of the Transaction Documents nor a waiver or amendment of any subsequent default or breach of any obligation of the Company or of any subsequent right of the Investor.

 

 

6.10            Fees and Expenses .  The Axis Entities and the Investor shall pay all costs and expenses that it incurs in connection with the negotiation, execution, delivery and performance of this Agreement and the other Transaction Documents, provided, however , that the Company shall, concurrently with the execution of this Agreement, pay the Investor the non-accountable sum of $10,000 in immediately available funds for its expenses (including without limitation legal fees and expenses) incurred or to be incurred by it in connection with the Company’s defaults described herein and with the negotiation and preparation of this Agreement and the other Transaction Documents to be delivered in connection herewith.

 

[Signature Page to Follow]

 

 

           IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the day and year first above written.

EXHIBIT A

 

THIS AMENDED AND RESTATED 10% SENIOR SECURED CONVERTIBLE NOTE AMENDS AND RESTATES THE 10% SENIOR SECURED CONVERTIBLE NOTE ORIGINALLY ISSUED PURSUANT TO THE SECURITIES PURCHASE AGREEMENT, DATED AS OF APRIL 25, 2008 AND THE 10% SENIOR SECURED NOTE ORIGINALLY ISSUED ON MARCH 25, 2009, EACH ISSUED BY AXIS TECHNOLOGIES GROUP, INC., A DELAWARE CORPORATION, TO GEMINI MASTER FUND, LTD.

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE 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 PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.  THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

Original Issue Date:  April 25, 2008

Restatement Date: December 30, 2009

$ 1,884,097.22

AXIS TECHNOLOGIES GROUP, INC.

AMENDED AND RESTATED

10% SENIOR SECURED CONVERTIBLE NOTE

THIS NOTE is one of a series of duly authorized and validly issued Amended and Restated 10% Senior Secured Convertible Notes of Axis Technologies Group, Inc., a Delaware corporation (the “ Company ”), having its principal place of business at 2055 S Folsom Street, Lincoln, NE 68522, designated as its 10% Senior Secured Convertible Notes (this Note, the “ Note ” and, collectively with the other Notes of such series, the “ Notes ”).

FOR VALUE RECEIVED, the Company promises to pay to GEMINI MASTER FUND, LTD. or its registered assigns (the “ Holder ”), or shall have paid pursuant to the terms hereunder, the principal sum of $1,884,097.22 on the date which is two years following the Original Issue Date of this Note (the “ Maturity Date ”) or such earlier date as this Note is required or permitted to be repaid as provided hereunder, or such later date as may be permitted by the Holder as set forth in Section 2 hereof, and to pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Note in accordance with the provisions hereof.

The Company’s and its Subsidiaries’ obligations under this Note and the other Transaction Documents are secured by the Collateral (as defined in the Security Agreement, including without limitation all Intellectual Property Rights) pursuant to the terms of the Security Documents and the obligations under this Note are guaranteed by the Company’s Subsidiaries pursuant to the Subsidiary Guarantee.

 

 

This Note is subject to the following additional provisions:

Section 1 .     Definitions .  For the purposes hereof, in addition to the terms defined elsewhere in this Note (a) capitalized terms not otherwise defined herein shall have the meanings set forth in the Purchase Agreement and (b) the following terms shall have the following meanings:

“ Alternate Consideration ” shall have the meaning set forth in Section 5(e).

“ Bankruptcy Event ” means any of the following events: (a) the Company or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) thereof 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 Significant Subsidiary thereof; (b) there is commenced against the Company or any Significant Subsidiary thereof any such case or proceeding that is not dismissed within 60 days after commencement; (c) the Company or any Significant Subsidiary thereof 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 Significant Subsidiary thereof 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 calendar days after such appointment; (e) the Company or any Significant Subsidiary thereof makes a general assignment for the benefit of creditors; (f) the Company or any Significant Subsidiary thereof calls a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or (g) the Company or any Significant Subsidiary thereof, 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.

“ Base Conversion Price ” shall have the meaning set forth in Section 5(b).

“ Business Day ” means any day except any Saturday, any Sunday, any day which shall be a federal legal holiday in the United States or any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.

“ Buy-In ” shall have the meaning set forth in Section 4(d)(v).

 

“ Change of Control Transaction ” means the occurrence after the date hereof of any of (i) an acquisition after the date hereof by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether through legal or beneficial ownership of capital stock of the Company, by contract or otherwise) of in excess of 33% of the voting securities of the Company (other than by means of conversion or exercise of the Notes and the Securities issued together with the Notes) (other than currently existing officers of the Company, so long as such officers do not beneficially own in the aggregate greater than 50% of the voting securities of the Company), or (ii) the Company merges into or consolidates with any other Person, or any Person merges into or consolidates with the Company and, after giving effect to such transaction, the stockholders of the Company immediately prior to such transaction own less than 66% of the aggregate voting power of the Company or the successor entity of such transaction, or (iii) the Company sells or transfers all or substantially all of its assets to another Person and the stockholders of the Company immediately prior to such transaction own less than 66% of the aggregate voting power of the acquiring entity immediately after the transaction, or (iv) a replacement at one time or within a three year period of more than one-half of the members of the Company’s board of directors which is not approved by a majority of those individuals who are members of the board of directors on the date hereof (or by those individuals who are serving as members of the board of directors on any date whose nomination to the board of directors was approved by a majority of the members of the board of directors who are members on the date hereof), or (v) the execution by the Company of an agreement to which the Company  is a party or by which it is bound, providing for any of the events set forth in clauses (i) through (iv) above.

“ Conversion Date ” shall have the meaning set forth in Section 4(a).

“ Conversion Price ” shall have the meaning set forth in Section 4(b).

“ Conversion Shares ” means, collectively, the shares of Common Stock issued or issuable upon conversion or redemption of this Note in accordance with the terms hereof, including without limitation shares of Common Stock issued or issuable as interest hereunder or as damages under the Transaction Documents.

“ Note Register ” shall have the meaning set forth in Section 2(c).

“ Dilutive Issuance ” shall have the meaning set forth in Section 5(b).

“ Dilutive Issuance Notice ” shall have the meaning set forth in Section 5(b).

 

“ Equity Conditions ” means, during the period in question, (i) the Company shall have duly honored all conversions and redemptions scheduled to occur or occurring by virtue of one or more Notices of Conversion of the Holder, if any, (ii) the Company shall have paid all liquidated damages and other amounts owing to the Holder in respect of this Note, (iii) all of the shares of Common Stock issued or issuable pursuant to the Transaction Documents may be sold by the Holder pursuant to either (a) clause (i) or (ii) of Section (b)(1) of Rule 144 and, with respect to such clause (i), the Company has been subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act for the then preceding 90 days and has filed all reports required to be filed thereunder during the then preceding 12 months (or such shorter period that the Company was required to file such reports) or (b) an effective Registration Statement (and the Company believes, in good faith, that such effectiveness will continue uninterrupted for the foreseeable future), (iv) the Common Stock is trading on a Trading Market and all of the shares issuable pursuant to the Transaction Documents are listed or quoted for trading on such Trading Market (and the Company believes, in good faith, that trading of the Common Stock on a Trading Market will continue uninterrupted for the foreseeable future), (v) there is a sufficient number of authorized but unissued and otherwise unreserved shares of Common Stock for the issuance of all of the shares issuable pursuant to the Transaction Documents, (vi) there is no existing Event of Default or no existing event which, with the passage of time or the giving of notice, would constitute an Event of Default, (vii) the issuance of the shares in question (or, in the case of a Forced Conversion, the shares issuable upon conversion in full of the Forced Conversion Amount)   to the Holder would not violate the limitations set forth in Section 4(c) below, (viii) there has been no public announcement of a pending or proposed Fundamental Transaction or Change of Control Transaction that has not been consummated, (ix) the Holder is not in possession of any information provided by the Company that constitutes, or may constitute, material non-public information, (x) the closing bid price per share of Common Stock on the Trading Market for each of the ten (10) Trading Days immediately preceding the applicable date in question shall be greater than $0.25 (subject to appropriate and equitable adjustment for stock splits, stock combinations, stock dividends and similar events), and (xi) the number of shares of Common Stock traded on the Trading Market for each of the ten (10) Trading Days immediately preceding the applicable date in question shall be greater than 200,000 shares (subject to appropriate and equitable adjustment for stock splits, stock combinations, stock dividends and similar events).

“ Event of Default ” shall have the meaning set forth in Section 8.

 

“ Forced Conversion ” shall have the meaning set forth in Section 6(d).

 

“ Forced Conversion Amount ” shall have the meaning set forth in Section 6(d).

 

“ Forced Conversion Date ” shall have the meaning set forth in Section 6(d).

“ Forced Conversion Notice ” shall have the meaning set forth in Section 6(d).

“ Forced Conversion Notice Date ” shall have the meaning set forth in Section 6(d).

“ Fundamental Transaction ” shall have the meaning set forth in Section 5(e).

 

“ Late Fees ” shall have the meaning set forth in Section 2(d).

“ Mandatory Default Amount ”  means the sum of (i) the greater of (A) 130% of the outstanding principal amount of this Note, plus 100% of accrued and unpaid interest hereon, or (B) the outstanding principal amount of this Note, plus all accrued and unpaid interest hereon, divided by the lesser of the Conversion Price and the Market Redemption Price on the date the Mandatory Default Amount is either (a) demanded (if demand or notice is required to create an Event of Default) or otherwise due or (b) paid in full, whichever has a lower price, multiplied by the VWAP on the date the Mandatory Default Amount is either (x) demanded or otherwise due or (y) paid in full, whichever has a higher VWAP, and (ii) all other amounts, costs, expenses and liquidated damages due in respect of this Note.

 

 

“ Market Redemption Price ” means 80% of the   lowest closing bid price occurring during the ten (10) consecutive Trading Days immediately preceding the date as of which the Market Redemption Price is being determined (subject to appropriate and equitable adjustment for any stock dividend, stock split, stock combination or other similar event affecting the Common Stock during such 10 Trading Day period).

“ New York Courts ” shall have the meaning set forth in Section 9(d).

“ Notice of Conversion ” shall have the meaning set forth in Section 4(a).

“ Original Issue Date ” means the date of the issuance of this Note, regardless of any transfers of any Note and regardless of the number of instruments which may be issued to evidence this Note.

“ Permitted Indebtedness ” means (a) the indebtedness evidenced by the Notes, (b) the Indebtedness existing on the Closing Date which is set forth on Schedule 3.1(aa) attached to the Purchase Agreement, provided that the terms of any such Indebtedness have not been changed from the terms existing on the Closing Date, (c) lease obligations and purchase money indebtedness of up to $100,000, in the aggregate, incurred in connection with the acquisition of capital assets and lease obligations with respect to newly acquired or leased assets, (d) purchase order non-convertible (nor otherwise equity-linked) debt financing in which a third party lender advances funds solely for financing the manufacture, production and/or purchase of inventory pursuant to purchase orders previously received by the Company, repayment of which is (i) secured solely by such inventory manufactured, produced or purchased and accounts receivables from the sales thereof, and (ii) due promptly following such sales, and (e) indebtedness that (i) is expressly subordinate to the Notes pursuant to a written subordination agreement with the Purchasers that is acceptable to each Purchaser in its sole and absolute discretion and (ii) matures at a date later than the Maturity Date, provided that the aggregate amount of Permitted Indebtedness pursuant to this clause (e) shall not at any time exceed 500% of the Company’s EBITDA for the 12-month period ending on the last day of the immediately preceding full calendar quarter.

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

 

 

“ Purchase Agreement ” means the Securities Purchase Agreement, dated as of April 25, 2008, among the Company and the original purchasers of Notes, as amended, modified or supplemented from time to time in accordance with its terms.

“ Registration Statement ” means an effective registration statement under the Securities Act that registers the resale of all Conversion Shares of the Holder, names the Holder as a “selling stockholder” therein, and contains a current prospectus not subject to any blackout, suspension or stop order.

“ Restatement Date ” means December 30, 2009, the date restatement of this Note, regardless of any transfers of any Note and regardless of the number of instruments which may be issued to evidence this Note.

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

“ Share Delivery Date ” shall have the meaning set forth in Section 4(d).

“ Subsidiary ” shall have the meaning set forth in the Purchase Agreement.

“ Threshold Period ” shall have the meaning set forth in Section 6(d).

“ Trading Day ” means a day on which the principal Trading Market is open for business.

“ Trading Market ” means the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the American Stock Exchange, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange or the OTC Bulletin Board.

“ Transaction Documents ” shall have the meaning set forth in the Purchase Agreement.

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

 

 

Section 2 .     Interest; No Prepayment .

 

              a)     Interest Rate .  Interest shall accrue daily on the outstanding principal amount of this Note at a rate per annum equal to 10%.

 

              b)     Payment of Interest .  On the Maturity Date, the Company shall pay to the Holder any accrued but unpaid interest hereunder on the aggregate unconverted and then outstanding principal amount of this Note, and on each Conversion Date the Company shall pay to the Holder any accrued but unpaid interest hereunder on that portion of the principal amount then being converted or redeemed, as the case may be.  The amount of interest payable on each Conversion Date and Maturity Date (“ Interest Amount ”) shall be added to and included in the principal amount being so converted or redeemed on such date.

 

              c)     Interest Calculations . Interest shall be calculated on the basis of a 360-day year, consisting of twelve 30 calendar day periods, and shall accrue daily commencing on the Restatement Date until payment in full of the outstanding principal, together with all accrued and unpaid interest, liquidated damages and other amounts which may become due hereunder, has been made.  Interest hereunder will be paid to the Person in whose name this Note is registered on the records of the Company regarding registration and transfers of this Note (the “ Note Register ”). Except as otherwise provided herein, if at any time the Company pays interest partially in cash and partially in shares of Common Stock to the holders of the Notes, then such payment of cash shall be distributed ratably among the holders of the then-outstanding Notes based on their (or their predecessor’s) original principal amounts of Notes.

 

              d)     Late Fees .  All overdue accrued and unpaid interest to be paid hereunder shall entail a late fee at an interest rate equal to the lesser of 24% per annum or the maximum rate permitted by applicable law (“ Late Fees ”) which shall accrue daily from the date such interest is due hereunder through and including the date of actual payment in full.

 

              e)     Prepayment .  The Company may prepay all or any portion of the principal amount of this Note at any time without the prior written consent of the Holder, provided that the Company delivers written notice of such election in each case at least ten (10) Trading Days but no more than thirty (30) Trading Days prior to the date of such prepayment, during which notice period the Holder shall have the right to convert any or all or the principal amount to be prepaid in accordance with the terms hereof.

Section 3.             Registration of Transfers and Exchanges .

 

              a)     Different Denominations . This Note is exchangeable for an equal aggregate principal amount of Notes of different authorized denominations, as requested by the Holder surrendering the same.  No service charge will be payable for such exchange.

 

 

              b)     Investment Representations .  This Note has been issued subject to certain investment representations of the original Holder set forth in the Purchase Agreement and may be transferred or exchanged only in compliance with the Purchase Agreement and applicable federal and state securities laws and regulations.

              c)     Reliance on Note Register .  Prior to due presentment for transfer to the Company of this Note, the Company and any agent of the Company may treat the Person in whose name this Note is duly registered on the Note Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Note is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary.

Section 4.             Conversion .

 

              a)     Voluntary Conversion . At any time after the Original Issue Date until this Note is no longer outstanding, this Note shall be convertible, in whole or in part, into shares of Common Stock at the option of the Holder, at any time and from time to time (subject to the conversion limitations set forth in Section 4(c) hereof).  The Holder shall effect conversions by delivering to the Company a Notice of Conversion, the form of which is attached hereto as Annex A (a “ Notice of Conversion ”), specifying therein the principal amount of this Note to be converted and the date on which such conversion shall be effected (such date, the “ Conversion Date ”).  If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion is deemed delivered hereunder.  To effect conversions hereunder, the Holder shall not be required to physically surrender this Note to the Company unless the entire principal amount of this Note, plus all accrued and unpaid interest thereon, has been so converted. Conversions hereunder shall have the effect of lowering the outstanding principal amount of this Note in an amount equal to the applicable conversion.  The Holder and the Company shall maintain records showing the principal amount(s) converted and the date of such conversion(s).  In the event of any dispute or discrepancy, the records of the Holder shall be controlling and determinative in the absence of manifest error. The Holder, and any assignee by acceptance of this Note, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Note, the unpaid and unconverted principal amount of this Note may be less than the amount stated on the face hereof.

 

               b)     Conversion Price .  The conversion price shall be equal to the lesser of (i) $0.10, and (ii) 80% of the lowest closing bid price occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable Conversion Date (in each case subject to appropriate and equitable adjustment in accordance with Section 5 below for any stock dividend, stock split, stock combination or other similar event affecting the Common Stock at any time (with respect to clause (i)) and during such 20 Trading Day period (with respect to clause (ii))), subject to adjustment herein (the “ Conversion Price ”).

 

 

              c)     Conversion Limitation – Holder’s Restriction on Conversion . The Company shall not effect any conversion of this Note, and a Holder shall not have the right to convert any portion of this Note, to the extent that after giving effect to the conversion set forth on the applicable Notice of Conversion, the Holder (together with the Holder’s Affiliates, and any other person or entity acting as a group together with the Holder or any of the Holder’s Affiliates) would beneficially own in excess of the Beneficial Ownership Limitation (as defined below).  For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon conversion of this Note with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which are issuable upon (A) conversion of the remaining, unconverted principal amount of this Note beneficially owned by the Holder or any of its Affiliates and (B) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company subject to a limitation on conversion or exercise analogous to the limitation contained herein (including, without limitation, any other Notes or the Warrants) beneficially owned by the Holder or any of its Affiliates.  Except as set forth in the preceding sentence, for purposes of this Section 4(c), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder.  To the extent that the limitation contained in this paragraph applies, the determination of whether this Note is convertible (in relation to other securities owned by the Holder together with any Affiliates) and of which principal amount of this Note is convertible shall be in the sole discretion of the Holder, and the submission of a Notice of Conversion shall be deemed to be the Holder’s determination of whether this Note may be converted (in relation to other securities owned by the Holder together with any Affiliates) and which principal amount of this Note is convertible, in each case subject to the Beneficial Ownership Limitation.  To ensure compliance with this restriction, the Holder will be deemed to represent to the Company each time it delivers a Notice of Conversion that such Notice of Conversion has not violated the restrictions set forth in this paragraph and the Company shall have no obligation to verify or confirm the accuracy of such determination.  In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder.  For purposes of this paragraph, in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as stated in the most recent of the following: (A) the Company’s most recent periodic or annual report, as the case may be; (B) a more recent public announcement by the Company; or (C) a more recent notice by the Company or the Company’s transfer agent setting forth the number of shares of Common Stock outstanding.  Upon the written or oral request of a Holder, the Company shall within two Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding.  In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Note, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The “ Beneficial Ownership Limitation ” shall be 4.9% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of this Note held by the Holder.  By written notice to the Company, the Holder may at any time and from time to time increase or decrease the Beneficial Ownership Limitation to any other percentage specified in such notice (or specify that the Beneficial Ownership Limitation shall no longer be applicable), provided, however, that (A) any such increase (or inapplicability) shall not be effective until the sixty-first (61st) day after such notice is delivered to the Company, and (B) any such increase or decrease shall apply only to the Holder and not to any other holder of Notes.  The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this paragraph to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation.  The limitations contained in this paragraph shall apply to a successor holder of this Note.

 

 

               d)     Mechanics of Conversion .
 

               i.            Conversion Shares Issuable Upon Conversion of Principal Amount .  The number of Conversion Shares issuable upon a conversion hereunder shall be determined by the quotient obtained by dividing (x) the outstanding principal amount of this Note to be converted plus any accrued but unpaid interest thereon, by (y) the Conversion Price.

 

              ii.            Delivery of Certificate Upon Conversion . Not later than three Trading Days after each Conversion Date (the “ Share Delivery Date ”), the Company shall deliver, or cause to be delivered, to the Holder a certificate or certificates representing the Conversion Shares which, on or after the Legend Removal Date, shall be free of restrictive legends and trading restrictions (other than those which may then be required by the Purchase Agreement) representing the number of Conversion Shares being acquired upon the conversion of this Note.  On or after the date on which the Holder may sell the Conversion Shares pursuant to Rule 144, the Company shall use its best efforts to deliver any certificate(s) or shares required to be delivered by the Company under this Section 4 electronically through the Depository Trust Company or another established clearing corporation performing similar functions.

 

             iii.            Failure to Deliver Certificates .  If in the case of any Notice of Conversion such certificate(s) or shares are not delivered to or as directed by the applicable Holder by the third Trading Day after the Conversion Date, the Holder shall be entitled to elect by written notice to the Company at any time on or before its receipt of such certificate or certificates, to rescind such Conversion, in which event the Company shall promptly return to the Holder any original Note delivered to the Company and the Holder shall promptly return to the Company the Common Stock certificates representing the principal amount of this Note unsuccessfully tendered for conversion to the Company.

 

 

     iv.            Obligation Absolute; Partial Liquidated Damages .  The Company’s obligations to issue and deliver the Conversion Shares upon conversion of this Note in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of such Conversion Shares; provided , however , that such delivery shall not operate as a waiver by the Company of any such action the Company may have against the Holder.  In the event the Holder of this Note shall elect to convert any or all of the outstanding principal amount hereof, the Company may not refuse conversion based on any claim that the Holder or anyone associated or affiliated with the Holder has been engaged in any violation of law, agreement or for any other reason, unless an injunction from a court, on notice to Holder, restraining and or enjoining conversion of all or part of this Note shall have been sought and obtained, and the Company posts a surety bond for the benefit of the Holder in the amount of 150% of the outstanding principal amount of this Note, which is subject to the injunction, which bond shall remain in effect until the completion of arbitration/litigation of the underlying dispute and the proceeds of which shall be payable to the Holder to the extent it obtains judgment.  In the absence of such injunction, the Company shall issue Conversion Shares or, if applicable, cash, upon a properly noticed conversion.  If the Company fails for any reason to deliver to the Holder such certificate(s) or shares pursuant to Section 4(d)(ii) by the second Trading Day after the Share Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1000 of principal amount being converted, $10 per Trading Day (increasing to $20 per Trading Day on the fifth Trading Day after such liquidated damages begin to accrue) for each Trading Day after such second Trading Day after the Share Delivery Date until such certificates are delivered.  Nothing herein shall limit a Holder’s right to pursue actual damages or declare an Event of Default pursuant to Section 8 hereof for the Company’s failure to deliver Conversion Shares within the period specified herein and the Holder shall have the right to pursue all remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief.  The exercise of any such rights shall not prohibit the Holder from seeking to enforce damages pursuant to any other Section hereof or under applicable law.

 

 

     v.            Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Conversion . In addition to any other rights available to the Holder, if the Company fails for any reason to deliver to the Holder such certificate(s) or shares by the Share Delivery Date pursuant to Section 4(d)(ii), and if after such Share Delivery Date the Holder is required by its brokerage firm to purchase (in an open market transaction or otherwise), or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Conversion Shares which the Holder was entitled to receive upon the conversion relating to such Share Delivery Date (a “ Buy-In ”), then the Company shall (A) pay in cash to the Holder (in addition to any other remedies available to or elected by the Holder) the amount by which (x) the Holder’s total purchase price (including any brokerage commissions) for the Common Stock so purchased exceeds (y) the product of (1) the aggregate number of shares of Common Stock that the Holder was entitled to receive from the conversion at issue multiplied by (2) the actual sale price at which the sell order giving rise to such purchase obligation was executed (including any brokerage commissions) and (B) at the option of the Holder, either reissue (if surrendered) this Note in a principal amount equal to the principal amount of the attempted conversion or deliver to the Holder the number of shares of Common Stock that would have been issued if the Company had timely complied with its delivery requirements under Section 4(d)(ii).  For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of this Note with respect to which the actual sale price of the Conversion Shares (including any brokerage commissions) giving rise to such purchase obligation was a total of $10,000 under clause (A) 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 and, upon request of the Company, evidence of the amount of such loss.  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 conversion of this Note as required pursuant to the terms hereof.

 

     vi.            Reservation of Shares Issuable Upon Conversion . The Company covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock for the sole purpose of issuance upon conversion of this Note and payment of interest on this Note, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of Persons other than the Holder (and the other holders of the Notes), not less than such aggregate number of shares of the Common Stock as shall (subject to the terms and conditions set forth in the Purchase Agreement) be issuable (taking into account the adjustments of Section 5) upon the conversion of the outstanding principal amount of this Note and payment of interest hereunder.  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 and, if the Registration Statement is then effective under the Securities Act, shall be registered for public sale in accordance with such Registration Statement.

 

     vii.            Fractional Shares . No fractional shares or scrip representing fractional shares shall be issued upon the conversion of this Note.  As to any fraction of a share which Holder would otherwise be entitled to purchase upon such conversion, the Company shall at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Conversion Price or round up to the next whole share.

 

 

     viii.            Transfer Taxes .  The issuance of certificates for shares of the Common Stock on conversion of this Note shall be made without charge to the Holder hereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificates, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of this Note and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.

Section 5 .            Certain Adjustments .

              a)     Stock Dividends and Stock Splits .  If the Company, at any time while this Note is outstanding: (A) pays a stock dividend or otherwise makes a distribution or distributions payable in shares of Common Stock on shares of Common Stock or any Common Stock Equivalents (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon conversion of, or payment of interest on, the Notes); (B) subdivides outstanding shares of Common Stock into a larger number of shares; (C) combines (including by way of a reverse stock split) outstanding shares of Common Stock into a smaller number of shares; or (D) issues, in the event of a reclassification of shares of the Common Stock, any shares of capital stock of the Company, then the Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding any treasury shares of the Company) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event.  Any adjustment made pursuant to this Section 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, combination or re-classification.

 

               b)     Subsequent Equity Sales .  If, at any time while this Note is outstanding, the Company or any Subsidiary, as applicable, sells or grants any option to purchase or sells or grants any right to reprice, or otherwise disposes of or issues (or announces any sale, grant or any option to purchase or other disposition), any Common Stock or Common Stock Equivalents entitling any Person to acquire shares of Common Stock at an effective price per share that is lower than the then Conversion Price (such lower price, the “ Base Conversion Price ” and such issuances, collectively, a “ Dilutive Issuance ”) (if the holder of the Common Stock or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share that is lower than the Conversion Price, such issuance shall be deemed to have occurred for less than the Conversion Price on such date of the Dilutive Issuance), then the Conversion Price shall be reduced to equal the Base Conversion Price.  Such adjustment shall be made whenever such Common Stock or Common Stock Equivalents are issued.   Notwithstanding the foregoing, no adjustment will be made under this Section 5(b) in respect of an Exempt Issuance .  If the Company enters into a Variable Rate Transaction or MFN Transaction, despite the prohibition set forth in the Purchase Agreement, the Company shall be deemed to have issued Common Stock or Common Stock Equivalents at the lowest possible conversion price at which such securities may be converted or exercised. The Company shall notify the Holder in writing, no later than 2 Business Day following the issuance of any Common Stock or Common Stock Equivalents subject to this Section 5(b), indicating therein the applicable issuance price, or applicable reset price, exchange price, conversion price and other pricing terms (such notice, the “ Dilutive Issuance Notice ”).  For purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 5(b), upon the occurrence of any Dilutive Issuance, the Holder is entitled to receive a number of Conversion Shares based upon the Base Conversion Price on or after the date of such Dilutive Issuance, regardless of whether the Holder accurately refers to the Base Conversion Price in the Notice of Conversion.

 

 

              c)     Subsequent Rights Offerings .  If the Company, at any time while the Note is outstanding, shall issue rights, options or warrants to all holders of Common Stock (and not to Holders) entitling them to subscribe for or purchase shares of Common Stock at a price per share that is lower than the VWAP on the record date referenced below, then the Conversion Price shall be multiplied by a fraction of which the denominator shall be the number of shares of the Common Stock outstanding on the date of issuance of such rights or warrants plus the number of additional shares of Common Stock offered for subscription or purchase, and of which the numerator shall be the number of shares of the Common Stock outstanding on the date of issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares issued (assuming delivery to the Company in full of all consideration payable upon exercise of such rights, options or warrants) would purchase at such VWAP.  Such adjustment shall be made whenever such rights or warrants are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights, options or warrants.

 

               d)     Pro Rata Distributions . If the Company, at any time while this Note is outstanding, distributes to all holders of Common Stock (and not to the Holders) evidences of its indebtedness or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security (other than the Common Stock, which shall be subject to Section 5(b)), then in each such case the Conversion Price shall be adjusted by multiplying such Conversion Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the VWAP determined as of the record date mentioned above, and of which the numerator shall be such VWAP on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to 1 outstanding share of the Common Stock as determined by the Board of Directors of the Company in good faith.  In either case the adjustments shall be described in a statement delivered to the Holder describing the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to 1 share of Common Stock.  Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above.

 

 

               e)     Fundamental Transaction . If, at any time while this Note is outstanding, (A) the Company effects any merger or consolidation of the Company with or into another Person, (B) the Company effects any sale of all or substantially all of its assets in one transaction or a series of related transactions, (C) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (D) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (in any such case, a “ Fundamental Transaction ”), then, upon any subsequent conversion of this Note, the Holder shall have the right to receive, for each Conversion Share that would have been issuable upon such conversion immediately prior to the occurrence of such Fundamental Transaction, the same kind and amount of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of 1 share of Common Stock (the “ Alternate Consideration ”).  For purposes of any such conversion, the determination of the Conversion Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of 1 share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Conversion Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration.  If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any conversion of this Note following such Fundamental Transaction.  To the extent necessary to effectuate the foregoing provisions, any successor to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder a new Note consistent with the foregoing provisions and evidencing the Holder’s right to convert such Note into Alternate Consideration. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this Section 5(e) and insuring that this Note (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction.

 

               f)     Calculations .  All calculations under this Section 5 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be.  For purposes of this Section 5, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding any treasury shares of the Company) issued and outstanding.

 

 

               g)          Notice to the Holder .

 

      i.     Adjustment to Conversion Price .  Whenever the Conversion Price is adjusted pursuant to any provision of this Section 5, the Company shall promptly deliver to each Holder a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.

 

     ii.     Notice to Allow Conversion by Holder .  If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, 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 exchange whereby the Common Stock is converted into other securities, cash or property or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of this Note, and shall cause to be delivered to the Holder at its last address as it shall appear upon the Note Register, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, 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 the 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 the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange, provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice.  The Holder is entitled to convert this Note during the 20-day period commencing on the date of such notice through the effective date of the event triggering such notice.

 

 

Section 6 .            Redemption and Forced Conversion .

 

              a)     Prepayment/Redemption .  To the extent the Company agrees with any other holder of Notes or otherwise elects to prepay or redeem such other holder’s Notes in whole or in part, the Company shall offer such prepayment or redemption of this Note on a pro rata basis on the same terms and conditions as agreed upon for such other Notes.

 

              b)     Intentionally Deleted .

 

              c)     Intentionally Deleted .

 

              d)     Forced Conversion . Notwithstanding anything herein to the contrary, if, after one year following the Original Issue Date of this Note, the VWAP for any 20 out of 30 consecutive Trading Days (such 30 Trading Day period being the “ Threshold Period ”) exceeds 300% of the initial Conversion Price   hereunder   (subject to appropriate and equitable adjustment for reverse and forward stock splits, stock dividends, stock combinations and other similar transactions of the Common Stock that occur after the Original Issue Date), then the Company may, within 1 Trading Day after the end of any such Threshold Period, deliver a written notice to the Holder (a “ Forced Conversion Notice ” and the date such notice is delivered to the Holder, the “ Forced Conversion Notice Date ”) to cause the Holder to convert all or part of the then outstanding principal amount of this Note as specified in such Forced Conversion Notice (“ Forced Conversion Amount ”) at the Conversion Price (“ Forced Conversion ”) on or prior to the tenth Trading Day following the Holder’s receipt of such Forced Conversion Notice (such date, the “ Forced Conversion Date ”).  The Company may not deliver a Forced Conversion Notice, and any Forced Conversion Notice delivered by the Company shall not be effective, unless all of the Equity Conditions are met (unless waived in writing by the Holder) on each Trading Day occurring during the applicable Threshold Period through and including the later of the Forced Conversion Date and the Trading Day after the date such Conversion Shares pursuant to such conversion are delivered to the Holder.  Any Forced Conversion shall be applied ratably to all Holders based on their original principal amount of Notes, provided that any voluntary conversions by a Holder shall be applied against the Holder’s pro rata allocation, thereby decreasing the aggregate amount forcibly converted hereunder if only a portion of this Note is forcibly converted.  For purposes of clarification, a Forced Conversion shall be subject to all of the provisions of Section 4, including, without limitation, the provision requiring payment of liquidated damages and limitations on conversions.

Section 7 .            Negative Covenants . As long as any portion of this Note remains outstanding, unless the holders of at least 67% in principal amount of the then outstanding Notes shall have otherwise given prior written consent, the Company shall not, and shall not permit any of its subsidiaries (whether or not a Subsidiary on the Original Issue Date) to, directly or indirectly:

 

              a)     other than Permitted Indebtedness, enter into, create, incur, assume, guarantee or suffer to exist any indebtedness for borrowed money of any kind, including but not limited to, a guarantee, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom;

 

 

               b)     other than Permitted Liens, enter into, create, incur, assume or suffer to exist any Liens of any kind, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom;

 

              c)     amend its charter documents, including, without limitation, its certificate of incorporation and bylaws, in any manner that materially and adversely affects any rights of the Holder;

 

              d)     repay, repurchase or offer to repay, repurchase or otherwise acquire more than a de minimis number of shares of its Common Stock or Common Stock Equivalents other than as to (a) the Conversion Shares or Warrant Shares as permitted or required under the Transaction Documents and (b) repurchases of Common Stock or Common Stock Equivalents of departing employees of the Company, provided that such repurchases shall not exceed an aggregate of $100,000 for all officers and directors during the term of this Note;

 

              e)     repay, repurchase or offer to repay, repurchase or otherwise acquire any Indebtedness (except for the Notes in accordance with the terms of the Notes), other than regularly scheduled principal and interest payments as such terms are in effect as of the Closing Date;

 

              f)     repay, repurchase or offer to repay, repurchase or otherwise acquire any indebtedness to any current or former employees, officers or directors of the Company, including without limitation any loans from Kipton P. Hirschbach, James A. Erickson or Mark B. Gruenewald;

 

              g)     pay cash dividends or distributions on any equity securities of the Company;

 

              h)     enter into any transaction with any Affiliate of the Company which would be required to be disclosed in any public filing with the Commission, unless such transaction is made on an arm’s-length basis and expressly approved by a majority of the disinterested directors of the Company (even if less than a quorum otherwise required for board approval); or

 

               i)     enter into any agreement with respect to any of the foregoing .

 

Section 8 .            Events of Default .

 

              a)     “ Event of Default ” means, wherever used herein, any of the following events (whatever the reason for such event and whether such event shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body):

 

 

            i.     any default in the payment of (A) the principal amount of any Note or (B) interest, liquidated damages and other amounts owing to a Holder on any Note, as and when the same shall become due and payable (whether on a Conversion Date or the Maturity Date or by acceleration or otherwise) which default, solely in the case of an interest payment or other default under clause (B) above, is not cured within 3 Trading Days;

 

           ii.     the Company shall fail to observe or perform any other covenant or agreement contained in the Notes (other than a breach by the Company of its obligations to deliver shares of Common Stock to the Holder upon conversion, which breach is addressed in clause (xii) below) which failure is not cured, if possible to cure, within the earlier to occur of (A) 5 Trading Days after notice of such failure sent by the Holder or by any other Holde r and (B) 10 Trading Days after the Company has become or should have become aware of such failure;

 

          iii.     a default or event of default (subject to any grace or cure period provided in the applicable agreement, document or instrument) shall occur under (A) any of the Transaction Documents or (B) any other material agreement, lease, document or instrument to which the Company or any Subsidiary is obligated (and not covered by clause (vi) below);

 

         iv.     any representation or warranty made in this Note, any other Transaction Documents, any written statement pursuant hereto or thereto or any other report, financial statement or certificate made or delivered to the Holder or any other Holder shall be untrue or incorrect in any material respect as of the date when made or deemed made;

 

           v.     the Company or any Significant Subsidiary shall be subject to a Bankruptcy Event;

 

           vi.     the Company or any Subsidiary shall default on any of its obligations under any mortgage, credit agreement or other facility, indenture agreement, factoring agreement or other instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness for borrowed money or money due under any long term leasing or factoring arrangement that (a) involves an obligation greater than $100,000, whether such indebtedness now exists or shall hereafter be created, and (b) results in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable;

 

         vii.     if at any time the Common Stock shall not be eligible for listing or quotation for trading on the Pink Sheets and shall not be eligible to resume listing or quotation for trading thereon within five (5) Trading Days, or the Company fails to use its best efforts to cause the Common Stock to be listed or quoted on a Trading Market after March 31, 2009;

 

 

        viii.     the Company shall be a party to any Change of Control Transaction or Fundamental Transaction or shall agree to sell or dispose of all or in excess of 33% of its assets in one transaction or a series of related transactions (whether or not such sale would constitute a Change of Control Transaction);

 

           ix.     if at any time after March 1, 2009 the Company is not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act or has failed to file all reports required to be filed thereunder during the then preceding 12 months (or such shorter period that the Company was required to file such reports) ;

 

            x.     if any of the Security Documents or any Subsidiary Guarantee ceases to be in full force and effect (including failure to create a valid and perfected first priority lien on and security interest in all the Collateral (as defined in the Security Agreement) and Intellectual Property Rights of the Company and its Subsidiaries) at any time for any reason;

 

           xi.     any material adverse change in the condition, value or operation of a material portion of the Collateral or Intellectual Property Rights;

 

          xii.     the Company shall fail for any reason to deliver certificates to a Holder prior to the fifth Trading Day after a Conversion Date or any Forced Conversion Date pursuant to Section 4(d) or the Company shall provide at any time notice to the Holder, including by way of public announcement, of the Company’s intention to not honor requests for conversions of any Notes in accordance with the terms hereof; or

 

         xiii.     any monetary judgment, writ or similar final process shall be entered or filed against the Company, any subsidiary or any of their respective property or other assets for more than $100,000, and such judgment, writ or similar final process shall remain unvacated, unbonded or unstayed for a period of 45 calendar days.

 

              b)     Remedies Upon Event of Default . If any Event of Default occurs, the outstanding principal amount of this Note, plus accrued but unpaid interest, liquidated damages and other amounts owing in respect thereof through the date of acceleration, shall become, at the Holder’s election, immediately due and payable in cash at the Mandatory Default Amount.  After the occurrence and during the continuance of any Event of Default, the interest rate on this Note shall accrue at an interest rate equal to the lesser of 24% per annum or the maximum rate permitted under applicable law.  Upon the payment in full of the Mandatory Default Amount, the Holder shall promptly surrender this Note to or as directed by the Company.  In connection with such acceleration described herein, the Holder need not provide, and the Company hereby waives, any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law.  Such acceleration may be rescinded and annulled by Holder at any time prior to payment hereunder and the Holder shall have all rights as a holder of the Note until such time, if any, as the Holder receives full payment pursuant to this Section 8(b).  No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon.

 

 

Section 9 .            Miscellaneous .

 

              a)     Notices .  Any and all notices or other communications or deliveries to be provided by the Holder hereunder, including, without limitation, any Notice of Conversion, shall be in writing and delivered personally, by facsimile, or sent by a nationally recognized overnight courier service, addressed to the Company, at the address set forth above, or such other facsimile number or address as the Company may specify for such purpose by notice to the Holder delivered in accordance with this Section 9.  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 sent by a nationally recognized overnight courier service addressed to each Holder at the facsimile number or address of the Holder appearing on the books of the Company, or if no such facsimile number or address appears, at the principal place of business of the Holder.  Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section 9 prior to 5:30 p.m. (New York City time), (ii) the date immediately following the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section 9 between 5:30 p.m. (New York City time) and 11:59 p.m. (New York City time) on any date, (iii) the second Business Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given.  The address for such notices and communications shall be as set forth on the signature pages attached to the Purchase Agreement.

 

              b)     Absolute Obligation . Except as expressly provided herein, no provision of this Note shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, liquidated damages and accrued interest, as applicable, on this Note at the time, place, and rate, and in the coin or currency, herein prescribed.  This Note is a direct debt obligation of the Company.  This Note ranks pari passu with all other Notes now or hereafter issued under the terms set forth herein.

 

               c)     Lost or Mutilated Note .  If this Note shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Note, or in lieu of or in substitution for a lost, stolen or destroyed Note, a new Note for the principal amount of this Note so mutilated, lost, stolen or destroyed, but only upon receipt of evidence of such loss, theft or destruction of such Note, and of the ownership hereof, reasonably satisfactory to the Company.

 

 

              d)     Governing Law .  All questions concerning the construction, validity, enforcement and interpretation of this Note shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflict of laws thereof.  Each party agrees that all legal proceedings concerning the interpretation, enforcement and defense of the transactions contemplated by any of the Transaction Documents (whether brought against a party hereto or its respective Affiliates, directors, officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in the City of New York, Borough of Manhattan (the “ New York Courts ”).  Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such New York Courts, or such New York Courts are improper or inconvenient venue for such proceeding.  Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Note and agrees that such service shall constitute good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by applicable law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Note or the transactions contemplated hereby. If either party shall commence an action or proceeding to enforce any provisions of this Note, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its attorney’s fees and other costs and expenses reasonably incurred in the investigation, preparation and prosecution of such action or proceeding.

 

              e)     Waiver .  Any waiver by the Company or the Holder of a breach of any provision of this Note shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Note.  The failure of the Company or the Holder to insist upon strict adherence to any term of this Note on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Note.  Any waiver by the Company or the Holder must be in writing.

 

               f)     Severability .  If any provision of this Note is invalid, illegal or unenforceable, the balance of this Note shall remain in effect, and if any provision is inapplicable to any Person or circumstance, it shall nevertheless remain applicable to all other Persons and circumstances.  If it shall be found that any interest or other amount deemed interest due hereunder violates the applicable law governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum rate of interest permitted under applicable law. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of or interest on this Note as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this indenture, and the Company (to the extent it may lawfully do so) hereby expressly waives all benefits or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impeded the execution of any power herein granted to the Holder, but will suffer and permit the execution of every such as though no such law has been enacted.

 

 

              g)     Next Business Day .  Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day.

 

              h)     Headings .  The headings contained herein are for convenience only, do not constitute a part of this Note and shall not be deemed to limit or affect any of the provisions hereof.

 

               i)     Assumption .  Any successor to the Company or any surviving entity in a Fundamental Transaction shall (i) assume, prior to such Fundamental Transaction, all of the obligations of the Company under this Note and the other Transaction Documents pursuant to written agreements in form and substance satisfactory to the Holder (such approval not to be unreasonably withheld or delayed) and (ii) issue to the Holder a new Note of such successor entity evidenced by a written instrument substantially similar in form and substance to this Note, including, without limitation, having a principal amount and interest rate equal to the principal amount and the interest rate of this Note and having similar ranking to this Note, which shall be satisfactory to the Holder (any such approval not to be unreasonably withheld or delayed).  The provisions of this Section 9(i) shall apply similarly and equally to successive Fundamental Transactions and shall be applied without regard to any limitations of this Note.

 

               j)     Usury .  This Note shall be subject to the anti-usury limitations contained in the Purchase Agreement.

*********************

 

 

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

 

 

 

ANNEX A

 

NOTICE OF CONVERSION

 

The undersigned hereby elects to convert principal under the 10% Senior Secured Convertible Note due _______________________ of Axis Technologies Group, Inc., a Delaware corporation (the Company ”), into shares of common stock (the “ Common Stock ”), of the Company according to the conditions hereof, as of the date written below.  If shares of Common Stock 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.  No fee will be charged to the holder for any conversion, except for such transfer taxes, if any.

By the delivery of this Notice of Conversion the undersigned represents and warrants to the Company that its ownership of the Common Stock does not exceed the amounts specified under Section 4 of this Note, as determined in accordance with Section 13(d) of the Exchange Act.

The undersigned agrees to comply with the prospectus delivery requirements under the applicable securities laws in connection with any transfer of the aforesaid shares of Common Stock pursuant to any prospectus.

Conversion calculations:

	Date to Effect Conversion: ________________________________________________
	Principal Amount of Note to be Converted: ____________________________________
	Interest Accrued on Account
	of Conversion at Issue: __________________________________________________
	Number of shares of Common Stock to be issued: ______________________________
	_____________________________________________________________________
	Signature: ____________________________________________________________
	Name: _______________________________________________________________
	Address for Delivery of Common Stock Certificates: _____________________________
	_____________________________________________________________________
	_____________________________________________________________________
	Or
	DWAC Instructions:
	Broker No:  __________________
	Account No: _________________

 

 

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