Contract
Exhibit
10.4
THIS
NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR RECEIPT BY THE MAKER OF
AN
OPINION OF COUNSEL IN THE FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY
TO
THE MAKER THAT THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION
HEREOF MAY BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION
FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES
LAWS.
QUEST
OIL CORPORATION
Senior
Secured Convertible Promissory Note
due
October __, 2007
No.
CN-05-__ $___________
Dated:
October __, 2005
For
value
received, QUEST
OIL
CORPORATION,
a
Nevada corporation (the "Maker"),
hereby promises to pay to the order of _______________________ (together with
its successors, representatives, and permitted assigns, the "Holder"),
in
accordance with the terms hereinafter provided, the principal amount of
________________________ ($______________), together with interest thereon.
Concurrently with the issuance of this Note, the Maker is issuing separate
senior secured convertible promissory notes (the “Other
Notes”)
to
separate purchasers (the “Other
Holders”)
pursuant to the Purchase Agreement (as defined in Section 1.1 hereof).
All
payments under or pursuant to this Note shall be made in United States Dollars
in immediately available funds to the Holder at
the
address of the Holder first set forth above or at such other place as the Holder
may designate from time to time in writing to the Maker or by wire transfer
of
funds to the Holder's account, instructions for which are attached hereto as
Exhibit
A. The
outstanding principal balance of this Note shall be due and payable on October
__, 2007 (the "Maturity
Date")
or at
such earlier time as provided herein.
ARTICLE
I
Section
1.1 Purchase
Agreement.
This
Note has been executed and delivered pursuant to the Note and Warrant Purchase
Agreement dated as of September 30, 2005 (the "Purchase Agreement”) by and among
the Maker
and the
purchasers listed therein. Capitalized terms used and not otherwise defined
herein shall have the meanings set forth for such terms in the Purchase
Agreement.
Section
1.2 -Interest.
Beginning on the issuance date of this Note (the “Issuance Date”), the
outstanding principal balance of this Note shall bear interest, in arrears,
at a
rate per annum equal to ten percent (10%), payable annually on October 1 of
each
year commencing October 1, 2006 at the option of the Maker in (A) cash, (B)
additional senior secured convertible promissory notes in a form substantially
identical to this Note, or (C) in registered shares of the Maker’s common stock,
par value $0.001 per share (the “Common Stock”), in accordance with terms of
Section 1.3 below. Interest shall be computed on the basis of a 360-day year
of
twelve (12) 30-day months and shall accrue commencing on the Issuance Date.
Furthermore,
upon the occurrence of an Event of Default (as defined in Section 2.1 hereof),
then to the extent permitted by law, the Maker will pay interest to the Holder,
payable on demand, on the outstanding principal balance of the Note from the
date of the Event of Default until such Event of Default is cured at the rate
of
the lesser of fifteen percent (15%) and the maximum applicable legal rate per
annum.
Section
1.3 Payment
of Principal and Interest.
(a) Commencing
on the fifth (5th)
month
following the Issuance Date and continuing thereafter on the first
(1st)
business day of each month (a “Principal Payment Date”), the Maker shall pay an
amount to the Holder equal to 1/20th
of the
original principal amount of this Note plus any accrued but unpaid interest
(the
“Principal
Installment Amount”);
provided,
however,
if on
any Principal Payment Date, the outstanding principal amount of this Note plus
any accrued but unpaid interest is less than the Principal Installment Amount,
then the Maker shall pay to the Holder such lesser amount. The Maker may pay
such Principal Installment Amount in cash or registered shares of Common Stock.
If the Maker elects to pay the Principal Installment Amount in cash such amount
shall be wired in immediately available funds on the Principal Payment Date;
provided,
however,
that if
the Holder has delivered a Conversion Notice to the Maker or delivers a
Conversion Notice prior to the Principal Payment Date, the Holder shall indicate
in such Conversion Notice whether the principal amount of this Note to be so
converted shall be applied against the final Principal Installment Amount or
some other Principal Installment Amount.
The
Maker shall provide irrevocable written notice to the Holder of the form of
payment of the Principal Installment Amount on the tenth (10th)
business day prior to the first day of each month for which a Principal
Installment Amount is required to be made by the Maker.
(b) If
the
Maker elects to pay the Principal Installment Amount in registered shares of
Common Stock, the number of registered shares of Common Stock to be issued
to
the Holder shall be an amount equal to the Principal Installment Amount divided
by eighty-seven and one-half percent (87.5%) of the average of the Closing
Bid
Price (as defined in Section 1.3(c) hereof) for the ten (10) Trading Days
immediately preceding the Principal Payment Date; provided,
however,
that if
the Holder has delivered a Conversion Notice to the Maker or delivers a
Conversion Notice prior to the Principal Payment Date, the Holder shall indicate
in such Conversion Notice whether the principal amount of this Note to be so
converted shall be applied against the final Principal Installment Amount or
some other Principal Installment Amount. Notwithstanding the foregoing to the
contrary, the Maker may elect to pay the Principal Installment Amount in
registered shares of Common Stock on any Principal Payment Date only if (A)
the
registration statement providing for the resale of the shares of Common Stock
issuable upon conversion of this Note (the “Registration
Statement”)
is
effective and has been effective, without lapse or suspension of any kind,
for a
period of twenty (20) consecutive calendar days, (B) trading
in the Common Stock shall not have been suspended by the Securities and Exchange
Commission or the OTC Bulletin Board (or other exchange or market on which
the
Common Stock is trading), (C) the Maker is in material compliance with the
terms
and conditions of this Note and the other Transaction Documents, and (D) the
issuance of shares of Common Stock on the Principal Payment Date does not
violate the provisions of Section 3.4 hereof.
(c) The
term
"Closing
Bid Price"
shall
mean, on any particular date (i) the last trading price per share of the Common
Stock on such date on the OTC
Bulletin Board or
another registered national stock exchange on which the Common Stock is then
listed, or if there is no such price on such date, then the last trading price
on such exchange or quotation system on the date nearest preceding such date,
or
(ii) if the Common Stock is not listed then on the OTC Bulletin Board or any
registered national stock exchange, the last trading price for a share of Common
Stock in the over-the-counter market, as reported by the OTC Bulletin Board
or
in the National Quotation Bureau Incorporated or similar organization or agency
succeeding to its functions of reporting prices) at the close of business on
such date, or (iii) if the Common Stock is not then reported by the OTC Bulletin
Board or the National Quotation Bureau Incorporated (or similar organization
or
agency succeeding to its functions of reporting prices), then the average of
the
"Pink Sheet" quotes for the relevant conversion period, as determined in good
faith by the Holder, or (iv) if the Common Stock is not then publicly traded
the
fair market value of a share of Common Stock as determined by the Holder and
reasonably acceptable to the Maker.
Section
1.4 Security
Agreement.
The
obligations of the Maker hereunder are secured by a continuing security interest
in certain assets of the Maker pursuant to the terms of a security agreement
dated as of September 30, 2005 by and among the Maker and the Maker’s wholly
owned subsidiaries, on the one hand, and the Holder and the Other Holders,
on
the other hand.
Section
1.5 Payment
on Non-Business Days. Whenever any payment to be made shall be due on a
Saturday, Sunday or a public holiday under the laws of the State of New York,
such payment may be due on the next succeeding business day and such next
succeeding day shall be included in the calculation of the amount of accrued
interest payable on such date.
Section
1.6 -Transfer.
This Note may be transferred or sold, subject to the provisions of Section
4.8
of this Note, or pledged, hypothecated or otherwise granted as security by
the
Holder.
Section
1.7 -Replacement.
Upon receipt of a duly executed, notarized and unsecured written statement
from
the Holder with respect to the loss, theft or destruction of this Note (or
any
replacement hereof) and a standard indemnity, or, in the case of a mutilation
of
this Note, upon surrender and cancellation of such Note, the Maker shall issue
a
new Note, of like tenor and amount, in lieu of such lost, stolen, destroyed
or
mutilated Note.
1
ARTICLE
II
EVENTS
OF
DEFAULT; REMEDIES
Section
2.1 Events
of Default.
The
occurrence of any of the following events shall be an "Event of Default" under
this Note:
(a) the
Maker
shall fail to make the Principal Installment Amount on a Principal Payment
Date
and such default is not fully cured within one (1) business day after the
occurrence thereof; or
(b) the
failure of the Registration Statement to be declared effective by the Securities
and Exchange Commission on or prior to the date which is one hundred eighty
(180) days after the Issuance Date; or
(c) the
suspension from listing, without subsequent listing on any one of, or the
failure of the Common Stock to be listed on at least one of the OTC Bulletin
Board, the American Stock Exchange, the Nasdaq National Market, the Nasdaq
SmallCap Market or The New York Stock Exchange, Inc. for a period of five (5)
consecutive Trading Days; or
(d) the
Maker's notice to the Holder, including by way of public announcement, at any
time, of its inability to comply (including for any of the reasons described
in
Section 3.8(a) hereof) or its intention not to comply with proper requests
for
conversion of this Note into shares of Common Stock; or
(e) the
Maker
shall fail to (i) timely deliver the shares of Common Stock upon conversion
of
the Note or any interest accrued and unpaid, (ii) file the Registration
Statement in accordance with the terms of the Registration Rights Agreement
or
(iii) make the payment of any fees and/or liquidated damages under this Note,
the Purchase Agreement or the Registration Rights Agreement, which failure
in
the case of items (i) and (iii) of this Section 2.1(e) is not remedied within
three (3) business days after the incurrence thereof; or
(f) while
the
Registration Statement is required to be maintained effective pursuant to the
terms of the Registration Rights Agreement, the effectiveness of the
Registration Statement lapses for any reason (including, without limitation,
the
issuance of a stop order) or is unavailable to the Holder for sale of the
Registrable Securities (as defined in the Registration Rights Agreement) in
accordance with the terms of the Registration Rights Agreement, and such lapse
or unavailability continues for a period of ten (10) consecutive Trading Days,
provided
that the
Maker has not exercised its rights pursuant to Section 3(n) of the Registration
Rights Agreement; or
(g) default
shall be made in the performance or observance of (i) any material covenant,
condition or agreement contained in this Note (other than as set forth in clause
(f) of this Section 2.1) and such default is not fully cured within three (3)
business days after the Maker receives notice from the Holder of the occurrence
thereof or (ii) any material covenant, condition or agreement contained in
the
Purchase Agreement, the Other Notes, the Registration Rights Agreement or any
other Transaction Document which is not covered by any other provisions of
this
Section 2.1 and such default is not fully cured within three (3) business days
after the Maker receives notice from the Holder of the occurrence thereof;
or
(h) any
material representation or warranty made by the Maker herein or in the Purchase
Agreement, the Registration Rights Agreement, the Other Notes or any other
Transaction Document shall prove to have been false or incorrect or breached
in
a material respect on the date as of which made; or
(i) the
Maker
shall (A) default in any payment of any amount or amounts of principal of or
interest on any Indebtedness (other than the Indebtedness hereunder) the
aggregate principal amount of which Indebtedness is in excess of
$100,000 or
(B)
default in the observance or performance of any other agreement or condition
relating to any Indebtedness or contained in any instrument or agreement
evidencing, securing or relating thereto, or any other event shall occur or
condition exist, the effect of which default or other event or condition is
to
cause, or to permit the holder or holders or beneficiary or beneficiaries of
such Indebtedness to cause with the giving of notice if required, such
Indebtedness to become due prior to its stated maturity; or
(j) the
Maker
shall (i) apply for or consent to the appointment of, or the taking of
possession by, a receiver, custodian, trustee or liquidator of itself or of
all
or a substantial part of its property or assets, (ii) make a general assignment
for the benefit of its creditors, (iii) commence a voluntary case under the
United States Bankruptcy Code (as now or hereafter in effect) or under the
comparable laws of any jurisdiction (foreign or domestic), (iv) file a petition
seeking to take advantage of any bankruptcy, insolvency, moratorium,
reorganization or other similar law affecting the enforcement of creditors'
rights generally, (v) acquiesce in writing to any petition filed against it
in
an involuntary case under United States Bankruptcy Code (as now or hereafter
in
effect) or under the comparable laws of any jurisdiction (foreign or domestic),
(vi) issue a notice of bankruptcy or winding down of its operations or issue
a
press release regarding same, or (vii) take any action under the laws of any
jurisdiction (foreign or domestic) analogous to any of the foregoing; or
(k) a
proceeding or case shall be commenced in respect of the Maker, without its
application or consent, in any court of competent jurisdiction, seeking (i)
the
liquidation, reorganization, moratorium, dissolution, winding up, or composition
or readjustment of its debts, (ii) the appointment of a trustee, receiver,
custodian, liquidator or the like of it or of all or any substantial part of
its
assets in connection with the liquidation or dissolution of the Maker or (iii)
similar relief in respect of it under any law providing for the relief of
debtors, and such proceeding or case described in clause (i), (ii) or (iii)
shall continue undismissed, or unstayed and in effect, for a period of thirty
(30) days or any order for relief shall be entered in an involuntary case under
United States Bankruptcy Code (as now or hereafter in effect) or under the
comparable laws of any jurisdiction (foreign or domestic) against the Maker
or
action under the laws of any jurisdiction (foreign or domestic) analogous to
any
of the foregoing shall be taken with respect to the Maker and shall continue
undismissed, or unstayed and in effect for a period of thirty (30) days;
or
(l) the
failure of the Maker to instruct its transfer agent to remove any legends from
shares of Common Stock eligible to be sold under Rule 144 of the Securities
Act
and issue such unlegended certificates to the Holder within three (3) business
days of the Holder’s request so long as the Holder has provided reasonable
assurances to the Maker that such shares of Common Stock can be sold pursuant
to
Rule 144; or
(m) the
failure of the Maker to pay any amounts due to the Holder herein or in the
Purchase Agreement or the Registration Rights Agreement within three (3)
business days of the date such payments are due; or
(n) the
occurrence of an Event of Default under the Other Notes or the Zero Coupon
Notes.
Section
2.2 Remedies
Upon An Event of Default.
If an
Event of Default shall have occurred and shall be continuing, the Holder of
this
Note may at any time at its option, (a) declare the entire unpaid principal
balance of this Note, together with all interest accrued hereon, due and
payable, and thereupon, the same shall be accelerated and so due and payable,
without presentment, demand, protest, or notice, all of which are hereby
expressly unconditionally and irrevocably waived by the Maker; provided,
however, that upon the occurrence of an Event of Default described in (i)
Sections 2.1 (j) or (k), the outstanding principal balance and accrued interest
hereunder shall be automatically due and payable and (ii) Sections 2.1 (b)-(i),
demand the prepayment of this Note pursuant to Section 3.7 hereof, (b) demand
that the principal amount of this Note then outstanding and all accrued and
unpaid interest thereon shall be converted into shares of Common Stock at a
Conversion Price per share calculated pursuant to Section 3.1 hereof assuming
that the date that the Event of Default occurs is the Conversion Date (as
defined in Section 3.1 hereof), or (c) exercise or otherwise enforce any one
or
more of the Holder's rights, powers, privileges, remedies and interests under
this Note, the Purchase Agreement, the Registration Rights Agreement or
applicable law. No course of delay on the part of the Holder shall operate
as a
waiver thereof or otherwise prejudice the right of the Holder. No remedy
conferred hereby shall be exclusive of any other remedy referred to herein
or
now or hereafter available at law, in equity, by statute or
otherwise.
2
ARTICLE
III
CONVERSION;
ANTIDILUTION; PREPAYMENT
Section
3.1 Conversion
Option.
(a) At
any
time on or after the Issuance Date, this Note shall be convertible (in whole
or
in part), at the option of the Holder (the "Conversion Option"), into such
number of fully paid and non-assessable shares of Common Stock (the "Conversion
Rate") as is determined by dividing (x) that portion of the outstanding
principal balance plus any accrued but unpaid interest under this Note as of
such date that the Holder elects to convert by (y) the Conversion Price (as
defined in Section 3.2(a) hereof) then in effect on the date on which the Holder
faxes a notice of conversion (the "Conversion Notice"), duly executed, to the
Maker (facsimile number (000) 000-0000, Attn.: Chief Executive Officer) (the
“Voluntary Conversion Date”), provided, however, that the Conversion Price shall
be subject to adjustment as described in Section 3.6 below. The Holder shall
deliver this Note to the Maker at the address designated in the Purchase
Agreement at such time that this Note is fully converted. With respect to
partial conversions of this Note, the Maker shall keep written records of the
amount of this Note converted as of each Conversion Date.
(b) On
the
Mandatory Conversion Date (as defined below), the Maker may cause the principal
amount of this Note plus all accrued and unpaid interest to convert into a
number of fully paid and nonassessable shares of Common Stock equal to the
quotient of (i) the principal amount of this Note plus all accrued and unpaid
interest outstanding on the Mandatory Conversion Date divided by (ii) the
Conversion Price in effect on the Mandatory Conversion Date by providing five
business (5) days prior written notice of such Mandatory Conversion Date;
provided,
that,
the Maker shall not convert, during any fifteen day period, this Note into
such
number of registered shares of Common Stock in excess of an amount equal to
the
greater of (1) twenty-five percent (25%) of the aggregate trading volume for
the
prior fifteen (15) days or (2) twenty percent (20%) of the original principal
amount of this Note. As used herein, a "Mandatory
Conversion Date"
shall
be a date following the effective date of the Registration Statement in which
the Closing Bid Price exceeds $0.80 for a period of ten (10) consecutive Trading
Days and the average daily trading volume for such ten (10) consecutive Trading
Day period exceeds 250,000 shares of Common Stock; provided,
that
(A) the
Registration Statement is effective and has been effective, without lapse or
suspension of any kind, for a period of twenty (20) consecutive calendar days
immediately preceding the Mandatory Conversion Date, (B) trading
in the Common Stock shall not have been suspended by the Securities and Exchange
Commission or the OTC Bulletin Board (or other exchange or market on which
the
Common Stock is trading), (C) the Maker is in material compliance with the
terms
and conditions of this Note and the other Transaction Documents, (D) the
issuance of shares of Common Stock on the Mandatory Conversion Date pursuant
to
such mandatory conversion does not violate the provisions of Section 3.4 hereof,
and (E) the Maker is not in possession of any material non-public
information.
Notwithstanding the foregoing to the contrary, the Mandatory Conversion Date
shall be extended for as long as a Triggering Event (as defined in Section
3.7(f) hereof) shall have occurred and be continuing. The Mandatory Conversion
Date and the Voluntary Conversion Date collectively are referred to in this
Note
as the "Conversion
Date."
(c) So
long
as the Registration Statement is effective, in the event that the Closing Bid
Price of the Common Stock is greater than $0.40 and less than $1.25, the maximum
number of shares of Common Stock that may be issued upon conversion of this
Note
shall not exceed the greater of (1) twenty-five percent (25%) of the aggregate
trading volume for the prior fifteen (15) days or (2) twenty percent (20%)
of
the original principal amount of this Note.
Section 3.2 Conversion
Price.
(a) The
term
"Conversion
Price"
shall
mean $0.40, subject to adjustment under Section 3.6 hereof.
(b) Notwithstanding
any of the foregoing to the contrary, if during any period (a "Black-out
Period"),
a
Holder is unable to trade any Common Stock issued or issuable upon conversion
of
this Note immediately due to the postponement of filing or delay or suspension
of effectiveness of the Registration Statement or because the Maker has
otherwise informed such Holder that an existing prospectus cannot be used at
that time in the sale or transfer of such Common Stock (provided that such
postponement, delay, suspension or fact that the prospectus cannot be used
is
not due to factors solely within the control of the Holder of this Note or
due
to the Maker exercising its rights under Section 3(n) of the Registration Rights
Agreement), such Holder shall have the option but not the obligation on any
Conversion Date within ten (10) Trading Days following the expiration of the
Black-out Period of using the Conversion Price applicable on such Conversion
Date or any Conversion Price selected by such Holder that would have been
applicable had such Conversion Date been at any earlier time during the
Black-out Period or within the ten (10) Trading Days thereafter. In no event
shall the Black-out Period have any effect on the Maturity Date of this Note.
Section 3.3 Mechanics
of Conversion.
(a) Not
later
than three (3) Trading Days after any Conversion Date, the Maker or its
designated transfer agent, as applicable, shall issue and deliver to the
Depository Trust Company (“DTC”)
account on the Holder’s behalf via the Deposit Withdrawal Agent Commission
System (“DWAC”)
as
specified in the Conversion Notice, registered in the name of the Holder or
its
designee, for the number of shares of Common Stock to which the Holder shall
be
entitled. In the alternative, not later than three (3) Trading Days after any
Conversion Date, the Maker shall deliver to the applicable Holder by express
courier a certificate or certificates which shall be free of restrictive legends
and trading restrictions (other than those required by Section 5.1 of the
Purchase Agreement) representing the number of shares of Common Stock being
acquired upon the conversion of this Note (the “Delivery
Date”).
Notwithstanding the foregoing to the contrary, the Maker or its transfer agent
shall only be obligated to issue and deliver the shares to the DTC on the
Holder’s behalf via DWAC (or certificates free of restrictive legends) if such
conversion is in connection with a sale and the Holder has complied with the
applicable prospectus delivery requirements (as evidenced by documentation
furnished to and reasonably satisfactory to the Maker). If in the case of any
Conversion Notice such certificate or certificates are not delivered to or
as
directed by the applicable Holder by the Delivery Date, the Holder shall be
entitled by written notice to the Maker at any time on or before its receipt
of
such certificate or certificates thereafter, to rescind such conversion, in
which event the Maker shall immediately return this Note tendered for
conversion, whereupon the Maker and the Holder shall each be restored to their
respective positions immediately prior to the delivery of such notice of
revocation, except that any amounts described in Sections 3.3(b) and (c) shall
be payable through the date notice of rescission is given to the Maker.
(b) The
Maker
understands that a delay in the delivery of the shares of Common Stock upon
conversion of this Note beyond the Delivery Date could result in economic loss
to the Holder. If the Maker fails to deliver to the Holder such shares via
DWAC
or a certificate or certificates pursuant to this Section hereunder by the
Delivery Date, the Maker shall pay to such Holder, in cash, an amount per
Trading Day for each Trading Day until such shares are delivered via DWAC or
certificates are delivered, together with interest on such amount at a rate
of
10% per annum, accruing until such amount and any accrued interest thereon
is
paid in full, equal to the greater of (A) (i) 1% of the aggregate principal
amount of the Notes requested to be converted for the first five (5) Trading
Days after the Delivery Date and (ii) 2% of the aggregate principal amount
of
the Notes requested to be converted for each Trading Day thereafter and (B)
$2,000 per day (which amount shall be paid as liquidated damages and not as
a
penalty). Nothing herein shall limit a Holder's right to pursue actual damages
for the Maker's failure to deliver certificates representing shares of Common
Stock upon conversion within the period specified herein and such Holder shall
have the right to pursue all remedies available to it at law or in equity
(including, without limitation, a decree of specific performance and/or
injunctive relief). Notwithstanding anything to the contrary contained herein,
the Holder shall be entitled to withdraw a Conversion Notice, and upon such
withdrawal the Maker shall only be obligated to pay the liquidated damages
accrued in accordance with this Section 3.3(b) through the date the Conversion
Notice is withdrawn.
(c) In
addition to any other rights available to the Holder, if the Maker fails to
cause its transfer agent to transmit to the Holder a certificate or certificates
representing the shares of Common Stock issuable upon conversion of this Note
on
or before the Delivery Date, and if after such date the Holder is required
by
its broker to purchase (in an open market transaction or otherwise) shares
of
Common Stock to deliver in satisfaction of a sale by the Holder of the shares
of
Common Stock issuable upon conversion of this Note which the Holder anticipated
receiving upon such exercise (a “Buy-In”),
then
the Maker shall (1) pay in cash to the Holder the amount by which (x) the
Holder’s total purchase price (including brokerage commissions, if any) for the
shares of Common Stock so purchased exceeds (y) the amount obtained by
multiplying (A) the number of shares of Common Stock issuable upon conversion
of
this Note that the Maker was required to deliver to the Holder in connection
with the conversion at issue times (B) the price at which the sell order giving
rise to such purchase obligation was executed, and (2) at the option of the
Holder, either reinstate the portion of the Note and equivalent number of shares
of Common Stock for which such conversion was not honored or deliver to the
Holder the number of shares of Common Stock that would have been issued had
the
Maker timely complied with its conversion and delivery obligations hereunder.
For example, if the Holder purchases Common Stock having a total purchase price
of $11,000 to cover a Buy-In with respect to an attempted conversion of shares
of Common Stock with an aggregate sale price giving rise to such purchase
obligation of $10,000, under clause (1) of the immediately preceding sentence
the Maker shall be required to pay the Holder $1,000. The Holder shall provide
the Maker written notice indicating the amounts payable to the Holder in respect
of the Buy-In, together with applicable confirmations and other evidence
reasonably requested by the Maker. Nothing herein shall limit a Holder’s right
to pursue any other remedies available to it hereunder, at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief with respect to the Maker’s failure to timely deliver
certificates representing shares of Common Stock upon conversion of this Note
as
required pursuant to the terms hereof.
3
Section
3.4 Ownership
Cap and Certain Conversion Restrictions.
(a) Notwithstanding
anything to the contrary set forth in Section 3 of this Note, at no time may
the
Holder convert all or a portion of this Note if the number of shares of Common
Stock to be issued pursuant to such conversion would exceed, when aggregated
with all other shares of Common Stock owned by the Holder at such time, the
number of shares of Common Stock which would result in the Holder beneficially
owning (as determined in accordance with Section 13(d) of the Exchange Act
and
the rules thereunder) more than 4.9% of all of the Common Stock outstanding
at
such time; provided,
however,
that
upon the Holder providing the Maker with sixty-one (61) days notice (pursuant
to
Section 4.1 hereof) (the "Waiver
Notice")
that
the Holder would like to waive this Section 3.4(a) with regard to any or all
shares of Common Stock issuable upon conversion of this Note, this Section
3.4(a) will be of no force or effect with regard to all or a portion of the
Note
referenced in the Waiver Notice.
(b) Notwithstanding
anything to the contrary set forth in Section 3 of this Note, at no time may
the
Holder convert all or a portion of this Note if the number of shares of Common
Stock to be issued pursuant to such conversion, when aggregated with all other
shares of Common Stock owned by the Holder at such time, would result in the
Holder beneficially owning (as determined in accordance with Section 13(d)
of
the Exchange Act and the rules thereunder) in excess of 9.9% of the then issued
and outstanding shares of Common Stock outstanding at such time; provided,
however,
that
upon the Holder providing the Maker with a Waiver Notice that the Holder would
like to waive Section 3.4(b) of this Note with regard to any or all shares
of
Common Stock issuable upon conversion of this Note, this Section 3.4(b) shall
be
of no force or effect with regard to all or a portion of the Note referenced
in
the Waiver Notice.
Section
3.5 Intentionally
Omitted.
Section
3.6 Adjustment
of Conversion Price.
(a) The
Conversion Price shall be subject to adjustment from time to time as
follows:
(i) Adjustments
for Stock Splits and Combinations.
If the
Maker shall at any time or from time to time after the Issuance Date, effect
a
stock split of the outstanding Common Stock, the applicable Conversion Price
in
effect immediately prior to the stock split shall be proportionately decreased.
If the Maker shall at any time or from time to time after the Issuance Date,
combine the outstanding shares of Common Stock, the applicable Conversion Price
in effect immediately prior to the combination shall be proportionately
increased. Any adjustments under this Section 3.6(a)(i) shall be effective
at
the close of business on the date the stock split or combination
occurs.
(ii) Adjustments
for Certain Dividends and Distributions.
If the
Maker shall at any time or from time to time after the Issuance Date, make
or
issue or set a record date for the determination of holders of Common Stock
entitled to receive a dividend or other distribution payable in shares of Common
Stock, then, and in each event, the applicable Conversion Price in effect
immediately prior to such event shall be decreased as of the time of such
issuance or, in the event such record date shall have been fixed, as of the
close of business on such record date, by multiplying, the applicable Conversion
Price then in effect by a fraction:
(1) the
numerator of which shall be the total number of shares of Common Stock issued
and outstanding immediately prior to the time of such issuance or the close
of
business on such record date; and
(2) the
denominator of which shall be the total number of shares of Common Stock issued
and outstanding immediately prior to the time of such issuance or the close
of
business on such record date plus the number of shares of Common Stock issuable
in payment of such dividend or distribution.
(iii) Adjustment
for Other Dividends and Distributions.
If the
Maker shall at any time or from time to time after the Issuance Date, make
or
issue or set a record date for the determination of holders of Common Stock
entitled to receive a dividend or other distribution payable in other than
shares of Common Stock, then, and in each event, an appropriate revision to
the
applicable Conversion Price shall be made and provision shall be made (by
adjustments of the Conversion Price or otherwise) so that the holders of this
Note shall receive upon conversions thereof, in addition to the number of shares
of Common Stock receivable thereon, the number of securities of the Maker which
they would have received had this Note been converted into Common Stock on
the
date of such event and had thereafter, during the period from the date of such
event to and including the Conversion Date, retained such securities (together
with any distributions payable thereon during such period), giving application
to all adjustments called for during such period under this Section 3.6(a)(iii)
with respect to the rights of the holders of this Note and the Other Notes;
provided,
however,
that if
such record date shall have been fixed and such dividend is not fully paid
or if
such distribution is not fully made on the date fixed therefor, the Conversion
Price shall be adjusted pursuant to this paragraph as of the time of actual
payment of such dividends or distributions.
(iv) Adjustments
for Reclassification, Exchange or Substitution.
If the
Common Stock issuable upon conversion of this Note at any time or from time
to
time after the Issuance Date shall be changed to the same or different number
of
shares of any class or classes of stock, whether by reclassification, exchange,
substitution or otherwise (other than by way of a stock split or combination
of
shares or stock dividends provided for in Sections 3.6(a)(i), (ii) and (iii),
or
a reorganization, merger, consolidation, or sale of assets provided for in
Section 3.6(a)(v)), then, and in each event, an appropriate revision to the
Conversion Price shall be made and provisions shall be made (by adjustments
of
the Conversion Price or otherwise) so that the Holder shall have the right
thereafter to convert this Note into the kind and amount of shares of stock
and
other securities receivable upon reclassification, exchange, substitution or
other change, by holders of the number of shares of Common Stock into which
such
Note might have been converted immediately prior to such reclassification,
exchange, substitution or other change, all subject to further adjustment as
provided herein.
(v) Adjustments
for Reorganization, Merger, Consolidation or Sales of Assets.
If at
any time or from time to time after the Issuance Date there shall be a capital
reorganization of the Maker (other than by way of a stock split or combination
of shares or stock dividends or distributions provided for in Section 3.6(a)(i),
(ii) and (iii), or a reclassification, exchange or substitution of shares
provided for in Section 3.6(a)(iv)), or a merger or consolidation of the Maker
with or into another corporation where the holders of outstanding voting
securities prior to such merger or consolidation do not own over fifty percent
(50%) of the outstanding voting securities of the merged or consolidated entity,
immediately after such merger or consolidation, or the sale of all or
substantially all of the Maker's properties or assets to any other person (an
"Organic
Change"),
then
as a part of such Organic Change, (A) if the surviving entity in any such
Organic Change is a public company that is
registered pursuant to the Securities Exchange Act of 1934, as amended, and
its
common stock is listed or quoted on a national exchange or the OTC Bulletin
Board, an
appropriate revision to the Conversion Price shall be made and provision shall
be made (by adjustments of the Conversion Price or otherwise) so that the Holder
shall have the right thereafter to convert such Note into the kind and amount
of
shares of stock and other securities or property of the Maker or any successor
corporation resulting from Organic Change, and (B) if the surviving entity
in
any such Organic Change is not a public company that is
registered pursuant to the Securities Exchange Act of 1934, as amended, or
its
common stock is not listed or quoted on a national exchange or the OTC Bulletin
Board,
the
Holder shall have the right to demand prepayment pursuant to Section 3.7(b)
hereof. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 3.6(a)(v) with respect to the
rights of the Holder after the Organic Change to the end that the provisions
of
this Section 3.6(a)(v) (including any adjustment in the applicable Conversion
Price then in effect and the number of shares of stock or other securities
deliverable upon conversion of this Note and the Other Notes) shall be applied
after that event in as nearly an equivalent manner as may be
practicable.
(vi) Adjustments
for Issuance of Additional Shares of Common Stock.
In the
event the Maker, shall, at any time, from time to time, issue or sell any
additional shares of common stock (otherwise than as provided in the foregoing
subsections (i) through (v) of this Section 3.6(a) or pursuant to Common Stock
Equivalents (hereafter defined) granted or issued prior to the Issuance Date)
(“Additional
Shares of Common Stock”),
at a
price per share less than the Conversion Price then in effect or without
consideration, then the Conversion Price upon each such issuance shall be
reduced to a price equal to the consideration per share paid for such Additional
Shares of Common Stock.
(vii) Issuance
of Common Stock Equivalents.
The
provisions of this Section 3.6(a)(vii) shall apply if (a) the Maker, at any
time
after the Issuance Date, shall issue any securities convertible into or
exchangeable for, directly or indirectly, Common Stock ("Convertible
Securities"),
other
than the Notes, or (b) any rights or warrants or options to purchase any such
Common Stock or Convertible Securities (collectively, the "Common
Stock Equivalents")
shall
be issued or sold. If the price per share for which Additional Shares of Common
Stock may be issuable pursuant to any such Common Stock Equivalent shall be
less
than the applicable Conversion Price then in effect, or if, after any such
issuance of Common Stock Equivalents, the price per share for which Additional
Shares of Common Stock may be issuable thereafter is amended or adjusted, and
such price as so amended shall be less than the applicable Conversion Price
in
effect at the time of such amendment or adjustment, then the applicable
Conversion Price upon each such issuance or amendment shall be adjusted as
provided in the first sentence of subsection (vi) of this Section 3.6(a). No
adjustment shall be made to the Conversion Price upon the issuance of Common
Stock pursuant to the exercise, conversion or exchange of any Convertible
Security or Common Stock Equivalent where an adjustment to the Conversion Price
was made as a result of the issuance or purchase of any Convertible Security
or
Common Stock Equivalent.
(viii) Consideration
for Stock.
In case
any shares of Common Stock or any Common Stock Equivalents shall be issued
or
sold:
(1) in
connection with any merger or consolidation in which the Maker is the surviving
corporation (other than any consolidation or merger in which the previously
outstanding shares of Common Stock of the Maker shall be changed to or exchanged
for the stock or other securities of another corporation), the amount of
consideration therefor shall be, deemed to be the fair value, as determined
reasonably and in good faith by the Board of Directors of the Maker, of such
portion of the assets and business of the nonsurviving corporation as such
Board
may determine to be attributable to such shares of Common Stock, Convertible
Securities, rights or warrants or options, as the case may be; or
(2) in
the
event of any consolidation or merger of the Maker in which the Maker is not
the
surviving corporation or in which the previously outstanding shares of Common
Stock of the Maker shall be changed into or exchanged for the stock or other
securities of another corporation, or in the event of any sale of all or
substantially all of the assets of the Maker for stock or other securities
of
any corporation, the Maker shall be deemed to have issued a number of shares
of
its Common Stock for stock or securities or other property of the other
corporation computed on the basis of the actual exchange ratio on which the
transaction was predicated, and for a consideration equal to the fair market
value on the date of such transaction of all such stock or securities or other
property of the other corporation. If any such calculation results in adjustment
of the applicable Conversion Price, or the number of shares of Common Stock
issuable upon conversion of the Notes, the determination of the applicable
Conversion Price or the number of shares of Common Stock issuable upon
conversion of the Notes immediately prior to such merger, consolidation or
sale,
shall be made after giving effect to such adjustment of the number of shares
of
Common Stock issuable upon conversion of the Notes. In the event Common Stock
is
issued with other shares or securities or other assets of the Maker for
consideration which covers both, the consideration computed as provided in
this
Section 3.6(viii) shall be allocated among such securities and assets as
determined in good faith by the Board of Directors of the Maker.
(b) Record
Date.
In case
the Maker shall take record of the holders of its Common Stock for the purpose
of entitling them to subscribe for or purchase Common Stock or Convertible
Securities, then the date of the issue or sale of the shares of Common Stock
shall be deemed to be such record date.
(c) Certain
Issues Excepted.
Anything herein to the contrary notwithstanding, the Maker shall not be required
to make any adjustment to the Conversion Price in connection with (i) securities
issued (other than for cash) in connection with a merger, acquisition, or
consolidation, (ii) securities issued pursuant to a bona fide firm underwritten
public offering of the Maker’s securities, (iii) securities issued pursuant to
the conversion or exercise of convertible or excercisable securities issued
or
outstanding on or prior to the date hereof or issued pursuant to the Purchase
Agreement, (iv) the shares of Common Stock issuable upon the exercise of
Warrants, (v) securities issued in connection with strategic license agreements
or other partnering arrangements so long as such issuances are not for the
purpose of raising capital, (vi) Common Stock issued or options to purchase
Common Stock granted or issued pursuant to the Maker’s employee stock purchase
plans as they now exist and stock incentive plans as they now exist or as may
be
amended so long as the aggregate number of shares of Common Stock issued
pursuant to such stock incentive plans does not exceed 8,000,000, (vii) any
warrants issued to the placement agent and its designees for the transactions
contemplated by the Purchase Agreement, and (viii) the payment of any principal
and accrued interest in shares of Common Stock pursuant to this Note or the
Other Notes.
(d) No
Impairment.
The
Maker
shall
not, by amendment of its Articles of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue
or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Maker,
but
will at all times in good faith, assist in the carrying out of all the
provisions of this Section 3.6 and in the taking of all such action as may
be
necessary or appropriate in order to protect the Conversion Rights of the Holder
against impairment. In the event a Holder shall elect to convert any Notes
as
provided herein, the Maker cannot refuse conversion based on any claim that
such
Holder or any one associated or affiliated with such Holder has been engaged
in
any violation of law, violation of an agreement to which such Holder is a party
or for any reason whatsoever, unless, an injunction from a court, or notice,
restraining and or adjoining conversion of all or of said Notes shall have
issued and the Maker posts a surety bond for the benefit of such Holder in
an
amount equal to one hundred thirty percent (130%) of the amount of the Notes
the
Holder has elected to convert, which bond shall remain in effect until the
completion of arbitration/litigation of the dispute and the proceeds of which
shall be payable to such Holder (as liquidated damages) in the event it obtains
judgment.
4
(e) Certificates
as to Adjustments.
Upon
occurrence of each adjustment or readjustment of the Conversion Price or number
of shares of Common Stock issuable upon conversion of this Note pursuant to
this
Section 3.6, the Maker
at its
expense shall promptly compute such adjustment or readjustment in accordance
with the terms hereof and furnish to the Holder a certificate setting forth
such
adjustment and readjustment, showing in detail the facts upon which such
adjustment or readjustment is based. The Maker
shall,
upon written request of the Holder, at any time, furnish or cause to be
furnished to the Holder a like certificate setting forth such adjustments and
readjustments, the applicable Conversion Price in effect at the time, and 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 the conversion of this Note.
Notwithstanding the foregoing, the Maker shall not be obligated to deliver
a
certificate unless such certificate would reflect an increase or decrease of
at
least one percent (1%) of such adjusted amount.
(f) Issue
Taxes.
The
Maker shall pay any and all issue and other taxes, excluding federal, state
or
local income taxes, that may be payable in respect of any issue or delivery
of
shares of Common Stock on conversion of this Note pursuant thereto; provided,
however,
that
the Maker shall not be obligated to pay any transfer taxes resulting from any
transfer requested by the Holder in connection with any such
conversion.
(g) Fractional
Shares.
No
fractional shares of Common Stock shall be issued upon conversion of this Note.
In lieu of any fractional shares to which the Holder would otherwise be
entitled, the Maker shall pay cash equal to the product of such fraction
multiplied by the average of the Closing Bid Prices of the Common Stock for
the
five (5) consecutive Trading Days immediately preceding the Conversion Date.
(h) Reservation
of Common Stock.
The
Maker shall at all times when this Note shall be outstanding, reserve and keep
available out of its authorized but unissued Common Stock, such number of shares
of Common Stock as shall from time to time be sufficient to effect the
conversion of this Note and all interest accrued thereon; provided
that the
number of shares of Common Stock so reserved shall at no time be less than
one
hundred twenty percent (120%) of the number of shares of Common Stock for which
this Note and all interest accrued thereon are at any time convertible. The
Maker shall, from time to time in accordance with the Nevada Revised Business
Corporation Act, increase the authorized number of shares of Common Stock if
at
any time the unissued number of authorized shares shall not be sufficient to
satisfy the Maker’s obligations under this Section 3.6(h).
(i) Regulatory
Compliance.
If any
shares of Common Stock to be reserved for the purpose of conversion of this
Note
or any interest accrued thereon require registration or listing with or approval
of any governmental authority, stock exchange or other regulatory body under
any
federal or state law or regulation or otherwise before such shares may be
validly issued or delivered upon conversion, the Maker shall, at its sole cost
and expense, in good faith and as expeditiously as possible, endeavor to secure
such registration, listing or approval, as the case may be.
Section
3.7 Prepayment.
(a) Prepayment
Upon an Event of Default.
Notwithstanding anything to the contrary contained herein, upon the occurrence
of an Event of Default described in Sections 2.1(b)-(k) hereof, the Holder
shall
have the right, at such Holder's option, to require the Maker to prepay in
cash
all or a portion of this Note at a price equal to one hundred ten percent (110%)
of the aggregate principal amount of this Note plus all accrued and unpaid
interest applicable at the time of such request. Nothing in this Section 3.7(a)
shall limit the Holder's rights under Section 2.2 hereof.
(b) Prepayment
Option Upon Major Transaction. In addition to all other rights of the Holder
contained herein, simultaneous with the occurrence of a Major Transaction (as
defined below), the Holder shall have the right, at the Holder's option, to
require the Maker to prepay all or a portion of the Holder's Notes at a price
equal to one hundred percent (100%) of the aggregate principal amount of this
Note plus all accrued and unpaid interest (the "Major Transaction Prepayment
Price"); provided that the Maker shall have the sole option to make payment
of
the Major Transaction Prepayment Price in cash or shares of Common Stock. If
the
Maker elects to make payment of the Major Transaction Prepayment Price in shares
of Common Stock, the price per share shall be based upon the Conversion Price
then in effect on the day preceding the date of delivery of the Notice of
Prepayment at Option of Holder Upon Major Transaction (as hereafter defined)
and
the Holder shall have demand registration rights with respect to such
shares.
(c) Prepayment
Option Upon Triggering Event.
In
addition to all other rights of the Holder contained herein, after a Triggering
Event (as defined below), the Holder shall have the right, at the Holder's
option, to require the Maker to prepay all or a portion of this Note in cash
at
a price equal to the sum of (i) the greater of (A) one hundred twenty percent
(120%) of the aggregate principal amount of this Note plus all accrued and
unpaid interest and (B) in the event at such time the Holder is unable to obtain
the benefit of its conversion rights through the conversion of this Note and
resale of the shares of Common Stock issuable upon conversion hereof in
accordance with the terms of this Note and the other Transaction Documents,
the
aggregate principal amount of this Note plus all accrued but unpaid interest
hereon, divided by the Conversion Price on (x) the date the Prepayment Price
(as
defined below) is demanded or otherwise due or (y) the date the Prepayment
Price
is paid in full, whichever is less, multiplied by the VWAP (as defined below)
on
(x) the date the Prepayment Price is demanded or otherwise due, and (y) the
date
the Prepayment Price is paid in full, whichever is greater, and (ii) all other
amounts, costs, expenses and liquidated damages due in respect of this Note
and
the other Transaction Documents (the "Triggering
Event Prepayment Price,"
and,
collectively with the Major Transaction Prepayment Price, the "Prepayment
Price").
For
purposes hereof, “VWAP”
means,
for any date, (i) the daily volume weighted average price of the Common Stock
for such date on the OTC Bulletin Board as reported by Bloomberg Financial
L.P.
(based on a Trading Day from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time);
(ii) if the Common Stock is not then listed or quoted on the OTC Bulletin
Board and if prices for the Common Stock are then reported in the “Pink Sheets”
published by the Pink Sheets, LLC (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent bid price
per
share of the Common Stock so reported; or (iii) in all other cases,
the
fair market value of a share of Common Stock as determined by an independent
appraiser selected in good faith by the Holder and reasonably acceptable to
the
Maker.
(d) Intentionally
Omitted.
(e) "Major
Transaction." A "Major Transaction" shall be deemed to have occurred at such
time as any of the following events:
(i) the
consolidation, merger or other business combination of the Maker with or into
another Person (as defined in Section 4.13 hereof) (other than (A) pursuant
to a
migratory merger effected solely for the purpose of changing the jurisdiction
of
incorporation of the Maker or (B) a consolidation, merger or other business
combination in which holders of the Maker's voting power immediately prior
to
the transaction continue after the transaction to hold, directly or indirectly,
the voting power of the surviving entity or entities necessary to elect a
majority of the members of the board of directors (or their equivalent if other
than a corporation) of such entity or entities).
(ii) the
sale
or transfer of more than fifty percent (50%) of the Maker’s assets (based on the
fair market value as determined in good faith by the Maker’s Board of Directors)
other than inventory in the ordinary course of business in one or a related
series of transactions; or
(iii) closing
of a purchase, tender or exchange offer made to the holders of more than fifty
percent (50%) of the outstanding shares of Common Stock in which more than
fifty
percent (50%) of the outstanding shares of Common Stock were tendered and
accepted.
(f) "Triggering
Event." A "Triggering Event" shall be deemed to have occurred at such time
as
any of the following events:
(i) so
long
as any Notes are outstanding, the effectiveness of the Registration Statement,
after it becomes effective, (i) lapses for any reason (including, without
limitation, the issuance of a stop order) or (ii) is unavailable to the Holder
for sale of the shares of Common Stock, and such lapse or unavailability
continues for a period of twenty (20) consecutive Trading Days, and the shares
of Common Stock into which the Holder's Notes can be converted cannot be sold
in
the public securities market pursuant to Rule 144(k), provided that the cause
of
such lapse or unavailability is not due to factors primarily within the control
of the Holder of the Notes; and provided further that a Triggering Event shall
not have occurred if and to the extent the Maker exercised its rights set forth
in Section 3(n) of the Registration Rights Agreement;
(ii) the
suspension from listing, without subsequent listing on any one of, or the
failure of the Common Stock to be listed on at least one of the OTC Bulletin
Board, the American Stock Exchange, the Nasdaq National Market, the Nasdaq
SmallCap Market or The New York Stock Exchange, Inc., for a period of five
(5)
consecutive Trading Days;
(iii) the
Maker's notice to any holder of the Notes, including by way of public
announcement, at any time, of its inability to comply (including for any of
the
reasons described in Section 3.8) or its intention not to comply with proper
requests for conversion of any Notes into shares of Common Stock;
or
(iv) the
Maker's failure to comply with a Conversion Notice tendered in accordance with
the provisions of this Note within ten (10) business days after the receipt
by
the Maker of the Conversion Notice; or
(v) the
Maker
deregisters its shares of Common Stock and as a result such shares of Common
Stock are no longer publicly traded; or
(vi) the
Maker
consummates a “going private” transaction and as a result the Common Stock is no
longer registered under Sections 12(b) or 12(g) of the Exchange
Act.
(g) Intentionally
Omitted.
(h) Mechanics
of Prepayment at Option of Holder Upon Major Transaction. No sooner than fifteen
(15) days nor later than ten (10) days prior to the consummation of a Major
Transaction, but not prior to the public announcement of such Major Transaction,
the Maker shall deliver written notice thereof via facsimile and overnight
courier ("Notice of Major Transaction") to the Holder of this Note. At any
time
after receipt of a Notice of Major Transaction (or, in the event a Notice of
Major Transaction is not delivered at least ten (10) days prior to a Major
Transaction, at any time within ten (10) days prior to a Major Transaction),
any
holder of the Notes then outstanding may require the Maker to prepay, effective
immediately prior to the consummation of such Major Transaction, all of the
holder's Notes then outstanding by delivering written notice thereof via
facsimile and overnight courier ("Notice of Prepayment at Option of Holder
Upon
Major Transaction") to the Maker, which Notice of Prepayment at Option of Holder
Upon Major Transaction shall indicate (i) the principal amount of the Notes
that
such holder is electing to have prepaid and (ii) the applicable Major
Transaction Prepayment Price, as calculated pursuant to Section 3.7(b)
above.
(i) Mechanics
of Prepayment at Option of Holder Upon Triggering Event. Within one (1) business
day after the occurrence of a Triggering Event, the Maker shall deliver written
notice thereof via facsimile and overnight courier ("Notice of Triggering
Event") to each holder of the Notes. At any time after the earlier of a holder's
receipt of a Notice of Triggering Event and such holder becoming aware of a
Triggering Event, any holder of this Note and the Other Notes then outstanding
may require the Maker to prepay all of the Notes on a pro rata basis by
delivering written notice thereof via facsimile and overnight courier ("Notice
of Prepayment at Option of Holder Upon Triggering Event") to the Maker, which
Notice of Prepayment at Option of Holder Upon Triggering Event shall indicate
(i) the amount of the Note that such holder is electing to have prepaid and
(ii)
the applicable Triggering Event Prepayment Price, as calculated pursuant to
Section 3.7(c) above. A holder shall only be permitted to require the Maker
to
prepay the Note pursuant to Section 3.7 hereof for the greater of a period
of
ten (10) days after receipt by such holder of a Notice of Triggering Event
or
for so long as such Triggering Event is continuing.
5
(j) Payment
of Prepayment Price.
Upon
the Maker's receipt of a Notice(s) of Prepayment at Option of Holder Upon
Triggering Event or a Notice(s) of Prepayment at Option of Holder Upon Major
Transaction from any holder of the Notes, the Maker shall immediately notify
each holder of the Notes by facsimile of the Maker's receipt of such Notice(s)
of Prepayment at Option of Holder Upon Triggering Event or Notice(s) of
Prepayment at Option of Holder Upon Major Transaction and each holder which
has
sent such a notice shall promptly submit to the Maker such holder's certificates
representing the Notes which such holder has elected to have prepaid. The Maker
shall deliver the applicable Triggering Event Prepayment Price, in the case
of a
prepayment pursuant to Section 3.7(i), to such holder within five (5) business
days after the Maker's receipt of a Notice of Prepayment at Option of Holder
Upon Triggering Event and, in the case of a prepayment pursuant to Section
3.7(h), the Maker shall deliver the applicable Major Transaction Prepayment
Price immediately prior to the consummation of the Major Transaction; provided
that a holder's original Note shall have been so delivered to the Maker;
provided further that if the Maker is unable to prepay all of the Notes to
be
prepaid, the Maker shall prepay an amount from each holder of the Notes being
prepaid equal to such holder's pro-rata amount (based on the number of Notes
held by such holder relative to the number of Notes outstanding) of all Notes
being prepaid. If the Maker shall fail to prepay all of the Notes submitted
for
prepayment (other than pursuant to a dispute as to the arithmetic calculation
of
the Prepayment Price), in addition to any remedy such holder of the Notes may
have under this Note and the Purchase Agreement, the applicable Prepayment
Price
payable in respect of such Notes not prepaid shall bear interest at the rate
of
two percent (2%) per month (prorated for partial months) until paid in full.
Until the Maker pays such unpaid applicable Prepayment Price in full to a holder
of the Notes submitted for prepayment, such holder shall have the option (the
"Void Optional Prepayment Option") to, in lieu of prepayment, require the Maker
to promptly return to such holder(s) all of the Notes that were submitted for
prepayment by such holder(s) under this Section 3.7 and for which the applicable
Prepayment Price has not been paid, by sending written notice thereof to the
Maker via facsimile (the "Void Optional Prepayment Notice"). Upon the Maker's
receipt of such Void Optional Prepayment Notice(s) and prior to payment of
the
full applicable Prepayment Price to such holder, (i) the Notice(s) of Prepayment
at Option of Holder Upon Triggering Event or the Notice(s) of Prepayment at
Option of Holder Upon Major Transaction, as the case may be, shall be null
and
void with respect to those Notes submitted for prepayment and for which the
applicable Prepayment Price has not been paid, (ii) the Maker shall immediately
return any Notes submitted to the Maker by each holder for prepayment under
this
Section 3.7(j) and for which the applicable Prepayment Price has not been paid
and (iii) the Conversion Price of such returned Notes shall be adjusted to
the
lesser of (A) the Conversion Price as in effect on the date on which the Void
Optional Prepayment Notice(s) is delivered to the Maker and (B) the lowest
Closing Bid Price during the period beginning on the date on which the Notice(s)
of Prepayment of Option of Holder Upon Major Transaction or the Notice(s) of
Prepayment at Option of Holder Upon Triggering Event, as the case may be, is
delivered to the Maker and ending on the date on which the Void Optional
Prepayment Notice(s) is delivered to the Maker; provided that no adjustment
shall be made if such adjustment would result in an increase of the Conversion
Price then in effect. A holder's delivery of a Void Optional Prepayment Notice
and exercise of its rights following such notice shall not effect the Maker's
obligations to make any payments which have accrued prior to the date of such
notice. Payments provided for in this Section 3.7 shall have priority to
payments to other stockholders in connection with a Major Transaction.
(k) Maker
Prepayment Option.
So long
as less than ten percent (10%) of the original principal amount of this Note
is
outstanding, the Maker may prepay in cash all or any portion of the outstanding
principal amount of this Note together with all accrued and unpaid interest
thereon upon thirty (30) days prior written notice to the Holder (the
"Maker's
Prepayment Notice")
at a
price equal to one hundred twenty-five percent (125%)
of the
aggregate principal amount of this Note plus any accrued but unpaid
interest
(the
"Maker's
Prepayment Price");
provided,
however,
that if
a holder has delivered a Conversion Notice to the Maker or delivers a Conversion
Notice within such thirty (30) day period following delivery of the Maker’s
Prepayment Notice, the principal amount of the Notes plus any accrued but unpaid
interest designated to be converted may not be prepaid by the Maker and shall
be
converted in accordance with Section 3.3 hereof; provided further
that if
during the period between delivery of the Maker's Prepayment Notice and the
Maker's Prepayment Date (as defined below), a holder shall become entitled
to
deliver a Notice of Prepayment at Option of Holder Upon Major Transaction or
Notice of Prepayment at Option of Holder upon Triggering Event, then the such
rights of the holders shall take precedence over the previously delivered Maker
Prepayment Notice. The Maker's Prepayment Notice shall state the date of
prepayment which date shall be the thirty-first (31st)
day
after the Maker has delivered the Maker's Prepayment Notice (the "Maker's
Prepayment Date"),
the
Maker’s Prepayment Price and the principal amount of Notes plus any accrued but
unpaid interest to be prepaid by the Maker. The Maker shall deliver the Maker's
Prepayment Price on the Maker’s Prepayment Date, provided,
that if
the holder(s) delivers a Conversion Notice before the Maker's Prepayment Date,
then the portion of the Maker's Prepayment Price which would be paid to prepay
the Notes covered by such Conversion Notice shall be returned to the Maker
upon
delivery of the Common Stock issuable in connection with such Conversion Notice
to the holder(s). On the Maker's Prepayment Date, the Maker shall pay the
Maker's Prepayment Price, subject to any adjustment pursuant to the immediately
preceding sentence, to the holder(s) on a pro rata basis. If the Maker fails
to
pay the Maker's Prepayment Price by the thirty-first (31st)
day
after the Maker has delivered the Maker's Prepayment Notice, the prepayment
will
be declared null and void and the Maker shall lose its right to serve a Maker
's
Prepayment Notice pursuant to this Section 3.7(k) in the future. Notwithstanding
the foregoing to the contrary, the Maker may effect a prepayment pursuant to
this Section 3.7(k) only if (A) the Registration Statement is effective and
has
been effective, without lapse or suspension of any kind, for a period sixty
(60)
consecutive calendar days immediately preceding the Maker’s Prepayment Notice
through the Maker’s Prepayment Date, (B) trading
in the Common Stock shall not have been suspended by the Securities and Exchange
Commission or the OTC Bulletin Board (or other exchange or market on which
the
Common Stock is trading), (C) the Maker is in material compliance with the
terms
and conditions of this Note and the other Transaction Documents, and (D) the
Maker is not in possession of any material non-public information.
Section
3.8 Inability
to Fully Convert.
(a) Holder's
Option if Maker Cannot Fully Convert.
If,
upon the Maker's receipt of a Conversion Notice, the Maker cannot issue shares
of Common Stock registered for resale under the Registration Statement for
any
reason, including, without limitation, because the Maker (w) does not have
a
sufficient number of shares of Common Stock authorized and available, (x) is
otherwise prohibited by applicable law or by the rules or regulations of any
stock exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Maker or any of its securities from
issuing all of the Common Stock which is to be issued to the Holder pursuant
to
a Conversion Notice or (y) fails to have a sufficient number of shares of Common
Stock registered for resale under the Registration Statement, then the Maker
shall issue as many shares of Common Stock as it is able to issue in accordance
with the Holder's Conversion Notice and, with respect to the unconverted portion
of this Note, the Holder, solely at Holder's option, can elect to:
(i) require
the Maker to prepay that portion of this Note for which the Maker is unable
to
issue Common Stock in accordance with the Holder's Conversion Notice (the
"Mandatory
Prepayment")
at a
price per share equal to the Triggering Event Prepayment Price as of such
Conversion Date (the "Mandatory
Prepayment Price");
(ii) if
the
Maker's inability to fully convert is pursuant to Section 3.8(a)(x) above,
require the Maker to issue restricted shares of Common Stock in accordance
with
such holder's Conversion Notice;
(iii) void
its
Conversion Notice and retain or have returned, as the case may be, this Note
that was to be converted pursuant to the Conversion Notice (provided that the
Holder's voiding its Conversion Notice shall not effect the Maker's obligations
to make any payments which have accrued prior to the date of such
notice);
(iv) exercise
its Buy-In rights pursuant to and in accordance with the terms and provisions
of
Section 3.3(c) of this Note.
In
the
event a Holder shall elect to convert any portion of its Notes as provided
herein, the Maker cannot refuse conversion based on any claim that such Holder
or any one associated or affiliated with such Holder has been engaged in any
violation of law, violation of an agreement to which such Holder is a party
or
for any reason whatsoever, unless, an injunction from a court, on notice,
restraining and or adjoining conversion of all or of said Notes shall have
been
issued and the Maker posts a surety bond for the benefit of such Holder in
an
amount equal to 130% of the principal amount of the Notes the Holder has elected
to convert, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be payable
to such Holder in the event it obtains judgment.
(b) Mechanics
of Fulfilling Holder's Election.
The
Maker shall immediately send via facsimile to the Holder, upon receipt of a
facsimile copy of a Conversion Notice from the Holder which cannot be fully
satisfied as described in Section 3.8(a) above, a notice of the Maker's
inability to fully satisfy the Conversion Notice (the "Inability
to Fully Convert Notice").
Such
Inability to Fully Convert Notice shall indicate (i) the reason why the Maker
is
unable to fully satisfy such holder's Conversion Notice, (ii) the amount of
this
Note which cannot be converted and (iii) the applicable Mandatory Prepayment
Price. The Holder shall notify the Maker of its election pursuant to Section
3.8(a) above by delivering written notice via facsimile to the Maker
("Notice
in Response to Inability to Convert").
(c) Payment
of Prepayment Price.
If the
Holder shall elect to have its Notes prepaid pursuant to Section 3.8(a)(i)
above, the Maker shall pay the Mandatory Prepayment Price to the Holder within
thirty (30) days of the Maker's receipt of the Holder's Notice in Response
to
Inability to Convert, provided
that
prior to the Maker's receipt of the Holder's Notice in Response to Inability
to
Convert the Maker has not delivered a notice to the Holder stating, to the
satisfaction of the Holder, that the event or condition resulting in the
Mandatory Prepayment has been cured and all Conversion Shares issuable to the
Holder can and will be delivered to the Holder in accordance with the terms
of
this Note. If the Maker shall fail to pay the applicable Mandatory Prepayment
Price to the Holder on the date that is one (1) business day following the
Maker's receipt of the Holder's Notice in Response to Inability to Convert
(other than pursuant to a dispute as to the determination of the arithmetic
calculation of the Prepayment Price), in addition to any remedy the Holder
may
have under this Note and the Purchase Agreement, such unpaid amount shall bear
interest at the rate of two percent (2%) per month (prorated for partial months)
until paid in full. Until the full Mandatory Prepayment Price is paid in full
to
the Holder, the Holder may (i) void the Mandatory Prepayment with respect to
that portion of the Note for which the full Mandatory Prepayment Price has
not
been paid, (ii) receive back such Note, and (iii) require that the Conversion
Price of such returned Note be adjusted to the lesser of (A) the Conversion
Price as in effect on the date on which the Holder voided the Mandatory
Prepayment and (B) the lowest Closing Bid Price during the period beginning
on
the Conversion Date and ending on the date the Holder voided the Mandatory
Prepayment.
(d) Pro-rata
Conversion and Prepayment.
In the
event the Maker receives a Conversion Notice from more than one holder of the
Notes on the same day and the Maker can convert and prepay some, but not all,
of
the Notes pursuant to this Section 3.8, the Maker shall convert and prepay
from
each holder of the Notes electing to have its Notes converted and prepaid at
such time an amount equal to such holder's pro-rata amount (based on the
principal amount of the Notes held by such holder relative to the principal
amount of the Notes outstanding) of all the Notes being converted and prepaid
at
such time.
Section
3.9 No
Rights as Shareholder. Nothing contained in this Note shall be
construed as conferring upon the Holder, prior to the conversion of this Note,
the right to vote or to receive dividends or to consent or to receive notice
as
a shareholder in respect of any meeting of shareholders for the election of
directors of the Maker or of any other matter, or any other rights as a
shareholder of the Maker.
6
ARTICLE
IV
MISCELLANEOUS
Section
4.1 Notices.
Any notice, demand, request, waiver or other communication required or permitted
to be given hereunder shall be in writing and shall be effective (a) upon hand
delivery, telecopy or facsimile at the address or number designated in the
Purchase Agreement (if delivered on a business day during normal business hours
where such notice is to be received), or the first business day following such
delivery (if delivered other than on a business day during normal business
hours
where such notice is to be received) or (b) on the second business day following
the date of mailing by express courier service, fully prepaid, addressed to
such
address, or upon actual receipt of such mailing, whichever shall first occur.
The Maker will give written notice to the Holder at least ten (10) days prior
to
the date on which the Maker takes a record (x) with respect to any dividend
or
distribution upon the Common Stock, (y) with respect to any pro rata
subscription offer to holders of Common Stock or (z) for determining rights
to
vote with respect to any Organic Change, dissolution, liquidation or winding-up
and in no event shall such notice be provided to such holder prior to such
information being made known to the public. The Maker will also give written
notice to the Holder at least ten (10) days prior to the date on which any
Organic Change, dissolution, liquidation or winding-up will take place and
in no
event shall such notice be provided to the Holder prior to such information
being made known to the public. The Maker shall promptly notify the Holder
of
this Note of any notices sent or received, or any actions taken with respect
to
the Other Notes.
Section
4.2 Governing
Law. This Note shall be governed by and construed in accordance with the
internal laws of the State of New York, without giving effect to any of the
conflicts of law principles which would result in the application of the
substantive law of another jurisdiction. This Note shall not be interpreted
or
construed with any presumption against the party causing this Note to be
drafted.
Section
4.3 Headings.
Article and section headings in this Note are included herein for purposes
of
convenience of reference only and shall not constitute a part of this Note
for
any other purpose.
Section
4.4 Remedies,
Characterizations, Other Obligations, Breaches and Injunctive Relief. The
remedies provided in this Note shall be cumulative and in addition to all other
remedies available under this Note, at law or in equity (including, without
limitation, a decree of specific performance and/or other injunctive relief),
no
remedy contained herein shall be deemed a waiver of compliance with the
provisions giving rise to such remedy and nothing herein shall limit a holder's
right to pursue actual damages for any failure by the Maker to comply with
the
terms of this Note. Amounts set forth or provided for herein with respect to
payments, conversion and the like (and the computation thereof) shall be the
amounts to be received by the holder thereof and shall not, except as expressly
provided herein, be subject to any other obligation of the Maker (or the
performance thereof). The Maker acknowledges that a breach by it of its
obligations hereunder will cause irreparable and material harm to the Holder
and
that the remedy at law for any such breach may be inadequate. Therefore the
Maker agrees that, in the event of any such breach or threatened breach, the
Holder shall be entitled, in addition to all other available rights and
remedies, at law or in equity, to seek and obtain such equitable relief,
including but not limited to an injunction restraining any such breach or
threatened breach, without the necessity of showing economic loss and without
any bond or other security being required.
Section
4.5 Enforcement
Expenses. The Maker agrees to pay all costs and expenses of enforcement of
this Note, including, without limitation, reasonable attorneys' fees and
expenses.
Section
4.6 Binding
Effect. The obligations of the Maker and the Holder set forth herein shall
be binding upon the successors and assigns of each such party, whether or not
such successors or assigns are permitted by the terms hereof.
Section
4.7 Amendments.
This Note may not be modified or amended in any manner except in writing
executed by the Maker and the Holder.
Section
4.8 Compliance
with Securities Laws. The Holder of this Note acknowledges that this Note is
being acquired solely for the Holder's own account and not as a nominee for
any
other party, and for investment, and that the Holder shall not offer, sell
or
otherwise dispose of this Note. This Note and any Note issued in substitution
or
replacement therefor shall be stamped or imprinted with a legend in
substantially the following form:
"THIS
NOTE
AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL
IN
THE FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO THE MAKER THAT THIS
NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE MAY
BE
SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION
FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS."
Section
4.9 Consent
to Jurisdiction.
Each of
the Maker and the Holder (i) hereby irrevocably submits to the exclusive
jurisdiction of the United States District Court sitting in the Southern
District of New York and the courts of the State of New York located in New
York
county for the purposes of any suit, action or proceeding arising out of or
relating to this Note and (ii) hereby waives, and agrees not to assert in any
such suit, action or proceeding, any claim that it is not personally subject
to
the jurisdiction of such court, that the suit, action or proceeding is brought
in an inconvenient forum or that the venue of the suit, action or proceeding
is
improper. Each of the Maker and the Holder consents to process being served
in
any such suit, action or proceeding by mailing a copy thereof to such party
at
the address in effect for notices to it under the Purchase Agreement and agrees
that such service shall constitute good and sufficient service of process and
notice thereof. Nothing in this Section 4.9 shall affect or limit any right
to
serve process in any other manner permitted by law. Each of the Maker and the
Holder hereby agree that the prevailing party in any suit, action or proceeding
arising out of or relating to this Note shall be entitled to reimbursement
for
reasonable legal fees from the non-prevailing party.
Section
4.10 Parties
in Interest. This Note shall be binding upon, inure to the benefit of and be
enforceable by the Maker, the Holder and their respective successors and
permitted assigns.
Section
4.11 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 privilege.
Section
4.12 Maker
Waivers. Except as otherwise specifically provided herein, the Maker and all
others that may become liable for all or any part of the obligations evidenced
by this Note, hereby waive presentment, demand, notice of nonpayment, protest
and all other demands' and notices in connection with the delivery, acceptance,
performance and enforcement of this Note, and do hereby consent to any number
of
renewals of extensions of the time or payment hereof and agree that any such
renewals or extensions may be made without notice to any such persons and
without affecting their liability herein and do further consent to the release
of any person liable hereon, all without affecting the liability of the other
persons, firms or Maker liable for the payment of this Note, AND DO HEREBY
WAIVE
TRIAL BY JURY.
(a) No
delay
or omission on the part of the Holder in exercising its rights under this Note,
or course of conduct relating hereto, shall operate as a waiver of such rights
or any other right of the Holder, nor shall any waiver by the Holder of any
such
right or rights on any one occasion be deemed a waiver of the same right or
rights on any future occasion.
(b) THE
MAKER
ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS NOTE IS A PART IS A COMMERCIAL
TRANSACTION, AND TO THE EXTENT ALLOWED BY APPLICABLE LAW, HEREBY WAIVES ITS
RIGHT TO NOTICE AND HEARING WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH THE
HOLDER OR ITS SUCCESSORS OR ASSIGNS MAY DESIRE TO USE.
Section
4.13 Definitions.
For the
purposes hereof, the following terms shall have the following
meanings:
"Person"
means
an individual or a corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability company, joint
stock company, government (or an agency or political subdivision thereof) or
other entity of any kind.
“Trading
Day”
means
(a) a day on which the Common Stock is traded on the OTC Bulletin Board, or
(b)
if the Common Stock is not traded on the OTC Bulletin Board, a day on which
the
Common Stock is quoted in the over-the-counter market as reported by the
National Quotation Bureau Incorporated (or any similar organization or agency
succeeding its functions of reporting prices); provided,
however,
that in
the event that the Common Stock is not listed or quoted as set forth in (a)
or
(b) hereof, then Trading Day shall mean any day except Saturday, Sunday and
any
day which shall be a legal holiday or a day on which banking institutions in
the
State of New York are authorized or required by law or other government action
to close.
7
QUEST
OIL CORPORATION
By:
______________________________
Name:
Title:
8
