EXHIBIT
10.4
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
Vernon, British Columbia, Canada
December 30, 2008
$30,644.26
FOR VALUE RECEIVED
, VALOR ENERGY CORP., a Nevada
corporation (hereinafter called the “ Borrower
”), hereby promises to pay to the order of AJW Master Fund,
Ltd. or registered assigns (the “ Holder ”) the
sum of $30,644.26, on December 30, 2011 (the “Maturity
Date ”), and to pay interest on the unpaid principal
balance hereof at the rate of two percent (2%) per annum from
December 30, 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 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, $.001 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.
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.
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.
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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 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 75.0%.
(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
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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
4
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
5
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,
6
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
7
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
8
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 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 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
9
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 Conversion Price then in effect,
then the 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 Conversion Price then in effect, then the
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
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.
10
(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
11
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
12
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
13
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
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;
3.4
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;
3.5
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;
3.6
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;
3.7
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;
3.8
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
3.9
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
14
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
2504 43 rd Street, Suite 5, Vernon, British Columbia,
Canada VIT GL1, facsimile number: (250) 558-3846. Both the
Holder and the
15
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
16
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
17
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 $0.0165 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
18
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]
19
IN WITNESS WHEREOF
, Borrower has caused this Note to be
signed in its name by its duly authorized officer this 30
th day of December, 2008.
VALOR ENERGY CORP.
By: _\S\ Sheridan Westgarde
__________
Sheridan B. Westgarde
Chief Executive Officer
20
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 $.001 per share (“
Common Stock ”), of Valor Energy Corp., a Nevada
corporation (the “ Borrower ”) according to the
conditions of the convertible Notes of the Borrower dated as of
December 30, 2008 (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:
____________________________________
21
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.
22
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
Vernon, British Columbia, Canada
December 30, 2008
$118,760.02
FOR VALUE RECEIVED
, VALOR ENERGY CORP., a Nevada
corporation (hereinafter called the “ Borrower
”), hereby promises to pay to the order of AJW Master Fund
II, Ltd. or registered assigns (the “ Holder ”)
the sum of $118,760.02, on December 30, 2011 (the
“Maturity Date ”), and to pay interest on the
unpaid principal balance hereof at the rate of two percent (2%) per
annum from December 30, 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 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, $.001 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.
23
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.
The following terms shall apply to this
Note:
ARTICLE
VI. CONVERSION
RIGHTS
6.1
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.
24
6.2
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 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 75.0%.
(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
25
transaction or tender offer (or takeover
scheme) which caused this Section 1.2(b) to become
operative.
6.3
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
26
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).
6.4
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
27
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,
28
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.
6.5
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
29
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.
6.6
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
30
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 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 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
31
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 Conversion Price then in effect,
then the 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 Conversion Price then in effect, then the
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
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.
32
(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.
6.7
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
33
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.
6.8
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
VII. CERTAIN
COVENANTS
7.1
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.
7.2
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.
7.3
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
34
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.
7.4
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.
7.5
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.
7.6
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
VIII. EVENTS OF
DEFAULT
If any of the following events of default
(each, an “ Event of Default ”) shall
occur:
8.1
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;
8.2
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
35
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;
8.3
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;
8.4
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;
8.5
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;
8.6
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;
8.7
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;
8.8
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
8.9
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
36
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
IX. MISCELLANEOUS
9.1
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.
9.2
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
2504 43 rd Street, Suite 5, Vernon, British Columbia,
Canada VIT GL1, facsimile number: (250) 558-3846. Both the
Holder and the
37
Borrower may change the address for
service by service of written notice to the other as herein
provided.
9.3
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.
9.4
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.
9.5
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.
9.6
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.
9.7
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
38
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.
9.8
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.
9.9
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.
9.10
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.
9.11
Purchase Agreement
. By its acceptance of this Note, each Holder
agrees to be bound by the applicable terms of the Purchase
Agreement.
9.12
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
39
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.
9.13
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
X. CALL OPTION
10.1
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 $0.0165 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
40
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]
41
IN WITNESS WHEREOF
, Borrower has caused this Note to be
signed in its name by its duly authorized officer this 30
th day of December, 2008.
VALOR ENERGY CORP.
By: _\S\ Sheridan Westgarde
__________
Sheridan B. Westgarde
Chief Executive Officer
42
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 $.001 per share (“
Common Stock ”), of Valor Energy Corp., a Nevada
corporation (the “ Borrower ”) according to the
conditions of the convertible Notes of the Borrower dated as of
December 30, 2008 (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:
____________________________________
43
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.
44
THE SECURITIES REPRESENTED
BY
