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
FOR VALUE RECEIVED , WELLSTAR INTERNATIONAL INC. , a Nevada
corporation (hereinafter called the “ Borrower
”), hereby promises to pay to the order of ____________ or
registered assigns (the “ Holder ”) the sum of
$_____, on May 15, 2012 (the “Maturity Date ”),
and to pay interest on the unpaid principal balance hereof at the
rate of thirteen percent (13%) (the “ Interest Rate
”) per annum from May 15, 2009 (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 $0.045 for each Trading Day (as such term is defined below) of
the month. All payments due hereunder (to the extent not converted
into common stock, $.001 par value per share (the “Common
Stock” ) in accordance with the terms hereof) shall be
made in lawful money of the United States of
America. All payments shall be made at such address as
the Holder shall hereafter give to the Borrower by written notice
made in accordance with the provisions of this
Note. Whenever any amount expressed to be due by the
terms of this Note is due on any day which is not a business day,
the same shall instead be due on the next succeeding day which is a
business day and, in the case of any interest payment date which is
not the date on which this Note is paid in full, the extension of
the due date thereof shall not be taken into account for purposes
of determining the amount of interest due on such
date. As used in this Note, the term “business
day” shall mean any day other than a Saturday, Sunday or a
day on which commercial banks in the city of New York, New York are
authorized or required by law or executive order to remain
closed. Each capitalized term used herein, and not
otherwise defined, shall have the meaning ascribed thereto in that
certain Securities Purchase Agreement, dated May 15, 2009, 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 May 15, 2009 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) subject to a
limitation on conversion or exercise analogous to the limitations
contained herein) and (2) the number of shares of Common Stock
issuable upon the conversion of the portion of this Note with
respect to which the determination of this proviso is being made,
would result in beneficial ownership by the Holder and its
affiliates of more than 4.99% of the outstanding shares of Common
Stock and provided further that the Holder shall not
be entitled to convert any portion of this Note during any month
immediately succeeding a Determination Date on which the Borrower
exercises its prepayment option pursuant to Section 5.2 of this
Note. For purposes of the proviso to the immediately
preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended, and Regulations 13D-G thereunder, except as
otherwise provided in clause (1) of such proviso. The
number of shares of Common Stock to be issued upon each conversion
of this Note shall be determined by dividing the Conversion Amount
(as defined below) by the applicable Conversion Price then in
effect on the date specified in the notice of conversion, in the
form attached hereto as Exhibit A (the “ Notice of
Conversion ”), delivered to the Borrower by the Holder in
accordance with Section 1.4 below; provided that the Notice of
Conversion is submitted by facsimile (or by other means resulting
in, or reasonably expected to result in, notice) to the Borrower
before 6:00 p.m., New York, New York time on such conversion date
(the “ Conversion Date ”). The term
“ Conversion Amount ” means, with respect to any
conversion of this Note, the sum of (1) the principal amount of
this Note to be converted in such conversion plus (2)
accrued and unpaid interest, if any, on such principal amount at
the interest rates provided in this Note to the Conversion Date,
provided, however, that the Company shall have the right to pay any
or all interest in cash plus (3) Default Interest, if any,
on the amounts referred to in the immediately preceding clauses (1)
and/or (2) plus (4) at the Holder’s option, any
amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g)
hereof or pursuant to Section 2(c) of that certain Registration
Rights Agreement, dated as of May 15, 2009, 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.
(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
Pink OTC Markets Inc., or applicable trading market (the “
Pink Sheets ”) 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 Pink Sheets 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 Pink Sheets, or on the principal
securities exchange or other securities market on which the Common
Stock is then being traded. “ Applicable
Percentage ” shall mean 25.0%. The “
Fixed Conversion Price ” shall mean $.12.
(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 Stockholder Approval
(as defined in the Agreement), the Borrower covenants that during
the period the conversion right exists, the Borrower will reserve
from its authorized and unissued Common Stock a sufficient number
of shares, free from preemptive rights, to provide for the issuance
of Common Stock upon the full conversion of this Note and the other
Notes issued pursuant to the Purchase Agreement. The
Borrower is required at all times to have authorized and reserved
two times the number of shares that is actually issuable upon full
conversion of the Notes (based on the Conversion Price of the
Notes) (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 two (2) business days after such receipt (and, solely in the
case of conversion of the entire unpaid principal amount hereof,
surrender of this Note) (such second business day being hereinafter
referred to as the “ Deadline ”) in accordance
with the terms hereof and the Purchase Agreement (including,
without limitation, in accordance with the requirements of Section
2(g) of the Purchase Agreement that certificates for shares of
Common Stock issued on or after the effective date of the
Registration Statement upon conversion of this Note shall not bear
any restrictive legend).
(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, the sale, conveyance or disposition of all or substantially
all of the assets of the Borrower, the effectuation by
the
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