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Exhibit 10.2
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
Houston,
Texas
June
2,
2008 $150,000
FOR VALUE RECEIVED , PEDIATRIC PROSTHETICS,
INC. , an Idaho Corporation (hereinafter called the “
Borrower
”), hereby promises to pay to the order of New Millennium
Capital Partners II, LLC or registered assigns (the “
Holder
”) the sum of $150,000, on June 2, 2011 (the “Maturity Date
”), and to pay interest on the unpaid principal balance
hereof at the rate of six percent (6%) (the “ Interest Rate ”)
per annum from June 2, 2008 (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 $.05 for each Trading Day (as such
term is defined below) of the month. All payments due hereunder (to
the extent not converted into common stock, $.001 par value per
share (the “Common
Stock” ) in accordance with the terms hereof) shall be
made in lawful money of the United States of
America. All payments shall be made at such address as
the Holder shall hereafter give to the Borrower by written notice
made in accordance with the provisions of this
Note. Whenever any amount expressed to be due by the
terms of this Note is due on any day which is not a business day,
the same shall instead be due on the next succeeding day which is a
business day and, in the case of any interest payment date which is
not the date on which this Note is paid in full, the extension of
the due date thereof shall not be taken into account for purposes
of determining the amount of interest due on such
date. As used in this Note, the term “business
day” shall mean any day other than a Saturday, Sunday or a
day on which commercial banks in the city of New York, New York are
authorized or required by law or executive order to remain
closed. Each capitalized
term used herein, and not otherwise defined, shall have the meaning
ascribed thereto in that certain Securities Purchase Agreement,
dated June 2, 2008, 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 that certain Intellectual Property Security
Agreement, each dated June 2, 2008 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 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 June 2,
2008, 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%.
(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 . The
Borrower covenants that during the period the conversion right
exists, the Borrower will reserve from its authorized and unissued
Common Stock a sufficient number of shares, free from preemptive
rights, to provide for the issuance of Common Stock upon the full
conversion of this Note and the other Notes issued pursuant to the
Purchase Agreement. The Borrower is required at all
times to have authorized and reserved two times the number of
shares that is actually issuable upon full conversion of the Notes
(based on the Conversion Price of the Notes or the Exercise Price
of the Warrants in effect from time to time) (the “
Reserved
Amount ”). The Reserved Amount shall be
increased from time to time in accordance with the Borrower’s
obligations pursuant to Section 4(h) of the Purchase
Agreement. The Borrower represents that upon issuance,
such shares will be duly and validly issued, fully paid and
non-assessable. In addition, if the Borrower shall issue
any securities or make any change to its capital structure which
would change the number of shares of Common Stock into which the
Notes shall be convertible at the then current Conversion Price,
the Borrower shall at the same time make proper provision so that
thereafter there shall be a sufficient number of shares of Common
Stock authorized and reserved, free from preemptive rights, for
conversion of the outstanding Notes. The Borrower (i)
acknowledges that it has irrevocably instructed its transfer agent
to issue certificates for the Common Stock issuable upon conversion
of this Note, and (ii) agrees that its issuance of this Note
shall constitute full authority to its officers and agents who are
charged with the duty of executing stock certificates to execute
and issue the necessary certificates for shares of Common Stock in
accordance with the terms and conditions of this Note.
If,
at any time a Holder of this Note submits a Notice of
Conversion, and the Borrower does not have sufficient
authorized but unissued shares of Common Stock available to
effect such conversion in accordance with the provisions of
this Article I (a “ Conversion Default
”), subject to Section 4.8, the Borrower shall issue to
the Holder all of the shares of Common Stock which are then
available to effect such conversion. The portion of
this Note which the Holder included in its Conversion Notice
and which exceeds the amount which is then convertible into
available shares of Common Stock (the “ Excess Amount
”) shall, notwithstanding anything to the contrary
contained herein, not be convertible into Common Stock in
accordance with the terms hereof until (and at the
Holder’s option at any time after) the
date
additional shares of Common Stock are authorized by the
Borrower to permit such conversion, at which time the
Conversion Price in respect thereof shall be the lesser of (i)
the Conversion Price on the Conversion Default Date (as
defined below) and (ii) the Conversion Price on the Conversion
Date thereafter elected by the Holder in respect
thereof. In addition, the Borrower shall pay to the
Holder payments (“ Conversion Default
Payments ”) for a Conversion Default in the
amount of (x) the sum of
(1) the then outstanding principal amount of this Note
plus (2)
accrued and unpaid interest on the unpaid principal amount of
this Note through the Authorization Date (as defined below)
plus (3)
Default Interest, if any, on the amounts referred to in
clauses (1) and/or (2), multiplied
by (y) .24, multiplied
by (z) (N/365), where N = the number of days from the
day the holder submits a Notice of Conversion giving rise to a
Conversion Default (the “ Conversion Default
Date ”) to the date (the “ Authorization Date
”) that the Borrower authorizes a sufficient number of
shares of Common Stock to effect conversion of the full
outstanding principal balance of this Note. The
Borrower shall use its best efforts to authorize a sufficient
number of shares of Common Stock as soon as practicable
following the earlier of (i) such time that the Holder
notifies the Borrower or that the Borrower otherwise becomes
aware that there are or likely will be insufficient authorized
and unissued shares to allow full conversion thereof and (ii)
a Conversion Default. The Borrower shall send
notice to the Holder of the authorization of additional shares
of Common Stock, the Authorization Date and the amount of
Holder’s accrued Conversion Default
Payments. The accrued Conversion Default Payments
for each calendar month shall be paid in cash or shall be
convertible into Common Stock (at such time as there are
sufficient authorized shares of Common Stock) at the
applicable Conversion Price, at the Borrower’s option,
as follows:
(a) In the event Holder elects
to take such payment in cash, cash payment shall be made to Holder
by the fifth (5 th
) day of the month following the month in which it has accrued;
and
(b) In the event Holder elects
to take such payment in Common Stock, the Holder may convert such
payment amount into Common Stock at the Conversion Price (as in
effect at the time of conversion) at any time after the fifth day
of the month following the month in which it has accrued in
accordance with the terms of this Article I (so long as there is
then a sufficient number of authorized shares of Common
Stock).
The
Holder’s election shall be made in writing to the
Borrower at any time prior to 6:00 p.m., New York, New York
time, on the third day of the month following the month in
which Conversion Default payments have accrued. If
no election is made, the Holder shall be deemed to have
elected to receive cash. Nothing herein shall limit
the Holder’s right to pursue actual damages (to the
extent in excess of the Conversion Default Payments) for the
Borrower’s failure to maintain a sufficient number of
authorized shares of Common Stock, and each holder shall have
the right to pursue all remedies available at law or in equity
(including degree of specific performance and/or injunctive
relief).
1.4
Method of
Conversion .
(a) Mechanics
of Conversion . Subject
to Section 1.1, this Note may be converted by the Holder in whole
or in part at any time from time to time after the Issue Date, by
(A) submitting to the Borrower a Notice of Conversion (by
facsimile or other reasonable means
of communication dispatched on the Conversion Date prior to 6:00
p.m., New York, New York time) and (B) subject to Section
1.4(b), surrendering this Note at the principal office of the
Borrower.
(b) Surrender
of Note Upon Conversion .
Notwithstanding anything to the contrary set forth herein, upon
conversion of this Note in accordance with the terms hereof, the
Holder shall not be required to physically surrender this Note to
the Borrower unless the entire unpaid principal amount of this Note
is so converted. The Holder and the Borrower shall
maintain records showing the principal amount so converted and the
dates of such conversions or shall use such other method,
reasonably satisfactory to the Holder and the Borrower, so as not
to require physical surrender of this Note upon each such
conversion. In the event of any dispute or discrepancy,
such records of the Borrower shall be controlling and determinative
in the absence of manifest error. Notwithstanding the
foregoing, if any portion of this Note is converted as aforesaid,
the Holder may not transfer this Note unless the Holder first
physically surrenders this Note to the Borrower, whereupon the
Borrower will forthwith issue and deliver upon the order of the
Holder a new Note of like tenor, registered as the Holder (upon
payment by the Holder of any applicable transfer taxes) may
request, representing in the aggregate the remaining unpaid
principal amount of this Note. The Holder and any
assignee, by acceptance of this Note, acknowledge and agree that,
by reason of the provisions of this paragraph, following conversion
of a portion of this Note, the unpaid and unconverted principal
amount of this Note represented by this Note may be less than the
amount stated on the face hereof.
(c) Payment
of Taxes . The Borrower
shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issue and delivery of
shares of Common Stock or other securities or property on
conversion of this Note in a name other than that of the Holder (or
in street name), and the Borrower shall not be required to issue or
deliver any such shares or other securities or property unless and
until the person or persons (other than the Holder or the custodian
in whose street name such shares are to be held for the
Holder’s account) requesting the issuance thereof shall have
paid to the Borrower the amount of any such tax or shall have
established to the satisfaction of the Borrower that such tax has
been paid.
(d) Delivery
of Common Stock Upon Conversion . Upon
receipt by the Borrower from the Holder of a facsimile transmission
(or other reasonable means of communication) of a Notice of
Conversion meeting the requirements for conversion as provided in
this Section 1.4, the Borrower shall issue and deliver or cause to
be issued and delivered to or upon the order of the Holder
certificates for the Common Stock issuable upon such conversion
within three (3) business days after such receipt (and, solely in
the case of conversion of the entire unpaid principal amount
hereof, surrender of this Note) (such third business day being
hereinafter referred to as the “ Deadline ”) in
accordance with the terms hereof and the Purchase Agreement
(including, without limitation, in accordance with the requirements
of Section 2(g) of the Purchase Agreement that certificates for
shares of Common Stock issued on or after the effective date of the
Registration Statement upon conversion of this Note shall not bear
any restrictive legend).
(e)
Obligation
of Borrower to Deliver Common Stock . Upon
receipt by the Borrower of a Notice of Conversion, the Holder shall
be deemed to be the holder of
record of the Common Stock issuable upon such conversion, the
outstanding principal amount and the amount of accrued and unpaid
interest on this Note shall be reduced to reflect such conversion,
and, unless the Borrower defaults on its obligations under this
Article I, all rights with respect to the portion of this Note
being so converted shall forthwith terminate except the right to
receive the Common Stock or other securities, cash or other assets,
as herein provided, on such conversion. If the Holder
shall have given a Notice of Conversion as provided herein, the
Borrower’s obligation to issue and deliver the certificates
for Common Stock shall be absolute and unconditional, irrespective
of the absence of any action by the Holder to enforce the same, any
waiver or consent with respect to any provision thereof, the
recovery of any judgment against any person or any action to
enforce the same, any failure or delay in the enforcement of any
other obligation of the Borrower to the holder of record, or any
setoff, counterclaim, recoupment, limitation or termination, or any
breach or alleged breach by the Holder of any obligation to the
Borrower, and irrespective of any other circumstance which might
otherwise limit such obligation of the Borrower to the Holder in
connection with such conversion. The Conversion Date
specified in the Notice of Conversion shall be the Conversion Date
so long as the Notice of Conversion is received by the Borrower
before 6:00 p.m., New York, New York time, on such
date.
(f) Delivery
of Common Stock by Electronic Transfer . In lieu
of delivering physical certificates representing the Common Stock
issuable upon conversion, provided the Borrower’s transfer
agent is participating in the Depository Trust Company (“
DTC
”) Fast Automated Securities Transfer (“ FAST ”) program,
upon request of the Holder and its compliance with the provisions
contained in Section 1.1 and in this Section 1.4, the Borrower
shall use its best efforts to cause its transfer agent to
electronically transmit the Common Stock issuable upon conversion
to the Holder by crediting the account of Holder’s Prime
Broker with DTC through its Deposit Withdrawal Agent Commission
(“ DWAC ”)
system.
(g) Failure
to Deliver Common Stock Prior to Deadline . Without
in any way limiting the Holder’s right to pursue other
remedies, including actual damages and/or equitable relief, the
parties agree that if delivery of the Common Stock issuable upon
conversion of this Note is more than three (3) business days after
the Deadline (other than a failure due to the circumstances
described in Section 1.3 above, which failure shall be governed by
such Section) the Borrower shall pay to the Holder $1,000 per day
in cash, for each day beyond the Deadline that the Borrower fails
to deliver such Common Stock. Such cash amount shall be
paid to Holder by the fifth day of the month following the month in
which it has accrued or, at the option of the Holder (by written
notice to the Borrower by the first day of the month following the
month in which it has accrued), shall be added to the principal
amount of this Note, in which event interest shall accrue thereon
in accordance with the terms of this Note and such additional
principal amount shall be convertible into Common Stock in
accordance with the terms of this Note.
1.5
Concerning
the Shares . The
shares of Common Stock issuable upon conversion of this Note may
not be sold or transferred unless (i) such shares are
sold pursuant to an effective registration statement under the Act
or (ii) the Borrower or its transfer agent shall have been
furnished with an opinion of counsel (which opinion
shall be in form, substance and scope customary for opinions of
counsel in comparable transactions) to the effect that the shares
to be sold or transferred may be sold or transferred pursuant to an
exemption from such registration
or (iii) such shares are sold or transferred pursuant to Rule
144 under the Act (or a successor rule) (“ Rule 144 ”) or
(iv) such shares are transferred to an “affiliate” (as
defined in Rule 144) of the Borrower who agrees to sell or
otherwise transfer the shares only in accordance with this Section
1.5 and who is an Accredited Investor (as defined in the Purchase
Agreement). Except as otherwise provided in the Purchase
Agreement (and subject to the removal provisions set forth below),
until such time as the shares of Common Stock issuable upon
conversion of this Note have been registered under the Act as
contemplated by the Registration Rights Agreement or otherwise may
be sold pursuant to Rule 144 without any restriction as to the
number of securities as of a particular date that can then be
immediately sold, each certificate for shares of Common Stock
issuable upon conversion of this Note that has not been so included
in an effective registration statement or that has not been sold
pursuant to an effective registration statement or an exemption
that permits removal of the legend, shall bear a legend
substantially in the following form, as appropriate:
“THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THE SECURITIES MAY NOT BE SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR
AN OPINION OF COUNSEL 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
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