Exhibit 10.3
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL IN FORM,
SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE
TRANSACTIONS THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
UNLESS SOLD PURSUANT TO RULE 144 OR REGULATION S UNDER SAID
ACT.
CALLABLE SECURED
CONVERTIBLE NOTE
Reno, Nevada
November 3, 2006
$150,000
FOR VALUE RECEIVED , ITRONICS INC. , a Texas
corporation (hereinafter called the " Borrower "), hereby
promises to pay to the order of AJW QUALIFIED PARTNERS, LLC or
registered assigns (the " Holder ") the sum of $150,000, on
November 3, 2009 (the "Maturity Date "), and to pay interest
on the unpaid principal balance hereof at the rate of six percent
(6%) (the " Interest Rate ") per annum from November 3, 2006
(the " Issue Date ") until the same becomes due and payable,
whether at maturity or upon acceleration or by prepayment or
otherwise. Any amount of principal or interest on this Note which
is not paid when due shall bear interest at the rate of fifteen
percent (15%) per annum from the due date thereof until the same is
paid (" Default Interest "). Interest shall commence
accruing on the Issue Date, shall be computed on the basis of a
365-day year and the actual number of days elapsed and shall be
payable quarterly provided that no interest shall be due and
payable for any month in which the Trading Price (as such term is
defined below) is greater than $.025 for each Trading Day (as such
term is defined below) of the month. All payments due hereunder (to
the extent not converted into common stock, $.001 par value per
share (the "Common Stock" ) in accordance with the terms
hereof) shall be made in lawful money of the United States of
America. All payments shall be made at such address as the Holder
shall hereafter give to the Borrower by written notice made in
accordance with the provisions of this Note. Whenever any amount
expressed to be due by the terms of this Note is due on any day
which is not a business day, the same shall instead be due on the
next succeeding day which is a business day and, in the case of any
interest payment date which is not the date on which this Note is
paid in full, the extension of the due date thereof shall not be
taken into account for purposes of determining the amount of
interest due on such date. As used in this Note, the term "business
day" shall mean any day other than a Saturday, Sunday or a day on
which commercial banks in the city of New York, New York are
authorized or required by law or executive order to remain
closed.
Each capitalized term used herein, and not otherwise defined,
shall have the meaning ascribed thereto in that certain Securities
Purchase Agreement, dated November 3, 2006, pursuant to which this
Note was originally issued (the " Purchase Agreement ").
This Note is free from all taxes, liens, claims and encumbrances
with respect to the issue thereof and shall not be subject to
preemptive rights or other similar rights of shareholders of the
Borrower and will not impose personal liability upon the holder
thereof. The obligations of the Borrower under this Note shall be
secured by that certain Security Agreement and Intellectual
Property Security Agreement, each dated November 3, 2006 by and
between the Borrower and the Holder.
The following terms shall apply to this Note:
Article I. CONVERSION
RIGHTS
1.1
Conversion Right . The Holder shall have the right from
time to time, and at any time on or prior to the earlier of (i) the
Maturity Date and (ii) the date of payment of the Default Amount
(as defined in Article III) pursuant to Section 1.6(a) or Article
III, the Optional Prepayment Amount (as defined in Section 5.1 or
any payments pursuant to Section 1.7, each in respect of the
remaining outstanding principal amount of this Note to convert all
or any part of the outstanding and unpaid principal amount of this
Note into fully paid and non-assessable shares of Common Stock, as
such Common Stock exists on the Issue Date, or any shares of
capital stock or other securities of the Borrower into which such
Common Stock shall hereafter be changed or reclassified at the
conversion price (the " Conversion Price ") determined as
provided herein (a " Conversion "); provided ,
however , that in no event shall the Holder be entitled to
convert any portion of this Note in excess of that portion of this
Note upon conversion of which the sum of (1) the number of shares
of Common Stock beneficially owned by the Holder and its affiliates
(other than shares of Common Stock which may be deemed beneficially
owned through the ownership of the unconverted portion of the Notes
or the unexercised or unconverted portion of any other security of
the Borrower (including, without limitation, the warrants issued by
the Borrower pursuant to the Purchase Agreement) subject to a
limitation on conversion or exercise analogous to the limitations
contained herein) and (2) the number of shares of Common Stock
issuable upon the conversion of the portion of this Note with
respect to which the determination of this proviso is being made,
would result in beneficial ownership by the Holder and its
affiliates of more than 4.99% of the outstanding shares of Common
Stock and provided further that the Holder shall not
be entitled to convert any portion of this Note during any month
immediately succeeding a Determination Date on which the Borrower
exercises its prepayment option pursuant to Section 5.2 of this
Note. For purposes of the proviso to the immediately preceding
sentence, beneficial ownership shall be determined in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulations 13D-G thereunder, except as otherwise
provided in clause (1) of such proviso. The number of shares of
Common Stock to be issued upon each conversion of this Note shall
be determined by dividing the Conversion Amount (as defined below)
by the applicable Conversion Price then in effect on the date
specified in the notice of conversion, in the form attached hereto
as Exhibit A (the " Notice of Conversion "), delivered to
the Borrower by the Holder in accordance with Section 1.4 below;
provided that the Notice of Conversion is submitted by facsimile
(or by other means resulting in, or reasonably expected to result
in, notice) to
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the Borrower before 6:00 p.m., New York, New York time on such
conversion date (the " Conversion Date "). The term "
Conversion Amount " means, with respect to any conversion of
this Note, the sum of (1) the principal amount of this Note to be
converted in such conversion plus (2) accrued and unpaid
interest, if any, on such principal amount at the interest rates
provided in this Note to the Conversion Date, provided, however,
that the Company shall have the right to pay any and all interest
in cash, plus (3) Default Interest, if any, on the amounts
referred to in the immediately preceding clauses (1) and/or (2)
plus (4) at the Holder’s option, any amounts owed to
the Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant
to Section 2(c) of that certain Registration Rights Agreement,
dated as of November 3, 2006, executed in connection with the
initial issuance of this Note and the other Notes issued on the
Issue Date (the " Registration Rights Agreement "). The term
"Determination Date" means the last business day of each
month after the Issue Date.
1.2
Conversion Price .
(a)
Calculation of Conversion Price . The Conversion Price
shall be the lesser of (i) the Variable Conversion Price (as
defined herein) and (ii) the Fixed Conversion Price (as defined
herein) (subject, in each case, to equitable adjustments for stock
splits, stock dividends or rights offerings by the Borrower
relating to the Borrower’s securities or the securities of
any subsidiary of the Borrower, combinations, recapitalization,
reclassifications, extraordinary distributions and similar events).
The " Variable Conversion Price " shall mean the Applicable
Percentage (as defined herein) multiplied by the Market Price (as
defined herein). " Market Price " means the average of the
lowest three (3) Trading Prices (as defined below) for the Common
Stock during the twenty (20) Trading Day period ending one Trading
Day prior to the date the Conversion Notice is sent by the Holder
to the Borrower via facsimile (the " Conversion Date "). "
Trading Price " means, for any security as of any date, the
intraday trading price on the Over-the-Counter Bulletin Board (the
" OTCBB ") as reported by a reliable reporting service
mutually acceptable to Borrower and Holders and hereafter
designated by Holders of a majority in interest of the Notes and
the Borrower or, if the OTCBB is not the principal trading market
for such security, the intraday trading price of such security on
the principal securities exchange or trading market where such
security is listed or traded or, if no intraday trading price of
such security is available in any of the foregoing manners, the
average of the intraday trading prices of any market makers for
such security that are listed in the "pink sheets" by the National
Quotation Bureau, Inc. If the Trading Price cannot be calculated
for such security on such date in the manner provided above, the
Trading Price shall be the fair market value as mutually determined
by the Borrower and the holders of a majority in interest of the
Notes being converted for which the calculation of the Trading
Price is required in order to determine the Conversion Price of
such Notes. " Trading Day " shall mean any day on which the
Common Stock is traded for any period on the OTCBB, or on the
principal securities exchange or other securities market on which
the Common Stock is then being traded. " Applicable
Percentage " shall mean 55.0%. The " Fixed Conversion
Price " shall mean $.10.
(b)
Conversion Price During Major Announcements .
Notwithstanding anything contained in Section 1.2(a) to the
contrary, in the event the Borrower (i) makes a public announcement
that it intends to consolidate or merge with any other corporation
(other than a merger in which the Borrower is the surviving or
continuing corporation and its capital stock is
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unchanged) or sell or transfer all or substantially all of the
assets of the Borrower or (ii) any person, group or entity
(including the Borrower) publicly announces a tender offer to
purchase 50% or more of the Borrower’s Common Stock (or any
other takeover scheme) (the date of the announcement referred to in
clause (i) or (ii) is hereinafter referred to as the "
Announcement Date "), then the Conversion Price shall,
effective upon the Announcement Date and continuing through the
Adjusted Conversion Price Termination Date (as defined below), be
equal to the lower of (x) the Conversion Price which would have
been applicable for a Conversion occurring on the Announcement Date
and (y) the Conversion Price that would otherwise be in effect.
From and after the Adjusted Conversion Price Termination Date, the
Conversion Price shall be determined as set forth in this Section
1.2(a). For purposes hereof, " Adjusted Conversion Price
Termination Date " shall mean, with respect to any proposed
transaction or tender offer (or takeover scheme) for which a public
announcement as contemplated by this Section 1.2(b) has been made,
the date upon which the Borrower (in the case of clause (i) above)
or the person, group or entity (in the case of clause (ii) above)
consummates or publicly announces the termination or abandonment of
the proposed transaction or tender offer (or takeover scheme) which
caused this Section 1.2(b) to become operative.
1.3
Authorized Shares . Subject to the Stockholder Approval
(as defined in the Agreement), the Borrower covenants that during
the period the conversion right exists, the Borrower will reserve
from its authorized and unissued Common Stock a sufficient number
of shares, free from preemptive rights, to provide for the issuance
of Common Stock upon the full conversion of this Note and the other
Notes issued pursuant to the Purchase Agreement. The Borrower is
required at all times to have authorized and reserved two times the
number of shares that is actually issuable upon full conversion of
the Notes (based on the Conversion Price of the Notes or the
Exercise Price of the Warrants in effect from time to time) (the "
Reserved Amount "). The Reserved Amount shall be increased
from time to time in accordance with the Borrower’s
obligations pursuant to Section 4(h) of the Purchase Agreement. The
Borrower represents that upon issuance, such shares will be duly
and validly issued, fully paid and non-assessable. In addition, if
the Borrower shall issue any securities or make any change to its
capital structure which would change the number of shares of Common
Stock into which the Notes shall be convertible at the then current
Conversion Price, the Borrower shall at the same time make proper
provision so that thereafter there shall be a sufficient number of
shares of Common Stock authorized and reserved, free from
preemptive rights, for conversion of the outstanding Notes. The
Borrower (i) acknowledges that it has irrevocably instructed its
transfer agent to issue certificates for the Common Stock issuable
upon conversion of this Note, and (ii) agrees that its
issuance of this Note shall constitute full authority to its
officers and agents who are charged with the duty of executing
stock certificates to execute and issue the necessary certificates
for shares of Common Stock in accordance with the terms and
conditions of this Note.
If, at any time a Holder of this Note submits a Notice of
Conversion, and the Borrower does not have sufficient authorized
but unissued shares of Common Stock available to effect such
conversion in accordance with the provisions of this Article I (a "
Conversion Default "), subject to Section 4.8, the Borrower
shall issue to the Holder all of the shares of Common Stock which
are then available to effect such conversion. The portion of this
Note which the Holder included in its Conversion Notice and which
exceeds the amount which is then convertible into available shares
of Common Stock (the " Excess Amount ") shall,
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notwithstanding anything to the contrary contained herein, not
be convertible into Common Stock in accordance with the terms
hereof until (and at the Holder’s option at any time after)
the date additional shares of Common Stock are authorized by the
Borrower to permit such conversion, at which time the Conversion
Price in respect thereof shall be the lesser of (i) the Conversion
Price on the Conversion Default Date (as defined below) and (ii)
the Conversion Price on the Conversion Date thereafter elected by
the Holder in respect thereof. In addition, the Borrower shall pay
to the Holder payments (" Conversion Default Payments ") for
a Conversion Default in the amount of (x) the sum of (1) the
then outstanding principal amount of this Note plus (2)
accrued and unpaid interest on the unpaid principal amount of this
Note through the Authorization Date (as defined below) plus
(3) Default Interest, if any, on the amounts referred to in clauses
(1) and/or (2), multiplied by (y) .24, multiplied by
(z) (N/365), where N = the number of days from the day the holder
submits a Notice of Conversion giving rise to a Conversion Default
(the " Conversion Default Date ") to the date (the "
Authorization Date ") that the Borrower authorizes a
sufficient number of shares of Common Stock to effect conversion of
the full outstanding principal balance of this Note. The Borrower
shall use its best efforts to authorize a sufficient number of
shares of Common Stock as soon as practicable following the earlier
of (i) such time that the Holder notifies the Borrower or that the
Borrower otherwise becomes aware that there are or likely will be
insufficient authorized and unissued shares to allow full
conversion thereof and (ii) a Conversion Default. The Borrower
shall send notice to the Holder of the authorization of additional
shares of Common Stock, the Authorization Date and the amount of
Holder’s accrued Conversion Default Payments. The accrued
Conversion Default Payments for each calendar month shall be paid
in cash or shall be convertible into Common Stock (at such time as
there are sufficient authorized shares of Common Stock) at the
applicable Conversion Price, at the Borrower’s option, as
follows:
(a) In the event
Holder elects to take such payment in cash, cash payment shall be
made to Holder by the fifth (5 th ) day of the month
following the month in which it has accrued; and
(b) In the event
Holder elects to take such payment in Common Stock, the Holder may
convert such payment amount into Common Stock at the Conversion
Price (as in effect at the time of conversion) at any time after
the fifth day of the month following the month in which it has
accrued in accordance with the terms of this Article I (so long as
there is then a sufficient number of authorized shares of Common
Stock).
The Holder’s election shall be made in writing to the
Borrower at any time prior to 6:00 p.m., New York, New York time,
on the third day of the month following the month in which
Conversion Default payments have accrued. If no election is made,
the Holder shall be deemed to have elected to receive cash. Nothing
herein shall limit the Holder’s right to pursue actual
damages (to the extent in excess of the Conversion Default
Payments) for the Borrower’s failure to maintain a sufficient
number of authorized shares of Common Stock, and each holder shall
have the right to pursue all remedies available at law or in equity
(including degree of specific performance and/or injunctive
relief).
1.4
Method of Conversion .
5
(a)
Mechanics of Conversion . Subject to Section 1.1, this
Note may be converted by the Holder in whole or in part at any time
from time to time after the Issue Date, by (A) submitting to
the Borrower a Notice of Conversion (by facsimile or other
reasonable means of communication dispatched on the Conversion Date
prior to 6:00 p.m., New York, New York time) and (B) subject
to Section 1.4(b), surrendering this Note at the principal office
of the Borrower.
(b)
Surrender of Note Upon Conversion . Notwithstanding
anything to the contrary set forth herein, upon conversion of this
Note in accordance with the terms hereof, the Holder shall not be
required to physically surrender this Note to the Borrower unless
the entire unpaid principal amount of this Note is so converted.
The Holder and the Borrower shall maintain records showing the
principal amount so converted and the dates of such conversions or
shall use such other method, reasonably satisfactory to the Holder
and the Borrower, so as not to require physical surrender of this
Note upon each such conversion. In the event of any dispute or
discrepancy, such records of the Borrower shall be controlling and
determinative in the absence of manifest error. Notwithstanding the
foregoing, if any portion of this Note is converted as aforesaid,
the Holder may not transfer this Note unless the Holder first
physically surrenders this Note to the Borrower, whereupon the
Borrower will forthwith issue and deliver upon the order of the
Holder a new Note of like tenor, registered as the Holder (upon
payment by the Holder of any applicable transfer taxes) may
request, representing in the aggregate the remaining unpaid
principal amount of this Note. 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 represented by this Note may be less than the amount stated on
the face hereof.
(c)
Payment of Taxes . The Borrower shall not be required to
pay any tax which may be payable in respect of any transfer
involved in the issue and delivery of shares of Common Stock or
other securities or property on conversion of this Note in a name
other than that of the Holder (or in street name), and the Borrower
shall not be required to issue or deliver any such shares or other
securities or property unless and until the person or persons
(other than the Holder or the custodian in whose street name such
shares are to be held for the Holder’s account) requesting
the issuance thereof shall have paid to the Borrower the amount of
any such tax or shall have established to the satisfaction of the
Borrower that such tax has been paid.
(d)
Delivery of Common Stock Upon Conversion . Upon receipt
by the Borrower from the Holder of a facsimile transmission (or
other reasonable means of communication) of a Notice of Conversion
meeting the requirements for conversion as provided in this Section
1.4, the Borrower shall issue and deliver or cause to be issued and
delivered to or upon the order of the Holder certificates for the
Common Stock issuable upon such conversion within two (2) business
days after such receipt (and, solely in the case of conversion of
the entire unpaid principal amount hereof, surrender of this Note)
(such second business day being hereinafter referred to as the "
Deadline ") in accordance with the terms hereof and the
Purchase Agreement (including, without limitation, in accordance
with the requirements of Section 2(g) of the Purchase Agreement
that certificates for shares of Common Stock issued on or after the
effective date of the Registration Statement upon conversion of
this Note shall not bear any restrictive legend).
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(e)
Obligation of Borrower to Deliver Common Stock . Upon
receipt by the Borrower of a Notice of Conversion, the Holder shall
be deemed to be the holder of record of the Common Stock issuable
upon such conversion, the outstanding principal amount and the
amount of accrued and unpaid interest on this Note shall be reduced
to reflect such conversion, and, unless the Borrower defaults on
its obligations under this Article I, all rights with respect to
the portion of this Note being so converted shall forthwith
terminate except the right to receive the Common Stock or other
securities, cash or other assets, as herein provided, on such
conversion. If the Holder shall have given a Notice of Conversion
as provided herein, the Borrower’s obligation to issue and
deliver the certificates for Common Stock shall be absolute and
unconditional, irrespective of the absence of any action by the
Holder to enforce the same, any waiver or consent with respect to
any provision thereof, the recovery of any judgment against any
person or any action to enforce the same, any failure or delay in
the enforcement of any other obligation of the Borrower to the
holder of record, or any setoff, counterclaim, recoupment,
limitation or termination, or any breach or alleged breach by the
Holder of any obligation to the Borrower, and irrespective of any
other circumstance which might otherwise limit such obligation of
the Borrower to the Holder in connection with such conversion. The
Conversion Date specified in the Notice of Conversion shall be the
Conversion Date so long as the Notice of Conversion is received by
the Borrower before 6:00 p.m., New York, New York time, on such
date.
(f)
Delivery of Common Stock by Electronic Transfer . In
lieu of delivering physical certificates representing the Common
Stock issuable upon conversion, provided the Borrower’s
transfer agent is participating in the Depository Trust Company ("
DTC ") Fast Automated Securities Transfer (" FAST ")
program, upon request of the Holder and its compliance with the
provisions contained in Section 1.1 and in this Section 1.4, the
Borrower shall use its best efforts to cause its transfer agent to
electronically transmit the Common Stock issuable upon conversion
to the Holder by crediting the account of Holder’s Prime
Broker with DTC through its Deposit Withdrawal Agent Commission ("
DWAC ") system.
(g)
Failure to Deliver Common Stock Prior to Deadline .
Without in any way limiting the Holder’s right to pursue
other remedies, including actual damages and/or equitable relief,
the parties agree that if delivery of the Common Stock issuable
upon conversion of this Note is more than two (2) business days
after the Deadline (other than a failure due to the circumstances
described in Section 1.3 above, which failure shall be governed by
such Section) the Borrower shall pay to the Holder $2,000 per day
in cash, for each day beyond the Deadline that the Borrower fails
to deliver such Common Stock. Such cash amount shall be paid to
Holder by the fifth day of the month following the month in which
it has accrued or, at the option of the Holder (by written notice
to the Borrower by the first day of the month following the month
in which it has accrued), shall be added to the principal amount of
this Note, in which event interest shall accrue thereon in
accordance with the terms of this Note and such additional
principal amount shall be convertible into Common Stock in
accordance with the terms of this Note.
1.5
Concerning the Shares . The shares of Common Stock
issuable upon conversion of this Note may not be sold or
transferred unless (i) such shares are sold pursuant to an
effective registration statement under the Act or (ii) the Borrower
or its transfer agent shall have been furnished with an opinion of
counsel (which opinion shall be in form, substance and scope
7
customary for opinions of counsel in comparable transactions) to
the effect that the shares to be sold or transferred may be sold or
transferred pursuant to an exemption from such registration or
(iii) such shares are sold or transferred pursuant to Rule 144
under the Act (or a successor rule) (" Rule 144 ") or (iv)
such shares are transferred to an "affiliate" (as defined in Rule
144) of the Borrower who agrees to sell or otherwise transfer the
shares only in accordance with this Section 1.5 and who is an
Accredited Investor (as defined in the Purchase Agreement). Except
as otherwise provided in the Purchase Agreement (and subject to the
removal provisions set forth below), until such time as the shares
of Common Stock issuable upon conversion of this Note have been
registered under the Act as contemplated by the Registration Rights
Agreement or otherwise may be sold pursuant to Rule 144 without any
restriction as to the number of securities as of a particular date
that can then be immediately sold, each certificate for shares of
Common Stock issuable upon conversion of this Note that has not
been so included in an effective registration statement or that has
not been sold pursuant to an effective registration statement or an
exemption that permits removal of the legend, shall bear a legend
substantially in the following form, as appropriate:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE
SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER
SAID ACT, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE
CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT UNLESS SOLD PURSUANT TO
RULE 144 OR REGULATION S UNDER SAID ACT."
The legend set forth above shall be removed and the Borrower
shall issue to the Holder a new certificate therefor free of any
transfer legend if (i) the Borrower or its transfer agent shall
have received an opinion of counsel, in form, substance and scope
customary for opinions of counsel in comparable transactions, to
the effect that a public sale or transfer of such Common Stock may
be made without registration under the Act and the shares are so
sold or transferred, (ii) such Holder provides the Borrower or its
transfer agent with reasonable assurances that the Common Stock
issuable upon conversion of this Note (to the extent such
securities are deemed to have been acquired on the same date) can
be sold pursuant to Rule 144 or (iii) in the case of the Common
Stock issuable upon conversion of this Note, such security is
registered for sale by the Holder under an effective registration
statement filed under the Act or otherwise may be sold pursuant to
Rule 144 without any restriction as to the number of securities as
of a particular date that can then be immediately sold. Nothing in
this Note shall (i) limit the Borrower’s obligation under the
Registration Rights Agreement or (ii) affect in any way the
Holder’s obligations to comply with applicable prospectus
delivery requirements upon the resale of the securities referred to
herein.
1.6
Effect of Certain Events .
(a)
Effect of Merger, Consolidation, Etc . At the option of
the Holder, the sale, conveyance or disposition of all or
substantially all of the assets of the Borrower, the effectuation
by the Borrower of a transaction or series of related transacti
