EXHIBIT 4.3
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“ACT”). THE SECURITIES MAY NOT BE SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF
COUNSEL IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF
COUNSEL IN COMPARABLE TRANSACTIONS THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT OR UNLESS SOLD PURSUANT TO RULE 144 OR
REGULATION S UNDER SAID ACT.
CALLABLE SECURED CONVERTIBLE NOTE
New
York, New York
December
13, 2007 $13,250
FOR VALUE RECEIVED , AVITAR 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 $13,250, on December
13, 2010 (the “Maturity Date ”), and
to pay interest on the unpaid principal balance hereof at the rate
of eight percent (8%) (the “ Interest Rate
”) per annum from December 13, 2007 (the “
Issue Date ”) until the same becomes due and
payable, whether at maturity or upon acceleration or by prepayment
or otherwise. Any amount of principal or interest on
this Note which is not paid when due shall bear interest at the
rate of fifteen percent (15%) per annum from the due date thereof
until the same is paid (“ Default Interest
”). Interest shall commence accruing on the Issue
Date, shall be computed on the basis of a 365-day year and the
actual number of days elapsed and shall be payable quarterly
provided that no interest shall be due and payable for any month in
which the Trading Price (as such term is defined below) is greater
than $.20 for each Trading Day (as such term is defined below) of
the month. All payments due hereunder (to the extent not converted
into common stock, $.01 par value per share (the
“Common Stock” ) in accordance with
the terms hereof) shall be made in lawful money of the United
States of America. All payments shall be made at such
address as the Holder shall hereafter give to the Borrower by
written notice made in accordance with the provisions of this
Note. Whenever any amount expressed to be due by the
terms of this Note is due on any day which is not a business day,
the same shall instead be due on the next succeeding day which is a
business day and, in the case of any interest payment date which is
not the date on which this Note is paid in full, the extension of
the due date thereof shall not be taken into account for purposes
of determining the amount of interest due on such
date. As used in this Note, the term “business
day” shall mean any day other than a Saturday, Sunday or a
day on which commercial banks in the city of New York, New York are
authorized or required by law or executive order to remain
closed. Each capitalized term used herein, and not
otherwise defined, shall have the meaning ascribed thereto in that
certain Securities Purchase Agreement, dated December 13, 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 and Intellectual Property Security Agreement, each
dated December 13, 2007 by and between the Borrower and the
Holder.
The
following terms shall apply to this Note:
ARTICLE I. CONVERSION
RIGHTS
1.1
Conversion Right . The
Holder shall have the right from time to time, and at any time on
or prior to the earlier of (i) the Maturity Date and (ii) the date
of payment of the Default Amount (as defined in Article III)
pursuant to Section 1.6(a) or Article III, the Optional Prepayment
Amount (as defined in Section 5.1 or any payments pursuant to
Section 1.7, each in respect of the remaining outstanding principal
amount of this Note to convert all or any part of the outstanding
and unpaid principal amount of this Note into fully paid and
non-assessable shares of Common Stock, as such Common Stock exists
on the Issue Date, or any shares of capital stock or other
securities of the Borrower into which such Common Stock shall
hereafter be changed or reclassified at the conversion
price (the “ Conversion Price
”) determined as provided herein (a “
Conversion ”); provided ,
however , that in no event shall the Holder be entitled to
convert any portion of this Note in excess of that portion of this
Note upon conversion of which the sum of (1) the number of shares
of Common Stock beneficially owned by the Holder and its affiliates
(other than shares of Common Stock which may be deemed beneficially
owned through the ownership of the unconverted portion of the Notes
or the unexercised or unconverted portion of any other security of
the Borrower (including, without limitation, the warrants issued by
the Borrower pursuant to the Purchase Agreement) subject to a
limitation on conversion or exercise analogous to the limitations
contained herein) and (2) the number of shares of Common Stock
issuable upon the conversion of the portion of this Note with
respect to which the determination of this proviso is being made,
would result in beneficial ownership by the Holder and its
affiliates of more than 4.99% of the outstanding shares of Common
Stock and provided further that the Holder shall not
be entitled to convert any portion of this Note during any month
immediately succeeding a Determination Date on which the Borrower
exercises its prepayment option pursuant to Section 5.2 of this
Note. For purposes of the proviso to the immediately
preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended, and Regulations 13D-G thereunder, except as
otherwise provided in clause (1) of such proviso. The
number of shares of Common Stock to be issued upon each conversion
of this Note shall be determined by dividing the Conversion Amount
(as defined below) by the applicable Conversion Price then in
effect on the date specified in the notice of conversion, in the
form attached hereto as Exhibit A (the “ Notice of
Conversion ”), delivered to the Borrower by the
Holder in accordance with Section 1.4 below; provided that the
Notice of Conversion is submitted by facsimile (or by other means
resulting in, or reasonably expected to result in, notice) to the
Borrower before 6:00 p.m., New York, New York time on such
conversion date (the “ Conversion Date
”). The term “ Conversion
Amount ” means, with respect to any conversion of
this Note, the sum of (1) the principal amount of this Note to be
converted in such conversion plus (2) accrued and unpaid
interest, if any, on such principal amount at the interest rates
provided in this Note to the Conversion Date, provided, however,
that the Company shall have the right to pay any or all interest in
cash plus (3) Default Interest, if any, on the amounts
referred to in the immediately preceding clauses (1) and/or (2)
plus (4) at the Holder’s option, any amounts owed to
the Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant
to Section 2(c) of that certain Registration Rights Agreement,
dated as of December 13, 2007, executed in connection with the
initial issuance of this Note and the other Notes issued on the
Issue Date (the “ Registration Rights
Agreement ”). The term
“Determination Date” means the last
business day of each month after the Issue Date.
1.2
Conversion Price .
(a)
Calculation of Conversion Price
. The Conversion Price shall be the
Variable Conversion Price (as defined herein) (subject, in each
case, to equitable adjustments for stock splits, stock dividends or
rights offerings by the Borrower relating to the Borrower’s
securities or the securities of any subsidiary of the Borrower,
combinations, recapitalization, reclassifications, extraordinary
distributions and similar events). The “
Variable Conversion Price ” shall mean the
Applicable Percentage (as defined herein) multiplied by the Market
Price (as defined herein). “ Market
Price ” means the average of the lowest three (3)
Trading Prices (as defined below) for the Common Stock during the
twenty (20) Trading Day period ending one Trading Day prior to the
date the Conversion Notice is sent by the Holder to the Borrower
via facsimile (the “ Conversion Date
”). “ Trading Price ”
means, for any security as of any date, the intraday trading price
on the Over-the-Counter Bulletin Board (the “
OTCBB ”) as reported by a reliable reporting
service ( “Reporting Service” )
mutually acceptable to Borrower and Holder and hereafter designated
by Holders of a majority in interest of the Notes and the Borrower
or, if the OTCBB is not the principal trading market for such
security, the intraday trading price of such security on the
principal securities exchange or trading market where such security
is listed or traded or, if no intraday trading price of such
security is available in any of the foregoing manners, the average
of the intraday trading prices of any market makers for such
security that are listed in the “pink sheets” by the
National Quotation Bureau, Inc. If the Trading Price
cannot be calculated for such security on such date in the manner
provided above, the Trading Price shall be the fair market value as
mutually determined by the Borrower and the holders of a majority
in interest of the Notes being converted for which the calculation
of the Trading Price is required in order to determine the
Conversion Price of such Notes. “ Trading
Day ” shall mean any day on which the Common Stock
is traded for any period on the OTCBB, or on the principal
securities exchange or other securities market on which the Common
Stock is then being traded. “ Applicable
Percentage ” shall mean 40.0%.
(b)
Conversion Price During Major Announcements
. Notwithstanding anything contained
in Section 1.2(a) to the contrary, in the event the Borrower (i)
makes a public announcement that it intends to consolidate or merge
with any other corporation (other than a merger in which the
Borrower is the surviving or continuing corporation and its capital
stock is unchanged) or sell or transfer all or substantially all of
the assets of the Borrower or (ii) any person, group or entity
(including the Borrower) publicly announces a tender offer to
purchase 50% or more of the Borrower’s Common Stock (or any
other takeover scheme) (the date of the announcement referred to in
clause (i) or (ii) is hereinafter referred to as
the “ Announcement Date ”),
then the Conversion Price shall, effective upon the Announcement
Date and continuing through the Adjusted Conversion Price
Termination Date (as defined below), be equal to the lower of (x)
the Conversion Price which would have been applicable for a
Conversion occurring on the Announcement Date and (y) the
Conversion Price that would otherwise be in effect. From and after
the Adjusted Conversion Price Termination Date, the Conversion
Price shall be determined as set forth in this Section
1.2(a). For purposes hereof, “
Adjusted Conversion Price Termination Date ”
shall mean, with respect to any proposed transaction or tender
offer (or takeover scheme) for which a public announcement as
contemplated by this Section 1.2(b) has been made, the date upon
which the Borrower (in the case of clause (i) above) or the person,
group or entity (in the case of clause (ii) above) consummates or
publicly announces the termination or abandonment of the proposed
transaction or tender offer (or takeover scheme) which caused this
Section 1.2(b) to become operative.
1.3
Authorized Shares .
Subject to Stockholder Approval (as such term is
defined in Section 4(n) of the Securities Purchase Agreement), the
Borrower covenants that during the period the conversion right
exists, the Borrower will reserve from its authorized and unissued
Common Stock a sufficient number of shares, free from preemptive
rights, to provide for the issuance of Common Stock upon the full
conversion of this Note and the other Notes issued pursuant to the
Purchase Agreement. The Borrower is required at all
times to have authorized and reserved two times the number of
shares that is actually issuable upon full conversion of the Notes
(based on the Conversion Price of the Notes or the Exercise Price
of the Warrants in effect from time to time) (the “
Reserved Amount ”). The Reserved
Amount shall be increased from time to time in accordance with the
Borrower’s obligations pursuant to Section 4(h) of the
Purchase Agreement. The Borrower represents that upon
issuance, such shares will be duly and validly issued, fully paid
and non-assessable. In addition, if the Borrower shall
issue any securities or make any change to its capital structure
which would change the number of shares of Common Stock into which
the Notes shall be convertible at the then current Conversion
Price, the Borrower shall at the same time make proper provision so
that thereafter there shall be a sufficient number of shares of
Common Stock authorized and reserved, free from preemptive rights,
for conversion of the outstanding Notes. The Borrower
(i) acknowledges that it has irrevocably instructed its transfer
agent to issue certificates for the Common Stock issuable upon
conversion of this Note, and (ii) agrees that its issuance of
this Note shall constitute full authority to its officers and
agents who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for
shares of Common Stock in accordance with the terms and conditions
of this Note.
If,
at any time a Holder of this Note submits a Notice of
Conversion, and the Borrower does not have sufficient
authorized but unissued shares of Common Stock available to
effect such conversion in accordance with the provisions of
this Article I (a “ Conversion Default
”), subject to Section 4.8, the Borrower shall issue to
the Holder all of the shares of Common Stock which are then
available to effect such conversion. The portion of
this Note which the Holder included in its Conversion Notice
and which exceeds the amount which is then convertible into
available shares of Common Stock (the “ Excess
Amount ”) shall, notwithstanding anything to
the contrary contained herein, not be convertible into Common
Stock in accordance with the terms hereof until (and at the
Holder’s option at any time after) the date additional
shares of Common Stock are authorized by the Borrower to
permit such conversion, at which time the Conversion Price in
respect thereof shall be the lesser of (i) the Conversion
Price on the Conversion Default Date (as defined below) and
(ii) the Conversion Price on the Conversion Date thereafter
elected by the Holder in respect thereof. In
addition, the Borrower shall pay to the Holder payments
(“ Conversion Default Payments ”)
for a Conversion Default in the amount of (x) the sum
of (1) the then outstanding principal amount of this Note
plus (2) accrued and unpaid interest on the unpaid
principal amount of this Note through the Authorization Date
(as defined below) plus (3) Default Interest, if any,
on the amounts referred to in clauses (1) and/or (2),
multiplied by (y) .24, multiplied by (z)
(N/365), where N = the number of days from the day the holder
submits a Notice of Conversion giving rise to a Conversion
Default (the “ Conversion Default Date
”) to the date (the “ Authorization
Date ”) that the Borrower authorizes a
sufficient number of shares of Common Stock to effect
conversion of the full outstanding principal balance of this
Note. The Borrower shall use its best efforts to
authorize a sufficient number of shares of Common Stock as
soon as practicable following the earlier of (i) such time
that the Holder notifies the Borrower or that the Borrower
otherwise becomes aware that there are or likely will be
insufficient authorized and unissued shares to allow full
conversion thereof and (ii) a Conversion
Default. The Borrower shall send notice to the
Holder of the authorization of additional shares of Common
Stock, the Authorization Date and the amount of Holder’s
accrued Conversion Default Payments. The accrued
Conversion Default Payments for each calendar month shall be
paid in cash or shall be convertible into Common Stock (at
such time as there are sufficient authorized shares of Common
Stock) at the applicable Conversion Price, at the
Borrower’s option, as follows:
(a)
In
the event Holder elects to take such payment in cash, cash payment
shall be made to Holder by the fifth (5 th ) day of
the month following the month in which it has accrued;
and
(b)
In
the event Holder elects to take such payment in Common Stock, the
Holder may convert such payment amount into Common Stock at the
Conversion Price (as in effect at the time of conversion) at any
time after the fifth day of the month following the month in which
it has accrued in accordance with the terms of this Article I (so
long as there is then a sufficient number of authorized shares of
Common Stock).
The
Holder’s election shall be made in writing to the
Borrower at any time prior to 6:00 p.m., New York, New York
time, on the third day of the month following the month in
which Conversion Default payments have accrued. If
no election is made, the Holder shall be deemed to have
elected to receive cash. Nothing herein shall limit
the Holder’s right to pursue actual damages (to the
extent in excess of the Conversion Default Payments) for the
Borrower’s failure to maintain a sufficient number of
authorized shares of Common Stock, and each holder shall have
the right to pursue all remedies available at law or in equity
(including degree of specific performance and/or injunctive
relief).
1.4
Method of Conversion .
(a)
Mechanics of Conversion
. Subject to Section 1.1, this Note
may be converted by the Holder in whole or in part at any time from
time to time after the Issue Date, by (A) submitting to the
Borrower a Notice of Conversion (by facsimile or other reasonable
means of communication dispatched on the Conversion Date prior to
6:00 p.m., New York, New York time) and (B) subject to Section
1.4(b), surrendering this Note at the principal office of the
Borrower.
(b)
Surrender of Note Upon Conversion
. Notwithstanding anything to the
contrary set forth herein, upon conversion of this Note in
accordance with the terms hereof, the Holder shall not be required
to physically surrender this Note to the Borrower unless the entire
unpaid principal amount of this Note is so
converted. The Holder and the Borrower shall maintain
records showing the principal amount so converted and the dates of
such conversions or shall use such other method, reasonably
satisfactory to the Holder and the Borrower, so as not to require
physical surrender of this Note upon each such
conversion. In the event of any dispute or discrepancy,
such records of the Borrower shall be controlling and determinative
in the absence of manifest error. Notwithstanding the
foregoing, if any portion of this Note is converted as aforesaid,
the Holder may not transfer this Note unless the Holder first
physically surrenders this Note to the Borrower, whereupon the
Borrower will forthwith issue and deliver upon the order of the
Holder a new Note of like tenor, registered as the Holder (upon
payment by the Holder of any applicable transfer taxes) may
request, representing in the aggregate the remaining unpaid
principal amount of this Note. The Holder and any
assignee, by acceptance of this Note, acknowledge and agree that,
by reason of the provisions of this paragraph, following conversion
of a portion of this Note, the unpaid and unconverted principal
amount of this Note represented by this Note may be less than the
amount stated on the face hereof.
(c)
Payment of Taxes . The
Borrower shall not be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of
shares of Common Stock or other securities or property on
conversion of this Note in a name other than that of the Holder (or
in street name), and the Borrower shall not be required to issue or
deliver any such shares or other securities or property unless and
until the person or persons (other than the Holder or the custodian
in whose street name such shares are to be held for the
Holder’s account) requesting the issuance thereof shall have
paid to the Borrower the amount of any such tax or shall have
established to the satisfaction of the Borrower that such tax has
been paid.
(d)
Delivery of Common Stock Upon Conversion
. Upon receipt by the Borrower from
the Holder of a facsimile transmission (or other reasonable means
of communication) of a Notice of Conversion meeting the
requirements for conversion as provided in this Section 1.4, the
Borrower shall issue and deliver or cause to be issued and
delivered to or upon the order of the Holder certificates for the
Common Stock issuable upon such conversion within three (3)
business days after such receipt (and, solely in the case of
conversion of the entire unpaid principal amount hereof, surrender
of this Note) (such third business day being hereinafter referred
to as the “ Deadline ”) in accordance
with the terms hereof and the Purchase Agreement (including,
without limitation, in accordance with the requirements of Section
2(g) of the Purchase Agreement that certificates for shares of
Common Stock issued on or after the effective date of the
Registration Statement upon conversion of this Note shall not bear
any restrictive legend).
(e)
Obligation of Borrower to Deliver Common Stock
. Upon receipt by the Borrower of a
Notice of Conversion, the Holder shall be deemed to be the holder
of record of the Common Stock issuable upon such conversion, the
outstanding principal amount and the amount of accrued and unpaid
interest on this Note shall be reduced to reflect such conversion,
and, unless the Borrower defaults on its obligations under this
Article I, all rights with respect to the portion of this Note
being so converted shall forthwith terminate except the right to
receive the Common Stock or other securities, cash or other assets,
as herein provided, on such conversion. If the Holder
shall have given a Notice of Conversion as provided herein, the
Borrower’s obligation to issue and deliver the certificates
for Common Stock shall be absolute and unconditional, irrespective
of the absence of any action by the Holder to enforce the same, any
waiver or consent with respect to any provision thereof, the
recovery of any judgment against any person or any action to
enforce the same, any failure or delay in the enforcement of any
other obligation of the Borrower to the holder of record, or any
setoff, counterclaim, recoupment, limitation or termination, or any
breach or alleged breach by the Holder of any obligation to the
Borrower, and irrespective of any other circumstance which might
otherwise limit such obligation of the Borrower to the Holder in
connection with such conversion. The Conversion Date
specified in the Notice of Conversion shall be the Conversion Date
so long as the Notice of Conversion is received by the Borrower
before 6:00 p.m., New York, New York time, on such
date.
(f)
Delivery of Common Stock by Electronic Transfer
. In lieu of delivering physical
certificates representing the Common Stock issuable upon
conversion, provided the Borrower’s transfer agent is
participating in the Depository Trust Company (“
DTC ”) Fast Automated Securities Transfer
(“ FAST ”) program, upon request of
the Holder and its compliance with the provisions contained in
Section 1.1 and in this Section 1.4, the Borrower shall use its
best efforts to cause its transfer agent to electronically transmit
the Common Stock issuable upon conversion to the Holder by
crediting the account of Holder’s Prime Broker with DTC
through its Deposit Withdrawal Agent Commission (“
DWAC ”) system.
(g)
Failure to Deliver Common Stock Prior to Deadline
. Without in any way limiting the
Holder’s right to pursue other remedies, including actual
damages and/or equitable relief, the parties agree that if delivery
of the Common Stock issuable upon conversion of this Note is more
than two (2) business days after the Deadline (other than a failure
due to the circumstances described in Section 1.3 above, which
failure shall be governed by such Section) the Borrower shall pay
to the Holder $2,000 per day in cash, for each day beyond the
Deadline that the Borrower fails to deliver such Common
Stock. Such cash amount shall be paid to Holder by the
fifth day of the month following the month in which it has accrued
or, at the option of the Holder (by written notice to the Borrower
by the first day of the month following the month in which it has
accrued), shall be added to the principal amount of this Note, in
which event interest shall accrue thereon in accordance with the
terms of this Note and such additional principal amount shall be
convertible into Common Stock in accordance with the terms of this
Note.
1.5
Concerning the Shares .
The shares of Common Stock issuable upon conversion of
this Note may not be sold or transferred unless (i) such
shares are sold pursuant to an effective registration statement
under the Act or (ii) the Borrower or its transfer agent shall have
been furnished with an opinion of counsel (which opinion
shall be in form, substance and scope 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,
t
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