EXHIBIT 99.2
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR UNDER ANY STATE SECURITIES OR BLUE SKY LAWS. THIS
NOTE IS SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE
OFFERED, SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT AS
PERMITTED UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES OR BLUE SKY
LAWS, PURSUANT TO REGISTRATION OR QUALIFICATION OR EXEMPTION THEREFROM.
INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS
OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER OF THIS NOTE MAY
REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER
TO THE EFFECT THAT ANY PROPOSED TRANSFER IS IN COMPLIANCE WITH THE SECURITIES
ACT AND ANY APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
SUBORDINATED CONVERTIBLE UNSECURED REVOLVING PROMISSORY NOTE
US $1,500,000 San Diego, California
March 17, 2008
MICROISLET, INC., a Nevada corporation (together with its successors,
the "BORROWER"), for value received, hereby promises to pay to the order of SMR
1996 Trust III, a New York trust, or its registered assigns (the "LENDER"), the
aggregate unpaid principal amount of all advances ("ADVANCES") made by Lender to
Borrower in accordance with the terms and conditions hereof, up to a maximum
principal amount of One Million Five Hundred Thousand Dollars (US $1,500,000.00)
(the "CREDIT"), or so much thereof as shall then equal the outstanding principal
amount hereof (such amount, as modified from time to time as provided herein,
the "PRINCIPAL AMOUNT"), and any unpaid accrued interest hereon, as set forth
below, which shall all be due and payable, unless earlier prepaid pursuant to
the terms hereof, on the earlier to occur of (i) May 31, 2008, and (ii) when
declared due and payable by the Lender upon the occurrence and during the
continuance of an Event of Default (as defined below) (the "MATURITY DATE").
Payment for all amounts due hereunder shall be made by mail to the registered
address of the Lender. All amounts advanced hereon, but not to exceed US
$1,500,000.00 Principal Amount at any one time outstanding, shall be so advanced
upon the request of the Borrower and with the consent of the Lender, as herein
provided.
The following is a statement of the rights and obligations of the
Borrower and Lender under this Subordinated Convertible Unsecured Revolving
Promissory Note ("NOTE") and the conditions to which this Note is subject, and
to which the Lender, by the acceptance of this Note, agrees:
1. DEFINITIONS; CONSTRUCTION. In addition to the terms defined
elsewhere in this Note, capitalized terms that are used but not otherwise
defined herein shall have the respective meanings ascribed to such terms in the
Purchase Agreement. The rules of construction set forth in Section 5.5 of the
Purchase Agreement shall apply MUTATIS MUTANDIS to this Note. As used in this
Note, the following terms, unless the context otherwise requires, shall have the
following meanings:
(a) "BUSINESS DAY" means any day except Saturday, Sunday and
any day which shall be a federal legal holiday or a day on which
banking institutions in the State of New York are authorized or
required by law or other governmental action to close.
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(b) "MAY 2007 XXXXXXXXX NOTE" means that certain Unsecured
Promissory Note issued by Borrower on May 15, 2007 in favor of Xxxx X.
Xxxxxxxxx, Trustee U/D/T dated September 13, 1995 in the original
principal amount of $1,000,000.
(c) "SENIOR INDEBTEDNESS" means the principal of and unpaid
accrued interest on: (i) all indebtedness of the Borrower which is
evidenced by the May 2007 Xxxxxxxxx Note, (ii) all indebtedness of the
Borrower to banks, commercial finance lenders, insurance companies or
other financial institutions regularly engaged in the business of
lending money, which is for money borrowed by the Borrower (whether or
not secured), (iii) amounts owed to equipment lessors pursuant to
equipment lease lines approved by the Borrower's Board of Directors,
(iv) all indebtedness of the Borrower evidenced by notes, debentures,
bonds or other securities of the Borrower which are designated by and
approved by the Borrower's Board of Directors, (v) all obligations and
liabilities in connection with the lease of real property, and (vi) all
modifications, renewals, extensions and refundings of indebtedness,
liabilities or obligations of the kind described in any of the
preceding clauses; PROVIDED, HOWEVER, no indebtedness of the Borrower,
all or part of which is convertible into equity, and no indebtedness
which has a material equity component, shall be deemed Senior
Indebtedness.
2. ADVANCES. Subject to all the terms and conditions of this Note, and
in reliance on the representations, warranties and covenants of Borrower set
forth in the Purchase Agreement, Lender may, upon request and at its sole
discretion, make Advances to Borrower from time to time prior to the Maturity
Date on a revolving basis, provided that at no time may the Principal Amount
(after giving effect to such Advance) exceed the Credit. To utilize the Credit,
Borrower shall notify the Lender by telephone or in writing specifying (i) the
amount of the Advance requested, and (ii) the date on which such Advance is
requested to be made. Each request for an Advance shall be for an aggregate
amount of $25,000.00 or integral multiples thereof. Notwithstanding the
foregoing, Xxxxxxxx acknowledges and agrees that Xxxxxx shall have no obligation
to make any Advance to Borrower hereunder.
3. INTEREST. Interest shall accrue on the Principal Amount commencing
on the date of issuance of this Note (the "ISSUE DATE") through (but excluding)
the date that the Principal Amount has been paid in full, at the rate (such
rate, the "INTEREST RATE") equal to the lesser of (i) through the Maturity Date,
ten percent (10%) per annum, and after the Maturity Date, twenty-four percent
(24%) per annum, and (ii) the maximum interest rate permitted under applicable
law. Interest shall be calculated on the daily Principal Amount based on the
actual number of days elapsed in the interest payment period over a year of 365
days, or 366 days, as appropriate. Accrued interest will be payable monthly in
arrears on the last calendar day of each calendar month (or, if such date is not
a Business Day, the next succeeding Business Day) (each such day, an "INTEREST
PAYMENT DATE") commencing on March 31, 2008, and on the Maturity Date.
Notwithstanding the foregoing, at the option of the Borrower, in lieu of a cash
payment of accrued interest by the Borrower on any or all Interest Payment
Dates, all or any portion of the interest due on such Interest Payment Date be
capitalized on and as of such Interest Payment Date by adding the amount of
accrued but unpaid interest to the Principal Amount; PROVIDED, that if the
Borrower shall elect to pay interest in cash, the Borrower shall have delivered
a written notice to the Lender no more than five (5) Business Days but no less
than two (2) Business Days prior to such Interest Payment Date notifying the
Lender of the amount of such cash payment.
4. PAYMENTS. All payments of principal and interest shall be made in
lawful money of the United States of America to Lender, either (at the
Borrower's election) (i) by wire transfer to the account specified below the
Lender's name on the signature page hereto (or to such other account at a
commercial Lender located in the United States of America as Lender may notify
the Borrower in writing from time to time not later than two Business Days prior
to the date of such payment), or (ii) by Lender cashier's or certified check
payable to Lender at Xxxxxx's principal address for notices (or at such other
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place as Lender may notify the Borrower in writing from time to time not later
than two Business Days prior to the date of the Borrower sending such payment).
The Principal Amount of this Note may be prepaid in whole or in part at any time
without notice and without premium or penalty. If not otherwise prepaid, the
outstanding Principal Amount and any unpaid accrued interest hereon shall be due
and payable on the Maturity Date. Each payment (including any prepayment) shall
be applied first to interest then due, and the balance, if any, to the Principal
Amount.
5. CONVERSION. The Lender may convert all or a portion of the Principal
Amount and accrued but unpaid interest thereon (the "CONVERSION AMOUNT") into
the kind, classes and series of securities, or units or combinations thereof
(the "OFFERED SECURITIES"), issued in the first equity financing completed by
the Borrower after the issuance of this Note in which at least US $3,000,000 is
raised from investors (a "QUALIFIED Financing"); PROVIDED that the Conversion
Amount shall conform to the minimum investment amount and permitted investment
denominations established by the Borrower's Board of Directors in good faith for
the Qualified Financing. Upon such an optional conversion, the Conversion Amount
will convert into the Offered Securities being issued to the other investors in
such Qualified Financing at a conversion price per Offered Security equal to the
price per Offered Security paid by such other investors in such Qualified
Financing, and Xxxxxxxx's purchase of such Other Securities shall otherwise be
on the same terms and conditions applicable to such other investors.
6. EVENTS OF DEFAULT. If any of the events specified in this Section 6
shall occur (herein individually referred to as an "EVENT OF DEFAULT"), the
Lender may, so long as such condition exists, declare the entire principal and
unpaid accrued interest hereon immediately due and payable, by notice in writing
to the Borrower:
(a) The institution by the Borrower of proceedings to be
adjudicated as bankrupt or insolvent, or the consent by it to
institution of bankruptcy or insolvency proceedings against it or the
filing by it of a petition or answer or consent seeking reorganization
or release under the federal Bankruptcy Act, or any other applicable
federal or state law, or the consent by it to the filing of any such
petition or the appointment of a receiver, liquidator, assignee,
trustee or other similar official of the Borrower, or of any
substantial part of its property, or the making by it of an assignment
for the benefit of creditors, or the taking of corporate action by the
Borrower in furtherance of any such action; or
(b) If, within ninety (90) days after the commencement of an
action against the Borrower (and service of process in connection
therewith on the Borrower) seeking any Bankruptcy, insolvency,
reorganization, liquidation or dissolution or similar relief under any
present or future statute, law or regulation, such action shall not
have been resolved in favor of the Borrower or all orders or
proceedings thereunder affecting the operations or the business of the
Borrower stayed, or if the stay of any such order or proceeding shall
thereafter be set aside, or if, within ninety (90) days after the
appointment without the consent or acquiescence of the Borrower of any
trustee, receiver or liquidator of the Borrower or of all or any
substantial part of the properties of the Borrower, such appointment
shall not have been vacated.
7. RIGHTS OF LENDER UPON DEFAULT. Upon the occurrence or existence of
any Event of Default and at any time thereafter during the continuance of such
Event of Default, the Lender may declare the Principal Amount and all accrued
but unpaid interest under this Note to be immediately due and payable in cash,
by notice in writing to the Borrower.
8. SUBORDINATION. The indebtedness from time to time evidenced by this
Note is hereby expressly subordinated, to the extent and in the manner
hereinafter set forth, in right of payment to the prior payment in full of all
the Borrower's Senior Indebtedness.
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(a) DEFAULT ON SENIOR INDEBTEDNESS. If there should occur any
receivership insolvency, assignment for the benefit of creditors,
bankruptcy, reorganization or arrangement with creditors (whether or
not pursuant to bankruptcy or other insolvency laws), sale of all or
substantially all of the assets, dissolution, liquidation or any other
marshalling of the assets and liabilities of Borrower, or if this Note
shall be declared due and payable upon the occurrence of an "Event of
Default" with respect to any Senior Indebtedness, then (i) no amount
shall be paid by Xxxxxxxx in respect of the principal of or interest on
this Note at the time outstanding, unless and until the principal of
and interest on the Senior Indebtedness then outstanding shall be
satisfied, and (ii) no claim or proof of claim shall be filed with the
Borrower by or on behalf of the Lender that shall assert any right to
receive any payment in respect of the principal of and interest on this
Note, except subject to the satisfaction of the principal of and
interest on all Senior Indebtedness then outstanding. If there occurs
an "event of default" (or similar event) that has been declared in
writing with respect to any Senior Indebtedness, or in the instrument
under which any Senior Indebtedness is outstanding, permitting the
holder of such Senior Indebtedness to accelerate the maturity thereof,
then no payment shall be made in respect of the Principal Amount or
interest accrued but unpaid on this Note, unless and until (i) such
"event of default" (or similar event) shall have been cured or waived
or shall have ceased to exist, (ii) the principal of and interest on
all Senior Indebtedness shall have been satisfied, or (iii) the
maturity of such Senior Indebtedness shall not have been accelerated
within three (3) months after the occurrence of such "event of default"
(or similar event).
(b) EFFECT OF SUBORDINATION. Subject to the rights, if any, of
the holders of Senior Indebtedness under this Section 8 to receive
cash, securities or other properties otherwise payable or deliverable
to the Lender, nothing contained in this Section 8 shall impair, as
between the Borrower and the Lender, the obligation of Borrower,
subject to the terms and conditions hereof, to pay to the Lender the
Principal Amount and interest accrued hereon as and when the same
become due and payable, or shall prevent the Lender, upon the
occurrence of a default hereunder, from exercising all of its rights,
powers and remedies otherwise provided herein or by applicable law.
(c) SUBROGATION. Subject to the payment in full of all Senior
Indebtedness and until this Note shall have been paid in full, the
Lender shall be subrogated to the rights of the holders of Senior
Indebtedness (to the extent of payments or distributions previously
made to such holders of Senior Indebtedness pursuant to the provisions
of Section 8(a)) to receive payments or distributions of assets of the
Borrower applicable to the Senior Indebtedness. No such payments or
distributions applicable to the Senior Indebtedness shall, as between
the Borrower and its creditors, other than the holders of Senior
Indebtedness and the Lender, be deemed to be a payment by the Borrower
to or on account of this Note; and for the purposes of such
subrogation, no payments or distributions to the holders of Senior
Indebtedness to which the Lender would be entitled except for the
provisions of this Section 8 shall, as between the Borrower and its
creditors, other than the holders of Senior Indebtedness and the
Lender, be deemed to be a payment by the Borrower to or on account of
the Senior Indebtedness.
(d) UNDERTAKING. By its acceptance of this Note, the Lender
agrees to execute and deliver such documents as may be reasonably
requested from time to time by the Borrower or the holder of any Senior
Indebtedness in order to implement the foregoing provisions of this
Section 8.
9. VOTING RIGHTS. The Lender shall have no voting rights as the holder
of this Note, except as required by applicable law, and as expressly provided in
this Note.
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10. USURY. The Borrower acknowledges that the Lender is purchasing this
Note under the understanding that the interest rate payable herein is exempt
from the usury provisions of the General Corporations Law of the State of
California, pursuant to Section 25118 thereof.
11. REPLACEMENT OF NOTE. If this note is mutilated, lost, stolen or
destroyed, the Borrower shall issue or cause to be issued in exchange and
substitution for and upon cancellation hereof, or in lieu of and substitution
for this note, a new Subordinated Convertible Unsecured Revolving Promissory
Note, but only upon receipt of evidence reasonably satisfactory to the Borrower
of such loss, theft or destruction and customary and reasonable indemnity, if
requested. Applicants for a new note under such circumstances shall also comply
with such other reasonable regulations and procedures and pay such other
reasonable third-party costs as the Borrower may prescribe. If a new note is
requested as a result of a mutilation of this note, then Xxxxxx shall deliver
such mutilated note to the Borrower as a condition precedent to the Borrower's
obligation to issue the new note.
12. ADDITIONAL RESTRICTIONS ON TRANSFER AND INTEREST EARNED. Xxxxxx has
purchased this Note for its own account and not with a view to or for sale in
connection with any distribution of securities. This Note must be surrendered
for transfer at the office or agency of the Borrower, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Borrower, duly executed by the Lender or its attorney-in-fact, duly authorized
in writing. Upon any such registration or transfer, the Borrower shall issue a
new Subordinated Convertible Unsecured Revolving Promissory Note, in
substantially the form of this Note (any such new Subordinated Convertible
Unsecured Revolving Promissory Note, a "NEW NOTE"), evidencing the portion of
this Note so transferred, to the transferee, and a New Note evidencing the
remaining portion of this Note not so transferred, if any, to the transferring
Lender. The acceptance of the New Note by the transferee thereof shall be deemed
the acceptance by such transferee of all of the rights and obligations of a
holder of a Note, including pursuant to the Purchase Agreement. The parties
intend that the interest earned under this Note shall be "portfolio interest" of
an "obligation in registered form" for U.S. income tax purposes in accordance
with IRC Sections 871(h) and 881(c) and Treasury Regulation Section 1.871-14.
13. ASSIGNMENT. Subject to the restrictions on transfer described
herein, the rights and obligations of the Borrower and the Lender shall be
binding upon, and inure to the benefit of, the successors, assigns, heirs,
administrators and transferees of the parties.
14. EXPENSES; WAIVERS. In the event that any dispute among the Borrower
and Lender relating to this Note should result in litigation, the prevailing
party in such dispute shall be entitled to recover from the losing party all
fees, costs and expenses of enforcing any right of such prevailing party under
or with respect to this Note, including such reasonable fees and expenses of
attorney's and accountants, which shall also include all fees, costs and
expenses of appeals. Except as otherwise set forth herein, the Borrower hereby
waives notice of default, presentation or demand for payment, protest or notice
of nonpayment or dishonor and all other notices or demands relative to this
Note.
15. WAIVER AND AMENDMENT. Any other term of this Note may be amended or
otherwise modified, and the observance of any other term of this Note may be
waived (either generally or in a particular instance and either retroactively or
prospectively), with the written consent of the Borrower and the Lender. Any
amendment or waiver effected in accordance with this Section 15 shall be binding
upon the Borrower and the Lender, and all of their respective successors and
permitted assigns, whether or not the successor or assign entered into or
approved such amendment, modification, or waiver.
16. NOTICES. All notices, requests, consents and other communications
hereunder shall be in writing, shall be mailed by first-class registered or
certified mail, confirmed facsimile, confirmed e-mail, or nationally recognized
overnight express courier postage prepaid, and shall be deemed delivered: five
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business days after such mailing; upon confirmation of such facsimile or email
delivery before 5:00 p.m. Pacific time on a business day, or if after such time,
the next business day; or one business day after such deposit with a recognized
overnight express courier. Notices shall be delivered as addressed as follows:
(a) if to the Borrower, at the address set forth for notice to the Borrower in
the Purchase Agreement (or at such other address as may be given to Lender by
the Borrower from time to time), and (b) if to Lender, at the address set forth
below Lender's signature to the Purchase Agreement (or at such other address as
may be given to the Borrower by Lender from time to time).
17. GOVERNING LAW. This Note and all actions arising out of or in
connection with this Note shall be governed by and construed in accordance with
the laws of the State of California, excluding that body of law relating to
conflict of laws.
18. HEADING; REFERENCES. All headings used herein are used for
convenience only and shall not be used to construe or interpret this Note.
Except where otherwise indicated, all references herein to Sections refer to
Sections hereof.
[ SIGNATURE PAGE FOLLOWS ]
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IN WITNESS OF WHICH, the Borrower has caused this Note to be issued as
of the first date written above.
MICROISLET, INC., a Nevada corporation
By: /S/ XXXXXXX X. XXXXXXX
---------------------------------
Name: Xxxxxxx X. Xxxxxxx
Title: Chief Executive Officer
ACKNOWLEDGED AND AGREED:
SMR 1996 TRUST III, a New York trust
By: /S/ XXXXXX XXXX
---------------------------------
Name: Xxxxxx Xxxx
Trustee
By: /S/ XXXXXX XXXXXXX
---------------------------------
Name: Xxxxxx Xxxxxxx
Trustee
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