THIS
NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION
OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
AS TO THIS NOTE UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO LOTUS PHARMACEUTICALS, INC. THAT SUCH REGISTRATION
IS NOT REQUIRED.
|
Principal
Amount: $_______________
|
Issue Date: February ___,
2007
|
SECURED CONVERTIBLE
NOTE
FOR VALUE
RECEIVED, LOTUS PHARMACEUTICALS, INC., a Nevada corporation
(hereinafter called "Borrower"), hereby promises to pay to
_____________________________________
______________________________________________,
Fax: ______________ (the "Holder") or order, without demand, the
sum of ___________________________ Dollars ($__________), with
simple and unpaid interest thereon, on February ____, 2008 (the
"Maturity Date"), if not paid sooner.
This Note has been entered into pursuant to the
terms of a subscription agreement between the Borrower and the
Holder, dated of even date herewith (the “Subscription
Agreement”), and shall be governed by the terms of such
Subscription Agreement. Unless otherwise separately defined herein,
all capitalized terms used in this Note shall have the same meaning
as is set forth in the Subscription Agreement. The following terms
shall apply to this Note:
ARTICLE I
GENERAL PROVISIONS
1.1 Payment Grace Period . The Borrower shall have a five (5) business
day grace period to pay any monetary amounts due under this Note,
after which grace period and during the pendency of an Event of
Default (as defined in Article III) a default interest rate of
eighteen percent (18%) per annum shall apply to the amounts owed
hereunder. The interest rate payable on Note principal
corresponding to the Withdrawn Registrable Securities (as defined
in Section 11.4 of the Subscription Agreement and such Note
principal referred to hereinafter as “Unregistered Note
Principal”) shall accrue at the annual rate of 18% during the
pendency of a Non-Registration Event which would have occurred in
connection with such Unregistered Note Principal if the Rule 415
Waiver (described in Section 11.4 of the Subscription Agreement)
had not been in effect (such period referred to herein as the
“Rule 415 Exclusion Period”).
1.2. Interest Rate . Simple interest
payable on this Note shall accrue at the annual rate of fourteen
percent (14%). Interest will be payable on April 30, 2007 and on
the last business day of each calendar quarter thereafter and on
the Maturity Date, accelerated or otherwise, when the principal and
remaining accrued but unpaid interest shall be due and payable, or
sooner as described below. Interest will be payable in cash so long
as neither an Event of Default, nor an event which with the passage
of time or the giving of notice could become an Event of Default
has occurred, at the election of the Holder, by the
Borrower’s delivery of registered Common Stock which were
registered exclusively for the purpose of satisfying the payment of
interest and not principal (“Interest Shares”) valued
at 75% of the average of the three lowest closing bid prices of the
Common Stock as reported by Bloomberg L.P. for the Principal Market
for the twenty trading days ending on the trading day preceding the
relevant interest payment date. The Borrower must notify the
Holder, in writing, not less than fifteen trading days prior to the
relevant interest payment date of its intention to pay interest
with shares of Common Stock otherwise such payment must be made in
cash. The Interest Shares must be delivered not later than two
trading days after the date the cash interest payment would
otherwise be payable.
1.3. Conversion Privileges . The Conversion Privileges set forth in Article
II shall remain in full force and effect immediately from the date
hereof and until the Note is paid in full regardless of the
occurrence of an Event of Default. The Note shall be payable in
full on the Maturity Date, unless previously converted into Common
Stock in accordance with Article II hereof; provided, that if an
Event of Default has occurred that has not been timely cured, the
Borrower may not pay this Note, without the consent of the Holder,
until one year after the later of the date the Event of Default has
been cured or one year after the Maturity Date.
ARTICLE
II
CONVERSION
RIGHTS
The Holder shall have the right to convert the
principal due under this Note into Shares of the Borrower's Common
Stock, $.001 par value per share (“Common Stock”) as
set forth below.
2.1. Conversion into the Borrower's Common
Stock .
(a) The Holder shall have the right from and after
the Issue Date of the issuance of this Note and then at any time
until this Note is fully paid, to convert any outstanding and
unpaid principal portion of this Note, and accrued interest if any,
at the election of the Holder (the date of giving of such notice of
conversion being a "Conversion Date") into fully paid and
nonassessable shares of Common Stock as such stock exists on the
date of issuance of this Note, or any shares of capital stock of
Borrower into which such Common Stock shall hereafter be changed or
reclassified, at the conversion price as defined in Section 2.1(b)
hereof (the "Conversion Price"), determined as provided herein.
Upon delivery to the Borrower of a completed Notice of Conversion,
a form of which is annexed hereto, Borrower shall issue and deliver
to the Holder within three (3) business days after the Conversion
Date (such third day being the “Delivery Date”) that
number of shares of Common Stock for the portion of the Note
converted in accordance with the foregoing. At the election of the
Holder, the Borrower will deliver accrued but unpaid interest on
the Note in the manner provided in Section 1.3 through the
Conversion Date directly to the Holder on or before the Delivery
Date (as defined in the Subscription Agreement). The number of
shares of Common Stock to be issued upon each conversion of this
Note shall be determined by dividing that portion of the principal
of the Note and interest to be converted, by the Conversion
Price.
(b) Subject to adjustment as provided in Section
2.1(c) hereof, the Conversion Price per share shall be $1.00,
except that the Conversion Price in connection with Unregistered
Note Principal shall be 75% of the Conversion Price otherwise in
effect during the Rule 415 Exclusion Period.
(c) The Conversion Price and number and kind of
shares or other securities to be issued upon conversion determined
pursuant to Section 2.1(a), shall be subject to adjustment from
time to time upon the happening of certain events while this
conversion right remains outstanding, as follows:
A. Merger, Sale of Assets, etc. If the Borrower at
any time shall consolidate with or merge into or sell or convey all
or substantially all its assets to any other corporation, this
Note, as to the unpaid principal portion thereof and accrued
interest thereon, shall thereafter be deemed to evidence the right
to purchase such number and kind of shares or other securities and
property as would have been issuable or distributable on account of
such consolidation, merger, sale or conveyance, upon or with
respect to the securities subject to the conversion or purchase
right immediately prior to such consolidation, merger, sale or
conveyance. The foregoing provision shall similarly apply to
successive transactions of a similar nature by any such successor
or purchaser. Without limiting the generality of the foregoing, the
anti-dilution provisions of this Section shall apply to such
securities of such successor or purchaser after any such
consolidation, merger, sale or conveyance.
B. Reclassification, etc. If the Borrower at any
time shall, by reclassification or otherwise, change the Common
Stock into the same or a different number of securities of any
class or classes that may be issued or outstanding, this Note, as
to the unpaid principal portion thereof and accrued interest
thereon, shall thereafter be deemed to evidence the right to
purchase an adjusted number of such securities and kind of
securities as would have been issuable as the result of such change
with respect to the Common Stock immediately prior to such
reclassification or other change.
C. Stock Splits, Combinations and Dividends. If
the shares of Common Stock are subdivided or combined into a
greater or smaller number of shares of Common Stock, or if a
dividend is paid on the Common Stock in shares of Common Stock, the
Conversion Price shall be proportionately reduced in case of
subdivision of shares or stock dividend or proportionately
increased in the case of combination of shares, in each such case
by the ratio which the total number of shares of Common Stock
outstanding immediately after such event bears to the total number
of shares of Common Stock outstanding immediately prior to such
event..
D. Share Issuance. So long as this Note is
outstanding, if the Borrower shall issue or agree to issue any
shares of Common Stock except for the Excepted Issuances (as
defined in the Subscription Agreement) for a consideration less
than the Conversion Price in effect at the time of such issue,
then, and thereafter successively upon each such issue, the
Conversion Price shall be reduced to such other lower issue price.
For purposes of this adjustment, the issuance of any security
carrying the right to convert such security into shares of Common
Stock or of any warrant, right or option to purchase Common Stock
shall result in an adjustment to the Conversion Price upon the
issuance of the above-described security and again upon the
issuance of shares of Common Stock upon exercise of such conversion
or purchase rights if such issuance is at a price lower than the
then applicable Conversion Price. The reduction of the Conversion
Price described in this paragraph is in addition to other rights of
the Holder described in this Note and the Subscription
Agreement.
(d) Whenever the Conversion Price is adjusted
pursuant to Section 2.1(c) above, the Borrower shall promptly mail
to the Holder a notice setting forth the Conversion Price after
such adjustment and setting forth a statement of the facts
requiring such adjustment.
(e) Borrower will reserve from its authorized and
unissued Common Stock the number of shares of Common Stock during
the time periods and in the amounts described in the Subscription
Agreement. Borrower represents that upon issuance, such shares will
be duly and validly issued, fully paid and non-assessable. Borrower
agrees that its issuance of this Note shall constitute full
authority to its officers, agents, and transfer agents who are
charged with the duty of executing and issuing stock certificates
to execute and issue the necessary certificates for shares of
Common Stock upon the conversion of this Note.
2.2 Method of Conversion . This Note may be converted by the Holder in
whole or in part as described in Section 2.1(a) hereof and the
Subscription Agreement. Upon partial conversion of this Note, a new
Note containing the same date and provisions of this Note shall, at
the request of the Holder, be issued by the Borrower to the Holder
for the principal balance of this Note and interest which shall not
have been converted or paid.
2.3 Maximum Conversion . The Holder shall not be entitled to convert
on a Conversion Date that amount of the Note in connection with
that number of shares of Common Stock which would be in excess of
the sum of (i) the number of shares of Common Stock beneficially
owned by the Holder and its affiliates on a Conversion Date, (ii)
any Common Stock issuable in connection with the unconverted
portion of the Note, and (iii) the number of shares of Common Stock
issuable upon the conversion of the Note with respect to
w
