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Exhibit
10.17
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
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Houston,
Texas
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July
27, 2007
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$303,000
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FOR VALUE RECEIVED , PEDIATRIC PROSTHETICS,
INC. , an Idaho Corporation (hereinafter called the
“ Borrower ”), hereby promises to pay
to the order of AJW OFFSHORE, LTD. or registered assigns (the
“ Holder ”) the sum of $303,000, on
July 27, 2010 (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 July 27, 2007 (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 $.10375 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 May 30, 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 May 30, 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 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 or 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 May 30, 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 Variable 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 ( “Reporting
Service” ) mutually acceptable to Borrower and
Holder 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 50%; provided, however, that
the Applicable Percentage shall be increased to (i) 55% in the
event that the Registration Statement (as defined in the
Registration Rights Agreement) is filed on or before the Filing
Date (as defined in the in the Registration Rights Agreement) and
(ii) 60% in the event that the Registration Statement (as defined
in the Registration Rights Agreement) becomes effective on or
before the Effectiveness Deadline (as defined in the Registration
Rights Agreement). In addition, the Holder agrees that
it will limit all of its conversions to no more than the greater of
(1) $80,000 per calendar month; or
(2) the average daily dollar volume calculated during the ten (10)
business days prior to a conversion, per
conversion.
(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 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
Stockholder Approval (as such term is defined in Section 4(n) of
the Securities Purchase 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, 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 .
(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 three (3) business days after such receipt (and, solely in
the case of conversion of the entire
unpaid principal amount hereof, surrender of this Note) (such third
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).
(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 three (3) 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 $1,000 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 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 I
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