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LETTER OF CREDIT
CONTINGENT NOTE
THIS LETTER OF CREDIT
CONTINGENT NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE “SECURITIES ACT”), NOR UNDER ANY
STATE SECURITIES LAW AND MAY NOT BE SOLD, PLEDGED, OFFERED FOR
SALE, ASSIGNED OR TRANSFERRED UNLESS (A) A REGISTRATION
STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES
ACT, AND ANY APPLICABLE STATE SECURITIES LAW REQUIREMENTS HAVE BEEN
MET OR (B) EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS UNDER
THE SECURITIES ACT AND THE REGISTRATION OR QUALIFICATION
REQUIREMENTS OF APPLICABLE STATE SECURITIES LAWS ARE AVAILABLE.
$1,825,000 May 23,
2007
Principal Amount
CONVERTED ORGANICS
INC.
LETTER OF CREDIT CONTINGENT NOTE
FOR VALUE RECEIVED,
CONVERTED ORGANICS INC., a Delaware corporation,
(“Borrower” or “COIN”) promises to pay to
the order of David A, Rapaport as agent (“Agent”) for
the beneficial owners listed on Schedule I hereto
(“Lenders”) the principal amount of up to $1,825,000,
together with interest on the unpaid principal amount at the rate
of 12% per annum based on a 360-day year, all upon the terms set
forth below. Interest shall be payable on the last business day of
each quarter beginning on March 31, 2008. High Capital
Funding, LLC (“HCF”), one of the Lenders, has named the
Borrower as beneficiary of a letter of credit in the amount of
$1,825,000 (the “LOC”), which was issued to the
Borrower in accordance with the terms of a letter of credit
agreement between the Borrower and HCF dated as May 9, 2007
(the “Letter of Credit Agreement” or “LOC
Agreement”). This note (the “Letter of Credit
Contingent Note” or the “LOC Note”) is subject to
the terms and conditions of the Letter of Credit Agreement. The
amount of the drawdown under the LOC shall be deemed to be a
borrowing under this LOC Note and shall be recorded by the Agent in
the columns headed “Amount of LOC Drawdown” and
“Remaining Principal Outstanding” on the record (the
“Grid”) attached hereto as Schedule II and forming
a part of this LOC Note. Capitalized terms used herein and not
otherwise defined have the meanings ascribed to them in the Letter
of Credit Agreement. This LOC Note shall be deemed null and void in
the event there has been no drawdown under the LOC prior to its
expiration at 6:00 PM PST March 17, 2008.
1. Computation of
Principal Balance: The Agent shall and is hereby
unconditionally and absolutely authorized and directed by the
Borrower to record on the Grid: (a) the date and amount of the
drawdown under the LOC, and the resulting increase in the Remaining
Principal Outstanding; and (b) the date and amount of each
repayment on account of the interest and principal made to the
Agent hereunder, and the resulting decrease of the Remaining
Principal Outstanding. The Agent shall provide a copy of the Grid
to the Borrower promptly following the making of any entry on the
Grid. Borrower shall have five business days following receipt of a
copy of the Grid to make any objection in writing to the Agent
regarding the most recent entry on the Grid. After such five
business day period such entry shall be conclusively deemed to be
correct.
2. Maturity .
Except as otherwise provided herein, the principal hereunder shall
become due and payable in full one year after the LOC Drawdown
(“Original Maturity Date”). After the Original Maturity
Date, this LOC Note shall bear interest at 18% per annum.
3. Extension of
Maturity Date . If the LOC Note is not paid by the Original
Maturity Date it shall be automatically extended for one month, a
maximum of twelve times, in which case COIN shall issue to the
Lenders and deliver to the Agent an additional number of shares of
its common stock (“Extension Shares”) equal to 8 1/3 %
of the then Remaining Principal Outstanding of the LOC Note divided
by the average of the closing bid price of the common stock on
NASDAQ (or subsequent trading market) for the five trading days
immediately preceding each Maturity Date extension. Extension
Shares shall be delivered to Agent within ten days of each such
Maturity Date extension.
4. Method of
Payment. Agent shall provide Borrower with appropriate wire
instructions for payment of LOC Note principal and interest and
Borrower shall make payment by wire transfer of same day funds. Any
partial payment shall be applied first to accrued and unpaid
interest and thereafter to a
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