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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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Clinton
Township, Michigan
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October
19, 2007
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$222,795
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FOR VALUE RECEIVED , MIDNIGHT HOLDINGS GROUP,
INC., a Delaware corporation (hereinafter called the “
Borrower
”), hereby promises to pay to the order of AJW Offshore, Ltd.
or registered assigns (the “ Holder ”) the sum
of $222,795 on October 19, 2010 (the “Maturity Date
”), and to pay interest on the unpaid principal balance
hereof at the rate of ten percent (10%) per annum from October 19,
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 on March 31, June 30, September 30 and
December 31 of each year beginning on the last day of the
first full quarter after Issue Date. All payments due
hereunder (to the extent not converted into common stock, $.00005
par value per share, of the Borrower (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 October 19, 2007, 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 by and between the Borrower and the Holder of even
date herewith.
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 (iii) 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 4.9% of the outstanding shares of Common
Stock. 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
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 October 19,
2007, executed in connection with the initial issuance of this Note
and the other Notes issued on the Issue Date (the “
Registration
Rights Agreement ”).
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 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 25%; provided, however, that the Applicable
Percentage shall be increased to (i) 30% 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
Registration Rights Agreement) and (ii) 40% 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). The “ Fixed Conversion Price
” shall mean $.02.
(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 the completion of the Charter Amendment Actions (as defined in
the 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 the Borrower elects to make 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 the Borrower elects to make 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
Borrower’s election shall be made in writing to the
Holder 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 Borrower shall be deemed to have
elected to remit Common Stock. 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 five (5) 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).
(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) 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 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 transactions
in which more than 50% of the voting power of the Borrower is
disposed of, or the consolidation, merger or other business
combination of the Borrower with or into any other Person (as
defined below) or Persons when the Borrower is not the survivor
shall either:
(i)
be deemed to be an Event of Default (as defined in Article III)
pursuant to which the Borrower shall be required to pay to the
Holder upon the consummation of and as a condition to such
transaction an amount equal to the Default Amount (as defined in
Article III) or (ii) be treated pursuant to Section 1.6(b)
hereof. “ Person ” shall
mean any individual, corporation, limited liability company,
partnership, association, trust or other entity or
organization.
(b)
Adjustment Due to
Merger, Consolidation, Etc . If, at
any time when this Note is issued and outstanding and prior to
conversion of all of the Notes, there shall be any merger,
consolidation, exchange of shares, recapitalization,
reorganization, or other similar event, as a result of which shares
of Common Stock of the Borrower shall be changed into the same or a
different number of shares of another class or classes of stock or
securities of the Borrower or another entity, or in case of any
sale or conveyance of all or substantially all of the assets of the
Borrower other than in connection with a plan of complete
liquidation of the Borrower, then the Holder of this Note shall
thereafter have the right to receive upon conversion of this Note,
upon the basis and upon the terms and conditions specified herein
and in lieu of the shares of Common Stock immediately theretofore
issuable upon conversion, such stock, securities or assets which
the Holder would have been entitled to receive in such transaction
had this Note been converted in full immediately prior to such
transaction (without regard to any limitations on conversion set
forth herein), and in any such case appropriate provisions shall be
made with respect to the rights and interests of the Holder of this
Note to the end that the provisions hereof (including, without
limitation, provisions for adjustment of the Conversion Price and
of the number of shares issuable upon conversion of the Note) shall
thereafter be applicable, as nearly as may be practicable in
relation to any securities or assets thereafter deliverable upon
the conversion hereof. The Borrower shall not effect any
transaction described in this Section 1.6(b) unless (a) it first
gives, to the extent practicable, thirty (30) days prior written
notice (but in any event at least fifteen (15) days prior written
notice) of the record date of the special meeting of shareholders
to approve, or if there is no such record date, the consummation
of, such merger, consolidation, exchange of shares,
recapitalization, reorganization or other similar event or sale of
assets (during which time the Holder shall be entitled to convert
this Note) and (b) the resulting successor or acquiring entity (if
not the Borrower) assumes by written instrument the obligations of
this Section 1.6(b). The above provisions shall
similarly apply to successive consolidations, mergers, sales,
transfers or share exchanges.
(c)
Adjustment Due to
Distribution . If the
Borrower shall declare or make any distribution of its assets (or
rights to acquire its assets) to holders of Common Stock as a
dividend, stock repurchase, by way of return of capital or
otherwise (including any dividend or distribution to the
Borrower’s shareholders in cash or shares (or rights to
acquire shares) of capital stock of a subsidiary (i.e., a
spin-off)) (a “ Distribution ”),
then the Holder of this Note shall be entitled, upon any conversion
of this Note after the date of record for determining shareholders
entitled to such Distribution, to receive the amount of such assets
which would have been payable to the Holder with respect to the
shares of Common Stock issuable upon such conversion had such
Holder been the holder of such shares of Common Stock on the record
date for the determination of shareholders entitled to such
Distribution.
(d)
Adjustment Due to
Dilutive Issuance . If, at
any time when any Notes are issued and outstanding, the Borrower
issues or sells, or in accordance with this Section 1.6(d) hereof
is deemed to have issued or sold, any shares of Common Stock for no
consideration or for a consideration per share (before deduction of
reasonable expenses or commissions or underwriting discounts or
allowances in connection therewith) less than the Fixed Conversion
Price in effect on the date of such issuance (or deemed issuance)
of such shares of Common Stock (a “ Dilutive Issuance
”), then immediately upon the Dilutive Issuance, the Fixed
Conversion Price will be reduced to the amount of the consideration
per share received by the Borrower in such Dilutive Issuance;
provided that
only one adjustment will be made for each Dilutive
Issuance.
The
Borrower shall be deemed to have issued or sold shares of
Common Stock if the Borrower in any manner issues or grants
any warrants, rights or options, whether or not immediately
exercisable, to subscribe for or to purchase Common Stock or
other securities convertible into or exchangeable for Common
Stock (“ Convertible
Securities ”) (such warrants, rights and options
to purchase Common Stock or Convertible Securities are
hereinafter referred to as “ Options ”)
and the price per share for which Common Stock is issuable
upon the exercise of such Options is less than the Fixed
Conversion Price then in effect, then the Fixed Conversion
Price shall be equal to such price per share. For
purposes of the preceding sentence, the “price per share
for which Common Stock is issuable upon the exercise of such
Options” is determined by dividing (i) the total amount,
if any, received or receivable by the Borrower as
consideration for the issuance or granting of all such
Options, plus the minimum aggregate amount of additional
consideration, if any, payable to the Borrower upon the
exercise of all such Options, plus, in the case of Convertible
Securities issuable upon the exercise of such Options, the
minimum aggregate amount of additional consideration payable
upon the conversion or exchange thereof at the time such
Convertible Securities first become convertible or
exchangeable, by (ii) the maximum total number of shares of
Common Stock issuable upon the exercise of all such Options
(assuming full conversion of Convertible Securities, if
applicable). No further adjustment to the
Conversion Price will be made upon the actual issuance of such
Common Stock upon the exercise of such Options or upon the
conversion or exchange of Convertible Securities issuable upon
exercise of such Options.
Additionally,
the Borrower shall be deemed to have issued or sold shares of
Common Stock if the Borrower in any manner issues or sells any
Convertible Securities, whether or not immediately convertible
(other than where the same are issuable upon the exercise of
Options), and the price per share for which Common Stock is
issuable upon such conversion or exchange is less than the
Fixed Conversion Price then in effect, then the Fixed
Conversion Price shall be equal to such price per
share. For the purposes of the preceding sentence,
the “price per share for which Common Stock is issuable
upon such conversion or exchange” is determined by
dividing (i) the total amount, if any, received or receivable
by the Borrower as consideration for the issuance or sale of
all such Convertible Securities, plus the minimum aggregate
amount of additional consideration, if any, payable to the
Borrower upon the conversion or exchange thereof at the time
such Convertible Securities first become convertible or
exchangeable, by (ii) the maximum total number of shares of
Common Stock issuable upon the conversion or exchange of all
such Convertible Securities. No further adjustment
to the Fixed Conversion Price will be made upon the actual
issuance of such Common Stock upon conversion or exchange of
such Convertible Securities.
(e)
Purchase
Rights . If, at
any time when any Notes are issued and outstanding, the Borrower
issues any convertible securities or rights to purchase stock,
warrants, securities or other property (the “ Purchase Rights
”) pro rata to the record holders of any class of Common
Stock, then the Holder of this Note will be entitled to acquire,
upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which such Holder could have acquired if such
Holder had held the number of shares of Common Stock acquirable
upon complete conversion of this Note (without regard to any
limitations on conversion contained herein) immediately before the
date on which a record is taken for the grant, issuance or sale of
such Purchase Rights or, if no such record is taken, the date as of
which the record holders of Common Stock are to be determined for
the grant, issue or sale of such Purchase Rights.
(f)
Notice of
Adjustments . Upon the
occurrence of each adjustment or readjustment of the Conversion
Price as a result of the events described in this Section 1.6, the
Borrower, at its expense, shall promptly compute such adjustment or
readjustment and prepare and furnish to the Holder of a certificate
setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is
based. The Borrower shall, upon the written request at
any time of the Holder, furnish to such Holder a like certificate
setting forth (i) such adjustment or readjustment, (ii) the
Conversion Price at the time in effect and (iii) the number of
shares of Common Stock and the amount, if any, of other securities
or property which at the time would be received upon conversion of
the Note.
1.7
Trading Market
Limitations . Unless permitted by
the applicable rules and regulations of the principal securities
market on which the Common Stock is then listed or traded, in no
event shall the Borrower issue upon conversion of or otherwise
pursuant to this Note and the other Notes issued pursuant to the
Purchase Agreement more than the maximum number of shares of Common
Stock that the Borrower can issue pursuant to any rule of the
principal United States securities market on which the Common Stock
is then traded (the “ Maximum Share Amount
”), which shall be 19.99% of the total shares outstanding on
the Closing Date (as defined in the Purchase Agreement), subject to
equitable adjustment from time to time for stock splits, stock
dividends, combinations, capital reorganizations and similar events
relating to the Common Stock occurring after the date
hereof. Once the Maximum Share Amount has been issued
(the date of which is hereinafter referred to as the “
Maximum Conversion
Date ”), if the Borrower fails to eliminate any
prohibitions under applicable law or the rules or regulations of
any stock exchange, interdealer quotation system or other
self-regulatory organization with jurisdiction over the Borrower or
any of its securities on the Borrower’s ability to issue
shares of Common Stock in excess of the Maximum Share Amount (a
“ Trading
Market Prepayment Event ”), in lieu of any further
right to convert this Note, and in full satisfaction of the
Borrower’s obligations under this Note, the Borrower shall
pay to the Holder, within fifteen (15) business days of the Maximum
Conversion Date (the “ Trading Market Prepayment
Date ”), an amount equal to 130% times the
sum of (a) the
then outstanding principal amount of this Note immediately
following the Maximum Conversion Date, plus (b)
accrued and unpaid interest on the unpaid principal amount of this
Note to the Trading Market Prepayment Date, plus (c)
Default Interest, if any, on the amounts referred to in clause (a)
and/or (b) above, plus (d) any
optional amounts that may be added thereto at the Maximum
Conversion Date by the Holder in accordance with the terms hereof
(the then outstanding principal amount of this Note immediately
following the Maximum Conversion Date, plus the
amounts referred to in clauses (b), (c) and (d) above shall
collectively be referred to as the “ Remaining Convertible
Amount ”).
With
respect to each Holder of Notes, the Maximum Share Amount shall
refer to such Holder’s pro
rata share
thereof determined in accordance with Section 4.8
below. In the event that the sum of (x) the aggregate
number of shares of Common Stock issued upon conversion of this
Note and the other Notes issued pursuant to the Purchase Agreement
plus (y) the
aggregate number of shares of Common Stock that remain issuable
upon conversion of this Note and the other Notes issued pursuant to
the Purchase Agreement, represents at least one hundred percent
(100%) of the Maximum Share Amount (the “ Triggering Event
”), the Borrower will use its best efforts to seek and obtain
Shareholder Approval (or obtain such other relief as will allow
conversions hereunder in excess of the Maximum Share Amount) as
soon as practicable following the Triggering Event and before the
Maximum Conversion Date. As used herein, “
Shareholder
Approval ” means approval by the shareholders of the
Borrower to authorize the issuance of the full number of shares of
Common Stock which would be issuable upon full conversion of the
then outstanding Notes but for the Maximum Share
Amount.
1.8
Status as
Shareholder . Upon
submission of a Notice of Conversion by a Holder, (i) the shares
covered thereby (other than the shares, if any, which cannot be
issued because their issuance would exceed such Holder’s
allocated portion of the Reserved Amount or Maximum Share Amount)
shall be deemed converted into shares of Common Stock and (ii) the
Holder’s rights as a Holder of such converted portion of this
Note shall cease and terminate, excepting only the right to receive
certificates for such shares of Common Stock and to any remedies
provided herein or otherwise available at law or in equity to such
Holder because of a failure by the Borrower to comply with the
terms of this Note. Notwithstanding the
foregoing, if a Holder has not received certificates for all shares
of Common Stock prior to the tenth (10th) business day after the
expiration of the Deadline with respect to a conversion of any
portion of this Note for any reason, then (unless the Holder
otherwise elects to retain its status as a holder of Common Stock
by so notifying the Borrower) the Holder shall regain the rights of
a Holder of this Note with respect to such unconverted portions of
this Note and the Borrower shall, as soon as practicable, return
such unconverted Note to the Holder or, if the Note has not been
surrendered, adjust its records to reflect that such portion of
this Note has not been converted. In all cases, the
Holder shall retain all of its rights and remedies (including,
without limitation, (i) the right to receive Conversion Default
Payments pursuant to Section 1.3 to the extent required thereby for
such Conversion Default and any subsequent Conversion Default and
(ii) the right to have the Conversion Price with respect to
subsequent conversions determined in accordance with Section 1.3)
for the Borrower’s failure to convert this Note.
ARTICLE II. CERTAIN
COVENANTS
2.1
Distributions on
Capital Stock . So long
as the Borrower shall have any obligation under this Note, the
Borrower shall not without the Holder’s written consent (a)
pay, declare or set apart for such payment, any dividend or other
distribution (whether in cash, property or other securities) on
shares of capital stock other than dividends on shares of Common
Stock solely in the form of additional shares of Common Stock or
(b) directly or indirectly or through any subsidiary make any other
payment or distribution in respect of its capital stock except for
distributions pursuant to any shareholders’ rights plan which
is approved by a majority of the Borrower’s disinterested
directors.
2.2
Restriction on Stock
Repurchases . So long
as the Borrower shall have any obligation under this Note, the
Borrower shall not without the Holder’s written consent
redeem, repurchase or otherwise acquire (whether for cash or in
exchange for property or other securities or otherwise) in any one
transaction or series of related transactions any shares of capital
stock of the Borrower or any warrants, rights or options to
purchase or acquire any such shares.
2.3
Borrowings
.
So long as the Borrower shall have any obligation under
this Note, the Borrower shall not, without the Holder’s
written consent, create, incur, assume or suffer to exist any
liability for borrowed money in excess of $50,000, except (a)
borrowings in existence or committed on the date hereof and of
which the Borrower has informed Holder in writing prior to the date
hereof, (b) indebtedness to trade creditors or financial
institutions incurred in the ordinary course of business or (c)
borrowings, the proceeds of which shall be used to repay this
Note.
2.4
Sale of
Assets . So long
as the Borrower shall have any obligation under this Note, the
Borrower shall not, without the Holder’s written consent,
sell, lease or otherwise dispose of any significant portion of its
assets outside the ordinary course of business. Any
consent to the disposition of any assets may be conditioned on a
specified use of the proceeds of disposition.
2.5
Advances and
Loans . So long
as the Borrower shall have any obligation under this Note, the
Borrower shall not, without the Holder’s written consent,
lend money, give credit or make advances to any person, firm, joint
venture or corporation, including, without limitation, officers,
directors, employees, subsidiaries and affiliates of the Borrower,
except loans, credits or advances (a) in existence or committed on
the date hereof and which the Borrower has informed Holder in
writing prior to the date hereof, (b) made in the ordinary course
of business or (c) not in excess of $50,000.
2.6
Contingent
Liabilities . So long
as the Borrower shall have any obligation under this Note, the
Borrower shall not, without the Holder’s written consent,
assume, guarantee, endorse, contingently agree to purchase or
otherwise become liable upon the obligation of any person, firm,
partnership, joint venture or corporation, except by the
endorsement of negotiable instruments for deposit or collection and
except assumptions, guarantees, endorsements and contingencies (a)
in existence or committed on the date hereof and which the Borrower
has informed Holder in writing prior to the date hereof, and (b)
similar transactions in the ordinary course of
business.
ARTICLE III. EVENTS OF
DEFAULT
If
any of the following events of default (each, an “
Event of
Default ”) shall occur:
3.1
Failure to Pay
Principal or Interest . The
Borrower fails to pay the principal hereof or interest thereon when
due on this Note, whether at maturity, upon a Trading Market
Prepayment Event pursuant to Section 1.7, upon acceleration or
otherwise;
3.2
Conversion and the
Shares . The
Borrower fails to issue shares of Common Stock to the Holder (or
announces or threatens that it will not honor its obligation to do
so) upon exercise by the Holder of the conversion rights of the
Holder in accordance with the terms of this Note (for a period of
at least sixty (60) days, if such failure is solely as a result of
the circumstances governed by Section 1.3 and the Borrower is using
its best efforts to authorize a sufficient number of shares of
Common Stock as soon as practicable), fails to transfer or cause
its transfer agent to transfer (electronically or in certificated
form) any certificate for shares of Common Stock issued to the
Holder upon conversion of or otherwise pursuant to this Note as and
when required by this Note or the Registration Rights Agreement, or
fails to remove any restrictive legend (or to withdraw any stop
transfer instructions in respect thereof) on any certificate for
any shares of Common Stock issued to the Holder upon conversion of
or otherwise pursuant to this Note as and when required by this
Note or the Registration Rights Agreement (or makes any
announcement, statement or threat that it does not intend to honor
the obligations described in this paragraph) and any such failure
shall continue uncured (or any announcement, statement or threat
not to honor its obligations shall not be rescinded in writing) for
ten (10) days after the Borrower shall have been notified thereof
in writing by the Holder;
3.3
Failure to Timely
File Registration or Effect Registration . The
Borrower fails to file the Registration Statement within sixty (60)
days following the Closing Date (as defined in the Purchase
Agreement) or obtain effectiveness with the Securities and Exchange
Commission of the Registration Statement within two hundred fifty
(250) days following the Closing Date (as defined in the Purchase
Agreement) or such Registration Statement lapses in effect (or
sales cannot otherwise be made thereunder effective, whether by
reason of the Borrower’s failure to amend or supplement the
prospectus included therein in accordance with the Registration
Rights Agreement or otherwise) for more than twenty (20)
consecutive days or forty (40) days in any twelve month period
after the Registration Statement becomes effective;
3.4
Breach of
Covenants . The
Borrower breaches any material covenant or other material term or
condition contained in Sections 1.3, 1.6 or 1.7 of this Note, or
Sections 4(c), 4(e), 4(h), 4(i), 4(j) or 5 of the Purchase
Agreement and such breach continues for a period of ten (10) days
after written notice thereof to the Borrower from the
Holder;
3.5
Breach of
Representations and Warranties . Any
representation or warranty of the Borrower made herein or in any
agreement, statement or certificate given in writing pursuant
hereto or in connection herewith (including, without limitation,
the Purchase Agreement and the Registration Rights Agreement),
shall be false or misleading in any material respect when made and
the breach of which has (or with the passage of time will have) a
material adverse effect on the rights of the Holder with respect to
this Note, the Purchase Agreement or the Registration Rights
Agreement;
3.6
Receiver or
Trustee . The
Borrower or any subsidiary of the Borrower shall make an assignment
for the benefit of creditors, or apply for or consent to the
appointment of a receiver or trustee for it or for a substantial
part of its property or business, or such a receiver or trustee
shall otherwise be appointed;
3.7
Judgments
.
Any money judgment, writ or similar process shall be
entered or filed against the Borrower or any subsidiary of the
Borrower or any of its property or other assets for more than
$50,000, and shall remain unvacated, unbonded or unstayed for a
period of twenty (20) days unless otherwise consented to by the
Holder, which consent will not be unreasonably
withheld;
3.8
Bankruptcy
.
Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy
law or any law for the relief of debtors shall be instituted by or
against the Borrower or any subsidiary of the
Borrower;
3.9
Delisting of Common
Stock . The
Borrower shall fail to maintain the listing of the Common Stock on
at least one of the OTCBB or an equivalent replacement exchange,
the Nasdaq National Market, the Nasdaq SmallCap Market, the New
York Stock Exchange, or the American Stock Exchange;
or
3.10
Default Under Other
Notes . An Event
of Default has occurred and is continuing under any of the other
Notes issued pursuant to the Purchase Agreement, then, upon the
occurrence and during the continuation of any Event of Default
specified in Section 3.1, 3.2, 3.3, 3.4, 3.5, 3.7, 3.9, or 3.10, at
the option of the Holders of a majority of the aggregate principal
amount of the outstanding Notes issued pursuant to the Purchase
Agreement exercisable through the delivery of written notice to the
Borrower by such Holders (the “ Default Notice
”), and upon the occurrence of an Event of Default specified
in Section 3.6 or 3.8, the Notes shall become immediately due and
payable and the Borrower shall pay to the Holder, in full
satisfaction of its obligations hereunder, an amount equal to the
greater of (i) 130% times the
sum of (w) the
then outstanding principal amount of this Note plus (x)
accrued and unpaid interest on the unpaid principal amount of this
Note to the date of payment (the “ Mandatory Prepayment
Date ”) plus (y)
Default Interest, if any, on the amounts referred to in clauses (w)
and/or (x) plus (z) any
amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g)
hereof or pursuant to Section 2(c) of the Registration Rights
Agreement (the then outstanding principal amount of this Note to
the date of payment plus the
amounts referred to in clauses (x), (y) and (z) shall collectively
be known as the “ Default Sum ”) or
(ii) the “parity value” of the Default Sum to be
prepaid, where parity value means (a) the highest number of shares
of Common Stock issuable upon conversion of or otherwise pursuant
to such Default Sum in accordance with Article I, treating the
Trading Day immediately preceding the Mandatory Prepayment Date as
the “Conversion Date” for purposes of determining the
lowest applicable Conversion Price, unless the Default Event arises
as a result of a breach in respect of a specific Conversion Date in
which case such Conversion Date shall be the Conversion Date),
multiplied by
(b) the highest Closing Price for the Common Stock during the
period beginning on the date of first occurrence of the Event of
Default and ending one day prior to the Mandatory Prepayment Date
(the “ Default Amount ”)
and all other amounts payable hereunder shall immediately become
due and payable, all without demand, presentment or notice, all of
which hereby are expressly waived, together with all costs,
including, without limitation, legal fees and expenses, of
collection, and the Holder shall be entitled to exercise all other
rights and remedies available at law or in equity. If
the Borrower fails to pay the Default Amount within five (5)
business days of written notice that such amount is due and
payable, then the Holder shall have the right at any time, so long
as the Borrower remains in default (and so long and to the extent
that there are sufficient authorized shares), to require the
Borrower, upon written notice, to immediately issue, in lieu of the
Default Amount, the number of shares of Common Stock of the
Borrower equal to the Default Amount divided by the Conversion
Price then in effect.
ARTICLE IV.
MISCELLANEOUS
4.1
Failure or Indulgence
Not Waiver . No
failure or delay on the part of the Holder in the exercise of any
power, right or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such
power, right or privilege preclude other or further exercise
thereof or of any other right, power or privileges. All
rights and remedies existing hereunder are cumulative to, and not
exclusive of, any rights or remedies otherwise
available.
4.2
Notices
.
Any notice herein required or permitted to be given
shall be in writing and may be personally served or delivered by
courier or sent by United States mail and shall be deemed to have
been given upon receipt if personally served (which shall include
telephone line facsimile transmission) or sent by courier or three
(3) days after being deposited in the United States mail,
certified, with postage pre-paid and properly addressed, if sent by
mail. For the purposes hereof, the address of the Holder
shall be as shown on the records of the Borrower; and the address
of the Borrower shall be 22600 Hall Road, Suite 205 Clinton
Township, MI 48036, facsimile number: 586-468-8768. Both
the Holder and the Borrower may change the address for service by
service of written notice to the other as herein
provided.
4.3
Amendments
.
This Note and any provision hereof may only be amended
by an instrument in writing signed by the Borrower and the
Holder. The term “Note” and all reference
thereto, as used throughout this instrument, shall mean this
instrument (and the other Notes issued pursuant to the Purchase
Agreement) as originally executed, or if later amended or
supplemented, then as so amended or supplemented.
4.4
Assignability
.
This Note shall be binding upon the Borrower and its
successors and assigns, and shall inure to be the benefit of the
Holder and its successors and assigns. Each transferee
of this Note must be an “accredited investor” (as
defined in Rule 501(a) of the 1933 Act). Notwithstanding
anything in this Note to the contrary, this Note may be pledged as
collateral in connection with a bona
fide margin
account or other lending arrangement.
4.5
Cost of
Collection . If
default is made in the payment of this Note, the Borrower shall pay
the Holder hereof costs of collection, including reasonable
attorneys’ fees.
4.6
Governing
Law . THIS NOTE
SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO
BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE
PRINCIPLES OF CONFLICT OF LAWS. THE BORROWER HEREBY
SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL
COURTS LOCATED IN NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE
ARISING UNDER THIS NOTE, THE AGREEMENTS ENTERED INTO IN CONNECTION
HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR
THEREBY.
BOTH
PARTIES IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO
THE MAINTENANCE OF SUCH SUIT OR PROCEEDING. BOTH PARTIES
FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST
CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF
PROCESS UPON THE PARTY IN ANY SUCH SUIT OR
PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER
PARTY’S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED
BY LAW. BOTH PARTIES AGREE THAT A FINAL NON-APPEALABLE
JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY
BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN
ANY OTHER LAWFUL MANNER. THE PARTY WHICH DOES NOT
PREVAIL IN ANY DISPUTE ARISING UNDER THIS NOTE SHALL BE RESPONSIBLE
FOR ALL FEES AND EXPENSES, INCLUDING ATTORNEYS’ FEES,
INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH
DISPUTE.
4.7
Certain
Amounts . Whenever
pursuant to this Note the Borrower is required to pay an amount in
excess of the outstanding principal amount (or the portion thereof
required to be paid at that time) plus accrued and unpaid interest
plus Default Interest on such interest, the Borrower and the Holder
agree that the actual damages to the Holder from the receipt of
cash payment on this Note may be difficult to determine and the
amount to be so paid by the Borrower represents stipulated damages
and not a penalty and is intended to compensate the Holder in part
for loss of the opportunity to convert this Note and to earn a
return from the sale of shares of Common Stock acquired upon
conversion of this Note at a price in excess of the price paid for
such shares pursuant to this Note. The Borrower and the
Holder hereby agree that such amount of stipulated damages is not
plainly disproportionate to the possible loss to the Holder from
the receipt of a cash payment without the opportunity to convert
this Note into shares of Common Stock.
4.8
Allocations of
Maximum Share Amount and Reserved Amount . The
Maximum Share Amount and Reserved Amount shall be allocated pro
rata among the Holders of Notes based on the principal amount of
such Notes issued to each Holder. Each increase to the
Maximum Share Amount and Reserved Amount shall be allocated pro
rata among the Holders of Notes based on the principal amount of
such Notes held by each Holder at the time of the increase in the
Maximum Share Amount or Reserved Amount. In the event a
Holder shall sell or otherwise transfer any of such Holder’s
Notes, each transferee shall be allocated a pro rata portion of
such transferor’s Maximum Share Amount and Reserved
Amount. Any portion of the Maximum Share Amount or
Reserved Amount which remains allocated to any person or entity
which does not hold any Notes shall be allocated to the remaining
Holders of Notes, pro rata based on the principal amount of such
Notes then held by such Holders.
4.9
Damages
Shares . The
shares of Common Stock that may be issuable to the Holder pursuant
to Sections 1.3 and 1.4(g) hereof and pursuant to Section 2(c) of
the Registration Rights Agreement (“ Damages Shares ”)
shall be treated as Common Stock issuable upon conversion of this
Note for all purposes hereof and shall be subject to all of the
limitations and afforded all of the rights of the other shares of
Common Stock issuable hereunder, including without limitation, the
right to be included in the Registration Statement filed pursuant
to the Registration Rights Agreement. For purposes of
calculating interest payable on the outstanding principal amount
hereof, except as otherwise provided herein, amounts convertible
into Damages Shares (“ Damages Amounts
”) shall not bear interest but must be converted prior to the
conversion of any outstanding principal amount hereof, until the
outstanding Damages Amounts is zero.
4.10
Denominations
.
At the request of the Holder, upon surrender of this
Note, the Borrower shall promptly issue new Notes in the aggregate
outstanding principal amount hereof, in the form hereof, in such
denominations of at least $50,000 as the Holder shall
request.
4.11
Purchase
Agreement . By its
acceptance of this Note, each Holder agrees to be bound by the
applicable terms of the Purchase Agreement.
4.12
Notice of Corporate
Events . Except as
otherwise provided below, the Holder of this Note shall have no
rights as a Holder of Common Stock unless and only to the extent
that it converts this Note into Common Stock. The
Borrower shall provide the Holder with prior notification of any
meeting of the Borrower’s shareholders (and copies of proxy
materials and other information sent to
shareholders). In the event of any taking by the
Borrower of a record of its shareholders for the purpose of
determining shareholders who are entitled to receive payment of any
dividend or other distribution, any right to subscribe for,
purchase or otherwise acquire (including by way of merger,
consolidation, reclassification or recapitalization) any share of
any class or any other securities or property, or to receive any
other right, or for the purpose of determining shareholders who are
entitled to vote in connection with any proposed sale, lease or
conveyance of all or substantially all of the assets of the
Borrower or any proposed liquidation, dissolution or winding up of
the Borrower, the Borrower shall mail a notice to the Holder, at
least twenty (20) days prior to the record date specified therein
(or thirty (30) days prior to the consummation of the transaction
or event, whichever is earlier), of the date on which any such
record is to be taken for the purpose of such dividend,
distribution, right or other event, and a brief statement regarding
the amount and character of such dividend, distribution, right or
other event to the extent known at such time. The
Borrower shall make a public announcement of any event requiring
notification to the Holder hereunder substantially simultaneously
with the notification to the Holder in accordance with the terms of
this Section 4.12.
4.13
Remedies
.
The Borrower acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holder, by
vitiating the intent and purpose of the transaction contemplated
hereby. Accordingly, the Borrower acknowledges that the
remedy at law for a breach of its obligations under this Note will
be inadequate and agrees, in the event of a breach or threatened
breach by the Borrower of the provisions of this Note, that the
Holder shall be entitled, in addition to all other available
remedies at law or in equity, and in addition to the penalties
assessable herein, to an injunction or injunctions restraining,
preventing or curing any breach of this Note and to enforce
specifically the terms and provisions thereof, without the
necessity of showing economic loss and without any bond or other
security being required.
ARTICLE V. CALL OPTION
5.1
Call
Option .
Notwithstanding anything to the contrary contained in
this Article V, so long as (i) no Event of Default or Trading
Market Prepayment Event shall have occurred and be continuing,
(ii) the Borrower has a sufficient number of authorized shares
of Common Stock reserved for issuance upon full conversion of the
Notes, then at any time after the Issue Date, and (iii) the
Common Stock is trading at or below $.04 per share, the Borrower
shall have the right, exercisable on not less than ten (10) Trading
Days prior written notice to the Holders of the Notes (which notice
may not be sent to the Holders of the Notes until the Borrower is
permitted to prepay the Notes pursuant to this Section 5.1), to
prepay all of the outstanding Notes in accordance with this Section
5.1. Any notice of prepayment hereunder (an “
Optional
Prepayment ”) shall be delivered to the Holders of the
Notes at their registered addresses appearing on the books and
records of the Borrower and shall state (1) that the Borrower is
exercising its right to prepay all of the Notes issued on the Issue
Date and (2) the date of prepayment (the “ Optional Prepayment
Notice ”). On the date fixed for prepayment
(the “ Optional Prepayment
Date ”), the Borrower shall make payment of the
Optional Prepayment Amount (as defined below) to or upon the order
of the Holders as specified by the Holders in writing to the
Borrower at least one (1) business day prior to the Optional
Prepayment Date. If the Borrower exercises its right to
prepay the Notes, the Borrower shall make payment to the holders of
an amount in cash (the “ Optional Prepayment
Amount ”) equal to either (i) 135% (for
prepayments occurring within thirty (30) days of the Issue
Date), (ii) 145% for prepayments occurring between thirty-one
(31) and ninety (90) days of the Issue Date, or (iii) 150% (for
prepayments occurring after the ninetieth (90 th ) day
following the Issue Date), multiplied by the sum of (w) the then
outstanding principal amount of this Note plus
(x) accrued and unpaid interest on the unpaid principal amount
of this Note to the Optional Prepayment Date plus (y)
Default Interest, if any, on the amounts referred to in clauses (w)
and (x) plus (z) any
amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g)
hereof or pursuant to Section 2(c) of the Registration Rights
Agreement (the then outstanding principal amount of this Note to
the date of payment plus the
amounts referred to in clauses (x), (y) and (z) shall collectively
be known as the “ Optional Prepayment Sum
”). Notwithstanding notice of an Optional Prepayment, the
Holders shall at all times prior to the Optional Prepayment Date
maintain the right to convert all or any portion of the Notes in
accordance with Article I and any portion of Notes so converted
after receipt of an Optional Prepayment Notice and prior to the
Optional Prepayment Date set forth in such notice and payment of
the aggregate Optional Prepayment Amount shall be deducted from the
principal amount of Notes which are otherwise subject to prepayment
pursuant to such notice. If the Borrower delivers an
Optional Prepayment Notice and fails to pay the Optional Prepayment
Amount due to the Holders of the Notes within two (2) business days
following the Optional Prepayment Date, the Borrower shall forever
forfeit its right to redeem the Notes pursuant to this Section
5.1.
[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF , Borrower has caused this Note to be
signed in its name by its duly authorized officer as of the date
first above written.
MIDNIGHT HOLDINGS GROUP, INC.
By:
/s/
Nicholas Cocco
Nicholas
Cocco
Chief
Executive Officer
EXHIBIT A
NOTICE OF CONVERSION
(To
be Executed by the Registered Holder
in
order to Convert the Notes)
The
undersigned hereby irrevocably elects to convert $__________
principal amount of the Note (defined below) into shares of
common stock, par value $.00005 per share (“ Common Stock
”), of Midnight Holdings Group, Inc., a Delaware
corporation (the “ Borrower ”)
according to the conditions of the convertible Notes of the
Borrower dated as of October 19, 2007 (the
“Notes”), as of the date written
below. If securities 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. No fee will
be charged to the Holder for any conversion, except for
transfer taxes, if any. A copy of each Note is
attached hereto (or evidence of loss, theft or destruction
thereof).
The
Borrower shall electronically transmit the Common Stock
issuable pursuant to this Notice of Conversion to the account
of the undersigned or its nominee with DTC through its Deposit
Withdrawal Agent Commission system (“ DWAC Transfer
”).
Name
of DTC Prime
Broker: _________________________
Account
Number: ________________________________
In
lieu of receiving shares of Common Stock issuable pursuant to
this Notice of Conversion by way of a DWAC Transfer, the
undersigned hereby requests that the Borrower issue a
certificate or certificates for the number of shares of Common
Stock set forth below (which numbers are based on the
Holder’s calculation attached hereto) in the name(s)
specified immediately below or, if additional space is
necessary, on an attachment hereto:
Name: ________________________________________
Address: ______________________________________
The
undersigned represents and warrants that all offers and sales
by the undersigned of the securities issuable to the
undersigned upon conversion of the Notes shall be made
pursuant to registration of the securities under the
Securities Act of 1933, as amended (the “ Act ”), or
pursuant to an exemption from registration under the
Act.
Date
of Conversion:___________________________
Applicable
Conversion Price:____________________
Number
of Shares of Common Stock to be Issued Pursuant
to
Conversion
of the Notes:______________
Signature:___________________________________
Name:______________________________________
Address:____________________________________
The
Borrower shall issue and deliver shares of Common Stock to an
overnight courier not later than three business days following
receipt of the original Note(s) to be converted, and shall
make payments pursuant to the Notes for the number of business
days such issuance and delivery is late.
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
|
Clinton
Township, Michigan
|
|
|
October
19, 2007
|
$
34,190
|
FOR VALUE RECEIVED , MIDNIGHT HOLDINGS GROUP,
INC., a Delaware corporation (hereinafter called the “
Borrower
”), hereby
promises to pay to the order of AJW Partners, LLC or registered
assigns (the “ Holder ”) the sum
of $34,190 on October 19, 2010 (the “Maturity Date
”), and to pay interest on the unpaid principal balance
hereof at the rate of ten percent (10%) per annum from October 19,
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 on March 31, June 30, September 30 and
December 31 of each year beginning on the last day of the
first full quarter after Issue Date. All payments due
hereunder (to the extent not converted into common stock, $.00005
par value per share, of the Borrower (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 October 19, 2007, 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 by and between the Borrower and the Holder of even
date herewith.
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 (iii) 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 4.9% of the outstanding shares of Common
Stock. 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
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 October 19,
2007, executed in connection with the initial issuance of this Note
and the other Notes issued on the Issue Date (the “
Registration
Rights Agreement ”).
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 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 25%; provided, however, that the Applicable
Percentage shall be increased to (i) 30% 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
Registration Rights Agreement) and (ii) 40% 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). The “ Fixed Conversion Price
” shall mean $.02.
(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 the completion of the Charter Amendment Actions (as defined in
the 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 the Borrower elects to make 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 the Borrower elects to make 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
Borrower’s election shall be made in writing to the
Holder 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 Borrower shall be deemed to have
elected to remit Common Stock. 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 five (5) 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).
(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) 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 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 transactions
in which more than 50% of the voting power of the Borrower is
disposed of, or the consolidation, merger or other business
combination of the Borrower with or into any other Person (as
defined below) or Persons when the Borrower is not the survivor
shall either:
(i)
be deemed to be an Event of Default (as defined in Article III)
pursuant to which the Borrower shall be required to pay to the
Holder upon the consummation of and as a condition to such
transaction an amount equal to the Default Amount (as defined in
Article III) or (ii) be treated pursuant to Section 1.6(b)
hereof. “ Person ” shall
mean any individual, corporation, limited liability company,
partnership, association, trust or other entity or
organization.
(b)
Adjustment Due to
Merger, Consolidation, Etc . If, at
any time when this Note is issued and outstanding and prior to
conversion of all of the Notes, there shall be any merger,
consolidation, exchange of shares, recapitalization,
reorganization, or other similar event, as a result of which shares
of Common Stock of the Borrower shall be changed into the same or a
different number of shares of another class or classes of stock or
securities of the Borrower or another entity, or in case of any
sale or conveyance of all or substantially all of the assets of the
Borrower other than in connection with a plan of complete
liquidation of the Borrower, then the Holder of this Note shall
thereafter have the right to receive upon conversion of this Note,
upon the basis and upon the terms and conditions specified herein
and in lieu of the shares of Common Stock immediately theretofore
issuable upon conversion, such stock, securities or assets which
the Holder would have been entitled to receive in such transaction
had this Note been converted in full immediately prior to such
transaction (without regard to any limitations on conversion set
forth herein), and in any such case appropriate provisions shall be
made with respect to the rights and interests of the Holder of this
Note to the end that the provisions hereof (including, without
limitation, provisions for adjustment of the Conversion Price and
of the number of shares issuable upon conversion of the Note) shall
thereafter be applicable, as nearly as may be practicable in
relation to any securities or assets thereafter deliverable upon
the conversion hereof. The Borrower shall not effect any
transaction described in this Section 1.6(b) unless (a) it first
gives, to the extent practicable, thirty (30) days prior written
notice (but in any event at least fifteen (15) days prior written
notice) of the record date of the special meeting of shareholders
to approve, or if there is no such record date, the consummation
of, such merger, consolidation, exchange of shares,
recapitalization, reorganization or other similar event or sale of
assets (during which time the Holder shall be entitled to convert
this Note) and (b) the resulting successor or acquiring entity (if
not the Borrower) assumes by written instrument the obligations of
this Section 1.6(b). The above provisions shall
similarly apply to successive consolidations, mergers, sales,
transfers or share exchanges.
(c)
Adjustment Due to
Distribution . If the
Borrower shall declare or make any distribution of its assets (or
rights to acquire its assets) to holders of Common Stock as a
dividend, stock repurchase, by way of return of capital or
otherwise (including any dividend or distribution to the
Borrower’s shareholders in cash or shares (or rights to
acquire shares) of capital stock of a subsidiary (i.e., a
spin-off)) (a “ Distribution ”),
then the Holder of this Note shall be entitled, upon any conversion
of this Note after the date of record for determining shareholders
entitled to such Distribution, to receive the amount of such assets
which would have been payable to the Holder with respect to the
shares of Common Stock issuable upon such conversion had such
Holder been the holder of such shares of Common Stock on the record
date for the determination of shareholders entitled to such
Distribution.
(d)
Adjustment Due to
Dilutive Issuance . If, at
any time when any Notes are issued and outstanding, the Borrower
issues or sells, or in accordance with this Section 1.6(d) hereof
is deemed to have issued or sold, any shares of Common Stock for no
consideration or for a consideration per share (before deduction of
reasonable expenses or commissions or underwriting discounts or
allowances in connection therewith) less than the Fixed Conversion
Price in effect on the date of such issuance (or deemed issuance)
of such shares of Common Stock (a “ Dilutive Issuance
”), then immediately upon the Dilutive Issuance, the Fixed
Conversion Price will be reduced to the amount of the consideration
per share received by the Borrower in such Dilutive Issuance;
provided that
only one adjustment will be made for each Dilutive
Issuance.
The
Borrower shall be deemed to have issued or sold shares of
Common Stock if the Borrower in any manner issues or grants
any warrants, rights or options, whether or not immediately
exercisable, to subscribe for or to purchase Common Stock or
other securities convertible into or exchangeable for Common
Stock (“ Convertible
Securities ”) (such warrants, rights and options
to purchase Common Stock or Convertible Securities are
hereinafter referred to as “ Options ”)
and the price per share for which Common Stock is issuable
upon the exercise of such Options is less than the Fixed
Conversion Price then in effect, then the Fixed Conversion
Price shall be equal to such price per share. For
purposes of the preceding sentence, the “price per share
for which Common Stock is issuable upon the exercise of such
Options” is determined by dividing (i) the total amount,
if any, received or receivable by the Borrower as
consideration for the issuance or granting of all such
Options, plus the minimum aggregate amount of additional
consideration, if any, payable to the Borrower upon the
exercise of all such Options, plus, in the case of Convertible
Securities issuable upon the exercise of such Options, the
minimum aggregate amount of additional consideration payable
upon the conversion or exchange thereof at the time such
Convertible Securities first become convertible or
exchangeable, by (ii) the maximum total number of shares of
Common Stock issuable upon the exercise of all such Options
(assuming full conversion of Convertible Securities, if
applicable). No further adjustment to the
Conversion Price will be made upon the actual issuance of such
Common Stock upon the exercise of such Options or upon the
conversion or exchange of Convertible Securities issuable upon
exercise of such Options.
Additionally,
the Borrower shall be deemed to have issued or sold shares of
Common Stock if the Borrower in any manner issues or sells any
Convertible Securities, whether or not immediately convertible
(other than where the same are issuable upon the exercise of
Options), and the price per share for which Common Stock is
issuable upon such conversion or exchange is less than the
Fixed Conversion Price then in effect, then the Fixed
Conversion Price shall be equal to such price per
share. For the purposes of the preceding sentence,
the “price per share for which Common Stock is issuable
upon such conversion or exchange” is determined by
dividing (i) the total amount, if any, received or receivable
by the Borrower as consideration for the issuance or sale of
all such Convertible Securities, plus the minimum aggregate
amount of additional consideration, if any, payable to the
Borrower upon the conversion or exchange thereof at the time
such Convertible Securities first become convertible or
exchangeable, by (ii) the maximum total number of shares of
Common Stock issuable upon the conversion or exchange of all
such Convertible Securities. No further adjustment
to the Fixed Conversion Price will be made upon the actual
issuance of such Common Stock upon conversion or exchange of
such Convertible Securities.
(e)
Purchase
Rights . If, at
any time when any Notes are issued and outstanding, the Borrower
issues any convertible securities or rights to purchase stock,
warrants, securities or other property (the “ Purchase Rights
”) pro rata to the record holders of any class of Common
Stock, then the Holder of this Note will be entitled to acquire,
upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which such Holder could have acquired if such
Holder had held the number of shares of Common Stock acquirable
upon complete conversion of this Note (without regard to any
limitations on conversion contained herein) immediately before the
date on which a record is taken for the grant, issuance or sale of
such Purchase Rights or, if no such record is taken, the date as of
which the record holders of Common Stock are to be determined for
the grant, issue or sale of such Purchase Rights.
(f)
Notice of
Adjustments . Upon the
occurrence of each adjustment or readjustment of the Conversion
Price as a result of the events described in this Section 1.6, the
Borrower, at its expense, shall promptly compute such adjustment or
readjustment and prepare and furnish to the Holder of a certificate
setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is
based. The Borrower shall, upon the written request at
any time of the Holder, furnish to such Holder a like certificate
setting forth (i) such adjustment or readjustment, (ii) the
Conversion Price at the time in effect and (iii) the number of
shares of Common Stock and the amount, if any, of other securities
or property which at the time would be received upon conversion of
the Note.
1.7
Trading Market
Limitations . Unless permitted by
the applicable rules and regulations of the principal securities
market on which the Common Stock is then listed or traded, in no
event shall the Borrower issue upon conversion of or otherwise
pursuant to this Note and the other Notes issued pursuant to the
Purchase Agreement more than the maximum number of shares of Common
Stock that the Borrower can issue pursuant to any rule of the
principal United States securities market on which the Common Stock
is then traded (the “ Maximum Share Amount
”), which shall be 19.99% of the total shares outstanding on
the Closing Date (as defined in the Purchase Agreement), subject to
equitable adjustment from time to time for stock splits, stock
dividends, combinations, capital reorganizations and similar events
relating to the Common Stock occurring after the date
hereof. Once the Maximum Share Amount has been issued
(the date of which is hereinafter referred to as the “
Maximum Conversion
Date ”), if the Borrower fails to eliminate any
prohibitions under applicable law or the rules or regulations of
any stock exchange, interdealer quotation system or other
self-regulatory organization with jurisdiction over the Borrower or
any of its securities on the Borrower’s ability to issue
shares of Common Stock in excess of the Maximum Share Amount (a
“ Trading
Market Prepayment Event ”), in lieu of any further
right to convert this Note, and in full satisfaction of the
Borrower’s obligations under this Note, the Borrower shall
pay to the Holder, within fifteen (15) business days of the Maximum
Conversion Date (the “ Trading Market Prepayment
Date ”), an amount equal to 130% times the
sum of (a) the
then outstanding principal amount of this Note immediately
following the Maximum Conversion Date, plus (b)
accrued and unpaid interest on the unpaid principal amount of this
Note to the Trading Market Prepayment Date, plus (c)
Default Interest, if any, on the amounts referred to in clause (a)
and/or (b) above, plus (d) any
optional amounts that may be added thereto at the Maximum
Conversion Date by the Holder in accordance with the terms hereof
(the then outstanding principal amount of this Note immediately
following the Maximum Conversion Date, plus the
amounts referred to in clauses (b), (c) and (d) above shall
collectively be referred to as the “ Remaining Convertible
Amount ”).
With
respect to each Holder of Notes, the Maximum Share Amount shall
refer to such Holder’s pro
rata share
thereof determined in accordance with Section 4.8
below. In the event that the sum of (x) the aggregate
number of shares of Common Stock issued upon conversion of this
Note and the other Notes issued pursuant to the Purchase Agreement
plus (y) the
aggregate number of shares of Common Stock that remain issuable
upon conversion of this Note and the other Notes issued pursuant to
the Purchase Agreement, represents at least one hundred percent
(100%) of the Maximum Share Amount (the “ Triggering Event
”), the Borrower will use its best efforts to seek and obtain
Shareholder Approval (or obtain such other relief as will allow
conversions hereunder in excess of the Maximum Share Amount) as
soon as practicable following the Triggering Event and before the
Maximum Conversion Date. As used herein, “
Shareholder
Approval ” means approval by the shareholders of the
Borrower to authorize the issuance of the full number of shares of
Common Stock which would be issuable upon full conversion of the
then outstanding Notes but for the Maximum Share
Amount.
1.8
Status as
Shareholder . Upon
submission of a Notice of Conversion by a Holder, (i) the shares
covered thereby (other than the shares, if any, which cannot be
issued because their issuance would exceed such Holder’s
allocated portion of the Reserved Amount or Maximum Share Amount)
shall be deemed converted into shares of Common Stock and (ii) the
Holder’s rights as a Holder of such converted portion of this
Note shall cease and terminate, excepting only the right to receive
certificates for such shares of Common Stock and to any remedies
provided herein or otherwise available at law or in equity to such
Holder because of a failure by the Borrower to comply with the
terms of this Note. Notwithstanding the
foregoing, if a Holder has not received certificates for all shares
of Common Stock prior to the tenth (10th) business day after the
expiration of the Deadline with
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