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THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE “ACT”), AND HAS BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE
OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION OF THIS NOTE
OR OF THE COMMON STOCK ISSUABLE UPON THE CONVERSION HEREOF MAY BE
EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED
THERETO OR AN OPINION OF COUNSEL IN A FORM REASONABLY SATISFACTORY
TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE
ACT. CONVERTIBLE PROMISSORY NOTE ETHOS ENVIRONMENTAL,
INC.
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$550,000
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January ____, 2009
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San Diego, CA
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For value received, Ethos Environmental, Inc., a Nevada
corporation (the “Company”), promises to pay to MKM
Opportunity Master Fund, Limited, a Cayman Islands corporation (the
“Holder”), the principal sum of Five Hundred Fifty
Thousand Dollars ($550,000), together with interest as set forth
herein. This Note is subject to the following terms and conditions.
1. Maturity; Payment due upon Maturity;
Default. Unless converted as provided in Section 3, this Note
will automatically mature and be due and payable on September 30,
2009 (the “Maturity Date”). The amount
payable upon the maturity of this Note shall be equal to five
hundred fifty thousand dollars
($550,000). Notwithstanding anything in the foregoing,
the entire unpaid principal sum of this Note shall become
immediately due and payable upon an “Event of Default”,
which is: the insolvency of the Company, the failure of the Company
to pay interest as set forth in Section 2 hereof, the commission of
any act of bankruptcy by the Company, the execution by the Company
of a general assignment for the benefit of creditors, the filing by
or against the Company of a petition in bankruptcy or any petition
for relief under the federal bankruptcy act or the continuation of
such petition without dismissal for a period of ninety (90) days or
more, or the appointment of a receiver or trustee to take
possession of the property or assets of the Company.
2. Interest. Simple interest will accrue (on the
basis of actual days elapsed in a 360-day year of twelve 30-day
months) at a rate equal to ten percent (10%) per annum on the
unpaid principal amount hereof beginning on January 1, 2009, until
paid in full or converted pursuant to Section 3, at which time the
Company promises to pay such interest (subject to the provisions of
Section 3, if such payment is in connection with a conversion of
this Note). 3. Conversion.
(a) Conversion.
(i) Conversion
on Maturity. Should the Company not repay the Note in
full prior to the Maturity Date, the entire principal amount shall
at the option of the Holder be converted into shares of the
Company’s common stock as of the Maturity Date at a
conversion rate of $0.25 per share or such other amount as
determined in accordance with Section 3(d) (such conversion rate,
as adjusted, being the “Conversion Price”).
(ii) Conversion
upon Event of Default. Should there occur an Event of
Default as defined in Section 2, the Holder may in its sole
discretion elect to convert any portion of the principal amount
into shares of the Company’s common stock at Conversion
Price.
(b) Prepayment. The
Company shall have the right to prepay the principal due under this
Note, in full, upon 10 days written notice to the
Holder. During the 10 day notice period, the Holder
shall have the right to convert the entire principal amount of the
Note into shares of the Company’s common stock. Should the
Holder elect to convert the entire principal due under this Note
such conversion shall be at the Conversion Price.
(c) Mechanics and Effect of
Conversion. Upon conversion of this Note pursuant to this
Section 3, the Holder shall surrender this Note at the principal
offices of the Company or any transfer agent of the Company. At its
expense, the Company will, as soon as practicable thereafter, issue
and deliver to such Holder a certificate or certificates for the
number of shares to which such Holder is entitled upon such
conversion, together with any other securities and property to
which the Holder is entitled upon such conversion under the terms
of this Note, including a check payable to the Holder for any
accrued interest due. Upon conversion of this Note, the Company
will be forever released from all of its obligations and
liabilities under this Note with regard to that portion of the
principal amount being converted including without limitation the
obligation to pay such portion of the principal amount and accrued
interest. 1
(d) Weighted-Average
Anti-Dilution Protection. (i) Stock Dividends
and Splits. If the Company, at any time while this Note is
outstanding: (A) pays a stock dividend or otherwise makes a
distribution or distributions on shares of its Common Stock or any
other equity or equity equivalent securities payable in shares of
Common Stock (which, for avoidance of doubt, shall not include any
shares of Common Stock issued by the Company pursuant to this Note
or the other securities issued or to be issued in this
transaction), (B) subdivides outstanding shares of Common Stock
into a larger number of shares, (C) combines (including by way of
reverse stock split) outstanding shares of Common Stock into a
smaller number of shares, or (D) issues by reclassification of
shares of the Common Stock any shares of capital stock of the
Company, then in each case the Conversion Price shall be multiplied
by a fraction of which the numerator shall be the number of shares
of Common Stock (excluding treasury shares, if any) outstanding
immediately before such event and of which the denominator shall be
the number of shares of Common Stock outstanding immediately after
such event and the number of shares issuable upon conversion of
this Note shall be proportionately and equitably
adjusted. Any adjustment made pursuant to this Section
3(d)(i) shall become effective immediately after the record date
for the determination of stockholders entitled to receive such
dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination
or re-classification. (ii) Subsequent Equity
Sales. If at any time while this Note is outstanding the Company
shall offer, sell, grant any option to purchase or offer, sell or
grant any right to reprice its securities, or otherwise dispose of
or issue (or announce any offer, sale, grant or any option to
purchase or other disposition) any Common Stock or any securities
of the Company or of any subsidiary of the Company which would
entitle the holder thereof to acquire at any time Common Stock
(hereinafter, “Common Stock Equivalents”), including
without limitation, any debt, preferred stock, rights, options,
Notes or other instrument that is at any time convertible into or
exchangeable for or otherwise entitles the holder thereof to
receive Common Stock, entitling any Person to acquire shares of
Common Stock, at an effective price per share less than the
Conversion Price then in effect (such issuances collectively, a
“Dilutive Issuance”), as adjusted hereunder (if the
holder of the Common Stock or Common Stock Equivalents so issued
shall at any time, whether by operation of purchase price
adjustments, reset provisions, floating conversion, exercise or
exchange prices or otherwise, or due to Notes, options or rights
per share which is issued in connection with such issuance, be
entitled to receive shares of Common Stock at an effective price
per share which is less than the Conversion Price, such issuance
shall be deemed to have occurred for less than the Conversion Price
in effect on such date of the Dilutive Issuance), then, the
Conversion Price shall be adjusted pursuant to the following
formula: NP = OP x [OB + (AMT/OP)] (OB+SI) where
NP is the new Conversion Price; OP is the Conversion
Price in effect immediately prior to such adjustment; OB is
the number of shares of Common Stock outstanding prior to the
Dilutive Issuance; AMT is the dollar amount of the Dilutive
Issuance, and SI is the number of shares of Common Stock
issuable in the Dilutive Issuance. The Company shall notify
the Holder in writing, no later than the business day following the
issuance of any Common Stock or Common Stock Equivalents subject to
this section, indicating therein the applicable information
required by the formula above (such notice the “Dilutive
Issuance Notice”). 2
(iii) Pro
Rata Distributions. If the Company, at any time during
the term of this Note, shall distribute to all holders of Common
Stock evidences of its indebtedness or assets (including cash and
cash dividends) or rights or Notes to subscribe for or purchase any
security other than the Common Stock (which shall be subject to
Section 3(d)(ii) above), then in each such case the Conversion
Price shall be adjusted by multiplying the Conversion Price in
effect immediately prior to the record date fixed for determination
of stockholders entitled to receive such distribution by a fraction
of which the denominator shall be the Closing Price (defined below)
determined as of the record date mentioned above, and of which the
numerator shall be such Closing Price on such record date less the
then per share fair market value at such record date of the portion
of such assets or evidence of indebtedness so distributed
applicable to one outstanding share of the Common Stock as
determined by the Board of Directors in good faith, or at the
option of the Holder, by an independent appraiser selected by the
Holder. and reasonably acceptable to the Company. In
either case the adjustments shall be described in a statement
provided by the Company to the Holder of the portion of assets or
evidences of indebtedness so distributed or such subscription
rights applicable to one share of Common Stock. Such
adjustment shall be made whenever any such distribution is made and
shall become effective immediately after the record date mentioned
above. At the time of such adjustment, the number of
shares of common stock issuable following such adjustment shall be
equitably and proportionally adjusted upward. As used
herein, “Closing Price”, shall mean the first of the
following clauses that applies: (A) if, at the time of
any such calculation, the Common Stock is listed or quoted on the
American Stock Exchange, or the New York Stock Exchange, or the
NASDAQ Market, the NASDAQ Capital Market or the Archipelago
Exchange, the Closing Price shall be the closing or last sale price
reported for the last business day immediately preceding the date
of any such calculation; (B) if, at the time of any such
calculation, the Common Stock is quoted on the OTC Bulletin Board
or listed in the “Pink Sheets” published by the
National Quotation Bureau Inc. or a similar agency or organization
succeeding to its function or reporting prices, the Closing Price
shall be the average of the high closing bid and low ask prices
reported for the last five (5) trading days immediately preceding
the date of any such calculation, or (C) in all other cases,
the Closing Price of a share of Common Stock shall be the price
determined by an independent appraiser selected in good faith by
the Holder and reasonably acceptable to the Company.
(iv) &
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